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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-13049
CCA PRISON REALTY TRUST
(Exact name of registrant as specified in its organizational documents)
MARYLAND
(State or other jurisdiction of
incorporation or organization)
62-1689525
(I.R.S. Employer Identification No.)
10 BURTON HILLS BLVD., SUITE 100, NASHVILLE,
TENNESSEE 37215 (Address and zip code of
principal executive office)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (615) 263-0200
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
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Common Shares, $.01 par value New York Stock Exchange
8.0% Series A Cumulative Preferred Shares, $.01 par value New York Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 12 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Registrant's Common Shares held by
non-affiliates was approximately $494,920,328 based on the closing price of such
shares on the New York Stock Exchange on December 31, 1998.
The number of the Registrant's Common Shares outstanding on December
31, 1998 was 25,315,380.
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CCA PRISON REALTY TRUST
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
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Item No. Page
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PART I.
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1. Business. 2
2. Properties. 18
3. Legal Proceedings. 21
4. Submission of Matters to a Vote of Shareholders. 21
PART II.
5. Market for Registrant's Common Equity and Related Shareholder Matters. 21
6. Selected Financial Data. 24
7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 25
7A. Quantitative and Qualitative Disclosures about Market Risk. 30
8. Financial Statements and Supplementary Data. 31
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 31
PART III.
10. Trustees and Executive Officers of the Company. 31
11. Executive Compensation. 35
12. Security Ownership of Certain Beneficial Owners and Management. 38
13. Certain Relationships and Related Transactions. 40
PART IV.
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 41
SIGNATURES.
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PRESENTATION OF CCA PRISON REALTY TRUST -
EXPLANATORY NOTE
This Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (the
"Annual Report") relates to CCA Prison Realty Trust, a Maryland real estate
investment trust (the "Company"), which was formed in April 1997 and commenced
operations in July 1997. Corrections Corporation of America ("CCA"), a Tennessee
corporation, and the Company each merged with and into Prison Realty
Corporation, a Maryland corporation ("New Prison Realty"), on December 31, 1998
and January 1, 1999, respectively, with New Prison Realty being the surviving
entity (collectively, the "Merger"). With the exception of certain information
regarding the Merger and certain actions taken by the Company, CCA or New Prison
Realty in connection therewith, the information contained in this Annual Report
reflects the status of the Company on December 31, 1998, immediately prior to
the completion of the Merger. The financial information of the Company,
including the Selected Financial Data, Management's Discussion and Analysis of
Financial Condition and Results of Operations and the Financial Statements, set
forth in this Annual Report is reported as of December 31, 1998 and does not
reflect the completion of the Merger.
The Merger has been legally structured as a common control transfer from CCA to
New Prison Realty at historical cost and the purchase of the Company by New
Prison Realty. CCA has been treated as the acquiring company, and the Company
has been treated as the acquired company, for financial reporting purposes.
Accordingly, the historical book basis of the assets, liabilities and
shareholders' equity of CCA has become the carrying value of the assets,
liabilities and shareholders' equity of New Prison Realty, and the assets and
liabilities of the Company have been recorded on the books of New Prison Realty
at their fair value. For additional information regarding the Merger and New
Prison Realty, please refer to the Annual Report on Form 10-K of New Prison
Realty filed with the Securities and Exchange Commission (the "Commission") on
or before March 31, 1999.
CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING INFORMATION
This Annual Report contains or incorporates by reference certain
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), which are
intended to be covered by the "safe harbors" created thereby. Those statements
include expectations concerning future results and assumptions regarding certain
other matters. Also, when any of the words "believes," "expects," "anticipates,"
"intends," "estimates," "plans," or similar terms or expressions are used in
this Annual Report, forward-looking statements are being made.
You should be aware that, while the expectations reflected in these
forward-looking statements are believed to be reasonable, they are inherently
subject to risks and uncertainties which could cause these forward-looking
statements to differ materially from expectations. These risks and uncertainties
are disclosed under "Risk Factors" set forth herein and in the Company's
Registration Statements on Form S-11 (Reg. nos. 333-25727 and 333-43935) and
S-3 (Reg. no. 333-63475) filed with the Commission and in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" set
forth herein. Because of these risks and uncertainties, there can be no
assurance that the forward-looking statements included or incorporated by
reference herein will prove to be accurate. You should not regard the inclusion
of forward-looking statements as a representation that they will be accurate. In
addition, these forward-looking statements will not be updated after the date of
this Annual Report, even if new information, future events or other
circumstances have made them incorrect or misleading as of any future date.
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PART I.
ITEM 1. BUSINESS.
BACKGROUND AND FORMATION TRANSACTIONS
The Company was formed on April 23, 1997 to acquire, develop, and lease private
and public correctional and detention facilities. The Company elected to be
taxed and operated so as to qualify as a real estate investment trust, or REIT,
under the Internal Revenue Code of 1986, as amended (the "Code"), beginning with
its taxable year ended December 31, 1997.
On July 18, 1997, the Company began operations after completing an initial
public offering (the "Initial Offering") of 21,275,000 of its common shares,
$.01 par value per share (the "Common Shares"), generating aggregate proceeds to
the Company, net of underwriters' discount and offering costs, of approximately
$412.1 million, $308.1 million of which were used to purchase nine correctional
and detention facilities from CCA and certain of its subsidiaries (the "Initial
Facilities").
The following transactions occurred prior to or simultaneously with the
completion of the Company's Initial Offering (collectively, the "Formation
Transactions"):
- The Company acquired the Initial Facilities from CCA and
certain of its subsidiaries for an aggregate purchase price of
$308.1 million, payable in cash.
- The Company entered into agreements with CCA to lease the
Initial Facilities back to CCA pursuant to long-term,
non-cancellable "triple net" leases (individually, a "CCA
Lease," and together with all leases between the Company and
CCA, collectively, the "CCA Leases") which required CCA to pay
all operating expenses, taxes, insurance and other costs. The
CCA Leases provided for initial, annual base rents with annual
escalations equal to the greater of (i) 4% or (ii) the
percentage which was 25% of the percentage interest in the
gross management revenues realized by CCA from such leased
property, exclusive of any increase attributable to expansions
in the size or number of beds in such property (the "Base Rent
Escalation"). The CCA Leases had primary terms ranging from
10-12 years which were renewable at fair market rental rates
for three additional five-year periods upon the mutual
agreement of the Company and CCA.
- The Company entered into agreements with CCA (the "Option
Agreements") pursuant to which the Company was granted the
option to acquire and leaseback to CCA any or all of five
correctional and/or detention facilities from CCA at any time
during the three-year period following the acquisition of the
Initial Facilities for a purchase price generally equal to
CCA's costs of developing, constructing and equipping such
facilities, plus 5% of such costs. The Option Agreements
provided that if acquired, such facilities would be leased to
CCA on terms substantially similar to those contained in the
CCA Leases.
In addition, the Company entered into an agreement with CCA (the "Right to
Purchase Agreement") whereby CCA granted the Company an option to acquire, at
fair market value, and leaseback to CCA at fair market rental rates, any
correctional or detention facility acquired or developed and owned by CCA in the
future for a period of three years following the date on which CCA first
received inmates at such facility (the "Service Commencement Date").
Additionally, CCA agreed to grant the Company a right of first refusal to
acquire any CCA-owned correctional or detention facility should CCA receive an
acceptable third-party offer to acquire such facility. Facilities which were
available for purchase by the Company through the Option Agreements and the
Right to Purchase Agreement are collectively referred to herein as the "Option
Facilities."
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RECENT DEVELOPMENTS
MERGER WITH NEW PRISON REALTY
Background. During the first quarter of 1998, the Company and CCA proposed a
strategic combination whereby the companies would be merged to create the
nation's leading company in the private corrections industry. Pursuant to the
terms of an Amended and Restated Agreement and Plan of Merger dated September
29, 1998, which amended and restated an Agreement and Plan of Merger dated April
18, 1998 (collectively, the "Merger Agreement"), each of CCA and the Company
agreed to merge with and into New Prison Realty, with New Prison Realty as the
surviving company (the "Merger"), and complete a series of transactions to
enable New Prison Realty to operate so as to qualify as a REIT for federal
income tax purposes after the Merger (the "Merger Related Transactions").
In order for New Prison Realty to qualify as a REIT, New Prison Realty's income
generally could not include income from the operation of facilities. Therefore,
after the Merger, New Prison Realty could not operate the correctional and
detention facilities operated by CCA prior to the Merger, including those
facilities to be acquired from CCA and the Company in the Merger. Accordingly,
immediately prior to the merger of CCA with and into the Company (the "CCA
Merger"), the non-real estate assets of CCA, including all management contracts,
would be transferred to a newly-formed management company, Correctional
Management Services Corporation ("Operating Company"), and to two newly-formed
service companies, Prison Management Services, Inc. ("Service Company A") and
Juvenile and Jail Facility Management Services, Inc. ("Service Company B")
(Service Company A and Service Company B are defined herein, collectively, as
the "Service Companies"). Following the Merger, a substantial majority of the
correctional and detention facilities acquired by New Prison Realty in the
Merger would be leased to Operating Company. Additionally, as a result of the
Merger and the Merger Related Transactions, New Prison Realty was to obtain an
ownership interest in each of Operating Company and the Service Companies and
derive certain economic benefits from each.
The purpose of the Merger was to create a unique investment opportunity for
shareholders of the Company and CCA by combining the Company's cash
distributions and tax advantages with an increased growth rate created by the
Company's leases with Operating Company and the other contractual arrangements
arising in connection with the Merger and the Merger Related Transactions.
Management of CCA and the Company believed that the Merger would allow the
respective shareholders of both companies to benefit, to the extent consistent
with the rules applicable to REITs, from every type of private sector/public
sector partnership with respect to correctional and detention facilities: (i)
facilities owned by New Prison Realty and managed by government entities; (ii)
facilities owned by New Prison Realty and managed by private operators; and
(iii) facilities owned by government entities and managed by private operators.
Completion of the Merger. The Merger Agreement and the Merger Related
Transactions were approved and adopted by the shareholders of CCA and the
Company at special meetings held on December 1, 1998 and December 3, 1998,
respectively. Subsequently, on January 1, 1999, the Merger and Merger Related
Transactions were completed substantially in accordance with the Merger
Agreement. Under the terms of the Merger Agreement: (i) holders of Common Shares
and the Company's 8% Cumulative Preferred Shares, $0.01 par value per share (the
"Series A Preferred Shares"), obtained 1.0 share of New Prison Realty common
stock, $0.01 par value per share (the "New Prison Realty Common Stock"), or New
Prison Realty 8% Series A Cumulative Preferred Stock, $0.01 par value per share
(the "New Prison Realty Preferred Stock"), for each Common Share or Series A
Preferred Share they owned at January 1, 1999, respectively; and (ii) holders of
shares of CCA's common stock, $1.00 par value per share (the "CCA Common
Stock"), obtained the right to receive 0.875 share of New Prison Realty Common
Stock for each share of CCA Common Stock they owned at December 31, 1998.
Approximately 25,315,380 Common Shares and 4,300,000 Series A Preferred Shares
were exchanged in the Merger. As intended, New Prison Realty will elect to be
taxed and expects to operate so as to qualify as a REIT for federal income tax
purposes beginning with its taxable year ending December 31, 1999.
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The Merger and the Merger Agreement are more fully described in (i) the Current
Report on Form 8-K filed by New Prison Realty with the Commission on January 6,
1999 (File no. 25245), which is incorporated herein by reference; and (ii) the
Joint Proxy Statement of the Company and CCA, dated October 31, 1998, as
supplemented on November 20, 1998, prepared with respect to the Merger and
included in the Registration Statement on Form S-4 filed with the Commission by
New Prison Realty in connection with the Merger on September 30, 1998, as
declared effective by the Commission on October 16, 1998 (Reg. no. 333-65017),
which is incorporated herein by reference.
SHELF REGISTRATION
On September 16, 1998, the Company filed a Registration Statement on Form S-3
(Reg. no. 333-63465) with the Commission to register an aggregate of $500.0
million in value of its Common Shares, Series A Preferred Shares and Common
Share rights or warrants for sale on a continuous or delayed basis. A portion of
the net proceeds from the sale of Common Shares by the Company under the
Registration Statement on Form S-3 were used to reimburse the cost of Common
Shares purchased by the Company on the open market. The remainder of the net
proceeds from the sale of Common Shares by the Company under the Registration
Statement on Form S-3 were used for general corporate purposes, including, among
others, repaying its obligations as they became due, redeeming its outstanding
capital expenditures and working capital. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" herein for more information concerning the Company's sales
and the Registration Statement on Form S-3.
ACQUISITIONS OF ASSETS
General. The Company historically focused its investments on privately managed
facilities which were owned and operated by CCA or its subsidiaries. However,
the Company also pursued other opportunities, including acquisitions and
leasebacks of, or financings for, facilities owned and operated by various
government entities and private operators other than CCA. The Company had
significant access to potential development and acquisition opportunities
through its relationship with CCA and the experience and industry contacts of
the Company's Board of Trustees (the "Company Board") and management,
particularly those of J. Michael Quinlan, the former head of the Federal Bureau
of Prisons, who served as the Company's Chief Executive Officer and as a member
of the Company Board.
Webb County Correctional Center. On December 29, 1998, the Company acquired from
the Webb County Correctional Center Public Facility Corporation ("WPFC") the 480
bed Webb County Correctional Center located in Laredo, Texas for a purchase
price of $21.3 million. The Webb County Correctional Center was not complete as
of December 31, 1998 but is scheduled to open in 1999. The facility will be
leased by New Prison Realty to Operating Company. Amounts required to complete
the initial construction are available in capital development funds related to a
bond issue used to finance the facility by the WPFC.
Central Arizona Detention Center. On November 2, 1998, the Company purchased the
expansion of Central Arizona Detention Center in Florence, Arizona for $25.0
million. The facility was leased to the operator, CCA, who acted as construction
manager for the expansion.
Leo Chesney Center. On May 4, 1998, the Company acquired the Leo Chesney Center,
a 200 bed correctional facility located in Live Oak, California. The facility,
acquired for a purchase price of approximately $5.1 million, was leased to and
operated by Cornell Corrections Corporation under contract with the California
Department of Corrections. The Company then expanded the facility to increase
the rated capacity by approximately 72 beds.
U.S. Corrections Corporation. On April 17, 1998, the Company and its
wholly-owned subsidiary USCA Corporation ("USCA"), on the one hand, and U.S.
Corrections Corporation, a privately-held owner and former operator of
correctional and detention facilities ("USCC"), on the other hand, entered into
and completed an
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Agreement of Merger, whereby USCA merged with and into USCC and the Company
acquired all of the outstanding capital stock and derivative securities of USCC
(the "USCC Merger") in exchange for a cash payment to the shareholders of USCC
of approximately $157.0 million. As a result of the USCC Merger, the Company
also assumed certain liabilities of USCC. Immediately prior to the USCC Merger,
CCA purchased eight USCC subsidiaries which held USCC's facility management
contracts and the corresponding enterprise value of operations from USCC for
$10.0 million in cash. Accordingly, as a result of the USCC Merger, the Company
acquired only real estate properties.
By virtue of the USCC Merger, the Company acquired four correctional and
detention facilities in Kentucky, one in Ohio and two in North Carolina. These
seven facilities had an aggregate design capacity of approximately 5,200 beds.
The Company leased the Kentucky facilities to CCA and leased the North Carolina
facilities to the State of North Carolina, which contracted with CCA to operate
the facilities. In addition, the Company leased the Ohio facility to Hamilton
County, Ohio.
Community Education Partners, Inc. During 1998, the Company developed two
educational facilities, one in Houston, Texas, and one in Dallas, Texas, for
Community Education Partners, Inc., a privately-held Delaware corporation
("CEP"), which develops and operates publicly funded, privately operated
alternative education programs for at-risk youth. The Company expended
approximately $13.0 million in renovations and leased the facilities to CEP
pursuant to terms and conditions materially consistent with the Company's
relationships with private prison operators.
BANK FINANCING
On July 31, 1998, the Company entered into an Amended and Restated Credit
Agreement with a syndicate of banks arranged by First Union National Bank
("First Union"), NationsBank, N.A. ("NationsBank"), and Canadian Imperial Bank
of Commerce ("CIBC"), whereby the Company's then existing revolving credit
facility was increased from $225.0 million to $300.0 million (the "Company
Credit Facility"). The Company Credit Facility had a maturity of July 18, 2000,
and the proceeds from the Company Credit Facility were used for the acquisition
of additional correctional and detention facilities as well as for working
capital and general corporate purposes. At December 31, 1998, the Company had a
total outstanding indebtedness of approximately $279.6 million under the Company
Credit Facility which was paid off in its entirety in conjunction with a credit
facility obtained by New Prison Realty upon the completion of the Merger.
SERIES A PREFERRED SHARE OFFERING
On January 30, 1998, the Company concluded a public offering of 4,300,000 of its
Series A Preferred Shares in an aggregate principal amount of $105.7 million.
The Company used the net proceeds from the offering, equal to approximately
$103.5 million after deduction of the underwriting discount and estimated
offering expenses, to repay outstanding indebtedness under the Company Credit
Facility and to acquire additional correctional and detention facilities.
As of December 31, 1998, the Series A Preferred Shares were redeemable at any
time on or after January 30, 2003, at $25.00 per share, plus dividends accrued
and unpaid to the redemption date. The Series A Preferred Shares had no stated
maturity, sinking fund provisions or mandatory redemption and were not
convertible into any other securities of the Company. Dividends on the Series A
Preferred Shares were cumulative from the date of original issue of such shares
and were payable quarterly in arrears on the 15th day of January, April, July
and October of each year, to shareholders of record on the last day of March,
June, September and December of each year, respectively, and at a fixed annual
rate of 8.0%.
The Series A Preferred Shares ranked senior to the Company's Common Shares as to
rights to receive distributions and to participate in distributions or payments
upon any liquidation, dissolution or winding-up of the Company.
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The Series A Preferred Shares were converted into preferred shares of New Prison
Realty in connection with the Merger.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
As of December 31, 1998 the Company was involved in only one industry segment,
the ownership of real estate. Accordingly, all of the financial statements
contained herein relate to this industry segment.
NARRATIVE DESCRIPTION OF THE BUSINESS
The Company was formed to capitalize on the opportunities created by the
perceived trend towards increased privatization in the corrections and detention
industry, including the increased demand for private correctional and detention
facilities. The principal business strategy of the Company was to own and
develop correctional and detention facilities that met the Company's investment
criteria, to acquire such facilities from both private prison managers and
government entities, to expand the design capacity of the Company's existing
facilities, and to lease all such facilities under long-term leases. As of
December 31, 1998, the Company owned 24 facilities, with an aggregate design
capacity in excess of 19,000 beds. The Company also had options to acquire up to
15 additional Option Facilities, with an aggregate design capacity of more than
17,000 beds, which were under construction or development by CCA. In addition,
the Company had an option to acquire any correctional or detention facility
acquired or developed and owned by CCA in the future, for a period of three
years following the Service Commencement Date with respect to such facility. As
a result of the transactions with CCA, the Company and CCA had several ongoing
relationships, some of which could have given rise to conflicts of interest. See
"Certain Relationships and Transactions" herein for a more complete discussion
of these relationships.
As a REIT, the Company generally was not subject to federal income tax in 1998
to the extent that its earnings were distributed to its shareholders and its
qualification as a REIT was maintained. In order to qualify as a REIT, the
Company's income was required to be derived from certain sources, including
rents from real property (and generally excluding income from the operation of a
correctional facility). Accordingly, the Company was precluded from operating
the correctional and detention facilities that it owned and, as a consequence,
leased all such properties pursuant to long-term non-cancellable leases.
As of December 31, 1998, the Company leased 18 of its facilities to CCA, which
managed the facilities pursuant to the CCA Leases (CCA also managed two of the
Company's other facilities which were leased to the State of North Carolina).
The Company also leased three of its facilities to private operators other than
CCA and leased three of its facilities to government entities. As of December
31, 1998, CCA was the largest developer and manager of privatized correctional
and detention facilities worldwide.
As of December 31, 1998, the Company's facilities were leased to CCA and other
third-party operators pursuant to long-term, non-cancellable "triple net" leases
which required the tenant to pay all operating expenses, taxes, insurance and
other costs (together with the CCA Leases, the "Leases"). See "-- Leases with
Primary Tenant" herein for a discussion of the CCA Leases.
The Company's executive offices, which are now the executive offices of New
Prison Realty, were located at 10 Burton Hills Boulevard, Suite 100, Nashville,
Tennessee 37215, and its telephone number, which is now the telephone number of
New Prison Realty, was (615) 263-0200.
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BUSINESS OBJECTIVES AND STRATEGIES
BUSINESS OBJECTIVES
As of December 31, 1998, the Company's primary business objectives were to
generate increasing returns to its shareholders through increases in cash flow
available for distribution and to maximize long-term total returns to its
shareholders. The Company generally sought to achieve these objectives by:
- Expanding its portfolio of correctional and detention
facilities by (i) designing, building and/or developing
correctional and detention facilities for both government
entities and qualified third-party operators, and (ii)
selectively acquiring correctional and detention facilities
that demonstrated potential for significant revenue and cash
flow from both private prison managers and government
entities;
- Expanding the design capacity of its facilities; and
- Structuring leases under which its lessees paid base rent with
certain annual escalations and paid certain expenses in
connection with the operation of the property, such as real
estate taxes, insurance, utilities and services, maintenance
and other operating expenses.
BUSINESS STRATEGY
The Company's principal business strategy was to design, build and finance new
correctional and detention facilities for, as well as to acquire and renovate
existing facilities from, both governmental entities and private prison managers
and to lease these facilities under long-term "triple net" leases to government
entities and qualified third party operators. Substantially all of the Company's
income was derived from rent payments from leases of correctional and detention
facilities.
The Industry. The Company believed the United States' private corrections
industry was in a period of significant growth as governments of all types faced
continuing pressure to control costs and improve the quality of services. As the
number of crimes committed each year, and the corresponding number of arrests,
continued to increase, governments became increasingly willing to consider
privatization of corrections and detention services as a means of controlling
costs and improving the quality of services.
According to the Private Adult Correctional Facility Census, prepared by the
Private Corrections Project Center for Studies in Criminology and Law,
University of Florida (the "Census"), the design capacity of privately managed
adult correctional and detention facilities worldwide has increased dramatically
since the first privatized facility was opened by CCA in 1984. The majority of
this growth has occurred since 1989, as the number of privately managed adult
correctional and detention facilities in operation or under construction
worldwide increased from 26 facilities with a design capacity of 10,973 beds in
1989 to 185 facilities with a design capacity of 132,572 beds in 1998. The
majority of all private prison management contracts are in the United States.
According to the Census, at December 31, 1998, 159 of the 185 private
correctional facilities were in the United States, with the remaining 26 divided
between Australia, the United Kingdom and South Africa. According to the Census,
the aggregate capacity of private facilities in operation or under construction
rose from 106,940 beds at December 31, 1997, to 132,572 beds at December 31,
1998, an increase of 24%.
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The Census reports that at December 31, 1998 there were 31 state jurisdictions,
the District of Columbia and Puerto Rico, within which there were private
correctional or detention facilities in operation or under construction.
Further, all three federal agencies with prisoner custody responsibilities
(i.e., the United States Bureau of Prisons (the "BOP"), the U.S. Immigration and
Naturalization Service (the "INS") and the U.S. Marshals Service (the "USMS"))
continued to contract with private management firms. Management believed that
the continued trend was a result of the fact that private companies competing
with each other are incentivized to keep costs down and to improve the quality
of services. Various industry studies show that cost savings from privately
operated prisons may be in the range of 10-15%. Further, based on recidivism
rates, the quality of services is generally better in privately operated prisons
than in public prisons.
