<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-25245
PRISON REALTY TRUST, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
MARYLAND 62-1763875
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
</TABLE>
10 BURTON HILLS BLVD., SUITE 100, NASHVILLE, TENNESSEE 37215
(ADDRESS AND ZIP CODE OF PRINCIPAL EXECUTIVE OFFICES)
(615) 263-0200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
PRISON REALTY CORPORATION
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR IF CHANGED SINCE LAST
REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
(Outstanding shares of the issuer's common stock, $0.01 par value per share, as
of May 10, 1999)
117,072,792
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PRISON REALTY TRUST, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
INDEX
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<CAPTION>
PAGE
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
a) Condensed Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998....................................... 2
b) Condensed Consolidated Statements of Income for the three
months ended March 31, 1999 and 1998........................ 4
c) Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1999 and 1998.................. 5
d) Notes to Condensed Consolidated Financial Statements........ 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 16
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 28
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings........................................... 29
Item 2. Changes in Securities and Use of Proceeds................... 29
Item 3. Defaults Upon Senior Securities............................. 29
Item 4. Submission of Matters to a Vote of Security Holders......... 29
Item 5. Other Information........................................... 29
Item 6. Exhibits and Reports on Form 8-K............................ 29
SIGNATURE............................................................ 30
</TABLE>
1
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PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS.
PRISON REALTY TRUST, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (SEE NOTE 3)
MARCH 31, 1999 AND DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Real estate properties, at cost:
Correctional and detention facilities.............. $2,031,019 $ 637,640
Less accumulated depreciation...................... (19,192) (10,251)
---------- ----------
Net real estate properties...................... 2,011,827 627,389
Cash and cash equivalents............................ 11,324 31,141
Restricted cash...................................... 91,581 --
Notes receivable..................................... 138,549 138,549
Investments in affiliates and others................. 132,703 127,691
Investments in direct financing leases............... 76,644 77,809
Deferred tax assets.................................. -- 51,200
Amounts under lease arrangements..................... 6,437 --
Receivable from New CCA.............................. 6,227 --
Other assets......................................... 19,153 36,658
---------- ----------
Total assets.................................... $2,494,445 $1,090,437
========== ==========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
(Continued)
2
<PAGE> 4
PRISON REALTY TRUST, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (SEE NOTE 3)
MARCH 31, 1999 AND DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(CONTINUED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Distributions payable.............................. $ 221,505 $ --
Bank credit facility............................... 620,000 222,000
Convertible subordinated notes and other debt...... 70,780 77,833
Accounts payable and accrued expenses.............. 107,656 81,200
Income taxes payable............................... 8,197 14,966
Deferred gains on real estate transactions......... -- 125,751
Deferred gains on sales of contracts............... 112,889 116,701
Deferred tax liability............................. 32,000 --
---------- ----------
Total liabilities............................... 1,173,027 638,451
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock , $.01 par value; 10,000 shares
authorized; 4,300 and 0 outstanding,............ 43 --
Common stock, $.01 par value; 300,000 shares
authorized, 114,391 and 79,956 shares issued and
outstanding,.................................... 1,144 800
Additional paid-in capital......................... 1,323,959 398,493
Retained earnings.................................. -- 52,693
Cumulative net income.............................. 60,595 --
Accumulated distributions.......................... (64,323) --
---------- ----------
Total stockholders' equity...................... 1,321,418 451,986
---------- ----------
Total liabilities and stockholders' equity...... $2,494,445 $1,090,437
========== ==========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
3
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PRISON REALTY TRUST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (SEE NOTE 3)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
REVENUES:
Rental revenues........................................ $ 63,640 $ --
Interest income........................................ 6,214 --
Licensing fees......................................... 2,132 --
Management and other revenues.......................... -- 141,298
-------- --------
71,986 141,298
-------- --------
EXPENSES:
Depreciation and amortization.......................... 9,917 3,388
General and administrative............................. 882 4,953
Operating.............................................. -- 99,719
Lease.................................................. -- 11,095
-------- --------
10,799 119,155
-------- --------
OPERATING INCOME......................................... 61,187 22,143
Equity in earnings of subsidiaries and amortization of
deferred gains......................................... 7,681 --
Interest expense......................................... (8,273) (6,024)
Interest income.......................................... -- 8,815
-------- --------
INCOME BEFORE INCOME TAXES............................... 60,595 24,934
Provision for change in tax status....................... 83,200 --
Provision for income taxes............................... -- 6,491
-------- --------
NET INCOME (LOSS)........................................ (22,605) 18,443
DIVIDENDS TO PREFERRED SHAREHOLDERS...................... (2,150) --
-------- --------
NET INCOME (LOSS) AVAILABLE FOR COMMON SHARES............ $(24,755) $ 18,443
======== ========
NET INCOME (LOSS) AVAILABLE PER COMMON SHARE:
Basic.................................................. $ (0.23) $ 0.27
======== ========
Diluted................................................ $ (0.23) $ 0.23
======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, BASIC........ 107,282 69,552
======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, DILUTED...... 107,282 79,132
======== ========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
4
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PRISON REALTY TRUST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (SEE NOTE 3)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED AND AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................... $ (22,605) $ 18,443
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization......................... 9,917 3,388
Provision for change in tax status.................... 83,200 --
Deferred and other noncash income taxes............... -- 2,612
Other noncash items................................... -- 122
Equity in earnings of unconsolidated entities......... (5,012) (350)
Recognized gain on sales of contracts................. (2,669) --
Recognized gain on real estate transactions........... -- (3,251)
Changes in assets and liabilities, net of acquisitions
and divestitures:
Accounts receivable................................ (1,314) (9,334)
Prepaid expenses................................... (398) 542
Other current assets............................... (6,754) (646)
Accounts payable................................... (1,641) (12,411)
Income taxes payable............................... (6,769) (9,520)
Accrued expenses and other liabilities............. 3,604 315
--------- --------
Net cash provided by (used in) operating
activities.................................... 49,559 (10,090)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment..................... (169,958) (69,918)
Increase in restricted cash and investments............. (74,393) --
Cash acquired in purchase of CCA Prison Realty Trust.... 21,894 --
Increase in other assets................................ (3,937) (2,697)
Proceeds from disposals of assets....................... -- 36,132
Payments received on direct financing leases and notes
receivable............................................ 1,165 1,257
--------- --------
Net cash used in investing activities............ (225,229) (35,226)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt................ 40,000 --
Payments on long-term debt.............................. (53) (11)
Proceeds from line of credit, net....................... 118,400 40,000
Payment of debt issuance costs.......................... (7,366) --
Proceeds from issuance of common stock.................. 74,840 --
Distributions paid on common shares..................... (67,818) --
Distributions paid on preferred shares.................. (2,150) --
Proceeds from exercise of stock options and warrants.... -- 727
Purchase of treasury stock.............................. -- (7,600)
--------- --------
Net cash provided by financing activities........ 155,853 33,116
--------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS............... (19,817) (12,200)
CASH AND CASH EQUIVALENTS, beginning of year............ 31,141 136,147
--------- --------
CASH AND CASH EQUIVALENTS, end of year.................. $ 11,324 $123,947
========= ========
</TABLE>
(Continued)
5
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PRISON REALTY TRUST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (SEE NOTE 3)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED AND AMOUNTS IN THOUSANDS)
(CONTINUED)
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized)................ $ -- $ 167
=========== ========
Income taxes......................................... $ 6,769 $ 13,403
=========== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES - INCREASES (DECREASES) TO CASH:
Long-term debt was converted into common stock:
Other assets......................................... $ 1,161 $ 5
Long-term debt....................................... (47,000) (1,400)
Common stock......................................... 50 51
Additional paid-in capital........................... 45,789 32
Treasury stock....................................... -- 32,812
Retained earnings.................................... -- (31,500)
----------- --------
$ -- $ --
=========== ========
The Company acquired treasury stock and issued common
stock through the exercise of stock options:
Common stock......................................... $ -- $ 374
Additional paid-in capital........................... -- 3,073
Retained earnings.................................... -- (114)
Treasury stock, at cost.............................. -- (3,333)
----------- --------
$ -- $ --
=========== ========
The Company acquired CCA Prison Realty Trust's assets
and liabilities for stock:
Restricted cash...................................... $ (17,188) $ --
Property and equipment............................... (1,323,100) --
Other assets......................................... (9,496) --
Accounts payable and accrued expenses................ 29,248 --
Line of credit....................................... 279,600 --
Distributions payable................................ 2,150 --
Common stock......................................... 253 --
Preferred stock...................................... 43 --
Additional paid-in capital........................... 1,081,161 --
Retained earnings.................................... 43,817 --
Accumulated distributions............................ (64,594) --
----------- --------
Net cash acquired............................... $ 21,894 $ --
=========== ========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
6
<PAGE> 8
PRISON REALTY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
1. ORGANIZATION AND OPERATIONS
BACKGROUND AND FORMATION TRANSACTIONS
Prison Realty Trust, Inc., formerly Prison Realty Corporation, a Maryland
corporation (the "Company"), was formed in September 1998. Corrections
Corporation of America, a Tennessee corporation ("Old CCA"), and CCA Prison
Realty Trust, a Maryland real estate investment trust ("Prison Realty"), merged
with and into the Company on December 31, 1998 and January 1, 1999, respectively
(collectively, the "Merger"), pursuant to an Amended and Restated Agreement and
Plan of Merger by and among Old CCA, Prison Realty and the Company, dated as of
September 29, 1998 (the "Merger Agreement"). In the Merger, Old CCA shareholders
received 0.875 share of common stock of the Company, $0.01 par value per share,
in exchange for each share of Old CCA common stock, $1.00 par value per share.
Prison Realty's common and preferred shareholders received one share of the
Company's common or preferred stock for each Prison Realty common or preferred
share held by them prior to the Merger.
The Merger was legally structured as a common control transfer from Old CCA and
Prison Realty to the Company. For accounting purposes, the Merger has been
accounted for as a reverse acquisition of the Company by Old CCA and the
acquisition of Prison Realty by the Company. As such, Old CCA's assets and
liabilities have been carried forward at historical cost and the provisions of
reverse accounting prescribe that Old CCA's historical financial statements be
presented as the Company's historical financial statements. The historical
equity sections of the financial statements and earnings per share have been
retroactively restated to reflect the Company's equity structure including the
exchange ratio and the effects of the differences in par values of the
respective companies' common stock. Prison Realty's assets and liabilities have
been recorded at fair market value, as required by Accounting Principles Board
Opinion No. 16.
OPERATIONS
Prior to the Merger, Old CCA operated and managed prisons and other correctional
and detention facilities and provided prisoner transportation services for
governmental agencies. Old CCA also provided a full range of related services to
governmental agencies, including managing, financing, developing, designing and
constructing new correctional and detention facilities and redesigning and
renovating older facilities. Subsequent to the Merger, the Company specializes
in acquiring, developing and owning correctional and detention facilities. The
Company intends to operate so as to qualify as a real estate investment trust,
or REIT, for federal income tax purposes and intends to elect to qualify as a
REIT commencing with its taxable year ending December 31, 1999.
The Company's results of operations for all periods prior to January 1, 1999
reflect the operating results of Old CCA and the results of operations
subsequent to January 1, 1999 reflect the operating results of the Company as a
REIT. The accompanying unaudited condensed consolidated financial statements
compare the operating results of the Company for the three months ended March
31, 1999 to the three months ended March 31, 1998. Management believes the
comparison between 1999 and 1998 is not meaningful because the 1998 results
reflect the operations of Old CCA and the 1999 results of operations reflect the
operating results of the Company as a REIT.