Management believed that the trend of increasing privatization of the
corrections industry would continue, in large part, because of the general
shortage of beds available in United States correctional and detention
facilities. According to reports issued by the United States Department of
Justice, Bureau of Justice statistics ("BJS"), the number of inmates housed in
United States federal and state prison and jail facilities increased from
744,208 at December 31, 1985 to 1,802,496 at June 30, 1998, a compound annual
growth rate of 7.3%. As of June 30, 1998, the BJS reported that one in every 150
United States residents was incarcerated. Further, at least 19 state prison
systems, as well as the federal prison system, are 24% or more over capacity.
Industry reports also indicate that inmates convicted of violent crimes
generally serve only one-third of their sentence, with the majority of them
being repeat offenders. Accordingly, there was a perceived public demand for,
among other things, longer prison sentences, as well as prison terms for
juvenile offenders, resulting in even more overcrowding in the United States
correctional and detention facilities. Finally, numerous courts and other
government entities in the United States have mandated that additional services
offered to inmates be expanded and living conditions be improved. Many
governments do not have the readily-available resources to make the changes
necessary to meet such mandates.
Growth Opportunities. The Company believed it had a competitive advantage in the
development, construction, and acquisition of new private correctional and
detention facilities due to the Company's significant capital resources and its
ability to finance and build facilities in significantly less time than
government entities. The Company believes that it could maintain access to
capital through a conservative capital structure. The Company believed that its
competitive advantage would have enabled it to capitalize on the following
opportunities:
Government Managed Facilities. Attractive opportunities existed to
develop correctional and detention facilities on behalf of various
government entities. Historically, government entities have used
various methods of construction financing to develop new correctional
and detention facilities, including but not limited to the following:
(i) one-time general revenue appropriations by the government agency
for the cost of the new facility; (ii) general obligation bonds that
are secured by either a limited or unlimited tax levied by the issuing
government entity; or (iii) lease revenue bonds secured by an annual
lease payment that is subject to annual or bi-annual legislative
appropriation of funds. Many jurisdictions are operating their
correctional and detention facilities at well above their rated
capacities, and as a result are under federal court orders to alleviate
prison overcrowding within a certain time period. These jurisdictions
are often not in a position to appropriate funds or obtain financing to
construct a correctional and detention facility because of other fiscal
demands or requirements for public approval. Accordingly, the Company
believed that, in an attempt to address fiscal pressures of matching
revenue collections with projected expenses, many such government
entities would have been be forced to consider private ownership with
respect to the development of new correctional and detention facilities
and sale-leaseback transactions or other financing alternatives with
respect to then existing correctional and detention facilities. The
Company further believed that by privatizing the development and
construction of a facility, a government entity could have avoided
large capital appropriations and voter referendum issues, freeing
itself to direct its capital to other competing infrastructure needs,
and accordingly, privatization would become even more attractive.
Expansion Opportunities. The Company's growth objectives focused on the
selective expansion of its existing correctional and detention
facilities to increase cash flows and property values. Prior to the
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Merger, the Company was in the process of developing approximately
3,000 beds through the expansion of six of its operating facilities.
The Company believed that CCA (and other future tenants of the Company)
would have continued to attempt to achieve economies of scale through
expansions of existing facilities. The Company intended to provide
expansion space as needed to CCA or any of the Company's other tenants.
Rent Escalations. The rent schedules under the Company's leases,
including those with CCA, provided for a relatively stable source of
cash flow and, with respect to CCA, opportunities to participate in
future growth in revenues of its tenants. The minimum rent for the
first year for each facility under the CCA Leases was initially set at
a fixed amount. Thereafter, the minimum rent was expected to escalate
by a percentage equal to the greater of (i) 4%, or (ii) 25% of the
percentage increase in the gross management revenues realized by CCA
from such facility, exclusive of any increase attributable to expansion
in the size of or the number of beds in such facility.
The Company's ability to acquire or develop new facilities or to expand its
existing facilities depended on its access to financing. There was no assurance
that the Company would be able to acquire or develop correctional facilities
that met its investment criteria. Moreover, acquisitions and expansions entailed
risks that acquired or expanded facilities would have failed to perform in
accordance with expectations. See "Risk Factors -- The Company was Subject to
Risks Inherent in Investment in Real Estate Properties" herein for a further
discussion of this risk.
LEASES WITH PRIMARY TENANT
At December 31, 1998, CCA was the Company's primary tenant, leasing 18 of the
Company's 24 operating facilities. Each such facility was leased to CCA under a
master lease agreement (the "Master Lease") with a primary term of 10 to 12
years (the "Fixed Term"). Immediately after the Merger, all existing leases
between CCA and the Company were canceled, and New Prison Realty and Operating
Company entered into a master lease agreement with respect to each facility
previously leased by CCA. Each CCA Lease conveyed a leasehold interest in the
land, the buildings and structures and other improvements thereon, easements,
rights and similar appurtenances to such land and improvements, and permanently
affixed equipment, machinery and other fixtures relating to the operation of the
facility and all personal property necessary to operate the facility for its
intended purpose (the "Leased Property"). Each CCA Lease permitted CCA to
operate the Leased Property only as a correctional or detention facility. CCA
had the responsibility in each CCA Lease to obtain and maintain all licenses,
certificates and permits in order to use and operate each facility.
The rent for the first year for each facility under the CCA Leases was initially
set at a fixed amount (the "Annual Base Rent") and was increased each year by
the Base Rent Escalation. The Annual Base Rent and the Base Rent Escalation for
each Leased Property were payable in monthly installments. The obligations of
CCA under each CCA Lease were cross-defaulted to each of the other CCA Leases
with respect to payment and certain other defaults. The Company had general
recourse to CCA under the CCA Leases, although CCA's payment obligations under
such CCA Leases were not secured by any assets of CCA.
The CCA Lease for each facility was renewable at fair market rates for three
additional five-year terms beyond the Fixed Term (the "Extended Terms"), but
only upon the mutual agreement of the Company and CCA. Fair market rates for
Extended Terms were determined mutually by the Company and CCA based on their
respective analyses of the market for the relevant CCA facility. Such analyses
included a review of the historical and projected economic performance of the
facility and took into account the interest rate environment at the time of the
extension and the creditworthiness of the tenant. The Fixed Term and Extended
Terms under each CCA Lease were subject to earlier termination upon the
occurrence of certain contingencies described in the CCA Lease. Additionally,
each CCA Lease was terminable by the Company, at its option, at any time after
the first five years of the CCA Lease, upon 18 months' written notice to CCA.
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Each CCA Lease was what is commonly known as a "triple-net" lease or "absolute
net" lease, under which CCA was to pay the Annual Base Rent and all additional
charges. Under each CCA Lease, CCA was required, at its sole cost and expense,
to maintain each Leased Property in good order, repair and appearance and to
make structural improvements and repairs which were necessary and appropriate to
keep such Leased Property in good order, repair and appearance (excluding
ordinary wear and tear). The Company was not required to build or rebuild any
improvements to any Leased Property, or to make any repairs, replacements,
alterations, restorations or renewals to any Leased Property. CCA, at its sole
cost and expense, could have made alterations, additions, changes and/or
improvements to each Leased Property with the prior written consent of the
Company, provided that the value and primary intended use of such Leased
Property was not impaired. All machinery, equipment, furniture, fixtures and
other personal property installed at the expense of CCA on any Leased Property
remained the property of CCA at the termination of the CCA Leases. Each CCA
Lease provided that, at the request of CCA, the Company could make capital
additions. In certain situations, a capital addition to a Leased Property could
be made directly by CCA and financed by third parties, with the prior written
consent of the Company. In the case of a capital addition not undertaken or
financed by the Company, the Company had an option to acquire and leaseback to
CCA such capital addition for a period of 10 years following the date on which
inmates were first received at such capital addition, at a cost equal to the
fair market value of such capital addition and at an annual rental rate equal to
fair market rental rates.
The CCA Leases provided that CCA could not have, without the prior written
consent of the Company, assigned, sublet, mortgaged, pledged, hypothecated,
encumbered or otherwise transferred any CCA Lease or any interest therein with
respect to all or any part of the Leased Property.
GOVERNMENT REGULATION
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in such property. Such laws often impose liability whether or not
the owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances. The cost of complying with environmental laws
could have materially adversely affected the amount of cash available for
distribution by the Company. Phase I environmental assessments were obtained on
substantially all of the Company's facilities. The purpose of a Phase I
environmental assessment is to identify potential environmental contamination
that is made apparent from historical reviews of such facilities, reviews of
certain public records, visual investigations of the sites and surrounding
properties, toxic substances and underground storage tanks. The Phase I
environmental assessment reports did not reveal any environmental contamination
that the Company believed would have had a material adverse effect on the
Company's business, assets, results of operations or liquidity, nor was the
Company aware of any such liability. Nevertheless, it is possible that these
reports did not reveal all environmental liabilities or that there were material
environmental liabilities of which the Company was unaware. In addition,
environmental conditions on properties owned by the Company had the potential to
affect the operation or expansion of facilities located on the properties. Each
CCA Lease made various representations and warranties relating to environmental
matters with respect to each facility. Each CCA Lease also required CCA to
indemnify and hold harmless the Company and any CCA mortgagee from and against
all liabilities, costs and expenses imposed upon or asserted against the Company
or a facility on account of, among other things, any federal, state or local
law, ordinance, regulation, order or decree relating to the protection of human
health or the environment with respect to a facility.
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AMERICANS WITH DISABILITIES ACT
The Company's facilities and the Option Facilities were subject to the Americans
with Disabilities Act of 1990, as amended (the "ADA"). The ADA has separate
compliance requirements for "public accommodations" and "commercial facilities"
but generally requires that public facilities such as correctional facilities be
made accessible to people with disabilities. These requirements became effective
in 1992. Compliance with the ADA requirements could have required removal of
access barriers and other capital improvements at the Company's facilities.
Noncompliance with the ADA could have resulted in the imposition of fines on the
Company, and potentially could still result in the imposition of fines on New
Prison Realty, as successor in interest to the Company, or an award of damages
to private litigants. The Leases provided that the lessee would be required to
make any necessary modifications or improvements to comply with the ADA. As of
December 31, 1998, the Company did not believe that the costs, if any, for any
modifications necessary to comply with the ADA were material.
INSURANCE
Each lease between the Company and its lessees, including the CCA Leases,
provided that the lessee would maintain insurance on each leased property under
the lessee's insurance policies providing for the following coverages: (i) fire,
vandalism and malicious mischief, extended coverage perils, and all physical
loss perils; (ii) comprehensive general public liability (including personal
injury and property damage); and (iii) worker's compensation. Under each of
these leases, the Company had the right to periodically review its lessees'
insurance coverage and provide input with respect thereto. CCA maintained
general liability coverage of $30.0 million. In addition to the insurance
coverage provided by the Company's insurance requirements under the triple net
leases, the Company maintained a general liability insurance policy of $10.0
million for all of its operations, as well as insurance in amounts it deemed
adequate to cover property and casualty risks, workers' compensation and
directors' and officers' liability.
EMPLOYEES
At December 31, 1998, the Company had 12 full-time employees, all of whom were
employed at the Company's corporate offices. At December 31, 1998, none of the
Company's employees were subject to a collective bargaining agreement, and the
Company had experienced no labor-related work stoppages and considered its
relations with its personnel to be good. With the exception of one employee,
each employee of the Company became an employee of New Prison Realty following
the Merger.
LEGAL PROCEEDINGS
Owners and operators of privatized correctional and detention facilities are
subject to a variety of legal proceedings arising in the ordinary course of
operating such facilities, including proceedings relating to personal injury and
property damage. Such proceedings are generally brought against the operator of
a correctional facility, but may also be brought against the owner. Although, as
of December 31, 1998, the Company was not subject to any such claims, the
Company's lessees, including CCA, were parties to proceedings in connection with
the operation of correctional and detention facilities. As of December 31, 1998,
the Company did not believe that such litigation, if resolved against its
lessees or their successors in interest, would have a material adverse effect
upon its business or financial position. The Company's leases with its lessees
or its successors in interest, including the CCA Leases, generally provided that
lessees were responsible for claims based on personal injury and property damage
at such facilities and that the Company's lessees maintain insurance for such
claims.
At December 31, 1998, the Company was subject to certain legal proceedings
arising out of the ordinary course of its business, including certain claims
arising in connection with the construction and development of its facilities.
At December 31, 1998, the Company did not believe that such litigation,
collectively, was material or that such litigation, a portion of which was
expected to be covered by liability insurance, would have a material adverse
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effect upon its business or financial position if resolved against the Company.
In connection with the Merger, New Prison Realty assumed the Company's potential
liabilities under these legal proceedings.
COMPETITION
The Company's facilities were subject to competition for inmates from private
prison managers and the number of inmates in a particular geographical area
could have materially affected the revenues of such facilities. In addition,
revenues of the Company's facilities were affected by a number of factors
including the demand for inmate beds and general economic conditions. The
Company was also subject to competition for the acquisition of correctional and
detention facilities with other purchasers of correctional and detention
facilities.
RISK FACTORS
The Company was subject to certain risks and uncertainties that could have
affected the actual results of the Company in 1998. The following risk factors
describe, among others, those risks as identified by the Company.
THE COMPANY WAS SUBJECT TO RISKS INHERENT IN THE CORRECTIONS AND DETENTION
INDUSTRY
General. At December 31, 1998, the Company primarily owned correctional and
detention facilities. Under the rules applicable to REITs, the Company was not
permitted to operate the facilities it owned, thus its revenues and therefore
its ability to make distributions were dependent on the ability of its tenants,
including CCA, to make lease payments under the Leases. Accordingly, the Company
was subject to the following risks, which are the primary operating risks
generally inherent in the corrections and detention industry.
Short-term Nature of Government Contracts. Private prison managers typically
enter into facility management contracts with government entities for terms of
up to five years, with one or more renewal options that may be exercised only by
the contracting government agency. The Company was not assured that any agency
would exercise a renewal option. The contracting agency typically could have
terminated a facility contract at any time without cause by giving the private
prison manager written notice. There also existed the risk that a facility owned
by the Company would not be the subject of a contract between a private manager
and a government entity while it was leased to a private prison manager since
the Company's leases with its lessees generally extended for periods
substantially longer than the contracts with government entities. Accordingly,
if a private prison manager's contract with a government entity to operate a
Company facility was terminated, or otherwise not renewed, or if such a
government entity was unable to supply a facility with a sufficient number of
inmates, such event could have adversely affected the ability of the contracting
private prison manager to make the required rental payments to the Company.
There also existed the risk that CCA would not be able to maintain certain of
its respective management contracts, which could have adversely affected its
ability to make payments to the Company or adversely affected the amount of such
payments.
Dependence on Government Appropriations. A private prison manager's cash flow is
subject to the receipt of sufficient funding of and timely payment by
contracting government entities. If the appropriate government agency had not
received sufficient appropriations to cover its contractual obligations, a
contract may have been terminated or the management fee may have been deferred
or reduced. Any delays in payment could have had an adverse effect on the
private prison manager's cash flow and therefore its ability to make lease
payments to the Company. Further, the ability of government entities contracting
directly with the Company to make lease payments to the Company was dependent
upon annual appropriations.
Dependence on Ability to Develop New Prisons and Contracts. The success of a
private prison manager in obtaining new awards and contracts may depend, in
part, upon its ability to locate land that can be leased or acquired under
favorable terms. Otherwise desirable locations may be in or near populated areas
and, therefore, may generate legal action or other forms of opposition from
residents in areas surrounding a proposed site. Moreover, the private
corrections industry is subject to public scrutiny. Negative publicity about an
escape, riot or
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other disturbance at a privately managed facility could have resulted in
publicity adverse to the Company or CCA and the private corrections industry in
general. In addition, organized labor unions in many states, including organized
labor unions consisting of state correctional and detention facility employees,
have increasingly opposed the awarding of contracts to private prison managers.
Any of these occurrences or trends could have made it more difficult for a
private prison manager to renew or maintain existing contracts or to obtain new
contracts or sites on which to operate new facilities or for the Company to have
developed or purchased facilities and to have leased them to government or
private entities, all of which could have had a material adverse effect on the
Company's business.
Increased Regulation of the Private Prison Industry. A substantial majority of
the Company's facilities were managed and operated by CCA. Several states
enacted legislation imposing restrictions upon private prison management
companies, such as CCA. Certain states enacted laws requiring licensing of
private prison management companies and increasing regulatory oversight over
private prison management companies. At least one state attempted to restrict
the ability of private prison management companies to transfer and house certain
types of out-of-state prisoners in that state. See "Business -- Government
Regulation." Although the Company does not believe that such requirements
adversely affected CCA's ability to make required lease payments under the CCA
Leases, there was no assurance that future legislation requiring further
regulatory private prison management companies would not have had such an
effect.
Options to Purchase and Reversions. Four of the facilities which were owned or
under development by the Company as of December 31, 1998 either were or would
have been subject to an option to purchase by certain government agencies. If
any of these options were exercised, there existed the risk that the Company
would not have recouped its full investment from the applicable facility or that
it would have otherwise been unable to invest the proceeds from the sale of the
facility in one or more properties that yielded as much revenue as the property
acquired by the government entity. In addition, ownership of two of the
Company's facilities owned as of December 31, 1998 would have, upon the
expiration of a specified time period, reverted to the respective government
agency which contracted with the Company or CCA. See "Properties -- The
Facilities."
Legal Proceedings. The Company's ownership of correctional and detention
facilities could have exposed it to potential third party claims or litigation
by prisoners or other persons relating to personal injury or other damages
resulting from contact with a facility, its managers, personnel or other
prisoners, including damages arising from a prisoner's escape from, or a
disturbance or riot at, a facility owned by the Company. In addition, as an
owner of real property, the Company was potentially subject to certain
proceedings relating to personal injuries of persons at such facilities. The
Company could have been held responsible under state laws for claims based on
personal injury or property damage despite contractual provisions in its leases
with private prison managers which provided for indemnity against such claims.
Moreover, such legal proceedings could have had a material adverse effect on
CCA, which could have adversely affected its ability to make lease payments to
the Company or the amounts of such payments.
THE COMPANY WAS SUBJECT TO TAX RELATED RISKS
General. The Company elected to be taxed as a REIT for federal income tax
purposes for its taxable year ending December 31, 1997. As a REIT, the Company
(subject to certain exceptions) was not subject to federal income taxation at
the corporate level on its taxable income that was currently distributed to its
stockholders. No assurance could have been made that the Company would qualify,
or continue to qualify, as a REIT. Qualification as a REIT involves the
application of highly technical and complex provisions of the Code for which
there are only limited judicial or administrative interpretations, as well as
various factual matters and circumstances which were not entirely within the
Company's control. See "-- Tax Status" herein for a more complete discussion of
the requirements for qualification as a REIT.
Adverse Effects of Failure to Qualify as a REIT. If the Company failed to
qualify as a REIT, it would have been subject to federal income tax, including
any applicable alternative minimum tax, on its taxable income at corporate
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rates. In addition, unless entitled to relief under certain statutory
provisions, the Company also would have been disqualified from re-electing REIT
status for the four taxable years following the year during which qualification
was lost. Failure to qualify as a REIT would have reduced the net earnings of
the Company available for distribution to shareholders because of the additional
tax liability to the Company for the year or years involved. To the extent that
distributions to shareholders would have been made in reliance upon the
Company's qualifying as a REIT, the Company might have been required to borrow
funds or to liquidate certain of its investments to pay the applicable tax. The
failure to qualify as a REIT also would have constituted a default under the
Company's current debt obligations.
THE COMPANY WAS SUBJECT TO RISKS INHERENT IN INVESTMENT IN REAL ESTATE
PROPERTIES
Investments in correctional and detention facilities are subject to risks
typically associated with investments in real estate. Such risks include the
possibility that the correctional and detention facilities and any additional
investment properties would generate total rental rates lower than those
anticipated or would have yielded returns lower than those available through
investment in comparable real estate or other investments. Furthermore, equity
investments in real estate are relatively illiquid and, therefore, the ability
of the Company to vary its portfolio promptly in response to changed conditions
was limited.
Investments in correctional and detention facilities subjected the Company to
risks involving potential exposure to environmental liability and uninsured
loss. The operating costs of the Company could have been affected by the
obligation to pay for the cost of complying with existing environmental laws,
ordinances and regulations. Additionally, although the CCA Leases required CCA
to maintain insurance with respect to each of the facilities owned by the
Company and leased to CCA, there were certain types of losses, such as losses
from earthquakes, which were either uninsurable or for which it was not
economically feasible to obtain insurance coverage, in light of the substantial
costs associated with such insurance. Should an uninsured loss have occurred,
the Company could have lost both its capital invested in, and anticipated
profits from, one or more of the facilities owned by the Company.
THE COMPANY WAS DEPENDENT ON CCA, AS PRIMARY LESSEE OF THE COMPANY'S FACILITIES,
FOR ITS REVENUES AND ABILITY TO MAKE DISTRIBUTIONS TO ITS SHAREHOLDERS
CCA was the lessee of a substantial majority of the Company's facilities.
Therefore, the Company was dependent for its revenues upon CCA's ability to make
the lease payments required under the CCA Leases for such facilities. CCA's
obligation to make CCA Lease payments was not secured by any of the assets of
CCA, although the obligations under the leases were cross-defaulted so that the
Company could have terminated all the CCA Leases if CCA failed to make required
lease payments. If this had happened, however, the Company would have been
required to find other suitable lessees or risk losing its ability to elect or
maintain REIT status, as applicable.
THE COMPANY LACKED CONTROL OVER DAY-TO-DAY OPERATIONS AND MANAGEMENT OF ITS
FACILITIES
To qualify as a REIT for federal income tax purposes, the Company could not
operate, or participate in decisions affecting the operations of, its
facilities. Accordingly, the Company's lessees controlled the operations of its
facilities pursuant to the Leases, most of which had initial terms of 12 years
and three renewal terms of five years each, exercisable upon the mutual
agreement of the lessee and the Company. During the terms of the Leases, the
Company did not have the authority to require lessees to operate the facilities
in a particular manner or to govern any particular aspect of their operation
except as set forth in the Leases. Thus, even if the Company believed a lessee
was operating a facility inefficiently or in a manner adverse to the Company's
interests, the Company could not have required a lessee to change its method of
operation. The Company was limited to seeking redress only if a lessee violated
the terms of a Lease, in which case the Company's primary remedy was to
terminate the Lease or, in certain circumstances, all of the Leases with that
particular lessee, and to attempt to recover damages from the lessee. If a Lease
had been terminated, the Company would have been required to find another
suitable lessee or risk losing its ability to elect or maintain REIT status, as
applicable.
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EXISTING CONFLICTS OF INTEREST MAY HAVE HAD AN EFFECT ON THE COMPANY
As of December 31, 1998, some trustees, officers and shareholders of the Company
had relationships with the Company and CCA which may have created a conflict of
interest with respect to the business decisions affecting the Company. In
addition, the significant contractual and other ongoing relationships between
the Company and CCA may have presented conflicts of interest. These conflicts
imposed risks that these persons favored their own interests over the interests
of the Company in connection with the operations of the Company and CCA and the
relationship between the two companies. See "Certain Relationships and
Transactions" herein for a more complete discussion of these to conflicts of
interest.
THE COMPANY WAS DEPENDENT ON CERTAIN INDIVIDUALS FOR ITS MANAGEMENT
Doctor R. Crants served as the Chairman of the Company Board. J. Michael Quinlan
served as the Chief Executive Officer of the Company. The loss of the services
of either of these individuals could have had a material adverse effect on the
Company as it would have lost the benefit of their extensive knowledge of, and
experience in, the corrections industry. The Company entered into an employment
agreement with J. Michael Quinlan. Under applicable Tennessee law, which
governed the interpretation and enforcement of the employment agreement with J.