7
<PAGE> 9
PRISON REALTY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The following unaudited pro forma operating information presents a summary of
comparable consolidated results of combined operations as a REIT of the Company
and Prison Realty for the three months ended March 31, 1998, as if the Merger
had occurred as of January 1, 1998 and excluding the effect of any provision for
the change in tax status. The unaudited pro forma operating information is
presented for comparison purposes only and does not purport to represent what
the Company's results of operations actually would have been had the Merger, in
fact, occurred on January 1, 1998.
<TABLE>
<CAPTION>
PRO FORMA
THREE MONTHS
ENDED
MARCH 31, 1998
--------------
(AMOUNTS IN
THOUSANDS)
<S> <C>
Revenues................................................. $54,746
Operating income......................................... 44,850
Net income available to common shareholders.............. 40,016
Net income per common share:
Basic.................................................. $ 0.44
Diluted................................................ 0.40
</TABLE>
2. MERGER TRANSACTIONS AND RELATED CONTRACTUAL RELATIONSHIPS
On December 31, 1998, immediately prior to the Merger, Old CCA sold to
Corrections Corporation of America, formerly Correctional Management Services
Corporation, a privately-held Tennessee corporation formed in connection with
the Merger ("New CCA"), all of the issued and outstanding capital stock of
certain wholly-owned corporate subsidiaries of Old CCA, certain management
contracts and certain other assets and liabilities, and entered into a trade
name use agreement as described below. In exchange, Old CCA received an
installment note in the principal amount of $137.0 million (the "CCA Note") and
100% of the non-voting common stock of New CCA, representing a 9.5% economic
interest in New CCA valued at the implied fair market value of $4.8 million. The
CCA Note has a term of 10 years and bears interest at a rate of 12% per annum.
Interest only is generally payable for the first four years of the CCA Note, and
the principal will be amortized over the following six years. The sale to New
CCA generated a deferred gain of $62.2 million. In accordance with the
installment method of gain recognition as specified by the Securities and
Exchange Commission's Staff Accounting Bulletin No. 81, the deferred gain from
the above described sale to New CCA will be amortized into income over the six
year period in which principal payments on the Note are received. The Company's
investment in New CCA is being accounted for under the cost method of
accounting.
On December 31, 1998, immediately prior to the Merger and in connection with the
transaction described above, Old CCA entered into a trade name use agreement
with New CCA (the "Trade Name Use Agreement"). Under the Trade Name Use
Agreement, which has a term of ten years, Old CCA granted to New CCA the right
to use the name "Corrections Corporation of America" and derivatives thereof,
subject to specified terms
8
<PAGE> 10
PRISON REALTY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
and conditions therein. In consideration for such right, New CCA agreed to pay a
fee equal to (i) 2.75% of the gross revenues of New CCA for the first three
years of the Trade Name Use Agreement, (ii) 3.25% of New CCA's gross revenues
for the following two years of the Trade Name Use Agreement, and (iii) 3.625% of
New CCA's gross revenues for the remaining term of the Trade Name Use Agreement,
provided that the amount of such fee may not exceed (a) 2.75% of the gross
revenues of the Company for the first three years of the Trade Name Use
Agreement, (b) 3.5% of the Company's gross revenues for the following two years
of the Trade Name Use Agreement, and (c) 3.875% of the Company's gross revenues
for the remaining term of the Trade Name Use Agreement. The Company succeeded to
Old CCA's interest in the Trade Name Use Agreement as a result of the Merger.
On December 31, 1998, immediately prior to the Merger and in connection with the
Merger, Old CCA sold to Prison Management Services, LLC, a privately-held
Delaware limited liability company formed in connection with the Merger ("PMS"),
certain management contracts and certain other assets and liabilities relating
to government-owned adult prison facilities managed by Old CCA. In exchange, Old
CCA received 100% of the non-voting membership interest in PMS which interest
obligates PMS to make distributions to Old CCA equal to 95% of its net income,
as defined, and is valued at the implied fair market value of $67.1 million. The
Company succeeded to this interest as a result of the Merger, and the Company's
interest in PMS is included in "Investments in affiliates and others" in the
accompanying balance sheet. The sale to PMS generated a deferred gain of $35.4
million. On January 1, 1999, PMS merged with Prison Management Services, Inc., a
privately-held Tennessee corporation ("Service Company A").
On December 31, 1998, immediately prior to the Merger and in connection with the
Merger, Old CCA sold to a privately-held Delaware limited liability company
formed in connection with the Merger, Juvenile and Jail Facility Management
Services, LLC ("JJFMS"), certain management contracts and certain other assets
and liabilities relating to government-owned jails and juvenile facilities
managed by Old CCA. In exchange, Old CCA received 100% of the non-voting
membership interest in JJFMS which interest obligates JJFMS to make
distributions to Old CCA equal to 95% of its net income, as defined, and is
valued at the implied fair market value of $55.9 million. The Company succeeded
to this interest as a result of the Merger and the Company's interest in JJFMS
is included in "Investments in affiliates and others" in the accompanying
balance sheet. The sale to JJFMS generated a deferred gain of $18.0 million. On
January 1, 1999, JJFMS merged with Juvenile and Jail Facility Management
Services, Inc., a privately-held Tennessee corporation ("Service Company B," and
collectively with Service Company A, the "Service Companies").
The deferred gains from the sales of contracts to the Service Companies will be
amortized into income over a five year period which represents the average
remaining lives of the contracts sold plus any contractual renewal options as
specified by the Securities and Exchange Commission's Staff Accounting Bulletin
No. 81. The Company's investments in the Service Companies will be accounted for
under the equity method of accounting.
On January 1, 1999, immediately after the Merger, all existing leases between
Old CCA and Prison Realty were cancelled and the Company entered into a master
lease agreement and leases with respect to each leased property with New CCA
(the "New CCA Leases"). The terms of the New CCA Leases are twelve years which
may be extended at
9
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PRISON REALTY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
fair market rates for three additional five-year periods upon the mutual
agreement of the Company and New CCA. The payments required under the lease
arrangements in the first quarter were approximately $61.0 million.
Effective January 1, 1999, the Company and New CCA entered into a Right to
Purchase Agreement (the "Right to Purchase Agreement") pursuant to which New CCA
granted to the Company the right to acquire, and leaseback to New CCA at fair
market rental rates, any correctional or detention facility acquired or
developed and owned by New CCA in the future for a period of ten years following
the date inmates are first received at such facility. The initial annual rental
rate on such facilities will be the fair market rental rate as determined by the
Company and New CCA. Additionally, New CCA granted the Company the right of
first refusal to acquire any New CCA-owned correctional or detention facility
should New CCA receive an acceptable third party offer to acquire any such
facility.
On January 1, 1999, immediately after the Merger, the Company entered into a
services agreement (the "Services Agreement") with New CCA pursuant to which New
CCA agreed to serve as a facilitator of the construction and development of
additional facilities on behalf of the Company for a term of five years from the
date of the Services Agreement. In such capacity, New CCA will perform, at the
direction of the Company, such services as are customarily needed in the
construction and development of correctional and detention facilities, including
services related to construction of the facilities, project bidding, project
design, and governmental relations. In consideration for the performance of such
services by New CCA, the Company agreed to pay a fee equal to 5% of the total
capital expenditures (excluding the incentive fee discussed below and the 5% fee
referred to herein) incurred in connection with the construction and development
of a facility, plus an amount equal to approximately $560 per bed for facility
preparation services provided by New CCA prior to the date on which inmates are
first received at such facility. The Board of Directors of the Company has
authorized payments up to an additional 5% of the total capital expenditures (as
determined above) to New CCA if additional services are requested by the
Company.
On January 1, 1999, immediately after the Merger, the Company entered into a
tenant incentive agreement (the "Tenant Incentive Agreement") with New CCA
pursuant to which the Company agreed to pay to New CCA an incentive fee to
induce New CCA to enter into New CCA Leases with respect to those facilities
developed and facilitated by New CCA. The amount of the incentive fee was set at
$840 per bed for each facility leased by New CCA for which New CCA served as
developer and facilitator. This $840 per bed incentive fee, however, did not
include an allowance for rental payments to be paid by New CCA. Therefore, on
May 4, 1999, the Company and New CCA entered into an amended and restated tenant
incentive agreement (the "Amended and Restated Tenant Incentive Agreement"),
effective as of January 1, 1999, providing for (i) a tenant incentive fee of up
to $4,000 per bed payable with respect to all future facilities developed and
facilitated by New CCA, as well as certain other facilities which, although
operational on January 1, 1999, had not achieved full occupancy, and (ii) an
$840 per bed allowance for all beds in operation at the beginning of January
1999, approximately 21,500 beds, that were not subject to the tenant allowance
in the first quarter of 1999. The amount of the amended tenant incentive fee
includes an allowance for rental payments to be paid by New CCA prior to the
facility reaching stabilized occupancy. The term of the Amended and
10
<PAGE> 12
PRISON REALTY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Restated Tenant Incentive Agreement is four years unless extended upon the
written agreement of the Company and New CCA. The incentive fees with New CCA
are being deferred and amortized as a reduction to rental revenues over the
respective lease term.
Effective January 1, 1999, the Company entered into a business development
agreement (the "Business Development Agreement") with New CCA which provides
that New CCA will perform, at the direction of the Company, services designed to
assist the Company in identifying and obtaining new business. Such services
include, but are not limited to, marketing and other business development
services designed to increase awareness of the Company and the facility
development and construction services it offers, identifying potential facility
sites and pursing all applicable zoning approvals related thereto, identifying
potential tenants for the Company's facilities and negotiating agreements
related to the acquisition of new facility management contracts for the
Company's tenants. Pursuant to the Business Development Agreement, the Company
will also reimburse New CCA for expenses related to third-party entities
providing government and community relations services to New CCA in connection
with the provision of the business development services described above. In
consideration for New CCA's performance of the business development services,
and in order to reimburse New CCA for the third-party government and community
relations expenses described above, the Company has agreed to pay to New CCA a
total fee equal to 4.5% of the total capital expenditures (excluding the amount
of the tenant incentive fee and the services fee discussed above as well as the
4.5% fee referred to herein) incurred in connection with the construction and
development of each new facility, or the construction and development of an
addition to an existing facility, for which New CCA performed business
development services. The term of the Business Development Agreement is four
years unless extended upon the written agreement of the Company and New CCA.
3. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of the Company include all the accounts of
the Company and its subsidiaries subsequent to the Merger, including Prison
Realty Management, Inc., a Tennessee corporation and wholly-owned management
subsidiary. All significant intercompany balances and transactions have been
eliminated.
The accompanying interim consolidated financial statements are unaudited. The
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and in conjunction with
the rules and regulations of the United States Securities and Exchange
Commission (the "Commission"). Accordingly, they do not include all of the
disclosures required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
solely of normal recurring matters) necessary for a fair presentation of the
financial statements for this interim period have been included. The results of
operations for the interim period are not necessarily indicative of the results
to be obtained for the full fiscal year. Reference is made to the audited
financial statements of the Company included in the Company's Annual Report on
Form 10-K for the fiscal year ending December 31, 1998, filed with the
Commission on March 30, 1999 (File no. 0-25245), with respect to certain
significant accounting and financial reporting policies as well as other
pertinent information of the Company. Since prior to the Merger Prison Realty
had
11
<PAGE> 13
PRISON REALTY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
operated so as to qualify as a REIT, the Company has adopted certain significant
accounting policies of Prison Realty. Reference is made to the audited financial
statements of Prison Realty included in Prison Realty's Annual Report on Form
10-K for the fiscal year ending December 31, 1998, filed with the Commission on
March 30, 1999 (File no. 1-13049), with respect to certain significant
accounting and financial reporting policies as well as other pertinent
information of Prison Realty.