Michael Quinlan, specific performance was not available as a remedy for
violation of the agreements. Moreover, the Company could not generally enforce
the provisions of the employment agreement, including noncompetition agreements,
if the provisions contained therein were deemed unreasonable; provided, however,
that courts might have enjoined violations of covenants not to compete if the
scope of the employment was deemed to require special skills that could not have
been attained by another employee of average competence.
THE COMPANY IMPOSED LIMITS ON THE OWNERSHIP OF ITS SHARES TO MAINTAIN
QUALIFICATION AS A REIT
For the Company to qualify as a REIT, not more than 50% in value of its
outstanding shares could have been owned, directly or constructively, by five or
fewer individuals, as defined in the Code. In addition, rent from related party
tenants is not qualifying income for purposes of the gross income tests under
the Code. Two sets of constructive ownership rules, one to determine whether a
REIT is closely held and one to determine whether rent is from a related party
tenant, apply in determining whether these requirements are met. For the purpose
of preserving the Company's REIT qualification, among other things, the
Company's Charter prohibited direct or constructive ownership by any person of
more than 9.8% of the Company's outstanding Common Shares or Series A Preferred
Shares (the "Ownership Limit"). The constructive ownership rules in the Code are
complex and could have caused the Company's Common Shares or the Company's
Series A Preferred Shares owned, directly or constructively, by a group of
related individuals and/or entities to be deemed to be constructively owned by
one individual or entity. As a result, the acquisition of less than 9.8% of the
Company's Common Shares or of the Company's Series A Preferred Shares or the
acquisition of an interest in an entity which owned the Company's Common Shares
or the Company's Series A Preferred Shares by an individual or entity could have
caused that individual or entity or another individual or entity to own
constructively in excess of 9.8% of the Company's Common Shares or of the
Company's Series A Preferred Shares, and thus would have subjected such Common
Shares or Series A Preferred Shares to the Ownership Limit. Direct or
constructive ownership of the Company's Common Shares or of the Company's Series
A Preferred Shares in excess of the Ownership Limit would have caused the
violative transfer or ownership to be void, or would have caused such shares to
be held in trust as Shares-in-Trust (as hereinafter defined) for the benefit of
one or more charitable organizations. These provisions could have inhibited
market activity and the resulting opportunity for shareholders to realize a
premium for the Company's Common Shares or the Company's Series A Preferred
Shares if a shareholder were attempting to assemble a block of shares in excess
of the Ownership Limit. These provisions could also have had the effect of
making it more difficult for a third party to acquire control of the Company,
including certain acquisitions the shareholder may have deemed to be in their
best interests. Also, there could have been no assurance that such provisions
would in fact have enabled the Company to meet relevant REIT ownership
requirements.
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CERTAIN PROVISIONS OF THE COMPANY'S GOVERNING DOCUMENTS MAY HAVE LIMITED CHANGES
IN CONTROL OF THE COMPANY
Certain provisions of the Company's Charter and the Company's Bylaws, including
provisions imposing the Ownership Limit, authorizing the issuance of the
Company's Series A Preferred Shares and requiring staggered terms for the
Company Board, and certain provisions of the Maryland General Corporation Law
("MGCL") regarding business combinations and control share acquisitions could
have had the effect of delaying, deferring or preventing a change in control of
the Company or the removal of existing management and, as a result, could have
prevented the shareholders of the Company from being paid a premium for their
shares of the Company. The Company's Charter authorized the Company Board to
issue the Company's Series A Preferred Shares in one or more series, to
establish the number of shares in each series and to fix the designations,
powers, preferences and rights of each series and the qualifications,
limitations or restrictions thereof, all without shareholder approval. The
authorization of the Company's Series A Preferred Shares may have had an
anti-takeover effect because it gave the Company Board the power to issue the
Series A Preferred Shares at its sole discretion on such terms as it, in its
sole discretion, deemed proper, which may have had a dilutive effect on or
otherwise deterred any potential acquirer of the Company. The Company's Charter
provided for three classes of trustees as nearly equal in size as practicable,
exclusive of trustees elected by holders of the Company's Series A Preferred
Shares only when dividends payable on such shares were in arrears. Each class of
trustees held office until the third annual meeting for selection of trustees
following the election of such class. The Company's Charter further provided
that the shareholders of the Company could have, at any time, removed any
trustee, with or without cause, by an affirmative vote of a majority of
shareholders entitled to vote in the election of trustees. These provisions may
have had an anti-takeover effect because a third party would have been unable to
acquire immediate control of the Company Board due to the existence of the
classified board and would further have been unable to remove trustees without
majority shareholder approval.
YEAR 2000 COMPLIANCE ISSUES MAY HAVE HAD AN EFFECT ON THE COMPANY
An assessment of the Company's information technology hardware and software was
performed, and the Company believed that both were Year 2000 compliant, although
there was no assurance that coding errors or other defects would not have been
discovered in the future. The Company, however, may have been vulnerable to the
failure of third parties, including CCA and government entities for which CCA
provided services, to remedy their Year 2000 issues. The failure of government
entities for which CCA provided services to resolve their Year 2000 problems, or
the failure of CCA to remedy its Year 2000 problems, could have resulted in the
delayed collection of accounts receivable by CCA. The delayed collection of
accounts receivable could have adversely affected CCA's ability to make timely
lease and other payments to the Company. See "Management Discussion and
Analysis--Year 2000 Compliance" contained herein for a more detailed discussion
of the Company's Year 2000 compliance assessment.
A FLUCTUATION IN MARKET INTEREST RATES MAY HAVE AFFECTED THE PRICE OF THE
COMPANY'S SHARES
One of the factors that may have affected the price of the capital shares of the
Company was the amount of its distributions to shareholders in comparison to
yields on other financial instruments. An increase in the market interest rate
would have provided higher yields on other financial instruments, which could
have adversely affected the price of the Company's capital shares.
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TAX STATUS
The Company elected to be taxed as a REIT for federal income tax purposes
beginning with its taxable year ending December 31, 1997. As a REIT, the Company
(subject to certain exceptions) was not subject to federal income taxation at
the corporate level on its taxable income that was currently distributed to its
shareholders. Qualification as a REIT depended on the Company's ability to meet
certain distribution and share ownership requirements, as well as various
qualification tests prescribed in the Code, as more fully described below.
SHARE OWNERSHIP RESTRICTIONS
As a REIT, the Company was subject to rules regarding ownership of its capital
shares (the "Share Ownership Restrictions"). First, the Company, during a
substantial portion of its taxable year, must have been beneficially owned by
100 or more persons. Second, during the last half of the Company's taxable year,
not more than 50% of the Company's capital shares could have been owned,
directly or indirectly, by five or fewer "individuals," as that term is defined
in the Code. The Company's Charter contained certain restrictive provisions with
respect to the direct or constructive ownership of the Company's capital shares
which were designed to assist the Company in satisfying the Share Ownership
Restrictions. However, the constructive ownership rules in the Code are complex
and may have caused the Company's capital shares owned, directly or indirectly,
by a group of related individuals and/or entities to be deemed to be
constructively owned by an individual or entity in violation of the Share
Ownership Restrictions.
INCOME TESTS
To maintain its status as a REIT, the Company was required to satisfy two gross
income requirements (the "Income Tests") on an annual basis. First, at least 75%
of the Company's gross income (excluding gross income from prohibited
transactions) for each taxable year was required to be derived directly or
indirectly from investments relating to real property (including, among other
items, Rents from Real Property, as hereinafter defined) or from "qualified
temporary investment income," as defined in the Code (the "75% Income Test").
"Rents from Real Property" generally means the gross amount received for the use
of, or the right to use, a REIT's real property. Rents received by a REIT
qualify as Rents from Real Property only if the following conditions, among
others, are met: (i) the leases under which such rents are paid must be
respected as "true leases" for federal income tax purposes; and (ii) the REIT
receiving rental payments from a corporate tenant, or a 10% shareholder of such
REIT, must not own, directly or constructively, 10% or more of the voting power
or total number of outstanding shares of such corporate tenant (a "Related Party
Tenant"). Second, at least 95% of the Company's gross income (excluding gross
income from prohibited transactions) for each taxable year was required to be
derived from investments related to real property or from certain other types of
passive income (the "95% Income Test").
Due to certain aspects of the Company's relationship with CCA, the Internal
Revenue Service (the "IRS") may not have considered part or all of the payments
that the Company received from CCA under the CCA Leases to be Rents from Real
Property. First, the IRS could have recharacterized the CCA Leases as service
contracts or partnership agreements, rather than as "true leases." Second, the
application of the Code's complex constructive ownership rules, together with
the failure of the Ownership Limit contained in the Company's Charter to prevent
such constructive ownership, could have led the IRS to recharacterize CCA as a
Related Party Tenant. In either event, based upon the amount of rent payments
received under the CCA Leases, the Company likely would not have satisfied
either the 75% Income Test or the 95% Income Test and, as a result, would have
lost its REIT status.
ASSET TESTS
To maintain its qualification as a REIT, the Company was required to satisfy
three tests relating to the nature of its assets (the "Asset Tests") at the
close of each quarter of its taxable year. First, at least 75% of the value of
the Company's total assets (determined in accordance with generally accepted
accounting principles ("GAAP")) was required to be represented by real estate
assets, cash, cash items and government securities. Second, the value of
17
<PAGE> 20
any one issuer's securities owned by the Company (other than those qualifying
for the 75% test) may not have exceeded 5% of the value of the Company's total
assets. Third, the Company may not have owned more than 10% of any one issuer's
outstanding voting securities. These Asset Tests were applied to the Company as
of the close of each quarter. After initially meeting the Asset Tests, the
Company would not have lost its status as a REIT for failure to satisfy the
Asset Tests at the end of a later quarter solely by reason of a change in asset
values. Pursuant to valuations determined in good faith by the Board of
Directors of the Company, the Company believed that, as of December 31, 1998, it
satisfied the Asset Tests. However, the Company's determination was not binding
on the IRS.
DISTRIBUTION REQUIREMENTS
As a REIT, the Company was required to make annual distributions to its
shareholders in an amount at least equal to (1) the sum of (a) 95% of the
Company's "REIT taxable income" (as defined in the Code to exclude net capital
gains) and (b) 95% of the net income, if any, from foreclosure property in
excess of the special tax on income from foreclosure property, minus (2) the sum
of certain items of non-cash income. To the extent that the Company did not
distribute all of its net capital gain or distribute at least 95% (but less than
100%) of its REIT taxable income, as adjusted, it was subject to tax on the
undistributed portion, at regular corporate tax rates. Furthermore, if the
Company failed to distribute for each calendar year at least the sum of (a) 85%
of its ordinary income for such year, (b) 95% of its net capital gain for such
year, and (c) any undistributed ordinary income and capital gain net income from
prior periods, the Company would have been subject to a 4% excise tax on the
excess of such required distribution over the amounts actually distributed.
TAX LEGISLATION
The REIT industry is subject to regulation by Congress. Legislation affecting
REITs could have been introduced in Congress at any time. Moreover, legislation,
as well as administrative interpretations or court decisions, could have changed
the tax laws with respect to REIT qualification and the federal income tax
consequences of such qualification. The adoption of any such legislation,
regulation, administrative interpretation or court decision could have had a
material adverse effect on the results of operations, financial condition and
prospects of the Company.
FOREIGN OPERATIONS
In July 1998, the Company entered into an agreement with CCA, whereby the
Company agreed to purchase from CCA all issued and outstanding stock of Agecroft
Properties, Inc. ("API") for approximately $80.0 million upon the completion of
an 800 bed medium-security prison in Salford, England for which API had entered
into a contract to design, develop and construct the facility. However, as of
December 31, 1998, the facility had not been completed and in conjunction with
the Merger, API was acquired by New Prison Realty and on January 1, 1999, New
Prison Realty acquired the Company. As such, the Company's agreement to purchase
the issued and outstanding stock of API will not be completed. Upon completion
of the construction of the facility, affiliates of Operating Company will lease
the facility from API and manage the facility pursuant to contracts with
agencies of the British government.
ITEM 2. PROPERTIES.
THE FACILITIES
General. The facilities owned by the Company, or subject to a purchase option
held by the Company, could 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
18
<PAGE> 21
patrol or detention services; and multi-security facilities are facilities with
various areas encompassing either minimum, medium or maximum security. The
Company's facilities could also be classified according to the type(s) of
inmates or other detainees held at such facility. The facilities could be
grouped in this manner into the following five facility types:
Correctional Facilities. Correctional facilities are used to house inmates on a
permanent basis for the duration of their sentences.
Detention Facilities. Detention facilities are multi-security level facilities
used to house inmates of all levels, including pre-trial and pre-sentence
prisoners for the United States Marshals Service (the "USMS"), inmates sentenced
but not yet housed in correctional facilities, inmates awaiting trial,
sentencing or hearing and persons detained by the United States Immigration and
Naturalization Service (the "INS").
Processing Centers. Processing centers are used to house undocumented aliens for
the INS and are classified as minimum to medium security facilities.
Pre-Parole Transfer Facilities. Pre-Parole Transfer facilities are used to hold
inmates who have been arrested for technical violations of their parole
agreements with a State Department of Criminal Justice, Board of Pardons and
Paroles. Pre-parole transfer facilities are classified as minimum security
facilities.
Each of the facilities owned by the Company was pledged to secure any borrowings
under the Company Credit Facility. The following table set forth certain
information with respect to the facilities owned by the Company as of December
31, 1998:
19
<PAGE> 22
FACILITIES OWNED BY THE COMPANY
<TABLE>
<CAPTION>
DESIGN SECURITY LEASE
FACILITIES LOCATION CAPACITY(1) LEVEL TENANT TERM
---------- -------- -------- ----- ------ ----
<S> <C> <C> <C> <C> <C>
Eloy Detention Center Eloy, Arizona 1,500 medium CCA 12
Central Arizona Detention Center Florence, Arizona 2,304 multi CCA 12
Leo Chesney Correctional Center Live Oak, California 240 minimum Cornell Corrections 5
Leavenworth Detention Center Leavenworth, Kansas 327 maximum CCA 12
Lee Adjustment Center Beattyville, Kentucky 756 medium CCA 12
River City Correctional Center Louisville, Kentucky 363 medium CCA 12
Marion Adjustment Center St. Mary, Kentucky 856 minimum CCA 12
Otter Creek Correctional Center Wheelwright, Kentucky 656 medium CCA 12
Pamlico Correctional Facility Bayboro, North 528 (2) medium State of 12
Carolina North Carolina
Mountain View Correctional Facility Spruce Pine, 528 (2) medium State of 12
North Carolina North Carolina
Torrance County Detention Facility Estancia, New Mexico 910 multi CCA 12
Queensgate Correctional Facility Cincinnati, Ohio 850 medium Hamilton County, 5
Ohio
Northeast Ohio Correctional Center Youngstown, Ohio 2,016 medium CCA 12
Cimarron Correctional Facility (3) Cushing, Oklahoma 960 medium CCA 12
Davis Correctional Facility Holdenville, Oklahoma 960 medium CCA 12
West Tennessee Detention Facility Mason, Tennessee 600 multi CCA 12
Bridgeport PPT Facility Bridgeport, Texas 200 minimum CCA 12
Community Education Partners --
Dallas County School for Dallas, Texas (4) juvenile/ Community 12
Accelerated Learning minimum Education
Partners
Community Education Partners --
Southeast Houston School for Houston, Texas (4) juvenile/ Community 12
Accelerated Learning minimum Education
Partners
Houston Processing Center Houston, Texas 411 medium CCA 12
Laredo Processing Center Laredo, Texas 258 medium CCA 12
Webb County Correctional Center Laredo, Texas 512 maximum CCA 12
Mineral Wells PPT Facility Mineral Wells, Texas 2,103 minimum CCA 12
T. Don Hutto Correctional Center Taylor, Texas 480 medium CCA 12
</TABLE>
20
<PAGE> 23
- -----------------------
(1) Design capacity measures the number of beds, and accordingly, the
number of inmates each facility is designed to accommodate. Management
believed design capacity was an appropriate measure for evaluating
prison operations, because the revenues generated by each facility were
based on a per diem or monthly rate per inmate housed at the facility
paid by the corresponding contracting government entity. The ability of
an operator to satisfy its financial obligations under its leases with
the Company was based in part on the revenues generated by the
facilities, which in turn depended on the design capacity of each
facility.
(2) The facility was being expanded by the Company at December 31, 1998.
(3) The facility was subject to a purchase option held by the Oklahoma
Department of Corrections (the "ODC") which granted the ODC the right
to purchase the facility at its fair market value.
(4) This alternative educational facility is currently configured to
accommodate 900 at-risk juveniles and may be expanded to accommodate a
total of 1400 students. The Company believed that design capacity does
not generally apply to educational facilities, and therefore, the
aggregate design capacity of the Company's facilities contained in this
Annual Report does not include the total number of students which could
be accommodated at this facility.
In addition, as of December 31, 1998, the Company had an option to purchase 15
Option Facilities, with an aggregate design capacity of more than 17,000 beds,
for an aggregate amount of more than $700.0 million.
ITEM 3. LEGAL PROCEEDINGS.
At December 31, 1998, the Company was subject to certain legal proceedings
arising out of the ordinary course of its business, including certain claims
arising in connection with the construction and development of its facilities.
At December 31, 1998, the Company did not believe that such litigation,
collectively, was material or that such litigation, a portion of which was
expected to be covered by liability insurance, would have a material adverse
effect upon its business or financial position if resolved against the Company.
In connection with the Merger, New Prison Realty assumed the Company's potential
liabilities under these legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS.
In September, 1998, the Board of Directors of CCA and the Company Board each
approved and adopted the Merger Agreement and the Merger Related Transactions
and recommended that the same be adopted and approved by their respective
shareholders. On December 1, 1998, at a special meeting of the shareholders of
CCA, the common shareholders of CCA approved and adopted the Merger Agreement
and the Merger Related Transactions with approximately 85.2% of the votes cast
(or approximately 61.9% of the total number of shares eligible to vote) favoring
the transaction, approximately 14.6% of the votes cast (or approximately 10.6%
of the total number of shares eligible to vote) not favoring the transaction,
and less than approximately 0.2% of the votes cast or total number of shares
eligible to vote abstaining. On December 3, 1998, at a special meeting of the
shareholders of the Company, the common shareholders of the Company approved and
adopted the Merger Agreement and the Merger Related Transactions with
approximately 98% of the votes cast (or approximately 82% of the total number of
shares eligible to vote) favoring the transaction, approximately 1.8% of the
votes cast (or approximately 1.5% of the total number of shares eligible to
vote) not favoring the transaction, and less than approximately 0.2% of the
votes cast or total number of shares eligible to vote abstaining.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS.
MARKET PRICE OF AND DISTRIBUTIONS ON COMMON SHARES
The Company's Common Shares began trading on the New York Stock Exchange (the
"Exchange") on July 18, 1997, under the symbol "PZN". On December 31, 1998, the
last reported sale price per share of the Common Shares was $20.50 and there
were 136 registered holders and approximately 6,000 beneficial holders,
respectively, of the Common Shares. As a result of the Merger, the Common Shares
and the Series A Preferred Shares, which prior to the Merger traded on the
Exchange under the symbols "PZN" and "PZN PrA", respectively, are no longer
traded on the Exchange or on any other securities exchange or market.
21
<PAGE> 24
The following table sets forth, for the fiscal quarters indicated (i) the range
of high and low closing prices of the Common Shares on the Exchange, and (ii)
the amount of cash distributions paid per share:
<TABLE>
<CAPTION>
PER SHARE
CLOSING PRICE CASH DISTRIBUTION
HIGH LOW PAID
---- --- ----
FISCAL YEAR 1997
<S> <C> <C> <C>
Third Quarter (July 18, 1997 through September 30,
1997)........................................................... $37.75 $28.83 $0.346(1)
Fourth Quarter.................................................. 44.63 33.00 0.425
FISCAL YEAR 1998
First Quarter................................................... 44.38 39.00 0.425
Second Quarter.................................................. 41.38 26.63 0.425
Third Quarter................................................... 30.25 18.00 0.480
Fourth Quarter ................................................. 25.94 16.00 0.480
</TABLE>
- -----------------------
(1) Represents a pro rata distribution of the Company's initial quarterly
distribution of $0.425 per share based on a partial calendar quarter
beginning on July 18, 1997, the closing date of the Initial Offering.
The Company has paid regular quarterly distributions on its Common Shares. The
Company has also paid regular quarterly dividends on its Series A Preferred
Shares pursuant to the terms of such shares. Distributions by the Company on the
Common Shares were made at the discretion of the Company Board and depended on
the Company's financial condition, its capital requirements, the annual
distribution requirements under the REIT provisions of the Code and such other
factors as the Company Board deemed relevant. Under the Company Credit Facility,
the Company was permitted to make distributions on its capital shares (including
distributions on the Common Shares and the dividends on the Series A Preferred
Shares discussed herein) only if the Company was not in default under the
Company Credit Facility.
In order to qualify as a REIT, the Company had to make annual distributions to
its shareholders of at least 95% of its taxable income (excluding net capital
gains).
RECENT SALES OF UNREGISTERED SECURITIES AND USE OF PROCEEDS FROM REGISTERED
SECURITIES
COMMON SHARES
The Company was formed as a Maryland real estate investment trust in April 1997,
with one shareholder being issued 1,000 Common Shares in consideration of
$1,000. This issuance of securities was exempt from the Securities Act
registration requirements pursuant to Section 4(2) of the Securities Act.
On July 18, 1997, pursuant to the Company's Registration Statement on Form S-11
(Reg. no. 333-25725), declared effective by the Commission on July 10, 1997, the
Company completed the Initial Offering. The gross proceeds to the Company from
the sale of the Common Shares were approximately $446.8 million, generating net
proceeds to the Company of $412.1 million after deduction of the underwriting
discount and offering expenses. The Company used $308.1 million of the net
proceeds to purchase the nine Initial Facilities simultaneously with the
completion of the Initial Offering. The balance of the net proceeds along with
working capital and borrowings under the
22
<PAGE> 25
Company's existing bank credit facility were subsequently used to purchase two
of the Option Facilities (the Northeast Ohio Correctional Center and the
Torrance County Detention Facility) and for general corporate purposes. The
Initial Offering was underwritten by a syndicate of underwriters lead managed by
J.C. Bradford & Co., A.G. Edwards & Sons, Inc., Legg Mason Wood Walker
Incorporated, Lehman Brothers, PaineWebber Incorporated, and Stephens Inc.
Pursuant to the requirements of the Commission, CCA was required to act as a
co-registrant on the Registration Statement on Form S-11 (Reg. no. 333-25725-01)
with respect to the Initial Offering. CCA, however, received no proceeds
directly from the Initial Offering.
On July 18, 1997, upon completion of the Initial Offering, D. Robert Crants, III
and Michael W. Devlin each received 150,000 Common Shares as a development fee
and for services rendered and as reimbursement of actual costs incurred in
connection with the formation of the Company, the completion of the Company's
Initial Offering and the closing of the Company's purchase of the Initial
Facilities from CCA. The reimbursed costs include certain costs related to
property due diligence, employee compensation, travel and overhead. The Company
received no cash proceeds from the issuance of these 300,000 Common Shares. This
issuance was exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) of the Securities Act.