4. REAL ESTATE PROPERTIES
As discussed previously, pursuant to the Merger, the Company acquired all of the
assets and liabilities of Prison Realty on January 1, 1999, including 23 leased
facilities and one real estate property under construction. The real estate
properties acquired by the Company in conjunction with the acquisition of Prison
Realty have been recorded at estimated fair market value in accordance with the
purchase method of accounting prescribed by Accounting Principles Board Opinion
No. 16.
At March 31, 1999, the Company owned 47 correctional and detention facilities,
nine of which were under construction or development, with a total aggregate
cost of $2.0 billion. At March 31, 1999, New CCA leased 30 facilities from the
Company, governmental agencies leased five facilities from the Company, and
private operators leased three facilities from the Company. Currently, the
Company owns 50 facilities, eleven of which are under construction. The Company
expects to lease ten of the facilities under development to New CCA.
In April 1999, the Company purchased the Eden Detention Center in Eden, Texas
for $28.0 million. The facility has a design capacity of 1,225 beds and is
leased to and managed by New CCA.
5. LONG TERM DEBT
On January 1, 1999, in connection with the completion of the Merger, the Company
obtained a $650.0 million, secured credit facility (the "Credit Facility")
pursuant to the terms of a credit agreement which replaced credit facilities
obtained prior to the Merger by each of Old CCA and Prison Realty. The Credit
Facility includes up to a maximum of $250.0 million in term loans and $400.0
million in revolving loans, including a $150.0 million subfacility for letters
of credit. The term loans require principal quarterly payments of $625,000
throughout the term of the loan with the remaining balance maturing on January
1, 2003 and the revolving loans maturing on January 1, 2002. Interest rates,
unused commitment fees, and letter of credit fees on the Credit Facility are
subject to change based on the Company's senior debt rating. The Credit Facility
is secured by mortgages on the Company's real property. At March 31, 1999, the
weighted average borrowing rate under the Credit Facility was 7.92% and the
outstanding borrowings thereunder were $620.0 million.
Borrowings under the Credit Facility are limited based on a borrowing base
formula which considers, among other things, eligible real estate. The Credit
Facility contains certain financial covenants, primarily: (a) maintenance of a
leverage, interest coverage, debt service coverage and total indebtedness
ratios, and (b) restrictions on the incurrence of additional indebtedness. The
Company is in compliance with all covenants under the Credit Facility.
12
<PAGE> 14
PRISON REALTY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
On April 26, 1999, the Company received a commitment from Lehman Commercial
Paper Inc. and Lehman Brothers Inc. with respect to an amendment and restatement
of the Credit Facility increasing amounts available to the Company under the
Credit Facility to $1.0 billion through the addition of a $350.0 million
delayed-draw term loan facility. The Company expects to amend and restate the
Credit Facility during the second quarter of 1999.
On January 29, 1999, the Company issued $20.0 million of convertible
subordinated notes to an outside party. The notes bear interest at 9.5% and are
convertible into shares of the Company's common stock at a conversion price of
$28.00 per share.
On March 8, 1999, the Company issued a $20.0 million convertible subordinated
note to Sodexho Alliance, S.A. ("Sodexho") pursuant to a forward contract
assumed by the Company from Old CCA in the Merger. The note bore interest at
LIBOR plus 1.35% and was convertible into shares of the Company's common stock
at a conversion price of $7.80 per share. On March 8, 1999, Sodexho converted
(i) $7.0 million of convertible subordinated notes bearing interest at 8.5% into
1.7 million shares of the Company's common stock at a conversion price of $4.09
per share, (ii) $20.0 million of convertible notes bearing interest at 7.5% into
700,000 shares of the Company's common stock at a conversion price of $28.53 and
(iii) $20.0 million of convertible subordinated notes bearing interest at LIBOR
plus 1.35% into 2.6 million shares of the Company's common stock at a conversion
price of $7.80 per share.
6. DISTRIBUTIONS TO STOCKHOLDERS
On March 4, 1999, the Company's Board of Directors declared a distribution of
$0.60 per share on the Company's common stock, comprised of a regular quarterly
dividend of $0.55 per share and a special dividend of $0.05 per share for the
quarter ended March 31, 1999, to common stockholders of record on March 19,
1999, payable on March 31, 1999. These distributions were paid on March 31,
1999. In addition, the Board of Directors declared a quarterly dividend on the
Company's 8.0% Series A Cumulative Preferred Stock of $0.50 per share to
preferred stockholders of record on March 31, 1999, payable on April 15, 1999.
These dividends were paid on April 15, 1999.
The Company, as a REIT, cannot complete any taxable year with accumulated
earnings and profits from a taxable corporation. Accordingly, to preserve its
REIT status, the Company will distribute Old CCA's accumulated earnings and
profits to which it succeeded in the Merger. The Company anticipates that it
will make this distribution to all holders of shares of its common stock in
December 1999. This total distribution is estimated at $225.0 million and has
been accrued on the Company's balance sheet at March 31, 1999 net of a quarterly
prepayment of $.05 per share and aggregating $5.6 million, which was paid out on
March 31, 1999.
7. EARNINGS 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 are
13
<PAGE> 15
PRISON REALTY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 during the period.
Diluted earnings per share was computed by dividing net income (as adjusted) by
the weighted average number of common shares after considering the additional
dilution related to convertible preferred stock, convertible subordinated notes,
options and warrants. The results of operations for the three months ended March
31, 1999 was a net loss; therefore, the diluted earnings per share was equal to
the basic earnings per share.
8. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income", effective for fiscal years beginning after
December 15, 1998. SFAS No. 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 No. 130 on
January 1, 1998. The Company's comprehensive income is equivalent to net income
for the three months ended March 31, 1999.
9. RELATIONSHIP WITH CORRECTIONS CORPORATION OF AMERICA
New CCA is a private prison management company which operates and manages
certain facilities owned by the Company. As of March 31, 1999, New CCA leased 30
of the 38 operating facilities owned by the Company. For the quarter ending
March 31, 1999, the Company recognized rental revenue from New CCA of $61.2
million. During the quarter, the Company provided tenant incentive fees of $6.6
million which are being amortized over the life of the leases. The amount of
unamortized incentives pursuant to the Tenant Incentive Agreement, as of March
31, 1999 is $6.4 million. On May 4, 1999, the Company and New CCA entered into
the Amended and Restated Tenant Incentive Agreement, effective as of January 1,
1999, providing for (i) an increase in the applicable tenant incentive fee up to
$4,000 per bed payable with respect to all future facilities developed and
facilitated by New CCA, as well as certain other facilities which, although
operational on January 1, 1999, had not achieved full occupancy and (ii) an $840
per bed allowance for all beds in operation at the beginning of January 1999,
approximately 21,500 beds, that were not subject to the tenant allowance in the
first quarter of 1999. The Company recognized interest income of $4.1 million on
the installment note in the principal amount of $137.0 million from New CCA. The
interest is due from New CCA by December 31, 1999. The Company recognized $2.1
million in licensing fee revenues from New CCA for the use of the name
"Corrections Corporation of America". The license fee was received from New CCA
in April 1999.
The Company has entered into certain agreements with New CCA, which provide for
the Company to pay fees to New CCA for services rendered to the Company,
including: (i) obtaining new construction projects (4.5% of expected project
expenditures) and (ii) facilitating the construction and development of
facilities (up to 10% of actual construction expenditures). For the quarter
ending March 31, 1999, the Company has paid $12.8 million and accrued $7.1
million to New CCA under these construction and development arrangements.
14
<PAGE> 16
PRISON REALTY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The following unaudited operating information presents a summary of New CCA's
results of operations for the quarter ending March 31, 1999:
<TABLE>
<S> <C>
Revenues.................................................... $116,492
Net loss.................................................... (25,642)
Deferred revenue during the quarter......................... 20,272
Cash flows used in operating activities..................... $ 5,611
Cash flows used in investing activities..................... 1,013
Cash flows used in financing activities..................... 1,517
Net decrease in cash for the quarter ended March 31, 1999... 8,141
</TABLE>
The following unaudited balance sheet information presents a summary of New
CCA's financial position as of March 31, 1999:
<TABLE>
<S> <C>
Current assets.............................................. $ 95,869
Total assets................................................ 213,333
Current liabilities......................................... 60,156
Total liabilities........................................... 217,428
Stockholders' equity........................................ (4,095)
</TABLE>
New CCA has no debt outstanding as of March 31, 1999 other than its note payable
to the Company.
10. RELATIONSHIP WITH UNCONSOLIDATED SUBSIDIARIES
The Company owns 100% of the non-voting stock of the Service Companies, which
manage certain government-owned prison and jail facilities under the
"Corrections Corporation of America" name. On a quarterly basis, the Company
receives 95% of the net income, as defined, of each Service Company through
ownership of the non-voting stock.
The following unaudited operating information presents a combined summary of the
Service Companies' results of operations for the quarter ending March 31, 1999:
<TABLE>
<S> <C>
Revenues.................................................... $69,082
Net income.................................................. 5,276
Total dividends accrued..................................... 7,733
Company share of dividends accrued.......................... 7,681
</TABLE>
The following unaudited balance sheet information presents a combined summary of
the Service Companies' financial position as of March 31, 1999:
<TABLE>
<S> <C>
Current assets.............................................. $ 61,464
Total assets................................................ 160,783
Current liabilities......................................... 30,512
Total liabilities........................................... 32,030
Stockholders' equity........................................ 128,753
</TABLE>
15
<PAGE> 17
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this report.
This Quarterly Report on Form 10-Q, including Management's Discussion and
Analysis of Financial Condition and Results of Operations, contains certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These forward-looking statements reflect the Company's current views
with respect to future events and financial performance, and these statements
can be identified, without limitations, by the use of the words "anticipates,"
"believes", "estimates", "expects", "intends", "plans", "projects" and similar
expressions. Forward-looking statements are subject to risks, uncertainties and
other factors that may cause actual results or outcomes to differ materially
from future outcomes expressed or implied by the forward-looking statement. Such
factors include, but are not limited to, risks associated with the corrections
and detention industry, competitive market conditions, strength of the real
estate markets in which the Company operates and general economic conditions.
The Company disclosed such risks in detail in its Annual Report on Form 10-K for
the fiscal year ended December 31, 1998, filed with the Commission on March 30,
1999 (File No. 0-25245). Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. The
Company undertakes no obligation to publicly revise these forward-looking
statements to reflect events or circumstances occurring after the date hereof or
to reflect the occurrence of unanticipated events.
OVERVIEW.
The Company was formed in September 1998 and commenced operations on January 1,
1999 after completion of the Merger. On December 31, 1998, immediately prior to
the Merger, and in connection with the Merger, Old CCA sold to New CCA all of
the issued and outstanding capital stock of certain wholly-owned corporate
subsidiaries of Old CCA, certain management contracts and certain other assets
and liabilities, and entered into the Trade Name Use Agreement, as described
below. In exchange, Old CCA received the CCA Note in the principal amount of
$137.0 million and 100% of the non-voting common stock of New CCA, representing
a 9.5% economic interest. The CCA Note has a term of 10 years and bears interest
at a rate of 12% per annum.