SUBSEQUENT OFFERING OF SERIES A PREFERRED SHARES
On January 30, 1998, pursuant to the Company's Registration Statement on Form
S-11 (Reg. no. 333-43935) declared effective by the Commission on January 26,
1998, the Company completed an offering of 4,300,000 of the Series A Preferred
Shares (including 300,000 Series A Preferred Shares issued as a result of the
exercise of an over-allotment option by the underwriters), at a price of $25.00
per share. The Series A Preferred Shares were redeemable at any time on or after
January 30, 2003, at $25.00 per share, plus dividends accrued and unpaid to the
redemption date. The Series A Preferred Shares had no stated maturity, sinking
fund provision or mandatory redemption and were not convertible into any other
securities of the Company. Dividends on the Series A Preferred Shares were
cumulative from the date of original issue of such shares and were payable
quarterly in arrears on the fifteenth day of January, April, July and October of
each year, to shareholders of record on the last day of March, June, September
and December of each year, respectively, at a fixed annual rate of 8.0%. Prior
to the Merger, the shares were listed on the Exchange under the symbol "PZN
PrA." The offering of the Series A Preferred Shares was underwritten by a
syndicate of underwriters lead managed by J.C. Bradford & Co., NationsBanc
Montgomery Securities LLC, PaineWebber Incorporated, Stephens Inc. and Wheat
First Butcher Singer. The gross proceeds from the sale of the Series A Preferred
Shares were approximately $107.5 million, generating net proceeds to the Company
of approximately $103.5 million after deduction of the underwriting discount and
estimated offering expenses. The Company used approximately $72.7 million of the
net proceeds to repay outstanding indebtedness under its existing bank credit
facility. The balance was used for general corporate purposes. Pursuant to the
requirements of the Commission, CCA was required to act as a co-registrant on
the Registration Statement on Form S-11 (Reg. no. 333-43935-01) with respect to
this offering. CCA, however, received no proceeds from this offering.
OFFERING OF COMMON SHARES ON A CONTINUOUS AND DELAYED BASIS
On September 16, 1998, the Company filed a Registration Statement on Form S-3
(Reg. no. 333-63745) with the Commission to register an aggregate of $500.0
million in value of its Common Shares, preferred shares and Common Share rights
or warrants, which became effective as of October 14, 1998. Pursuant to the
Registration Statement on Form S-3, the Company issued 324,000 Common Shares to
certain trustees and officers of the Company in a series of private placements
previously approved by the Company Board, resulting in aggregate cash proceeds
to the Company of approximately $7.0 million. The Company used these proceeds to
reimburse the cost of a like number of Common Shares purchased by the Company on
the open market. The Company also issued a total of 3,732,542 Common Shares to
institutional investors in a series of private placements pursuant to this
Registration Statement on Form S-3, resulting in aggregate cash proceeds to the
Company of $85.0 million. These proceeds were used by the Company for general
corporate purposes, including, among others, repaying its obligations as they
became due, redeeming its outstanding indebtedness, capital expenditures and
working capital. Pursuant to the requirements of the Commission, CCA was
required to act as a co-registrant on the Registration
23
<PAGE> 26
Statement on Form S-3 (Reg. no. 333-63475-01) with respect to this offering.
CCA, however, received no proceeds from this offering.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected financial data relating to the
historical financial condition and results of operations of the Company for the
year ended December 31, 1998 and the period from July 18, 1997 to December 31,
1997. Such selected financial data is qualified in its entirety by, and should
be read in conjunction with, "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation" and the financial statements and
notes thereto incorporated by reference herein.
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
PERIOD FROM
Year ended JULY 18, 1997 TO
December 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Operating Data:
REVENUES
Rental $ 69,867 $19,980
Interest 796 600
-------- -------
70,663 20,580
-------- -------
EXPENSES
Depreciation 17,609 5,088
Interest 9,827 184
General and Administrative 2,648 981
Write off of Loan Costs 2,559 --
Merger Costs 8,530 --
-------- -------
41,173 6,253
-------- -------
NET INCOME 29,490 14,327
DIVIDENDS TO PREFERRED SHAREHOLDERS (7,869) --
-------- -------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 21,621 $14,327
======== =======
NET INCOME PER SHARE:
Basic $ 0.99 $ 0.66
Diluted $ 0.98 $ 0.65
Weighted Average Number of Shares Outstanding, Basic 21,818 21,576
Weighted Average Number of Shares Outstanding, Diluted 22,103 22,007
</TABLE>
24
<PAGE> 27
<TABLE>
<S> <C> <C>
OTHER DATA:
Funds from Operations(1) $ 50,319 $ 19,415
Net cash from operating activities 52,706 19,835
Net cash from investing activities (409,472) (455,360)
Net cash from financing activities 377,904 436,281
Distributions on Common Shares 47,959 16,635
Distributions per Common Share 1.81 0.77
Ratio of Earnings to Fixed Charges(2) 4.0 78.9
Balance Sheet Data:
Net real estate properties $845,134 $453,272
Total assets 893,712 454,438
Line of credit 279,600 32,000
Total shareholders' equity 582,714 412,749
</TABLE>
-------------------------
(1) Management believes Funds from Operations (as hereinafter defined) is
helpful to investors as a measure of the performance of an equity REIT
because, along with cash flows from operating activities, financing
activities and investing activities, it provides investors with an
understanding of the ability of the Company to incur and service debt
and make capital expenditures. Funds from Operations is defined by the
Board of Governors of the National Association of Real Estate
Investment Trusts ("NAREIT") as net income (loss) (computed in
accordance with GAAP), excluding significant non-recurring items, gains
(or losses) from debt restructuring and sales of property, plus
depreciation and amortization on real estate assets, and after
adjustments for unconsolidated partnerships and joint ventures and,
accordingly, may not be comparable to other REITs' Funds from
Operations calculated under a differing methodology. Funds from
Operations should be examined in conjunction with net income as
presented.
Calculation of Funds from Operations:
<TABLE>
<CAPTION>
Period from
Year ended July 18, 1997 to
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
FUNDS FROM OPERATIONS:
NET INCOME AVAILABLE FOR COMMON SHARES $ 21,621 $14,327
PLUS REAL ESTATE DEPRECIATION 17,609 5,088
ADD BACK NON-RECURRING ITEMS:
PLUS WRITE OFF OF LOAN COSTS 2,559 --
PLUS MERGER COSTS 8,530 --
-------- -------
$ 50,319 $19,415
======== =======
</TABLE>
Funds from operations should not be considered as an alternative to net
income (determined in accordance with GAAP) as an indication of the
Company's financial performance or to cash flows from operating
activities (determined in accordance with GAAP) as a measure of the
Company's liquidity, nor is it indicative of funds available to fund
the Company's cash needs, including its ability to make distributions.
(2) The ratio of earnings to fixed charges was computed by dividing
earnings by fixed charges. Fixed charges consist of interest expense
and amortization of loan origination fees. Earnings consist of net
income (loss) before income taxes and extraordinary items, plus fixed
charges.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The following discussion relates to the operation of the Company, which was
formed in April 1997 and commenced operations in July 1997. CCA and the Company
each merged with and into New Prison Realty, on December 31, 1998 and January 1,
1999, respectively, with New Prison Realty being the surviving entity. With the
exception of certain information regarding the Merger and certain actions taken
by the Company, CCA or New Prison Realty in connection therewith, the following
information reflects the status of the Company on December 31, 1998, immediately
prior to the completion of the Merger and does not reflect the completion of the
Merger.
25
<PAGE> 28
The Merger has been legally structured as a common control transfer from CCA to
New Prison Realty at historical cost and the purchase of the Company by New
Prison Realty. CCA has been treated as the acquiring company, and the Company
has been treated as the acquired company, for financial reporting purposes.
Accordingly, the historical book basis of the assets, liabilities and
shareholders' equity of CCA has become the carrying value of the assets,
liabilities and shareholders' equity of New Prison Realty, and the assets and
liabilities of the Company have been recorded on the books of New Prison Realty
at their fair value. For additional information regarding the Merger and New
Prison Realty, please refer to the Annual Report on Form 10-K of New Prison
Realty filed with the Commission on or before March 31, 1999.
OVERVIEW
The Company was formed as a Maryland REIT to capitalize on the opportunities
created by the increased demand for private correctional and detention
facilities. The Company elected to qualify as a REIT for federal income tax
purposes beginning with its taxable year ended December 31, 1997.
On July 18, 1997, the Company commenced operations after completing the Initial
Offering of 21,275,000 of its Common Shares. The Common Shares were issued at an
Initial Offering price of $21.00 per share, generating gross proceeds to the
Company of $446.8 million. The aggregate proceeds to the Company, net of the
underwriters' discount and offering costs, were approximately $412.1 million.
Prior to the completion of the Merger, the principal business strategy of the
Company was to acquire correctional and detention facilities that met the
Company's investment criteria from both private prison managers and government
entities, to expand its existing facilities, and to lease all such facilities
under long-term leases to qualified third-party operators, including affiliates
of the sellers. The Company's initial investments were privately-managed
facilities that were owned and operated by CCA. However, the Company
successfully pursued other opportunities, including acquisitions and leasebacks
of, or financings for, correctional facilities owned and operated by various
government entities and private operators other than CCA. Substantially all of
the Company's revenues were derived from: (i) rents received under triple net
leases of correctional and detention facilities; and (ii) interest earned from
the temporary investment of funds in short-term investments.
The Company, together with its wholly-owned management subsidiary, Prison Realty
Management, Inc., a Tennessee corporation, incurred operating and administrative
expenses including, principally, compensation expense for its executive officers
and other employees, office rental and related occupancy costs and various
expenses incurred in the process of acquiring additional properties. The Company
was self-administered and managed by its executive officers and staff, and did
not engage a separate advisor or pay an advisory fee for administrative or
investment services, although the Company did engage legal, accounting, tax and
financial advisors from time to time. The primary non-cash expense of the
Company was depreciation of its correctional detention facilities.
The Company has made distributions to its shareholders in amounts not less than
the amounts required to maintain REIT status under the Code and, in general, in
amounts exceeding taxable income.
RESULTS OF OPERATIONS
The Company commenced operations on July 18, 1997, and consequently, a
comparison of the year ended December 31, 1998 to the period from July 18, 1997
through December 31, 1997 (the "1997 Initial Period") is not always meaningful.
The following analysis of the results of operations for the year ended December
31, 1998 and the 1997 Initial Period evaluates results in a variety of ways
based upon the comparison that would provide the most meaningful information.
The increases in rental revenues, expenses and net income between periods are
primarily a result of increases in the number of correctional and detention
facilities available for lease as shown in the following table (dollar amounts
are in thousands):
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<TABLE>
Year Ended December 31, Period from July 18, 1997
----------------------- -------------------------
1998 to December 31, 1997
---- --------------------
<S> <C> <C>
Net Book Value of Real Estate Properties $ 845,134 $ 453,272
Number of Total Leased Properties 23 12
Number of Non-CCA Leased Properties 6 --
</TABLE>
RENTAL REVENUES
For the periods ended December 31, 1998 and 1997, rental revenues of $69.9
million and $20.0 million, respectively, were generated from the leasing of
correctional and detention facilities. Rentals for the year ended December 31,
1998 for real properties owned at December 31, 1997 total $51.3 million or 73.4%
of the total 1998 rentals. All leases initiated during the 1997 Initial Period
incurred at least a 4.0% escalation in annual lease rate coincident with the
anniversary date of such lease. The remaining $18.6 million in rentals from real
property were the result of new leases from acquisitions and development
becoming operative at some time during the year ended December 31, 1998. Lease
rates for all correctional and detention facilities leased to CCA were 11.0%
based upon original acquisition costs. Lease rates for non-CCA correctional and
detention facilities leased were 11.0% and 12.0% based upon original acquisition
or development costs.
INTEREST INCOME
For the year ended December 31, 1998 and the 1997 Initial Period, interest
income was $0.8 million and $0.6 million, respectively. Interest income was
earned through the investment of cash prior to the purchase of the real estate
properties.
DEPRECIATION EXPENSE
For the year ended December 31, 1998 and the 1997 Initial Period, depreciation
expense was $17.6 million and $5.1 million, respectively. Depreciation expense
as a percentage of rental revenues for the year ended December 31, 1998 and the
1997 Initial Period was 25.2% and 25.5%, respectively. The increase in
depreciation expense of $12.5 million is a result of the increase in the number
of facilities from 12 for the 1997 Initial Period to 24 for the year ended
December 31, 1998, coupled with the depreciation of the properties acquired
during the 1997 Initial Period for the full year in 1998.
INTEREST EXPENSE
For the year ended December 31, 1998 and the 1997 Initial Period, interest
expense was $9.8 million and $0.2 million, respectively. Interest expense is
based on borrowings under the Company Credit Facility and includes amortization
of loan costs, net of capitalized interest on construction in progress. The
Company had $279.6 million and $32.0 million outstanding under the Company
Credit Facility at December 31, 1998 and 1997, respectively.
GENERAL AND ADMINISTRATIVE EXPENSES
For the year ended December 31, 1998 and the 1997 Initial Period, general and
administrative expense was $2.6 million and $1.0 million, respectively. General
and administrative expense as a percentage of rental revenues for the year ended
December 31, 1998 and the 1997 Initial Period were 3.8% and 4.9%, respectively.
The expenses consisted primarily of management salaries and benefits, legal and
other administrative costs.
EXPENSES RELATING TO THE MERGER
Write off of loan costs of $2.6 million and merger costs of $8.5 million are
additional expenses of the Company for the year ended December 31, 1998. No
similar expenses were incurred in the 1997 Initial Period. Loan costs
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<PAGE> 30
incurred to establish the Company Credit Facility were written off when the
closing of the Merger terminated the Company Credit Facility. Merger costs
incurred in conjunction with the Company's evaluation of the Merger are expensed
in the current year in accordance with GAAP. Merger costs include fees paid to
outside professionals rendering advice to the Company's management and the
Company of Trustees.
LIQUIDITY AND CAPITAL RESOURCES
On December 29, 1998, the Company acquired from the WPFC the 480 bed Webb County
Correctional Center located in Laredo, Texas for a purchase price of $21.3
million. The Webb County Correctional Center was not complete as of December 31,
1998 but is scheduled to open in 1999. The facility will be leased by New Prison
Realty to Operating Company. Amounts required to complete the initial
consultation are available in capital development funds related to a bond issue
to finance the facility by the WPFC.
On September 16, 1998, the Company filed the Registration Statement on Form S-3
to register an aggregate of $500.0 million in value of its Common Shares,
Preferred Shares and Common Share rights or warrants. Pursuant to the
Registration Statement on Form S-3, which became effective as of October 14,
1998, the Company issued a total of 3,732,542 of its Common Shares to
institutional investors in a series of private placements pursuant to the
Registration Statement on Form S-3, resulting in aggregate cash proceeds of
$85.0 million. These proceeds were used by the Company for general corporate
purposes, including, among others, repaying its obligations as they became due,
redeeming its outstanding indebtedness, capital expenditures and working
capital. The Company also issued 324,000 of its Common Shares to certain of its
trustees and officers in a series of private placements pursuant to the
Registration Statement on Form S-3, resulting in aggregate cash proceeds of
approximately $7.0 million. The Company used these proceeds to reimburse the
cost of a like number of its Common Shares purchased by the Company on the open
market. Pursuant to the requirements of the Commission, CCA was required to act
as a co-registrant on the Registration Statement on Form S-3 (File no.
333-63475-01) with respect to this offering. CCA, however, received no proceeds
from this offering.
On July 31, 1998, the Company entered into the Company Credit Facility. General
provisions of the Company Credit Facility were as follows: the effective
interest rate was determined by adding 1.50% to the LIBOR rate for the interest
period selected by the Company. The Company could specify LIBOR rate loans of
one, two or three month maturities. The Company could also borrow up to $5.0
million at the prime rate for working capital purposes and repay such loans at
any time. The Company Credit Facility was secured by all assets of the Company.
The Company was subject to ongoing compliance with a number of financial and
other covenants under the facility, with which the Company was and had been in
compliance. As of December 31, 1998, the Company had a total outstanding
indebtedness of approximately $279.6 million under the Company Credit Facility
and this amount was paid off in its entirety in conjunction with a credit
facility obtained by New Prison Realty upon the completion of the Merger. The
proceeds from the Company Credit Facility were used for the acquisition of
additional correctional and detention facilities as well as for working capital
and general corporate purposes.
In July 1998, the Company entered into an agreement with CCA, whereby the
Company agreed to purchase from CCA all issued and outstanding capital stock of
API for approximately $80.0 million upon the completion of an 800 bed medium
security prison in Salford, England for which API had entered into a contract to
design, develop and construct the facility. However, as of December 31, 1998,
the facility had not been completed and in conjunction with the Merger, API was
acquired by New Prison Realty and on January 1, 1999, New Prison Realty acquired
the Company. As such, the Company's agreement to purchase the issued and
outstanding stock of API will not be completed. Upon completion of the
construction of the facility, affiliates of Operating Company will lease the
facility from API and manage the facility pursuant to contracts with agencies of
the British government.
On April 17, 1998, the Company, USCA and USCC completed the USCC Merger. As a
result of the USCC Merger, the Company also assumed certain liabilities of USCC
consisting of a bank credit facility, two subordinated loans, and obligations
outstanding for convertible, redeemable preferred stock totaling approximately
$79.4 million. Immediately prior to the USCC Merger, CCA purchased USCC's
facility management contracts and the corresponding enterprise value of
operations from USCC for $10.0 million in cash. Accordingly, as a result of the
USCC Merger, the Company acquired only real estate properties.
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<PAGE> 31
By virtue of the USCC Merger, the Company acquired four correctional and
detention facilities in Kentucky, one in Ohio and two in North Carolina. At the
time of the USCC Merger, the two North Carolina facilities were under
construction. As of December 31, 1998, the Company had completed the two North
Carolina facilities. The Company does not operate the facilities acquired in the
USCC Merger, but leases the Kentucky facilities to CCA and leases the North
Carolina facilities to the State of North Carolina, which has contracted with
CCA to operate the facilities. The Company leases the Ohio facility to Hamilton
County, Ohio.
On January 30, 1998, the Company netted approximately $103.5 million through its
offering of 4,300,000 Series A Preferred Shares at a price of $25 per share. The
Company used approximately $72.7 million of the offering proceeds to repay
outstanding indebtedness under its then existing bank credit facility. Remaining
proceeds of the preferred share offering were used to finance the acquisition of
additional facilities.
Upon completion of the Initial Offering, the Company received approximately
$412.1 million in net proceeds. The Company used these funds and borrowings
under its then existing credit facility to purchase 12 correctional and
detention facilities at an aggregate cost of $455.4 million. Initially, cash on
hand was invested by the Company in interest-bearing accounts and other
short-term, interest-bearing securities that are consistent with the Company's
election to seek qualification for taxation as a REIT. After the Company began
utilizing the Company Credit Facility, cash available was utilized to reduce
outstanding borrowings. Outstanding borrowings under the Company Credit Facility
at December 31, 1998 totaled $279.6 million.
Prior to the Merger, the Company had options with varying terms to purchase any
and all of the 15 correctional and detention facilities from CCA for CCA's costs
of developing, constructing and equipping the facilities, plus 5% of such costs,
aggregating in excess of $700.0 million. The Company also had an option to
acquire, at fair market value, and lease back to CCA, any correctional or
detention facility acquired or developed and owned by CCA in the future for a
period of three years following the date CCA first received inmates at such
facility.
At December 31, 1998, the Company had no commitments with respect to other
capital expenditures, with the exception of its rights and obligation under the
Option Agreements and the Right to Purchase Agreement.
YEAR 2000 COMPLIANCE
The Year 2000 issue generally relates to computer programs that were written
using two digits rather than four to define the applicable year. In those
programs, the year 2000 may be incorrectly identified as the year 1900, which
can result in a system failure or miscalculations causing a disruption of
operations, including a temporary inability to process transactions, prepare
financial statements or engage in other normal business activities. While the
Year 2000 issue did not adversely affect the Company prior to the Merger, as of
December 31, 1998, the Company had a Year 2000 compliance program in place that
was focused on addressing Year 2000 readiness in the following areas: (i) the
Company's information technology hardware and software; (ii) the Company's
material non-information technology systems; (iii) the Year 2000 compliance of
third parties with which the Company has a material relationship; and (iv) the
development of contingency plans.
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<PAGE> 32
FUNDS FROM OPERATIONS
Management believes Funds from Operations is helpful to investors as a measure
of the performance of an equity REIT because, along with cash flows from
operating activities, financing activities and investing activities, it provides
investors with an understanding of the ability of the Company to incur and
service debt and make capital expenditures. The Company computes Funds from
Operations in accordance with standards established by the White Paper on Funds
from Operations approved by the Board of Governors of NAREIT in 1995, which may
differ from the methodology for calculating Funds from Operations utilized by
other equity REITs, and, accordingly, may not be comparable to such other REITs.
The White Paper defines Funds from Operations as net income (loss), computed in
accordance with GAAP excluding gains (or losses) from debt restructuring and
sales of property, plus real estate related depreciation and amortization and
after adjustments for unconsolidated partnerships and joint ventures. Further,
Funds from Operations does not represent amounts available for management's
discretionary use because of needed capital replacement or expansion, debt
service obligations, or other commitments and uncertainties. Funds from
Operations should not be considered as an alternative to net income (determined
in accordance with GAAP) as an indication of the Company's financial performance
or to cash flows from operating activities (determined in accordance with GAAP)
as a measure of the Company's liquidity, nor is it indicative of funds available
to fund the Company's cash needs, including its ability to make distributions.
The Company believes that in order to facilitate a clear understanding of the
consolidated operating results of the Company, Funds from Operations should be
examined in conjunction with net income as presented in the consolidated
financial statements.
The following table presents the Company's Funds from Operations (amounts in
thousands):
<TABLE>
<CAPTION>
Year ended Period from July 18, 1997
December 31, 1998 to December 31, 1997
----------------- --------------------
<S> <C> <C>
Funds from Operations:
Net Income Available for Common Shares $ 21,621 $14,327
Plus Real Estate depreciation 17,609 5,088
Add back non-recurring items:
Plus Write Off of Loan Costs 2,559 --
Plus Merger Costs 8,530 --
-------- -------
$ 50,319 $19,415
======== =======
</TABLE>
CASH FLOWS FROM OPERATING, INVESTING AND FINANCING ACTIVITIES
The Company's cash flow provided from operating activities was $52.7 million for
the year ended December 31, 1998 and represented net income plus depreciation
and amortization and changes in the various components of working capital. The
Company's cash flow used in investing activities was $409.5 million for the year
ended December 31, 1998 and represented acquisitions of real estate properties.
The Company's cash flow provided by financing activities was $377.9 million for
the year ended December 31, 1998 and represents proceeds from the Series A
Preferred Share offering, borrowings under the line of credit, and payments of
dividends on the Series A Preferred Shares and Common Shares.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's primary market risk exposure was to changes in U.S. interest
rates. The Company was exposed to market risk related to the Company Credit
Facility and certain other indebtedness as discussed in "Management's Discussion
and Analysis of Financial Condition and Results of Operation - Liquidity and
Capital Resources". The interest on the Company Credit Facility and such other
indebtedness is subject to fluctuations in the market. If the interest rate for
the Company Credit Facility debt was 100 basis points higher or lower during
1998, the Company's interest expense net of amounts capitalized would have been
increased or decreased by approximately $1.4 million.
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<PAGE> 33
Additionally, the Company may have, from time to time, invested its cash in a
variety of short-term financial instruments. These instruments generally
consisted of highly liquid investments with original maturities at the date of
purchase between three and twelve months. While these investments were subject
to interest rate risk and would have declined in value if market interest rates
had increased, a hypothetical 10 percent increase in market interest rates would
not have materially affected the value of these investments.
The Company also used long-term and medium-term debt as a source of capital.
These debt instruments, if issued, would typically bear fixed interest rates.
When these debt instruments matured, the Company could have refinanced such debt
at then-existing market interest rates which may have been more or less than the
interest rates on the maturing debt. In addition, the Company may have attempted
to reduce interest rate risk associated with a forecasted issuance of new debt.
In order to reduce interest rate risk associated with these transactions, the
Company may have occasionally entered into interest rate protection agreements.
The Company did not have a material exposure to risks associated with foreign
currency fluctuations related to its operations. The Company did not use
derivative financial instruments in its operations or investment portfolio.
The Company did not believe it had any other material exposure to market risks
associated with interest rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by Regulation S-X are
included in this Annual Report on Form 10-K commencing on page F-2 as indicated
below.
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
Page
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants. F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997. F-3
Consolidated Statements of Income for the year ended December
31, 1998 and for the period from July 18, 1997
to December 31, 1997. F-4
Consolidated Statement of Shareholders' Equity for the
year ended December 31, 1998 and for the period from July 18, 1997
to December 31, 1997. F-5
Consolidated Statement of Cash Flows for the year ended
December 31, 1998 and for the period from July 18, 1997
to December 31, 1997. F-6
Notes to the Consolidated Financial Statements. F-7
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
There have been no disagreements with the Company's accountants on any matter of
accounting principles and practices or financial statement disclosures. Arthur
Andersen LLP was selected by the Company Board to serve as the Company's
independent public accountant for the year ended December 31, 1998 and in
connection with the Merger.
PART III.
ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS OF THE COMPANY.
Set forth below is information with respect to each of the trustees and
executive officers of the Company, all of whom joined the Company upon its
formation in April 1997 (except for Messrs. Cardin, Carell, Eakin and Feldman,
each of whom joined the Company as trustees on June 6, 1997) and who served the
Company until the
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<PAGE> 34
completion of the Merger. Independent Trustees were those trustees who were not
employees of the Company and who were not otherwise affiliated with CCA (Mr.
Bell and Rusty L. Moore were not executive officers of the Company but were
otherwise affiliated with CCA, as more fully described in "Certain Relationships
and Related Transactions"). Likewise, Independent Directors are those directors
of New Prison Realty who are not employees of New Prison Realty, Operating
Company, Service Company A or Service Company B and who are not otherwise
affiliated with any of these entities. Subject to the rights enumerated in
employment agreements with Mr. Quinlan, D. Robert Crants, III, and Mr. Devlin,
the executive officers of the Company served at the sole discretion of the
Company Board. Ages are given as of the date of this Annual Report.
TRUSTEES AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH THE COMPANY
- ---- --- ----------------------------
<S> <C> <C>
Doctor R. Crants 54 Chairman of the Board of Trustees
J. Michael Quinlan 57 Chief Executive Officer; Trustee
D. Robert Crants, III 30 President; Trustee
Michael W. Devlin 39 Chief Operating Officer; Trustee
C. Ray Bell 57 Trustee
Richard W. Cardin 63 Independent Trustee
Monroe J. Carell, Jr. 67 Independent Trustee
John W. Eakin, Jr. 44 Independent Trustee
Ted Feldman 45 Independent Trustee
Jackson W. Moore 50 Independent Trustee
Rusty L. Moore 39 Trustee
Joseph V. Russell 58 Independent Trustee
Charles W. Thomas, Ph.D. 56 Trustee
Vida H. Carroll 38 Chief Financial Officer;
Secretary/Treasurer
</TABLE>
DOCTOR R. CRANTS served as the Chairman of the Company Board prior to the
Merger, as well as the Chairman, Chief Executive Officer and President of CCA,
which he co-founded in 1983. Mr. Crants currently serves as the Chairman of the
Board of Directors and Chief Executive Officer of New Prison Realty, as well as
Chief Executive Officer and President of Operating Company and as a member of
the Board of Directors of each of Service Company A and Service Company B. Mr.
Crants also currently serves on the Board of Directors of Sodexho Marriott
Services, Inc., which is the largest food service and facility management
company in North America. Mr. Crants graduated from the United States Military
Academy at West Point in 1966 and received a joint Masters in Business
Administration and Juris Doctor degree from the Harvard Business School and the
Harvard Law School, respectively, in 1974.
J. MICHAEL QUINLAN served as a Trustee and as the Chief Executive Officer of the
Company prior to the Merger. Mr. Quinlan currently serves as the Vice-Chairman
of the Board of Directors of New Prison Realty. Mr. Quinlan has been employed in
the corrections and detention industry for 28 years. 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 $2.0
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 LL.M. from the George Washington University School of
Law in 1970.
D. ROBERT CRANTS, III served as a Trustee and as the President of the Company
prior to the Merger. Mr. Crants, who co-founded the Company in 1997, currently
serves as a Director and as the President of New Prison Realty.
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Mr. Crants also serves as a manager of DC Investment Partners, LLC, which serves
as the general partner of private investment partnerships. From 1990 through
1996, Mr. Crants was associated with Goldman Sachs & Company, ("Goldman Sachs"),
most recently serving as an associate in the Goldman Sachs Special Investments
Group. During his tenure with Goldman Sachs, Mr. Crants was involved in
structuring over $3.0 billion in real estate transactions, including over $1.0
billion in real estate investment trust public offerings. During this time, he
also negotiated triple net leases for shopping centers, free standing stores and
other properties on behalf of several clients. Mr. Crants graduated from
Princeton University in 1990 with an A.B., summa cum laude, in Economics.
Mr. Crants is the son of Doctor R. Crants.
MICHAEL W. DEVLIN served as a Trustee and as the Chief Operating Officer of the
Company prior to the Merger. Mr. Devlin, who co-founded the Company in 1997,
currently serves as a Director and as the Chief Operating Officer of New Prison
Realty. Mr. Devlin also serves as a manager of DC Investment Partners, LLC,
which serves as the general partner of private investment partnerships. From
1993 through 1995, Mr. Devlin was a Vice President in the business development
group of Goldman Sachs. Immediately prior to joining Goldman Sachs, Mr. Devlin
practiced law for four years at the law firm of Davis, Polk and Wardwell in New
York, working on various corporate transactions, including leveraged leasing.
During that time, he negotiated approximately $1.0 billion in leases, including
triple net leases. Mr. Devlin is a graduate of Yale University and the Duke
University School of Law.
C. RAY BELL served as a Trustee of the Company prior to the Merger and currently
serves as a Director of New Prison Realty. Mr. Bell is the President and owner
of Ray Bell Construction, Inc. ("Ray Bell Construction"). Ray Bell Construction
specializes in the construction of a wide range of commercial buildings and has
constructed approximately 40 correctional and detention facilities, consisting
of over 15,000 beds in seven states on behalf of various government entities and
private companies including, prior to the Merger, CCA. Mr. Bell is a founding
member of the Middle Tennessee Chapter of Associated Builders and Contractors.
Mr. Bell is a graduate of the University of the South. Mr. Bell was a member of
the Compensation Committee of the Company Board prior to the Merger and
currently serves as a member of the Compensation Committee of the Board of
Directors of New Prison Realty.
RICHARD W. CARDIN served as an Independent Trustee of the Company prior to the
Merger and currently serves as an Independent Director of New Prison Realty. Mr.
Cardin is a certified public accountant and is currently a consultant and a
retired partner at Arthur Andersen LLP. Prior to his retirement in 1995, Mr.
Cardin was affiliated with, and a partner in, Arthur Andersen LLP, an
international firm of independent public accountants and consultants, for 37
years. From 1980 through 1994, Mr. Cardin served as the managing partner of
Arthur Andersen LLP's Nashville office. Mr. Cardin is a member of the Board of
Directors of Atmos Energy Corporation and United States Lime & Minerals, Inc.
Mr. Cardin was a member of the Audit Committee and Independent Committee of the
Company Board prior to the Merger and currently serves as a member of the Audit
Committee and Independent Committee of the Board of Directors of New Prison
Realty.
MONROE J. CARELL, JR. served as an Independent Trustee of the Company prior to
the Merger and currently serves as an Independent Director of New Prison Realty.
For the past 19 years, Mr. Carell has served as Chief Executive Officer and
Chairman of the Board of Directors of Central Parking Corporation, a company
which provides parking services nationwide and is publicly traded on the
Exchange. Since 1991, Mr. Carell has served as a Trustee of Vanderbilt
University in Nashville, and he is currently a member of the Board of Trust of
the Urban Land Institute. Mr. Carell is also a member of the Board of Directors
of Vanderbilt University Medical Center. Mr. Carell was a member of the Audit
Committee and Independent Committee of the Company Board prior to the Merger and
currently serves as a member of the Audit Committee and Independent Committee of
the Board of Directors of New Prison Realty.
JOHN W. EAKIN, JR. served as an Independent Trustee of the Company prior to the
Merger and currently serves as an Independent Director of New Prison Realty. Mr.
Eakin founded Eakin and Smith, Inc., a real estate development and management
company ("Eakin and Smith") in 1987 and served as its president from that time
until 1996, when Eakin and Smith was merged with Highwoods Property, Inc.
("Highwoods"), a self-administered and self-managed office and industrial real
estate investment trust based in Raleigh, North Carolina that is publicly
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<PAGE> 36
traded on the Exchange. Mr. Eakin left Highwoods in January 1999 after serving
as a Senior Vice President and Director of Highwoods for three years. Mr. Eakin
is also a member of the Board of Directors of Central Parking and a member of
the advisory board of First American National Bank of Nashville. Mr. Eakin was a
member of the Audit Committee and Independent Committee of the Company Board
prior to the Merger and currently serves as a member of the Audit Committee and
Independent Committee of the Board of Directors of New Prison Realty.
TED FELDMAN served as an Independent Trustee of the Company prior to the Merger
and currently serves as an Independent Director of New Prison Realty. Mr.
Feldman is currently the Chief Operating Officer of StaffMark, Inc., a provider
of diversified staffing services to business, medical, professional and service
organizations and governmental agencies that is publicly traded on the NASDAQ
exchange, a position he has held since October, 1996. Prior to joining
StaffMark, Mr. Feldman founded HRA, Inc., a Nashville provider of staffing
services, in 1991, and served as its President and Chief Executive Officer from
that time until it merged with StaffMark in October, 1996. Mr. Feldman was the
Chairman of the Audit Committee of the Company Board prior to the Merger and
currently serves as the Chairman of the Audit Committee of the Board of
Directors of New Prison Realty. Mr. Feldman also was a member of the Independent
Committee of the Company Board prior to the Merger and currently serves as a
member of the Independent Committee of the Board of Directors of New Prison
Realty.
JACKSON W. MOORE served as an Independent Trustee of the Company prior to the
Merger and currently serves as an Independent Director of New Prison Realty. Mr.
Moore is presently a Director of and is the President and Chief Operating
Officer of Union Planters Corporation, a publicly-traded multi-state bank and
savings and loan holding company headquartered in Memphis, Tennessee, positions
he has held since 1986, 1989, and 1994, respectively. He is also Chairman of PSB
Bancshares, Inc. and a Vice President and Director of its subsidiary, the People
Savings Bank in Clanton, Alabama. Prior to joining Union Planters, Mr. Moore
practiced law for 16 years. Mr. Moore is a graduate of the University of Alabama
and Vanderbilt University School of Law. Mr. Moore is not related to Rusty L.
Moore. Mr. Moore was the Chairman of the Independent Committee of the Company
Board prior to the Merger and currently serves as the Chairman of the
Independent Committee of the Board of Directors of New Prison Realty. Mr. Moore
also was a member of the Compensation Committee of the Company Board prior to
the Merger and currently serves as a member of the Compensation Committee of the
Board of Directors of New Prison Realty.
RUSTY L. MOORE served as a Trustee of the Company prior to the Merger and
currently serves as a Director of New Prison Realty. Since 1996, Mr. Moore has
been a principal of the Nashville law firm of Moore and Waechter, PLC and the
President of its affiliate, Bankers Title & Escrow Corporation. He is also a
principal and an executive officer of a privately-held real estate investment
and property management company that owns multi-family residential properties
throughout the Southeast. Mr. Moore has over 13 years of experience in
negotiating and structuring real estate transactions, including the development,
acquisition, leasing and financing of various types of property. Prior to
forming Moore and Waechter, Mr. Moore was a partner at Stokes and Bartholomew,
P.A. Mr. Moore graduated from the University of Tennessee, where he received a
B.S. in Public Administration in 1981 and a J.D. in 1985. Mr. Moore is not
related to Jackson W. Moore. Mr. Moore was a member of the Compensation
Committee of the Company Board prior to the Merger and currently serves as a
member of the Compensation Committee of the Board of Directors of New Prison
Realty.
JOSEPH V. RUSSELL served as an Independent Trustee of the Company prior to the
Merger and currently serves as an Independent Director of New 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 Board 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. Mr. Russell was the Chairman of the Compensation
Committee of the Company Board prior to the Merger and currently serves as the
Chairman of the Compensation Committee of the Board of Directors of New Prison
Realty. Mr. Russell also was a member of the Independent Committee of the
Company Board prior to the Merger and currently serves as a member of the
Independent Committee of the Board of Directors of New Prison Realty.
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<PAGE> 37
CHARLES W. THOMAS, PH.D. served as a Trustee of the Company prior to the Merger,
and currently serves as a Director of New Prison Realty. Dr. Thomas is a
university professor who has taught and written on the criminal justice and
private corrections fields for almost 30 years. Currently, he is Professor of
Criminology and the Director of the Private Corrections Project Center for
Studies in Criminology and Law (the "Center") at the University of Florida,
Gainesville, positions he has held since 1980 and 1989, respectively. While
serving as Director of the Center, Dr. Thomas authored the Center's soon to be
released Census. In connection with the Merger, Dr. Thomas performed certain
consulting services for each of the Company and CCA. Dr. Thomas continues to
perform consulting services for New Prison Realty and Operating Company relating
to their business objectives. Dr. Thomas graduated from McMurry University in
1966 with a B.S. in Secondary Education and from the University of Kentucky with
a M.A. in Sociology in 1969, and a Ph.D. in Sociology in 1971. Mr. Thomas was a
member of the Audit Committee of the Company Board prior to the Merger, and
currently serves as a member of the Audit Committee of the Board of Directors of
New Prison Realty.
VIDA H. CARROLL served as the Chief Financial Officer, Secretary and Treasurer
of the Company prior to the Merger and currently serves as the Chief Financial
Officer, Secretary and Treasurer of New Prison Realty. From 1991 to 1996, Ms.
Carroll, as a sole proprietor, worked as a financial consultant, specializing in
accounting conversions and systems designs. Prior to this time, she worked in
public accounting, including working as an audit manager with KPMG Peat Marwick.
Ms. Carroll holds a Bachelor of Science Degree from Tennessee Technological
University and is a certified public accountant.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth certain summary information concerning the
compensation paid by the Company for December 31, 1998 to the Company's Chief
Executive Officer and its two executive officers whose cash compensation from
the Company in 1998 exceeded $100,000 on an annualized basis (the "Named
Executive Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- ---------------------------------
SECURITIES
BASE UNDERLYING SHARE BONUS
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(#)(1) AWARD(#)(2)
- --------------------------- ---- ------ ----- ------------ -----------
<S> <C> <C> <C> <C> <C>
J. Michael Quinlan . . . . . . . . 1998 $160,625 (3) -- -- --
Chief Executive Officer 1997 150,000 (4) -- 375,000 --
D. Robert Crants, III. . . . . . . 1998 108,750 (3) -- -- --
President 1997 100,000 (4) 225,000 150,000
Michael W. Devlin. . . . . . . . . 1998 108,750 (3) -- -- --
Chief Operating Officer 1997 100,000 (4) -- 225,000 150,000
</TABLE>
- -------------------------
(1) Options to purchase all but 25,000 shares of the shares shown for each
executive officer above vest in 25% increments over a three-year period
with the first increment having vested on July 18, 1997 and are
exercisable at a price of $21.00 per share, the per share offering
price of the Company's Initial Offering. The balance vests in 25%
increments over a three-year period with the first increment having
vested on December 2, 1997 and are exercisable at a price of $37.81 per
share, the per share market price of the Company's Common Shares on the
date of the grant.
(2) Represents Common Shares issued as a development fee and as
reimbursement for actual costs incurred in connection with the
promotion and formation of the Company, the consummation of the
Company's Initial Offering, and the closing of the purchase of the
Initial Facilities upon the consummation of the Company's Initial
Offering.
(3) Includes $5,000 matching contribution to the Company's Employee Share
Ownership Plan.
(4) Amounts are annualized salaries for the fiscal year ended December
31, 1997.
35
<PAGE> 38
OPTION/SAR GRANTS IN LAST FISCAL YEAR
There were no options to purchase Common Shares granted to any of the Named
Executive Officers during the 1998 fiscal year.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUE
The following table sets forth information with respect to the value of options
to purchase Common Shares at December 31, 1998. The Named Executive Officers
exercised no options during the 1998 fiscal year.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS/SARS AT OPTIONS/SARS
FISCAL YEAR-END(#) AT FISCAL YEAR-END($)(1)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ------------------------- -------------------------
<S> <C> <C>
J. Michael Quinlan 187,500/187,500 $ 0/0
D. Robert Crants, III 112,500/112,500 0/0
Michael W. Devlin 112,500/112,500 0/0
</TABLE>
- ------------------------------
(1) The value of the unexercised options at December 31, 1998 is based upon
the closing market price of the Company's Common Shares of $20.50 at
such date. The exercise prices applicable to the options granted to the
Named Executive Officers in July and December of 1997 are $21.00 and
$37.81, respectively, both of which exceeded the closing market price
of $20.50. Thus, the unexercised options held by the Named Executive
Officers had no value as of December 31, 1998.
REPORT OF THE COMPENSATION COMMITTEE
OBJECTIVES OF EXECUTIVE COMPENSATION
The Company's executive compensation program was designed to attract, retain and
reward experienced, highly motivated executives who were capable of leading the
Company effectively and continuing its growth and profitability. The Company's
objective was to utilize a combination of cash and equity-based compensation to
provide appropriate incentives for executives while aligning their interests
with those of the Company's shareholders.
COMPENSATION COMMITTEE PROCEDURES
The Company's executive compensation program was administered under the
direction of the Compensation Committee of the Company Board comprised of Joseph
V. Russell (Chairman), C. Ray Bell, Jackson W. Moore and Rusty L. Moore (the
"Compensation Committee"). The compensation determinations for the Company's
executive officers for 1998 were made in April 1998 after audited financial
statements for such year had become available and were filed with the
Commission, and upon a review of the salaries of comparable real estate
investment trusts as disclosed in available SNL Reviews (as hereinafter defined)
and publicly held documents.
In determining the executive officers' base salaries for the fiscal year ended
December 31, 1998, the Company Board and the Compensation Committee, as
applicable, took into consideration the above referenced factors and examined
comparable executive compensation made by a peer group of real estate investment
trusts of similar size, makeup and performance as reported in the SNL Executive
Compensation Review 1998 -- REITS (the "SNL Review"). While the companies
consisting of the SNL Review may not be identical to the companies used to
calculate the NAREIT Total Return Equity Index (the "NAREIT Index"), to which
the Company's share performance is compared in this Annual Report, the
Compensation Committee believed that the compensation
36
<PAGE> 39
information in such survey was comparable since it contained data pertaining to
real estate investment trusts of similar size, makeup and performance to that of
the Company.
The Compensation Committee exercised its independent discretion in determining
the compensation of the Company's executive officers, and its members were
permitted to consult by telephone prior to the meeting at which compensation
decisions were made.
Each element of the Company's executive compensation for the fiscal year ended
December 31, 1998, as well as the compensation of the Chief Executive Officer
for such year, is discussed separately below.
BASE SALARY
In April 1998, the Company Board set the 1998 base salaries for the Company's
executive officers in accordance with the policies and considerations stated
above. For the year ended December 31, 1998, the Company's Named Executive
Officers (other than its Chief Executive Officer, who is discussed separately
below) received the following base salaries: D. Robert Crants, III (President) -
$108,750; and Michael W. Devlin (Chief Operating Officer) - $108,750.
SHARE OPTIONS
Under the Company's 1997 Employee Share Incentive Plan (the "Share Incentive
Plan"), the Compensation Committee had the discretion to grant share options to
its executives. The Compensation Committee believed that the grant of such share
options could align an executive's long-term objectives with those of the
Company's shareholders. The Share Incentive Plan was administered by the
Compensation Committee, which had the power to determine, among other things,
those individuals to whom options would be granted, the number of shares
issuable, the type of options granted and other terms and conditions of the
options. No options were granted to executives of the Company under the Share
Incentive Plan in 1998.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
Base Salary. In April 1998, the Company Board set the 1998 base salary for the
Company's Chief Executive Officer, J. Michael Quinlan, in accordance with the
policies and considerations stated above. For the year ended December 31, 1998,
the Company's Chief Executive Officer received a base salary of $160,625. For
the year ended December 31, 1998, the Compensation Committee did not award any
options to purchase Common Shares to the Company's Chief Executive Officer.
Tax Deductibility of Compensation. Section 162(m) of the Internal Revenue Code
of 1986, as amended, limits the deductibility on the Company's tax return of
compensation over $1.0 million to any of the Named Executive Officers of the
Company unless, in general, the compensation was paid pursuant to a plan which
was performance-related, non-discretionary and had been approved by the
Company's shareholders. The Compensation Committee's policy with respect to
Section 162(m) was to make every reasonable effort to ensure that compensation
was deductible to the extent permitted while simultaneously providing Company
executives with appropriate rewards for their performance.
Submitted by the Compensation Committee:
Joseph V. Russell, Chairman
C. Ray Bell
Jackson W. Moore
Rusty L. Moore
PERFORMANCE GRAPH
The following graph provides a comparison of the cumulative total shareholder
return on the Company's Common Shares compared to the cumulative total return of
the Standard & Poor's ("S&P") 500 Index and the NAREIT
37
<PAGE> 40
Index for the year ended December 31, 1998. The graph assumes an investment of
$100 on January 1, 1998, a reinvestment of distributions and/or dividends and
actual increase of the market value of the Company's Common Shares relative to
the initial investment of $100. The comparisons in this table are required by
the Commission and are not intended to forecast or be indicative of possible
future performance of the Company's Common Shares.
[graph]
<TABLE>
<CAPTION>
6/30/97* 12/31/97 12/31/98
-------------------------------------------------------------------
<S> <C> <C> <C>
CCA Prison Realty Trust $100.00 (1) $216.82 $106.70
-------------------------------------------------------------------
NAREIT Index $100.00 $112.17 $ 91.06
-------------------------------------------------------------------
S&P 500 Index $100.00 $110.58 $142.18
-------------------------------------------------------------------
</TABLE>
* Prison Realty's common shares did not begin trading on the New York
Stock Exchange until July 18, 1997. Accordingly, the table and graph
reflect Prison Realty's performance from that date only.
(1) Reflects a purchase price of $21.00 per share, the initial public
offering price of Prison Realty's common shares on the New York Stock
Exchange on July 18, 1997. The Company believes that the use of the
initial offering price better reflects shareholder return rather than
the use of the opening purchase price of Prison Realty's common shares
on such date. If a purchase price of $28.00 were used as the initial
investment price (as was done in determining Prison Realty's cumulative
shareholder return in the performance graph appearing in Prison
Realty's proxy statement prepared in connection with its 1998 Annual
Meeting of Shareholders), the cumulative total shareholder return would
be $157.69 and $77.60 for the periods ending December 31, 1997 and
December 31, 1998, respectively.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
COMMON SHARES
The following table sets forth, as of December 31, 1998 except as may otherwise
be indicated, the beneficial ownership of Common Shares for (i) each shareholder
of the Company that the Company believes held more than a 5% beneficial interest
in the Company, (ii) each trustee of the Company, and (iii) the trustees and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF COMMON COMMON SHARES
NAME OF BENEFICIAL OWNERS SHARES BENEFICIALLY OWNED(1) BENEFICIALLY OWNED(2)
- ------------------------- --------------------------- ---------------------
<S> <C> <C>
Baron Capital Group, Inc.(3) 2,768,200 10.9%
767 Park Ave., 24th Floor
New York, NY 10153 1,770,100 6.9
Capital Research and Management Company(4)
333 South Hope Street
Los Angeles, CA 90071
Brookside Capital Partners Fund, L.P.(5) 1,565,800 6.2
Two Copley Place
Boston, MA 02116
The Prudential Insurance Company of America(6) 1,471,200 5.8
751 Broad Street
Newark, NJ 07102
Doctor R. Crants 819,500 (7) 3.2
J. Michael Quinlan 187,700 (8) *
D. Robert Crants, III 262,500 (9) *
Michael W. Devlin 262,500 (9) *
C. Ray Bell 22,102 (10) *
Richard W. Cardin 12,060 (11) *
Monroe J. Carell, Jr. 20,811 (11) *
John W. Eakin, Jr 18,060 (11) *
Ted Feldman 13,060 (11) *
Jackson W. Moore 21,069 (11) *
Rusty L. Moore 12,861 (12) *
Joseph V. Russell 81,519 (13) *
Charles W. Thomas, Ph.D 40,938 (11) *
Vida H. Carroll 33,250 (14) *
All executive officers and trustees
as a group (14 persons) 1,807,925 (15) 7.14%
</TABLE>
- -----------------------------
* Represents beneficial ownership of less than 1% of the outstanding
Common Shares.