On December 31, 1998, immediately prior to the Merger and in connection with the
transaction described above, Old CCA entered into the Trade Name Use Agreement.
Under the Trade Name Use Agreement, Old CCA granted to New CCA the right to use
the name "Corrections Corporation of America" and derivatives thereof, subject
to specified terms and conditions therein. In consideration for such right, New
CCA agreed to pay a fee equal to (i) 2.75% of the gross revenues of New CCA for
the first three years of the Trade Name Use Agreement, (ii) 3.25% of New CCA's
gross revenues for the following two years of the Trade Name Use Agreement, and
(iii) 3.625% of New CCA's gross revenues for the remaining term of the Trade
Name Use Agreement, provided that the amount of such fee may not exceed (a)
2.75% of the gross revenues of the Company for the first three years of the
Trade Name Use Agreement, (b) 3.5% of the Company's gross revenues for the
following two years of the Trade Name Use Agreement, and (c) 3.875% of the
Company's gross revenues for the remaining term of the Trade Name
16
<PAGE> 18
Use Agreement. The Company succeeded to Old CCA's interest in the Trade Name Use
Agreement as a result of the Merger.
On December 31, 1998, immediately prior to the Merger and in connection with the
Merger, Old CCA sold to PMS certain management contracts and certain other
assets and liabilities relating to government-owned adult prison facilities
managed by Old CCA. In exchange, Old CCA received 100% of the non-voting
membership interest in PMS which interest obligates PMS to make distributions to
Old CCA equal to 95% of its net income, as defined, and is valued at the implied
fair market value of $67.1 million. The Company succeeded to this interest as a
result of the Merger, and the Company's interest in PMS is included in
"Investments in affiliates and others" in the accompanying balance sheet. On
January 1, 1999, PMS merged with Service Company A.
On December 31, 1998, immediately prior to the Merger and in connection with the
Merger, Old CCA sold to JJFMS certain management contracts and certain other
assets and liabilities relating to government-owned jails and juvenile
facilities managed by Old CCA, as well as all of the issued and outstanding
capital stock of Old CCA constituting its international operations. In exchange,
Old CCA received 100% of the non-voting membership interest in JJFMS which
interest obligates JJFMS to make distributions to Old CCA equal to 95% of its
net income, as defined, and is valued at the implied fair market value of $55.9
million. The Company succeeded to this interest as a result of the Merger, and
the Company's interest in JJFMS is included in "Investments in affiliates and
others" in the accompanying balance sheet. On January 1, 1999, JJFMS merged with
Service Company B.
The Merger was legally structured as a common control transfer from Old CCA and
Prison Realty to the Company. For accounting purposes, the Merger has been
accounted for as a reverse acquisition of the Company by Old CCA and the
acquisition of Prison Realty by the Company. As such, Old CCA's assets and
liabilities have been carried forward at historical cost and Old CCA's
historical financial statements are presented as the continuing accounting
entity's historical financial statements.
The Company's principal business strategy is to design, build and finance new
correctional and detention facilities and to lease these facilities under
long-term "triple net" leases to government entities and qualified private
prison managers, as well to expand its existing facilities. In addition, the
Company acquires existing facilities meeting certain investment criteria from
government and private prison owners.
Substantially all of the Company's revenues are derived from: (i) rents received
under triple net leases of correctional and detention facilities, (ii) dividends
from investments in the non-voting stock of certain subsidiaries, (iii) interest
income on the CCA Note, and (iv) license fees earned under the Trade Name Use
Agreement. New CCA currently leases 31 of the Company's 39 operating facilities
pursuant to the New CCA Leases and is the Company's primary tenant.
As New CCA is the lessee of a substantial majority of the Company's facilities,
the Company is dependent for its rental revenues upon New CCA's ability to make
the lease payments required under the New CCA Leases for such facilities. New
CCA's obligation to make payments under the New CCA Leases is not secured by any
of the assets of New CCA, although the obligations under the New CCA Leases are
cross-defaulted so that the Company could terminate all the leases if New CCA
fails to make required lease payments. If this were to happen, however, the
Company would be required to renegotiate existing leases or incentive fee
arrangements, to find other suitable lessees or to risk losing its ability to
elect or maintain REIT status, as applicable. New CCA experienced a net loss of
$25.6 million and used $5.6 million of cash flow in operating activities for the
first
17
<PAGE> 19
quarter of 1999. Total cash used in all activities in the quarter by New CCA
was $8.1 million. In monitoring the ability of New CCA to satisfy its
obligations under the lease agreements, the Company reviews on a quarterly basis
(i) the net increase or decrease in cash of New CCA, (ii) the amount of
available cash of New CCA and (iii) the amount of outstanding borrowings under
New CCA's credit facility. On this basis, the Company believes that New CCA has
sufficient assets and borrowing capacity to enable it to satisfy its obligations
under such lease agreements at this time; however, there can be no assurance
that New CCA will have such assets, borrowing capacity or income in the future.
A delay in payments from New CCA would likely require the Company to borrow
funds in order to continue its dividend policy. Moreover, while the Company has
leases with tenants other than New CCA, there can be no assurance that the
Company will be successful in obtaining lease agreements with lessees other than
New CCA to an extent such that the Company is not dependent on New CCA as the
primary source of its revenues. Due to the unique nature of correctional and
detention facilities, the Company may be unable to locate suitable replacement
lessees or to attract such lessees, and may, therefore, be required to provide
additional tenant incentives or reduce the amounts to be received by the Company
under its lease agreements. The Company will continue to monitor the performance
of New CCA, and, to the extent New CCA's financial performance exceeds
expectations, the Company will attempt to modify its contractual relationships
with New CCA to make them more favorable to the Company.