38
<PAGE> 41
(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 each of these
terms is defined in Rule 13d-3(a) of the Exchange Act, as amended.
Common Shares underlying options to purchase Common Shares, which are
exercisable, or become exercisable within sixty days after December 31,
1998, are deemed to be outstanding for the purpose of computing the
outstanding Common Shares owned by the particular person and by the
group, but are not deemed outstanding for any other purpose.
(2) Based on 25,315,380 Common Shares issued and outstanding.
(3) Includes shares beneficially owned by Ronald Baron, Baron Capital
Group, Inc., ("BCG"), BAMCO, Inc., Baron Capital, Inc. ("BCI"), Baron
Capital Management, Inc. ("BCM") and Baron Asset Fund ("BAF"). BAMCO
and BCI are subsidiaries of BCG. BCM is a subsidiary of BCI. BAF is an
investment advisory client of BAMCO, and Ronald Baron owns a
controlling interest in BCG. BCG, BCI and Ronald Baron disclaim
beneficial ownership of shares held by their controlled entities to the
extent such shares are held by persons other than BCG, BCI and Ronald
Baron. BAMCO and BCM disclaim beneficial ownership of shares held by
their investment advisory clients. Pursuant to the authority granted to
the Company Board under the Company's Charter, the Company Board has
waived the Ownership Limit contained in the Charter after obtaining
such representations and undertakings from Baron Capital Group, Inc.
and its affiliates to assure the Company's status as a REIT would not
be adversely affected by exempting it from the Ownership Limit. The
foregoing information is based solely on information provided to the
Company by BCG and its related entities and information obtained in
Schedule 13G/A filed by BCG and its related entities with the
Commission on March 4, 1999, which reported ownership information as of
December 31, 1998.
(4) Based solely on a Schedule 13G filed with the Commission on February
11, 1999 by Capital Research and Management Company ("Capital
Research"), which reported ownership information as of December 31,
1998. Capital Research is deemed to be the beneficial owner of the
shares indicated as a result of acting as investment advisor to various
investment companies registered under Section 8 of the Investment
Company Act of 1940.
(5) Based solely on a Schedule 13G/A filed with the Commission by Brookside
Capital Partners Fund, L.P. on February 12, 1999, which reported
ownership information as of December 31, 1998.
(6) Based solely on a Schedule 13G filed with the Commission on February
12, 1998 by The Prudential Insurance Company of America ("Prudential"),
Prudential may have direct or indirect voting and/or investment
discretion over all the shares indicated, which are held for the
benefit of its clients by its separate accounts, externally managed
accounts, registered investment companies, subsidiaries and/or other
affiliates. Prudential does not admit that it is beneficial owner of
any of the shares shown. The number of Common Shares beneficially owned
and reported in the table is based solely on information provided to
the Company by Prudential as of March 13, 1998.
(7) Includes 100,000 Common Shares issuable upon the exercise of vested
options and an aggregate of 438,000 Common Shares held equally in two
trusts for the benefit of his two children other than D. Robert Crants,
III.
(8) Includes 187,500 Common Shares issuable upon the exercise of vested
options and 200 Common Shares owned by his daughters.
(9) Includes 112,500 Common Shares issuable upon the exercise of vested
options.
(10) Includes 10,000 Common Shares issuable upon the exercise of vested
options and 1,000 Common Shares owned jointly with his wife.
(11) Includes 10,000 Common Shares issuable upon the exercise of vested
options.
(12) Includes 10,000 Common Shares issuable upon the exercise of vested
options and 2200 Common Shares owned jointly with his wife.
(13) Includes 10,000 Common Shares issuable upon the exercise of vested
options and 437 Common Shares owned jointly with his daughter.
(14) Includes 32,500 Common Shares issuable upon the exercise of vested
options.
(15) Includes 635,000 Common Shares issuable upon the exercise of vested
options.
SERIES A PREFERRED SHARES
The following table sets forth the beneficial ownership of Series A Preferred
Shares for (i) the only trustees of the Company who beneficially owned Series A
Preferred Shares as of December 31, 1998, and (ii) the trustees and executive
officers of the Company as a group. No executive officers of the Company owned
any Series A Preferred Shares as of December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SERIES A PREFERRED PERCENTAGE OF SERIES
SHARES A PREFERRED SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) BENEFICIALLY OWNED(2)
- ------------------------ --------------------- ---------------------
<S> <C> <C>
</TABLE>
39
<PAGE> 42
<TABLE>
<S> <C> <C>
C. Ray Bell 5,000 *
Monroe J. Carell, Jr. 5,000 *
All executive officers and trustees 10,000 *
as a group (14 persons)
</TABLE>
- -------------------------
* Represents beneficial ownership of less than 1% of the outstanding
Series A Preferred Shares.
(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 of these terms are
defined in Rule 13d-3(a) of the Exchange Act.
(2) Based on 4,300,000 Series A Preferred Shares issued and outstanding.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive officers and
trustees, and persons who own more than 10% of a registered class of the
Company's equity securities ("10% Holders"), to file reports of ownership and
changes in ownership with the Commission and the Exchange. Executive officers,
trustees and 10% Holders are required by Commission regulation to furnish the
Company with copies of all Section 16(a) forms that they file. To the Company's
knowledge, based solely on review of the copies of such reports and amendments
thereto furnished to the Company and on written representations that no other
reports were required during or with respect to the fiscal year ended December
31, 1998, all Section 16(a) filing requirements were made timely.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In July 1997, the Company began operations and completed the Initial Offering.
In conjunction therewith, the Company and CCA completed the Formation
Transactions whereby the Company purchased the Initial Facilities from CCA,
leased the Initial Facilities back to CCA pursuant to the CCA Leases and entered
into the Option Agreements and the Right to Purchase Agreement regarding the
Company's purchase and leaseback of certain additional correctional and
detention facilities. In April 1998, the Company Board approved the Merger which
was subsequently completed on January 1, 1999. As a result of the formation of
New Prison Realty and the completion of the Merger, CCA transferred certain of
its operations and management contracts to Operating Company who leases the
related facilities from New Prison Realty. CCA's remaining operations and
management contracts were transferred to the Service Companies.
Prior to the completion of the Merger, Doctor R. Crants served as the Chairman,
Chief Executive Officer and President of CCA and as the Chairman of the Company
Board. Doctor R. Crants currently serves as Chairman of the Board of Directors
and Chief Executive Officer of New Prison Realty, as well as Chief Executive
Officer and President of Operating Company. D. Robert Crants, III, the President
of the Company and a member of the Company Board prior to the completion of the
Merger, is the son of Doctor R. Crants. D. Robert Crants, III, currently serves
as a Director and President of New Prison Realty. J. Michael Quinlan, who was
Chief Executive Officer and a Trustee of the Company prior to the Merger,
currently serves as Vice Chairman of the Board of Directors of New Prison
Realty. Michael W. Devlin served as Chief Operating Officer and a Trustee of the
Company prior to the Merger and currently serves as Chief Operating Officer and
a Director of New Prison Realty. D. Robert Crants, III, Mr. Quinlan and Mr.
Devlin all received employment agreements from the Company and have received
employment agreements with New Prison Realty and Doctor R. Crants has also
received an employment agreement with New Prison Realty.
Doctor R. Crants and D. Robert Crants, III, as well as certain other trustees or
officers of the Company and directors or officers of CCA, also owned, directly
or indirectly, shares in CCA and the Company, prior to the Merger. Upon
completion of the Merger, these persons owned shares in New Prison Realty, and
the officers of New Prison Realty other than Doctor R. Crants owned shares of
common stock of Operating Company. Sodexho Alliance, S.A., a French societe
anonyme ("Sodexho") and largest shareholder of New Prison Realty, owns 16% of
the issued and outstanding voting common stock of Operating Company. Jean-Pierre
Cuny, an affiliate of
40
<PAGE> 43
Sodexho, has been appointed to the New Prison Realty Board of Directors. A
mutual fund managed by an affiliate of Baron Capital Group, Inc., a significant
shareholder of New Prison Realty, owns 16% of the issued and outstanding voting
common stock of Operating Company. New Prison Realty owns all of Operating
Company's issued and outstanding non-voting common stock, which represents
approximately 9.5% of the value of all of the outstanding common stock of
Operating Company.
Rusty L. Moore, who served as a Trustee of the Company prior to the Merger and
who currently serves as a Director of New Prison Realty, is the spouse of a
shareholder of Stokes & Bartholomew, P.A., tax and securities counsel to the
Company and CCA prior to the Merger and tax and securities counsel to New Prison
Realty. Stokes & Bartholomew, P.A. also currently provides legal services to
Operating Company and the Service Companies. Additionally, C. Ray Bell, who
served as a Trustee of the Company prior to the Merger and who currently serves
as a Director of New Prison Realty, is the principal of a construction company
which, as a part of its business, built correctional and detention facilities
for CCA and the Company prior to the Merger, and may do so in the future for New
Prison Realty and Operating Company. The Company paid Mr. Bell's construction
company $8.7 million during 1998.
The Company's policies and procedures to address these conflicts of interest
included requiring Doctor R. Crants to abstain from making management decisions
in his capacity as a trustee, director or officer of the Company and CCA with
regard to matters that presented a conflict of interest between the companies,
and to abstain from voting as a trustee or director of either company with
respect to matters that presented a conflict of interest between the companies.
An independent committee consisting of the Company's trustees who were not
employees of the Company or affiliated with CCA (the "Independent Committee")
had the sole authority to approve actions of the Company Board concerning
agreements or transactions with CCA. The members of the Independent Committee
were Jackson W. Moore (Chairman), Richard W. Cardin, Monroe J. Carell, Jr., John
W. Eakin, Jr., Ted Feldman, and Joseph V. Russell. Pursuant to the Company's
Bylaws, the Independent Committee approved the actions of the Company Board
regarding the election of the operators of the Company's properties, including
CCA; the entering into of any agreement with CCA or its affiliates; and the
consummation of any transaction between the Company and CCA or its affiliates,
including, but not limited to, the negotiation, enforcement and renegotiation of
the terms of any lease of the Company's properties. Pursuant to the bylaws of
New Prison Realty, the Independent Committee of New Prison Realty's Board of
Directors must approve the same actions as they relate to the operators of its
properties, including Operating Company.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K.
(a) The following documents are filed as part of this Report:
(1) Financial Statements. The Financial Statements as set
forth under Item 8 of this Annual Report have been
filed herewith, beginning on Page F-2 of this report.
(2) Financial Statement Schedules.
The financial statement schedules entitled "Schedule
III-Real Estate and Accumulated Depreciation as of
December 31, 1998" and "Schedule III-Real Estate and
Accumulated Depreciation as of December 31, 1997" are
included herein as an exhibit to the Financial
Statements, beginning on page S-1 of this report. All
other schedules for which provision is made in
Regulation S-X are either not required to be included
herein under the related instructions or are
inapplicable or the related information is included
in the footnotes to the applicable financial
statements and, therefore, have been omitted.
(3) The Exhibits are listed in the Index of Exhibits
required by Item 601 of Regulation S-K included
herewith.
41
<PAGE> 44
(b) The Company filed a Current Report on Form 8-K, dated November
20, 1998, relating to the settlement of certain litigation
regarding the Merger.
(c) Certain Exhibits. See Item 14(a)(3) above.
(d) Certain Financial Statements. See Item 14(a) (1) and (2) above.
42
<PAGE> 45
SIGNATURES
Pursuant to the requirements of the Exchange Act, New Prison Realty, on behalf
of the Company, has duly caused this Annual Report on Form 10-K to be signed on
its behalf by the undersigned, thereunto duly authorized.
PRISON REALTY CORPORATION
Date: March 30, 1999 By: /s/ Vida H. Carroll
-------------------------
Vida H. Carroll, Chief Financial Officer
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears below
constitutes and appoints DOCTOR R. CRANTS and VIDA H. CARROLL, and each of them,
as their true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for them and in their name, place and stead, in
any and all capacities, to sign any and all amendments to the Annual Report on
Form 10-K of CCA Prison Realty Trust for the fiscal year ended December 31,
1998, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission and the New
York Stock Exchange, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as they might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of them, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Exchange Act, this Annual Report on Form
10-K has been signed by the following persons on the dates indicated in their
respective capacities with New Prison Realty.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Doctor R. Crants Chief Executive Officer March 30, 1999
- ----------------------------------- (Principal Executive Officer),
Doctor R. Crants Chairman and Director
/s/ J. Michael Quinlan Vice-Chairman and Director March 30, 1999
- -----------------------------------
J. Michael Quinlan
/s/ D. Robert Crants, III President and Director March 30, 1999
- -----------------------------------
D. Robert Crants, III
/s/ Michael W. Devlin Chief Operating Officer March 30, 1999
- ----------------------------------- and Director
Michael W. Devlin
/s/ Vida H. Carroll Chief Financial Officer March 30, 1999
- ----------------------------------- (Principal Financial and
Vida H. Carroll Accounting Officer),
Secretary and Treasurer
/s/ C. Ray Bell Director March 30, 1999
- -----------------------------------
C. Ray Bell
/s/ Richard W. Cardin Director March 30, 1999
- -----------------------------------
Richard W. Cardin
</TABLE>
43
<PAGE> 46
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
- ----------------------------------- Director March , 1999
Monroe J. Carell, Jr.
/s/ Jean-Pierre Cuny Director March 30, 1999
- -----------------------------------
Jean-Pierre Cuny
/s/ John W. Eakin, Jr. Director March 30, 1999
- -----------------------------------
John W. Eakin, Jr.
/s/ Ted Feldman Director March 30, 1999
- -----------------------------------
Ted Feldman
/s/ Jackson W. Moore Director March 30, 1999
- -----------------------------------
Jackson W. Moore
/s/ Rusty L. Moore Director March 30, 1999
- -----------------------------------
Rusty L. Moore
/s/ Joseph V. Russell Director March 30, 1999
- -----------------------------------
Joseph V. Russell
/s/ Charles W. Thomas, Ph.D. Director March 30, 1999
- -----------------------------------
Charles W. Thomas, Ph.D.
</TABLE>
44
<PAGE> 47
CCA PRISON REALTY TRUST
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants. F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997. F-3
Consolidated Statements of Income for the year ended December
31, 1998 and for the period from July 18, 1997 to
December 31, 1997. F-4
Consolidated Statement of Cash Flows for the year ended
December 31, 1998 and for the period from July 18,
1997 to December 31, 1997. F-5
Consolidated Statement of Shareholders' Equity for the year
ended December 31, 1998 and the period from July
18, 1997 to December 31, 1997. F-7
Notes to the Consolidated Financial Statements. F-8
</TABLE>
F-1
<PAGE> 48
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CCA Prison Realty Trust:
We have audited the accompanying consolidated balance sheets of CCA Prison
Realty Trust (a Maryland real estate investment trust) and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of income,
shareholders' equity and cash flows for the year ended December 31, 1998, and
for the period from July 18, 1997 through December 31, 1997. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CCA Prison Realty
Trust and subsidiaries as of December 31, 1998 and 1997, and the consolidated
results of their operations and their cash flows for the year ended December 31,
1998 and for the period from July 18, 1997 through December 31, 1997, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
NASHVILLE, TENNESSEE
JANUARY 22, 1999
F-2
<PAGE> 49
CCA PRISON REALTY TRUST
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
(amounts in thousands, except share amounts)
<TABLE>
<CAPTION>
ASSETS 1998 1997
--------- ---------
<S> <C> <C>
Real Estate Properties, at Cost:
Correctional and Detention Facilities $ 867,831 $ 458,360
Less--Accumulated Depreciation (22,697) (5,088)
--------- ---------
Net Real Estate Properties 845,134 453,272
Cash and Cash Equivalents 21,894 756
Restricted Cash 17,188 --
Other Assets 9,496 410
--------- ---------
TOTAL ASSETS $ 893,712 $ 454,438
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Distributions Payable $ 2,150 $ 9,170
Line of Credit 279,600 32,000
Accounts Payable and Accrued Expenses 29,248 519
--------- ---------
TOTAL LIABILITIES 310,998 41,689
--------- ---------
Commitments and Contingencies -- --
SHAREHOLDERS' EQUITY:
Preferred Shares, $.01 par value; 10,000,000 shares
authorized; 4,300,000 and 0 outstanding, 43 --
Common Shares, $.01 par value; 90,000,000 shares
authorized; 25,315,380 and 21,576,000 shares issued
and outstanding, 253 216
Capital in Excess of Par Value 603,195 414,841
Cumulative Net Income 43,817 14,327
Accumulated Distributions (64,594) (16,635)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 582,714 412,749
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 893,712 $ 454,438
========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
F-3
<PAGE> 50
CCA PRISON REALTY TRUST
CONSOLIDATED STATEMENTS OF INCOME
For the Year ended December 31, 1998 and the Period from
July 18, 1997 to December 31, 1997
(amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 1997 (1)
-------- -------
<S> <C> <C>
REVENUES
Rental $ 69,867 $19,980
Interest 796 600
-------- -------
70,663 20,580
-------- -------
EXPENSES
Depreciation 17,609 5,088
Interest 9,827 184
General and Administrative 2,648 981
Write off of Loan Costs 2,559 --
Merger Costs 8,530 --
-------- -------
41,173 6,253
-------- -------
NET INCOME
29,490 14,327
DIVIDENDS TO PREFERRED SHAREHOLDERS
(7,869) --
-------- -------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 21,621 $14,327
======== =======
NET INCOME PER SHARE:
Basic $ 0.99 $ 0.66
Diluted $ 0.98 $ 0.65
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC 21,818 21,576
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, DILUTED 22,103 22,007
</TABLE>
(1) For the period from July 18, 1997 (inception) to December 31, 1997.
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
F-4
<PAGE> 51
CCA PRISON REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 1998 and the Period from
July 18, 1997 to December 31, 1997
(amounts in thousands)
<TABLE>
<CAPTION>
1998 1997 (1)
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 29,490 $ 14,327
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation of Real Estate Properties 17,609 5,088
Amortization of Loan Origination Costs 856 47
Write off of Loan Costs 2,559 --
Changes in Assets and Liabilities:
Increase in Restricted Cash (17,188) --
Increase in Other Assets (9,349) (146)
Increase in Accounts Payable and Accrued Expenses 28,729 519
--------- ---------
Net Cash Provided by Operating Activities 52,706 19,835
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Real Estate Properties (409,472) (455,360)
--------- ---------
Net Cash Used In Investing Activities (409,472) (455,360)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Initial Capital Contribution -- 1
Proceeds from Initial Public Offering, net of
Offering Costs of $3,445 -- 412,056
Proceeds from Common Share Issuances, net of
Offering Costs of $173 85,011 --
Proceeds from Preferred Share Offering, net of
Offering Costs of $4,077 103,423 --
Net Borrowings under Line of Credit 247,600 32,000
Distributions paid on Common Shares (48,889) (7,465)
Distributions paid on Preferred Shares (6,090) --
Loan Origination Costs (3,151) (311)
--------- ---------
Net Cash Provided by Financing Activities 377,904 436,281
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 21,138 756
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 756 --
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 21,894 $ 756
========= =========
</TABLE>
(Continued)
F-5
<PAGE> 52
CCA PRISON REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 1998 and the Period from
July 18, 1997 to December 31, 1997
(amounts in thousands)
(Continued)
<TABLE>
<CAPTION>
1998 1997 (1)
-------- -------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Increase (Decrease) in Distributions Payable $ (7,020) $ 9,170
Increase (Decrease) in Shareholders' Equity through
Distributions to Shareholders 7,020 (9,170)
Increase in Real Estate Properties due to
Development Fee Paid in Shares -- (3,000)
Increase in Shareholders' Equity through Issuance
of Development Fee Shares -- 3,000
-------- -------
$ -- $ --
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for Interest $ 12,986 $ --
Cash paid for Income Taxes --
$ 12,986 $ --
======== =======
</TABLE>
(1) For the period from July 18, 1997 (inception) to December 31, 1997.
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
F-6
<PAGE> 53
CCA PRISON REALTY TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Year Ended December 31, 1998 and the Period from
July 18, 1997 to December 31, 1997
(amounts in thousands)
<TABLE>
<CAPTION>
CAPITAL IN
PREFERRED SHARES COMMON SHARES EXCESS OF CUMULATIVE ACCUMULATED
SHARES AMOUNT SHARES AMOUNT PAR VALUE NET INCOME DISTRIBUTIONS TOTAL
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Capital Contribution $ -- $-- $ 1 $ -- $ 1 $ -- $ -- $ 1
Shares Issued, net of
offering costs of $3,445 -- -- 21,575 216 414,840 -- -- 415,056
Net Income -- -- -- -- -- 14,327 -- 14,327
Distributions to Shareholders -- -- -- -- -- -- (16,635) (16,635)
-------------------------------------------------------------------------------------
Balance, December 31, 1997 -- -- 21,576 216 414,841 14,327 (16,635) 412,749
-------------------------------------------------------------------------------------
Shares Issued, net of
offering costs of $4,077 4,300 43 -- -- 103,380 -- -- 103,423
Net Shares Issued, net of
offering costs of $173 -- -- 3,733 37 84,790 -- -- 84,827
Shares Issued to Trustees -- -- 7 -- 184 -- -- 184
Net Income -- -- -- -- -- 29,490 -- 29,490
Distributions to Shareholders -- -- -- -- -- -- (47,959) (47,959)
-------------------------------------------------------------------------------------
Balance, December 31, 1998 $ 4,300 $43 $25,316 $253 $603,195 $43,817 $(64,594) $582,714
=====================================================================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
F-7
<PAGE> 54
CCA PRISON REALTY TRUST
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
1. ORGANIZATION AND OPERATIONS
CCA Prison Realty Trust (the "Company"), a Maryland real estate investment
trust, was formed April 23, 1997 to acquire, develop, and lease private and
public correctional and detention facilities. The Company will operate to
qualify as a real estate investment trust ("REIT") under the Internal Revenue
Code of 1986, as amended (the "Code").
On July 18, 1997, the Company commenced operations after completing an initial
public offering of 21,275,000 common shares (including 2,775,000 shares issued
as a result of the exercise of an over-allotment option by the underwriters)
(the "Initial Offering"). The 21,275,000 common shares were issued at the
Initial Offering price of $21.00, generating gross proceeds of $446,775,000. The
aggregate proceeds to the Company, net of underwriters' discount and offering
costs, were approximately $412,056,000.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of Presentation
The consolidated financial statements of the Company include all the accounts of
the Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all short-term, highly-liquid investments that are readily
convertible to cash and have an original maturity of three months or less at the
time of purchase to be cash equivalents.
Restricted Cash
Restricted cash at December 31, 1998 was $17.2 million, of which $2.2 million
was reserved to fund the $0.50 per share dividend payment to be made on January
15, 1999 for the 4,300,000 8% Series A Cumulative Preferred Shares. The
remaining $15.0 million represents cash collateral for an irrevocable letter of
credit issued in connection with the submission of a proposal for the
construction of a facility.
Real Estate Properties
Real estate properties are recorded at cost. Acquisition costs and transaction
fees directly related to each property are capitalized as a cost of the
respective property. The cost of real estate properties acquired is allocated
between land and land improvements, building and improvements, and machinery and
equipment based upon estimated market values at the time of
F-8
<PAGE> 55
acquisition. Depreciation is provided for on a straight-line basis over an
estimated useful life of 40 years for building and improvements and seven years
for machinery and equipment.
Federal Income Taxes
The Company has elected to qualify as a REIT under the Code. As a result, the
Company will generally not be subject to federal income tax on its taxable
income at corporate rates to the extent it distributes annually at least 95% of
its taxable income to its shareholders and complies with certain other
requirements. Accordingly, no provision has been made for federal income taxes
in the accompanying consolidated financial statements.
Leases and Rental Income
All leases are accounted for as operating leases. Under this method, lease
payments are recognized as revenue as earned. 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.
Fair Value of Financial Instruments
To meet the reporting requirements of Statement of Financial Accounting
Standards No. ("SFAS") 107, "Disclosures About Fair Value of Financial
Instruments," the Company calculates the fair value of financial instruments at
quoted market prices. At December 31, 1998, there were no material differences
in the book values of the Company's financial instruments and their related fair
values.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS 130,
"Reporting Comprehensive Income," effective for fiscal years beginning after
December 15, 1997. SFAS 130 requires that changes in the amounts of certain
items, including gains and losses on certain securities, be shown in the
financial statements. The Company adopted the provisions of SFAS 130 on January
1, 1998. The Company's comprehensive income is equivalent to net income for the
year ended December 31, 1998 and for the period from July 18, 1997 to December
31, 1997.
Segment Disclosures
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information," effective for fiscal years beginning after
December 15, 1997. SFAS 131 establishes standards for the method that business
enterprises report information about operating segments in annual and interim
financial statements. SFAS 131 also establishes standards for
F-9
<PAGE> 56
related disclosures about products and services, geographic areas and major
customers. The Company operates in one industry segment and accordingly, the
adoption of SFAS 131 had no impact on the Company's financial statement
disclosures.
3. REAL ESTATE PROPERTIES
The cost components and the number of the Company's investments in correctional
and detention facilities are as follows:
<TABLE>
<CAPTION>
As of December 31, (in thousands):
1998 1997
--------- ---------
<S> <C> <C>
Land and land improvements $ 9,722 $ 6,321
Buildings and improvements 777,382 439,664
Machinery and equipment 17,123 12,375
Construction in progress 63,604 --
--------- ---------
867,831 458,360
Less accumulated depreciation (22,697) (5,088)
========= =========
$ 845,134 $ 453,272
========= =========
Number of total leased properties 23 12
========= =========
Number of non-CCA leased properties 6 --
========= =========
</TABLE>
On January 5, 1998, the Company acquired from Corrections Corporation of America
("CCA") the 960 bed Davis County Correctional Center located in Holdenville,
Oklahoma for a purchase price of $36.1 million. The facility was leased to and
operated by CCA at December 31, 1998.
On April 17, 1998, the Company and its newly-formed, wholly-owned subsidiary
USCA Corporation ("USCA") and U.S. Corrections Corporation, a privately-held
owner and former operator of correctional and detention facilities ("USCC"),
entered into and consummated an Agreement of Merger, whereby USCA merged with
and into USCC and the Company acquired all of the outstanding capital stock and
derivative securities of USCC (the "USCC Merger"), in exchange for a cash
payment to the shareholders of USCC of approximately $157.0 million. As a result
of the USCC Merger, the Company also assumed certain liabilities of USCC
consisting of a bank credit facility, two subordinated loans, and obligations
outstanding for convertible, redeemable preferred stock totaling approximately
$79.4 million. Immediately prior to the USCC Merger, CCA purchased USCC's
facility management contracts and the corresponding enterprise value of
operations from USCC for $10.0 million in cash. Accordingly, as a result of the
USCC Merger, the Company acquired only real estate properties.
By virtue of the USCC Merger, the Company acquired four correctional and
detention facilities in Kentucky, one in Ohio and two in North Carolina. At the
time of the USCC merger, the two North Carolina facilities were under
construction. As of December 31, 1998, the Company had completed the two North
Carolina facilities. The Company does not operate the facilities acquired in the
USCC merger, but leases the Kentucky facilities to CCA and leases the North
Carolina facilities to the State of North Carolina, which has contracted with
CCA to operate the facilities. The Company leases the Ohio facility to Hamilton
County, Ohio.
F-10
<PAGE> 57
On May 4, 1998, the Company acquired the Leo Chesney Center, a 200 bed
correctional facility located in Live Oak, California. The facility, acquired
for a purchase price of approximately $5.1 million, is leased to and operated by
Cornell Corrections Corporation under contract with the California Department of
Corrections.
During 1998, the Company developed two educational facilities, one in Houston,
Texas and one in Dallas, Texas, for Community Education Partners ("CEP"), which
develops and operates publicly funded, privately operated alternative education
programs for at-risk youth. The Company expended approximately $13.0 million in
renovations and leased the facilities to CEP pursuant to terms and conditions
materially consistent with the Company's current relationship with private
prison operators.
On November 2, 1998, the Company purchased the expansion of Central Arizona
Detention Center in Florence, Arizona for $25.0 million. The facility was leased
to the operator, CCA, who acted as construction manager for the expansion. Total
annual rental under the Company's lease with CCA was increased by 11% of the
purchase price of the expansion, calculated at construction cost plus 5%.
On December 29, 1998, the Company acquired from the Webb County Correctional
Center Public Facility Corporation ("WPFC") the 480 bed Webb County Correctional
Center located in Laredo, Texas for a purchase price of $21.3 million. The Webb
County Correctional Center was not complete as of December 31, 1998 but is
scheduled to open in 1999, and will be leased to Correctional Management
Services Corporation (see Note 11). Amounts required to complete the initial
construction are available in capital development funds related to a bond issue
used to finance the facility by the WPFC.
Four of the facilities owned by the Company are subject to an option to purchase
the facility held by a government agency. If a government agency exercised its
option to purchase a facility, the option price could be less than the book
value of the facility which could have a detrimental effect on the Company.
4. DISTRIBUTIONS TO SHAREHOLDERS
Quarterly distributions and the resulting tax classification for the Company's
common shares are as follows:
<TABLE>
<CAPTION>
Declaration Record Date Payment Date Distribution Ordinary Return of Capital
Date Per Share Income
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
09/03/97 09/30/97 10/15/97 $0.346 100.00% 0.00%
12/02/97 12/31/97 01/15/98 $0.425 (1) (1)
03/02/98 03/31/98 04/15/98 $0.425 73.79% 26.21%
06/26/98 07/01/98 07/15/98 $0.425 73.79% 26.21%
08/25/98 09/30/98 10/15/98 $0.480 73.79% 26.21%
12/09/98 12/21/98 12/31/98 $0.480 73.79% 26.21%
</TABLE>
(1) Approximately 74.8% of this distribution was classified as 100.0%
ordinary taxable income for 1997. The remaining 25.2% is considered a
1998 distribution and accordingly 73.79% would be considered 1998
ordinary income and 26.21% return of capital.
F-11
<PAGE> 58
Quarterly distributions and the resulting tax classification for the Company's
8.0% Series A Cumulative Preferred Shares are as follows:
<TABLE>
<CAPTION>
Declaration Record Date Payment Date Distribution Ordinary Return of Capital
Date Per Share Income
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
03/02/98 03/31/98 04/15/98 $0.417 100.0% 0.0%
06/26/98 07/01/98 07/15/98 $0.500 100.0% 0.0%
08/25/98 09/30/98 10/15/98 $0.500 100.0% 0.0%
12/09/98 12/31/98 01/15/99 $0.500 100.0% 0.0%
</TABLE>
5. BANK CREDIT FACILITY
On April 17, 1998, the Company's $150.0 million revolving credit facility was
increased by $75.0 million to facilitate the acquisition of real estate
properties through the USCC Merger. On July 31, 1998, the Company entered into
an amendment and restatement of this same bank credit facility, maturing July
2000, to increase the total available borrowings to $300.0 million. General
provisions of the Bank Credit Facility remained unchanged by the amendment and
restatement. The effective interest rate is determined by adding 1.50% to the
LIBOR rate for the interest period selected by the Company. The Company may
specify LIBOR rate loans of one, two, or three month maturities. The Company can
borrow up to $5.0 million at the prime rate for working capital purposes and
repay such loans at any time. A commitment fee of 0.125% per annum accrues on
the amount of the unused available credit commitment. A facility fee of 0.25%
per annum accrues on the amount of outstanding borrowings. At December 31, 1998,
the effective interest rate was approximately 7.67% and the Bank Credit Facility
was secured by all assets of the Company. The Company is subject to ongoing
compliance with a number of financial and other covenants under the Bank Credit
Facility. The Bank Credit Facility was paid in full on January 4, 1999 in
conjunction with the Company's merger as disclosed in Note 11. The Company wrote
off all unamortized loan costs associated with the Bank Credit Facility during
the fourth quarter of 1998 for a total of approximately $2.6 million.
6. EMPLOYEE BENEFIT PLAN
On September 3, 1997, the Board of Trustees adopted the CCA Prison Realty Trust
Employee Savings and Stock Ownership Plan (the "ESOP") whereby eligible
employees may defer certain percentages of their pretax compensation, subject to
federal limitations, for the purchase of Company common shares at current market
prices. Benefits are paid on death, retirement or termination. The Company may
make contributions to the ESOP, subject to approval by the Plan Administrator.
Company contributions may be in the form of "matching" contributions determined
as a percentage of the employee's deferral amount or "basic" contributions which
would be set as a percentage of all participants' compensation, subject to
limitations of the Code. Company contributions made on behalf of employees will
vest ratably over five years. Expense accrued by the Company for matching and
basic contributions at December 31, 1998 and 1997 totaled approximately $66,000
and $22,000, respectively. On January 1, 1999, the ESOP was converted into the
Prison Realty Corporation 401(k) Savings and Retirement Plan in conjunction with
the Company's merger into Prison Realty Corporation as disclosed in Note 11.
F-12
<PAGE> 59
7. SHARE OPTION AND INCENTIVE PLANS AND NON-EMPLOYEE TRUSTEE COMPENSATION PLAN
Share Option and Incentive Plans
The Company has established share option and incentive plans for the purpose of
attracting and retaining qualified executive officers and key employees, as well
as non-employee trustees. In conjunction with the Initial Offering, the Company
granted options to officers, employees and trustees. Options granted under the
Company's plans are granted with exercise prices equal to the market value at
the date of grant. The term of such options is ten years from the date of grant.
In general, one-fourth of the options granted to executive officers and
employees vest immediately, with the remaining options becoming exercisable
ratably on the first, second, and third anniversary of the dates of grant.
Options granted to non-employee trustees vest at the date of grant. Shares
remaining for issuance under the share incentive and non-employee trustees plans
total 466,000 and 60,000, respectively.
A summary of the Company's share option activity, and related information for
the period from July 18, 1997 to December 31, 1998 follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTIONS EXERCISE
(000S) PRICE
------ ------
<S> <C> <C>
Granted at Initial Offering 1,075 $21.00
Granted in 1997 103 37.81
Exercised in 1997 -- --
Forfeited in 1997 -- --
------ ------
Outstanding at December 31, 1997 1,178 22.47
Granted during 1998 45 35.13
Exercised in 1998 -- --
Forfeited in 1998 (1) 37.81
------ ------
Outstanding at December 31, 1998 1,222 $22.92
====== ======
Exercisable at December 31, 1998 656 $23.28
====== ======
</TABLE>
F-13
<PAGE> 60
A summary of the Company's outstanding and exercisable options and related
information at December 31, 1998 follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
EXERCISE PRICES (000S) LIFE PRICE (000S) PRICE
--------------- ------ ---- ----- ------ -----
<S> <C> <C> <C> <C> <C>
$21.00 1,075 8.54 $21.00 560 $21.00
$37.81 102 8.92 51 37.81
37.81
$35.13 45 9.30 45 35.13
35.13
--------------------------------------------------------------------------
1,222 8.60 $22.92 656 $23.28
==========================================================================
</TABLE>
The Company applies APB Opinion 25 and related Interpretations in accounting
for its plans. In accordance with APB Opinion 25, during the year ended
December 31, 1998 and the period from July 18, 1997 to December 31, 1997, the
Company recognized no compensation expense related to the grant of share option
awards. In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation." SFAS 123 established new financial accounting and reporting
standards for stock-based compensation plans. The Company has adopted the
disclosure-only provisions of SFAS 123. However, had compensation cost for the
Company's share-based compensation plans been determined based on the fair
value at the grant dates for awards under those plans consistent with the
method of SFAS 123, the Company's net income available to common shareholders
and earnings per share for the year ended December 31, 1998 and the period from
July 18, 1997 to December 31, 1997, would have been reduced to the following
pro forma amounts (in thousands except per share amounts):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net Income Available to Common Shareholders $ 20,337 $ 13,960
Basic Net Income per Share $ 0.93 $ 0.65
Diluted Net Income Per Share $ 0.92 $ 0.63
</TABLE>
The fair value of each option grant (expected lives of ten years for each
option) is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions used for
options granted in:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Dividend yield 5.67% 7.57%
Expected volatility 40.00% 40.00%
Risk-free interest rate of US zero coupon bonds with time to
maturity approximately equal to the
options average time to exercise 5.178% 6.22%
</TABLE>
F-14
<PAGE> 61
Non-Employee Trustee Compensation Plan
On December 2, 1997, the Board of Trustees adopted the CCA Prison Realty Trust
Non-Employee Trustees' Compensation Plan (the "Trustees' Plan"), approved by
shareholders on May 8, 1998. The purpose of the Trustees' Plan is to encourage
equity ownership in the Company by non-employee trustees who elect to receive
the value of their annual retainer and/or meeting fees in the form of shares of
the Company in lieu of cash. A total of 50,000 common shares were reserved for
issuance pursuant to the Trustees' Plan. The number of shares to be issued in
payment under the Plan shall be calculated on the basis of the fair market value
(the mean of the highest and lowest selling prices for the common shares on the
New York Stock Exchange ("NYSE") on the date in question) on the first business
day preceding the payment date as of which such common shares are to be issued.
During 1998, approximately 7,000 shares were issued in lieu of cash compensation
of $184,000 which has been expensed as compensation in the accompanying 1998
Statement of Income.
8. SHAREHOLDERS' EQUITY
Common Stock
On September 16, 1998, the Company filed a Registration Statement on Form S-3
(File No. 333-63475) to register an aggregate of $500.0 million in value of its
common shares, preferred shares, and common share rights and warrants for sale
to the public. Proceeds from sales under the Company's Registration Statement on
Form S-3 will be used for general corporate purposes. The Company issued and
sold 4,056,542 common shares under the Company's Registration Statement on Form
S-3 prior to December 31, 1998. Of those shares, 324,000 common shares were sold
to certain trustees and officers of the Company, with a like number repurchased
on the open market and retired resulting in net common shares issued of
3,732,542. Net proceeds to the Company from all common share issuances totaled
approximately $85.0 million.
Preferred Stock
On January 30, 1998, pursuant to the Company's Registration Statement on Form
S-11 (File No. 333-43935) declared effective by the Commission on January 26,
1998, the Company completed an offering of 4,300,000 shares of 8.0% Series A
Cumulative Preferred Shares, $0.01 par value per share (the "Series A Preferred
Shares") (including 300,000 Series A Preferred Shares issued as a result of the
exercise of an over-allotment option by the underwriters), at a price of $25.00
per share. The Series A Preferred Shares are redeemable at any time on or after
January 30, 2003, at $25.00 per share, plus dividends accrued and unpaid to the
redemption date. The Series A Preferred Shares have no stated maturity, sinking
fund provision or mandatory redemption and are not convertible into any other
securities of the Company. Dividends on the Series A Preferred Shares are
cumulative from the date of original issue of such shares and are payable
quarterly in arrears on the fifteenth day of January, April, July and October of
each year, to shareholders of record on the last day of March, June, September
and December of each year, respectively, at a fixed annual rate of 8.0%. The
shares are listed on the NYSE under the symbol "PZN Pr A."
The gross proceeds from the sale of the Series A Preferred Shares were
approximately $107.5 million, generating net proceeds to the Company of
approximately $103.4 million after
F-15
<PAGE> 62
deduction of the underwriting discount and estimated offering expenses. The
Company used approximately $72.7 million of the net proceeds to repay
outstanding indebtedness under the Company's bank credit facility. The balance
of the net proceeds was used in connection with the Company's acquisition of
USCC as discussed in Note 3.
9. NET INCOME PER SHARE
SFAS 128, "Earnings per Share," has been issued effective for fiscal periods
ending after December 15, 1997. SFAS 128 establishes standards for computing
and presenting earnings per share. The Company adopted the provisions of SFAS
128 in the fourth quarter of 1997. Under the standards established by SFAS 128,
earnings per share is measured at two levels: basic earnings per share and
diluted earnings per share. Basic earnings per share for the Company was
computed by dividing net income by the weighted average number of common shares
outstanding or 21,818,000 shares and 21,576,000 shares for the year ended
December 31, 1998 and the period from July 18, 1997 to December 31, 1997,
respectively. Diluted earnings per share was computed by dividing net income by
the weighted average number of common shares after considering the additional
dilution related to the Company's outstanding share options after assuming a
buyback of shares under the treasury method, or additional common shares of
285,000 and 431,000 for the year ended December 31, 1998, and the period from
July 18, 1997 to December 31, 1997, respectively.
10. RELATED PARTIES
Corrections Corporation of America
On July 18, 1997, the following transactions with Corrections Corporation of
America and certain of its subsidiaries (collectively, "CCA") occurred
simultaneously with the completion of the Initial Offering:
- -- The Company acquired the following nine correctional and detention
facilities (the "Initial Facilities") from CCA for an aggregate purchase
price of $308.1 million:
<TABLE>
<CAPTION>
<S> <C>
(i) Houston Processing Center, located in Houston, Texas;
(ii) Laredo Processing Center, located in Laredo, Texas;
(iii) Bridgeport Pre-Parole Transfer Facility, located in Bridgeport, Texas;
(iv) Mineral Wells Pre-Parole Transfer Facility, located in Mineral Wells, Texas;
(v) West Tennessee Detention Facility, located in Mason, Tennessee;
(vi) Leavenworth Detention Center, located in Leavenworth, Kansas;
(vii) Eloy Detention Center, located in Eloy, Arizona;
(viii) Central Arizona Detention Center, located in Florence, Arizona; and
(ix) T. Don Hutto Correctional Center, located in Taylor, Texas.
</TABLE>
The Company purchased a 100% interest in the real property and all
tangible personal property associated with each of the Initial Facilities
from CCA. The real and personal property associated with each of the
Initial Facilities was used by CCA in the ownership and operation of
correctional and detention facilities. The Company will continue to use
the
F-16
<PAGE> 63
property in the same manner by leasing each of the Initial Facilities
back to CCA who will use the property in the operation of correctional
and detention facilities.
- -- The Company entered into agreements with CCA to lease the Initial
Facilities back to CCA pursuant to long-term, non-cancelable triple net
leases (the "Leases") which require CCA to pay all operating expenses,
taxes, insurance and other costs. All of the Leases provide for initial,
annual base rents which aggregate $33.9 million, with certain contingent
annual escalations, and have primary terms ranging from 10-12 years which
may be extended at the fair market rates for three additional five-year
periods upon the mutual agreement of the Company and CCA. The obligations
of CCA under the Leases are cross-defaulted to each of the other Leases
with respect to payment defaults and certain other defaults. In addition,
the Leases provide CCA with a right of first refusal in the event the
Company obtains an acceptable third party offer to acquire any interest
in any facility or in any correctional or detention facility acquired or
developed by the Company in the future and operated by CCA.
- -- The Company entered into option agreements with CCA (the "Option
Agreements") pursuant to which the Company was granted the option to
acquire and leaseback to CCA any or all of five option facilities (the
"Initial Option Facilities") from CCA at any time during the three-year
period following the acquisition of the Initial Facilities for CCA's
costs of developing, constructing and equipping such facilities, plus 5%
of such costs. In addition, CCA granted the Company an option to acquire,
at fair market value, and lease back to CCA, any correctional or
detention facility acquired or developed and owned by CCA in the future
for a period of three years following the date CCA first receives inmates
at such facility.
Subsequent to the Initial Offering, through December 31, 1998, the Company
individually acquired the following four correctional and detention facilities
from CCA and immediately entered into 10 year lease agreements with CCA which
will continue to operate each of the facilities:
(i) Northeast Ohio Correctional Center, located in
Youngstown, Ohio (one of the five Initial Option
Facilities) for $70.1 million;
(ii) Torrance County Detention Facility, located in
Estancia, New Mexico (one of the five Initial Option
Facilities) for $38.5 million; and
(iii) Cimarron Correctional Facility, located in Cushing,
Oklahoma for $38.3 million.
(iv) Davis County Correctional Facility, located in
Holdenville, Oklahoma for $36.1 million.
The terms of the leases for the above facilities are substantially similar to
the Leases with respect to the Initial Facilities. The acquisitions were funded
with remaining proceeds of the Initial Offering, borrowings under the Bank
Credit Facility, and cash generated from operations.
F-17
<PAGE> 64
By virtue of the USCC Merger, the Company acquired four correctional facilities
in Kentucky and CCA purchased the management contracts for these facilities.
Therefore, the Company does not operate the following four facilities, but
leases the facilities to CCA:
(i) Lee Adjustment Center, located in Beattyville, Kentucky;
(ii) Marion Adjustment Center, located in St. Mary, Kentucky;
(iii) Otter Creek Correctional Center, located in Wheelwright, Kentucky;
and
(iv) River City Correctional Center, located in Louisville, Kentucky.
In July 1998, the Company entered into an agreement with CCA, whereby the
Company agreed to purchase from CCA all issued and outstanding stock of Agecroft
Properties, Inc. ("API") for approximately $80 million upon the completion of an
800 bed medium-security prison in Salford, England for which API had entered
into a contract to design, develop and construct the facility. However, as of
December 31, 1998, the facility had not been completed and in conjunction with
the merger as discussed in Note 11, API was acquired by Prison Realty
Corporation and on January 1, 1999, Prison Realty Corporation acquired the
Company. As such, the Company's agreement to purchase the issued and outstanding
stock of API will not be consummated. Upon completion of the construction,
affiliates of Correctional Services Management Corporation will lease the
facility from API and manage the facility pursuant to contracts with agencies of
the British government.
CCA served as the construction facilitator for the two North Carolina
facilities, which were under construction when the Company merged with USCC. CCA
also served as the construction facilitator for the additions at the four
Kentucky facilities acquired in the Company's merger with USCC. In its capacity
as facilitator, CCA was entitled to a fee of 5% of the capital expenditures. The
Company paid a total of $1.8 million during 1998 to CCA.
The Company derived 95.5% and 100% of its revenue from CCA for the year ended
December 31, 1998 and the period from July 18, 1997 to December 31, 1997,
respectively.
The Chairman of the Board of Trustees of the Company is also the Chairman of the
Board of Directors, President and Chief Executive Officer of CCA.
C. Ray Bell, who was a trustee of the Company, is the principal of a
construction company which has built correctional and detention facilities for
and on behalf of the Company. The Company paid a total of $8.7 million during
1998. No payments were made in 1997.
F-18
<PAGE> 65
11. EVENT SUBSEQUENT TO DECEMBER 31, 1998
Effective January 1, 1999, Prison Realty Corporation, a Maryland corporation,
completed the transactions contemplated by the Amended and Restated Agreement
and Plan of Merger, dated September 29, 1998 (the "Merger Agreement"), by and
among CCA, the Company and Prison Realty Corporation. The Merger Agreement and
the transactions contemplated thereby were approved and adopted by the
shareholders of CCA and the Company at special meetings held on December 1, 1998
and December 3, 1998, respectively. The merger will be accounted for as a common
control transfer from CCA to Prison Realty Corporation and the purchase of the
Company by Prison Realty Corporation. CCA will be treated as the acquiring
company and the Company will be treated as the acquired company for financial
reporting purposes. The Company has incurred a total of approximately $15.2
million in costs related to the merger, of which approximately $8.5 million has
been expensed and approximately $6.7 million was incurred on behalf of the
accounting acquirer, Prison Realty Corporation. As such, the Company has
recorded a receivable of $6.7 million in other assets on the accompanying
balance sheet to be reimbursed by Prison Realty Corporation. On December 31,
1998, CCA sold all of its management contracts and related net assets to one of
three newly formed companies: Correctional Management Services Corporation
("CMSC"); Prison Management Services LLC; and Juvenile and Jail Facility
Management Services LLC. Immediately after the Company's merger with Prison
Realty Corporation, CMSC entered into new leases with Prison Realty Corporation
for all facilities previously leased by CCA from the Company. Prison Realty
Corporation intends to operate so as to qualify as a real estate investment
trust for federal income tax purposes. In connection with the merger, the
Company's common and preferred shareholders received one share of Prison Realty
Corporation's common or preferred shares for each share of the Company's common
or preferred shares held. Additionally, the Company's Bank Credit Facility was
fully repaid by Prison Realty Corporation and the Company's ESOP was converted
into the Prison Realty Corporation 401(k) Plan.
F-19
<PAGE> 66
To CCA Prison Realty Trust:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of CCA Prison Realty Trust as of December 31,
1998 and 1997 and for the year ended December 31, 1998 and for the period from
July 18, 1997 to December 31, 1997 included in this Annual Report on Form 10-K
and have issued our report thereon dated January 22, 1999. Our audit was made
for the purpose of forming an opinion on the basic financial statements taken
as a whole. The financial statement schedules listed in the accompanying index
are the responsibility of the Company's management and are presented for
purposes of complying with the Securities and Exchange Commission's rules and
regulations under the Securities and Exchange Act of 1934 and are not otherwise
a required part of the basic financial statements. The financial statement
schedules have been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states, in all
material respects, the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
March 25, 1999
S-1
<PAGE> 67
CCA PRISON REALTY TRUST
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Costs Capitalized
Initial Cost Subsequent to Acquisition
---------------------- -----------------------------
Building and
Properties by State Encumbrances Land Improvements Improvements Carrying Costs
<S> <C> <C> <C> <C> <C>
Texas (5 Properties) Note 1 1,502 73,358 -- --
Kentucky (4 Properties) Note 1 1,750 175,742 -- --
Arizona (2 Properties) Note 1 2,583 190,283 -- --
North Carolina (2 Properties) Note 1 401 83,038 -- --
Ohio (2 Properties) Note 1 1,500 87,547 -- --
Oklahoma (2 Properties) Note 1 500 73,954 -- --
All Other States (4 Properties) Note 1 1,486 105,583 -- --
-------------------- -----------------------------
9,722 794,505 -- --
==================== =============================
<CAPTION>
Life on which
depreciation
Gross Amount at which carried at close of period in latest
------------------------------------------------ income
Building and Accumulated Date of Date statements
Properties by State Land Improvements Total Depreciation Construction Acquired is prepared
<S> <C> <C> <C> <C> <C> <C> <C>
Texas (5 Properties) 1,502 77,358 78,860 3,708 Note 2 Note 2 Note 3
Kentucky (4 Properties) 1,730 175,342 177,492 2,539 Note 2 Note 2 Note 3
Arizona (2 Properties) 2,513 190,283 192,866 7,925 Note 2 Note 2 Note 3
North Carolina (2 Properties) 401 83,038 83,439 615 Note 2 Note 2 Note 3
Ohio (2 Properties) 1,560 87,347 89,047 3,187 Note 2 Note 2 Note 3
Oklahoma (2 Properties) 300 73,954 74,454 3,165 Note 2 Note 2 Note 3
All Other States (4 Properties) 1,416 106,187 108,069 3,858 Note 2 Note 2 Note 3
------------------------------------- ------
9,722 794,105 108,227 22,697
===================================== ======
</TABLE>
Note 1 - All facilities are security under the Company's Bank Credit Facility.
The outstanding balance for the Bank Credit Facility at December 31, 1998 was
$279.6 million.
Note 2 - Individual facility profiles are included in Part 1, Item 2.
Note 3 - The Company has elected depreciable lives of 40 years and 7 years for
buildings and improvements and property, plant and equipment, respectively.
The following schedule is a reconciliation of the total changes in cost of real
estate properties and accumulated depreciation for the Company for the period
from July 18, 1997 (inception) to December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
Cost of Real Estate
Properties
<S> <C>
Balance, July 18, 1997 $ --
Acquisitions 455,360
Improvements --
Other--Capitalized Development Fee
Paid in Shares 3,000
--------
Balance, December 31, 1997 $458,360
Acquisitions 345,867
Improvements --
--------
Balance, December 31, 1998 $804,227
========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Depreciation
<S> <C>
Balance, July 18, 1997 $ --
Depreciation Expense 5,089
Dispositions --
-------
Balance, December 31, 1997 $ 5,089
Depreciation Expense 17,608
Dispositions --
-------
Balance, December 31, 1998 $22,697
=======
</TABLE>
S-2
<PAGE> 68
CCA PRISON REALTY TRUST
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Gross Amount at which carried
Initial Cost Costs Capitalized at close of period
---------------------- Subsequent to Acquisition -----------------------------
Building and ---------------------------- Building and
Properties by State Encumbrances Land Improvements Improvements Carrying Costs Land Improvements Total
- ------------------- ------------ ----- ------------ ------------ -------------- ------ ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Texas (5 Properties) Note 1 1,502 77,358 - - 1,502 77,358 78,860
Arizona (2 Properties) Note 1 2,583 165,236 - - 2,583 165,236 167,819
All Other States (5 Properties) Note 1 2,216 209,445 - - 2,236 209,445 211,681
----- ------- --- --- ----- ------- -------
6,321 452,039 - - 6,321 452,039 458,160
===== ======= === === ===== ======= =======
<CAPTION>
Life on which
depreciation in latest
Accumulated Date of income statements is
Depreciation Construction Date Acquired prepared
------------ ------------ ------------- ----------------------
<S> <C> <C> <C> <C>
Texas (5 Properties) 1,029 Note 2 Note 2 Note 3
Arizona (2 Properties) 2,126 Note 2 Note 2 Note 3
All Other States (5 Properties) 1,933 Note 2 Note 2 Note 3
-----
3,089
=====
</TABLE>
Note 1 - All facilities are security under the Company's Bank Credit Facility.
The outstanding balance for the Bank Credit Facility at December 31,
1997 was $32.0 million.
Note 2 - Individual facility profiles are included in Part I., Item 2.
Note 3 - The Company has elected depreciable lives of 40 years and 7 years for
buildings and improvements and property, plant and equipment,
respectively.
S-3
<PAGE> 69
INDEX OF EXHIBITS
Exhibits marked with an * are filed herewith. Other exhibits have previously
been filed with the Commission and are incorporated herein by reference.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 Agreement of Sale and Purchase between the Company and CCA (previously
filed as Exhibit 2 to the Company's Registration Statement on Form
S-11 (Commission File no. 333-25727) Amendment no. 4, filed with the
Commission on July 9, 1997 and incorporated herein by reference).
2.2 Agreement of Sale and Purchase between the Company and CCA (previously
filed as Exhibit 2 to the Agreement and Plan of Merger dated April 17,
1998, by and among the Company and USCA Corporation, a wholly-owned
Kentucky subsidiary of the Company, and U.S. Corrections Corporation,
a Kentucky corporation (previously filed as Exhibit 2.2 to the
Company's Current Report on Form 8-K (Commission File no. 1-13049),
filed with the Commission on April 22, 1998 and incorporated herein by
reference.
2.3 Amended and Restated Agreement and Plan of Merger, dated as of
September 29, 1998, by and among CCA, the Company and New Prison
Realty (included as Appendix A to the Prospectus filed pursuant to
Rule 424(b)(4) included in New Prison Realty's Registration Statement
on Form S-4 (Commission File no. 33-65017), filed with the Commission
on September 30, 1998, as declared effective on October 16, 1998 (as
directed by Item 601(b)(1) of Regulation S-K, certain schedules and
exhibits to this document were omitted from that filing, and the
Registrant agreed to furnish supplementally a copy of any omitted
schedule or exhibit to the Commission upon request).
3.1 Amended and Restated Declaration of Trust of the Company (previously
filed as Exhibit 3.1 to the Company's Registrant Statement on Form
S-11 (Commission File no. 333-25727) Amendment no. 1, filed with the
Commission on June 16, 1997) and incorporated herein by reference).
3.2 Articles Supplementary to the Company's Declaration of Trust
(previously filed as Exhibit 3(b) to the Company's Annual Report on
Form 10-K (Commission File no. 1-13049), filed with the Commission on
March 30, 1998 and incorporated herein by reference).
3.3 Amended and Restated Bylaws of the Company (previously filed as
Exhibit 3.2 to the Company's Registration Statement on Form S-11
(Commission File no. 333-25727) Amendment no. 1, filed with the
Commission on June 16, 1997 and incorporated herein by reference).
4.1 Provision defining the rights of shareholders are found in Sections
8-10 and 15 and in Article II in the Amended and Restated Declaration
of Trust and Amended and Restated Bylaws, respectively, of the Company
(included as Exhibits 3.1, 3.2 and 3.3 herein).
4.2 Specimen of certificate representing the Company's Common Shares
(previously filed as Exhibit 3.3 to the Company's Registration
Statement on Form S-11 (Commission File no 333-25727), Amendment no.
1, filed with the Commission on June 16, 1997 and incorporated herein
by reference).
4.3 Specimen of certificate representing the Company's Series A Preferred
Shares (previously filed as Exhibit 4.1 to the Company's Registration
Statement on Form S-11 (Commission File no. 333-43935), filed with the
Commission on January 27, 1998 and incorporated herein by reference.
<PAGE> 70
<TABLE>
<S> <C>
10.1 Option Agreement between the Company and CCA with respect to the
Northeast Ohio Correctional Center (previously filed as Exhibit
10.1(a) to the Company's Registration Statement on Form S-11
(Commission File no. 333-25727) Amendment no. 4, filed with the
Commission on July 9, 1997 and incorporated herein by reference).
10.2 Option Agreement between the Company and CCA with respect to the
Torrance County Detention Facility (previously filed as Exhibit 10.1(b)
to the Company's Registration Statement on Form S-11 (Commission File
no. 333-25727) Amendment no. 4, filed with the Commission on July 9,
1997 and incorporated herein by reference).
10.3 Option Agreement between the Company and CCA with respect to the
Southern Colorado Correctional Facility (previously filed as Exhibit
10.1(c) to the Company's Registration Statement on Form S-11
(Commission File no. 333-25727) Amendment no. 4, filed with the
Commission on July 9, 1997 and incorporated herein by reference).
10.4 Option Agreement between the Company and CCA with respect to the North
Fork Correctional Facility (previously filed as Exhibit 10.1(d) to the
Company's Registration Statement on Form S-11 (Commission File no.
333-25727) Amendment no. 4, filed with the Commission on July 9, 1997
and incorporated herein by reference).
10.5 Option Agreement between the Company and CCA with respect to the
Whiteville Correctional Center (previously filed as Exhibit 10.1(e) to
the Company's Registration Statement on Form S-11 (Commission File no.
333-25727) Amendment no. 4, filed with the Commission on July 9, 1997
and incorporated herein by reference).
10.6 Master Agreement to Lease between the Company and CCA (previously
filed as Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q
(Commission File no. 1-13409), filed with the Commission on August 25,
1997 and incorporated herein by reference).
10.7 Lease Agreement between the Company and CCA with respect to the
Houston Processing Center (previously filed as Exhibit 10.7 to the
Company's Quarterly Report on Form 10-Q (Commission File no. 1-13409),
filed with the Commission on August 25, 1997 and incorporated herein by
reference).
10.8 Lease Agreement between the Company and CCA with respect to the
Laredo Processing Center (previously filed as Exhibit 10.8 to the
Company's Quarterly Report on Form 10-Q (Commission File no. 1-13409),
filed with the Commission on August 25, 1997 and incorporated herein by
reference).
10.9 Lease Agreement between the Company and CCA with respect to the
Bridgeport Pre-Parole Transfer Facility (previously filed as Exhibit
10.9 to the Company's Quarterly Report on Form 10-Q (Commission File
no. 1-13409), filed with the Commission on August 25, 1997 and
incorporated herein by reference).
10.10 Lease Agreement between the Company and CCA with respect to the
Mineral Wells Pre-Parole Transfer Facility (previously filed as Exhibit
10.10 to the Company's Quarterly Report on Form 10-Q (Commission File
no. 1-13409), filed with the Commission on August 25, 1997 and
incorporated herein by reference).
10.11 Lease Agreement between the Company and CCA with respect to the
West Tennessee Detention Facility (previously filed as Exhibit 10.11 to
the Company's Quarterly Report on Form 10-Q (Commission File no.
1-13409), filed with the Commission on August 25, 1997 and incorporated
herein by reference).
</TABLE>
<PAGE> 71
10.12 Lease Agreement between the Company and CCA with respect to the
Leavenworth Detention Center (previously filed as Exhibit 10.12 to the
Company's Quarterly Report on Form 10-Q (Commission File no. 1-13409),
filed with the Commission on August 25, 1997 and incorporated herein
by reference).
10.13 Lease Agreement between the Company and CCA with respect to the Eloy
Detention Center (previously filed as Exhibit 10.13 to the Company's
Quarterly Report on Form 10-Q (Commission File no. 1-13409), filed
with the Commission on August 25, 1997 and incorporated herein by
reference).
10.14 Lease Agreement between the Company and CCA with respect to the
Central Arizona Detention Center (previously filed as Exhibit 10.14 to
the Company's Quarterly Report on Form 10-Q (Commission File no.
1-13409), filed with the Commission on August 25, 1997 and
incorporated herein by reference).
10.15 Lease Agreement between the Company and CCA with respect to the T. Don
Hutto Correctional Center (previously filed as Exhibit 10.15 to the
Company's Quarterly Report on Form 10-Q (Commission File no. 1-13409),
filed with the Commission on August 25, 1997 and incorporated herein
by reference).
10.16 Right to Purchase Agreement between the Company and CCA (previously
filed as Exhibit 10.4 to the Company's Registration Statement on Form
S-11 (Commission File no. 333-25727) Amendment no. 4, filed with the
Commission on July 9, 1997 and incorporated herein by reference).
10.17 Trade Name Use Agreement between the Company and CCA (previously filed
as Exhibit 10.17 to the Company's Quarterly Report on Form 10-Q
(Commission File no. 1-13409), filed with the Commission on August 25,
1997 and incorporated herein by reference).
10.18 Lease Agreement between the Company and CCA with respect to the
Northeast Ohio Correctional Facility (previously filed as Exhibit 10.5
to the Company's Current Report on Form 8-K (Commission File no.
1-13409), filed with the Commission on August 4, 1997 and incorporated
herein by reference).
10.19 Officer and Trustee Indemnification Agreement between the Company and
its trustees and officers (previously filed as Exhibit 10.21 to the
Company's Quarterly Report on Form 10-Q (Commission File no. 1-13409),
filed with the Commission on August 25, 1997 and incorporated herein
by reference).
10.20 Employment Agreement between J. Michael Quinlan and the Company
(previously filed as Exhibit 10.22 to the Company's Quarterly Report
on Form 10-Q (Commission File no. 1-13409), filed with the Commission
on August 25, 1997 and incorporated by reference).
10.21 Employment Agreement between D. Robert Crants, III and the Company
(previously filed as Exhibit 10.23 to the Company's Quarterly Report
on Form 10-Q (Commission File no. 1-13409), filed with the Commission
on August 25, 1997 and incorporated herein by reference).
10.22 Employment Agreement between Michael W. Devlin and the Company
(previously filed as Exhibit 10.24 to the Company's Quarterly Report
on Form 10-Q (Commission File no. 1-13409), filed with the Commission
on August 25, 1997 and incorporated herein by reference).
10.23 The Company's 1997 Employee Share Incentive Option Plan (previously
filed as Exhibit 10.25 to the Company's Quarterly Report on Form 10-Q
(Commission File no. 1-13409), filed with the Commission on August 25,
1997 and incorporated herein by reference).
<PAGE> 72
<TABLE>
<S> <C>
10.24 The Company's Non-Employee Trustees' Share Option Plan, as amended
(previously filed as Exhibit 10.26 to the Company's Quarterly Report
on Form 10-Q (Commission File no. 1-13409), filed with the Commission
on August 25, 1997 and incorporated herein by reference).
10.25 Lease Agreement between the Company and CCA with respect to the
Torrance County Detention Facility (previously filed as Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q (Commission File no.
1-13049), filed with the Commission on November 13, 1997 and
incorporated herein by reference).
10.26 CCA Prison Realty Trust Employee Savings and Stock Ownership Plan
(previously filed as Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q (Commission File no. 1-13049), filed with the Commission on
November 13, 1997 and incorporated herein by reference).
10.27 Lease Agreement between the Company and CCA with respect to the
Cimmarron Correctional Facility (previously filed as Exhibit 10.29 to
the Company's Registration Statement on Form S-11 (Commission File no.
333-43935), filed with the Commission on January 9, 1998 and
incorporated herein by reference).
10.28 Lease Agreement between the Company and CCA with respect to the Davis
Correctional Facility (previously filed as Exhibit 10.30 to the
Company's Registration Statement (Commission File no. 333-43935),
filed with the Commission on January 9, 1998 and incorporated herein
by reference).
10.29 Exercise Agreement, dated as of December 11, 1997, by and between the
Company and CCA with respect to the Cimarron Correction Facility
(previously filed as Exhibit 10(ee) to the Company's Annual Report on
Form 10-K (Commission File no. 1-13049), filed with the Commission on
March 30, 1998 and incorporated herein by reference).
10.30 Exercise Agreement, dated as of January 5, 1998, by and between the
Company and CCA with respect to the Davis Correctional Facility
(previously filed as Exhibit 10(ff) to the Company's Annual Report on
Form 10-K (Commission File no. 1-13049), filed with the Commission on
March 30, 1998 and incorporated herein by reference).
10.31 The Company's Non-Employee Trustees' Compensation Plan (Filed as
Appendix A to the Company's definitive Proxy Statement relating to the
1998 Annual Meeting of Shareholders (Commission File no. 1-13049),
filed with the Commission on March 23, 1998 and incorporated herein by
reference).
10.32 REIT Management Agreement, dated as of July 21, 1997, by and between
the Company and Prison Realty Management, Inc. (previously filed as
Exhibit 10(hh) to the Company's Annual Report on Form 10-K/A
(Commission File no. 1-13049), filed with the Commission on March 30,
1998 and incorporated herein by reference.
10.33 Waiver, Amendment and Joinder Agreement, dated April 17, 1998, between
the Company and U.S. Corrections Corporation, Subsidiaries of U.S.
Corrections Corporation, certain financial institutions, and First
Union National Bank (previously filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q (Commission File no. 1-13049), filed
with the Commission on August 14, 1998 and incorporated herein by
reference).
10.34 CCA Prison Realty Trust Non-Employee Trustees' Compensation Plan
(previously filed as Exhibit 4.3 to the Company's Registration
Statement on Form S-8 (Commission File no. 333-58339), filed with the
Commission on July 1, 1998 and incorporated herein by reference).
</TABLE>
<PAGE> 73
<TABLE>
<S> <C>
10.35 Amended and Restated Credit Agreement, dated as of July 31, 1998, by
and among the Company, various Lenders, First Union National Bank, as
administrative agent, Canadian Imperial Bank of Commerce, as
documentation agent, and NationsBank, N.A., as syndication agent
(previously filed as Exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q (Commission File no. 1-13049), filed with the Commission
on November 17, 1998 and incorporated herein by reference).
10.36 Security Agreement entered into by the Company in favor of First
Union National Bank of Tennessee (previously filed as Exhibit 10.20
to the Company's Quarterly Report on Form 10-Q (Commission File no.
1-13049), filed with the Commission on August 25, 1997 and
incorporated herein by reference).
10.37 Agreement in Principle by and among Sodexho Alliance, S.A., CCA and
the Company (previously filed as Exhibit 10.13 to New Prison Realty's
Registration Statement on Form S-4 (Commission File no. 333-65017),
filed with the Commission on September 30, 1998, as declared
effective on October 16, 1998, and incorporated herein by reference).
10.38 Assignment of International Joint Venture Agreement by and between
CCA and Sodexho S.A., dated as of December 30, 1998, by and between
Sodexho, CCA, the Company, New Prison Realty, Operating Company and
the Service Companies (previously filed as Exhibit 10.87 to New
Prison Realty's Annual Report on Form 10-K (Commission File no.
0-25245), file with the Commission on March 30, 1999 and incorporated
herein by reference).
10.39 Form of Agreement in Principle by and among Baron Capital Group,
Inc., and its affiliates, CCA, the Company and Correctional
Management Services Corporation (previously filed as Exhibit 10.13
to New Prison Realty's Registration Statement on Form S-4 (Commission
File no. 333-65017), filed with the Commission on September 30, 1998,
as declared effective October 16, 1998, and incorporated herein by
reference).
10.40 Exercise Agreement, dated as of January 5, 1998, by and between the
Company and CCA with respect to the Holdenville, Oklahoma facility
(previously filed as Exhibit 10.175 to CCA's Annual Report on Form
10-K (Commission File no. 1-13560), filed with the Commission on
March 30, 1998 and incorporated herein by reference.
10.41 Exercise Agreement, dated as of December 11, 1997, by and between
the Company and CCA with respect to the Cushing, Oklahoma facility
(previously filed as Exhibit 10.177 to CCA's Annual Report on Form
10-K (Commission File no. 1-13560), filed with the Commission on
March 30, 1998 and incorporated herein by reference.
12 Statement re: computation of ratios (included within this Annual
Report on Form 10-K).
21* Subsidiaries of the Company.
23* Consent of Arthur Andersen LLP.
24 Powers of Attorney (included on signature pages hereto).
27* Financial Data Schedule (for SEC use only).
</TABLE>
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF CCA PRISON REALTY TRUST
First-Tier:
U.S. Corrections Corporation, a Kentucky corporation
Agecroft Property, Inc., a Tennessee corporation
Prison Realty Management, Inc., a Tennessee corporation
Second-Tier:
USCC, Inc., a Kentucky corporation
Third-Tier:
Queensgate Correctional Center, Inc., a Kentucky corporation
U.S. Corrections Leasing (NC) Avery/Mitchell Facility, Inc., a North Carolina
corporation
U.S. Corrections Leasing (NC) Pamlico Facility, Inc., a North Carolina
corporation
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports dated January 22, 1999 and March 25, 1999 included in this Annual Report
on Form 10-K of CCA Prison Realty Trust, into Prison Realty Corporation's
previously filed Registration Statement File Numbers 333-70419 and 333-70625. It
should be noted that we have not audited any financial statements of CCA Prison
Realty Trust subsequent to December 31, 1998, or performed any audit procedures
subsequent to the date of our reports.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
March 25, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CCA PRISON REALTY TRUST FOR THE YEAR ENDED DECEMBER 31,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 39,082
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<DEPRECIATION> (22,697)
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0
43
<COMMON> 253
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