The Company, together with its wholly owned management subsidiary, Prison Realty
Management, Inc., incurs operating and administrative expenses including,
principally, compensation expenses 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 is
self-administered and managed by its executive officers and staff, and does not
engage a separate advisor or pay an advisory fee for administrative or
investment services, although the Company does procure property related services
from New CCA and engage legal, accounting, tax and financial advisors from time
to time. The primary non-cash expense of the Company is depreciation of its
correctional and detention facilities.
The Company expects to leverage its portfolio of real estate equity investments
and will incur long and short-term indebtedness, and related interest expense,
from time to time.
The Company has made distributions to its stockholders in amounts not less than
the amounts required to maintain REIT status under the Code and, in general, in
amounts exceeding taxable income.
18
<PAGE> 20
RESULTS OF OPERATIONS.
The Company commenced operations on January 1, 1999 as a result of the Merger.
The Merger was accounted for as a reverse acquisition of the Company by Old CCA
and the purchase of Prison Realty by the Company. As such, Old CCA was treated
as the acquiring company and Prison Realty was treated as the acquired company
for financial reporting purposes. The provisions of purchase method of
accounting prescribe that Old CCA's historical financial statements be presented
as the Company's historical financial statements. Management believes that
comparison of financial results between 1999 and 1998 is not meaningful because
the 1998 results reflect the operations of Old CCA and the 1999 results of
operations reflect the operating results of the Company as a REIT. To provide a
more reasonable prior period comparison, the following table presents the
results of operations of the Company for the three months ending March 31, 1999
and the pro forma results of operations of the Company for the three months
ending March 31, 1998 as if the Merger had occurred on January 1, 1998.
<TABLE>
<CAPTION>
PRO FORMA
1999 1998
-------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
REVENUES:
Rental revenue.......................................... $63,640 $40,221
Interest income......................................... 6,214 12,925
Licensing fees.......................................... 2,132 1,600
------- -------
Total Revenues....................................... 71,986 54,746
------- -------
EXPENSES:
Depreciation and amortization........................... 9,917 9,021
General and administrative.............................. 882 875
------- -------
Total Expenses....................................... 10,799 9,896
------- -------
OPERATING INCOME.......................................... 61,187 44,850
Equity in earnings of subsidiaries and amortization of
deferred gains.......................................... 7,681 5,025
Interest expense.......................................... (8,273) (8,440)
------- -------
INCOME BEFORE TAX EFFECTS AND DIVIDENDS TO PREFERRED
SHAREHOLDERS............................................ $60,595 $41,435
======= =======
</TABLE>
RENTAL REVENUES -- For the three months ended March 31, 1999, rental revenues
were $63.6 million and were generated from the leasing of correctional and
detention facilities. The Company began leasing one new facility in February
1999 in addition to the 37 facilities which were previously leased for the three
months ended March 31, 1999.
INTEREST INCOME -- For the three months ended March 31, 1999, interest income
was $6.2 million. The $137.0 million CCA Note bears interest at 12% and
generated $4.1 million in interest income for the three months ended March 31,
1999. The remaining $2.1 million was a result of interest earned on cash used to
collateralize letters of credit for certain construction projects, direct
financing leases and investments of cash prior to the funding of construction
projects.
LICENSING FEES -- For the three months ended March 31, 1999, licensing fees were
$2.1 million. The licensing fees were earned as a result of the Trade Name Use
Agreement
19
<PAGE> 21
which granted New CCA the right to use the name "Corrections Corporation of
America" and derivatives thereof subject to specified terms and conditions
therein. The fee is based upon gross revenues of New CCA, subject to a
limitation of 2.75% of the gross revenues of the Company.
DEPRECIATION EXPENSE -- For the three months ended March 31, 1999, depreciation
expense was $9.9 million. Depreciation expense as a percentage of rental
revenues for the three months ended March 31, 1999 was 16%. The Company uses the
straight-line depreciation method over the 50 and 5 year lives of buildings and
machinery and equipment, respectively.
GENERAL AND ADMINISTRATIVE EXPENSES -- For the three months ended March 31,
1999, general and administrative expenses were $0.9 million. General and
administrative expenses were 1.2% of total revenues for the three months ended
March 31, 1999. General and administrative expenses consist primarily of
management salaries and benefits, legal and other administrative costs.
EQUITY IN EARNINGS OF SUBSIDIARIES AND AMORTIZATION OF DEFERRED GAINS -- For the
three months ended March 31, 1999, equity in earnings of subsidiaries and
amortization of deferred gains were $7.7 million. The equity in earnings of the
Service Companies was $5.0 million for the three months ended March 31, 1999.
The amortization of the deferred gain on the sales of contracts to the Service
Companies was $2.7 million for the three months ended March 31, 1999.
INTEREST EXPENSE -- For the three months ended March 31, 1999, interest expense
was $8.3 million. Interest expense is based on outstanding convertible notes
payable balances and borrowings under the Company's bank credit facility,
including amortization of loan costs. Interest expense is reported net of
capitalized interest on construction in progress of $7.1 million.
CHANGE IN TAX STATUS -- In connection with the Merger, the Company intends to
change its tax status from a C-Corporation to a REIT effective January 1, 1999.
As of December 31, 1998, the Company's balance sheet reflected $51.2 million in
deferred tax assets. In accordance with the provisions of Statement of Financial
Accounting Standards No. 109, the Company was required to provide a provision
for these deferred tax assets, excluding any tax liabilities required for
subsequent periods, upon completion of the Merger and the election to be taxed
as a REIT. As such, the Company's results of operations reflect a provision for
change in tax status of $83.2 million for the three months ended March 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES.
The Company's growth strategy includes acquiring, developing and expanding
correctional and detention facilities as well as other properties. The Company
expects that it generally will not be able to fund its growth with cash from its
operating activities because the Company will be required to distribute to its
stockholders at least 95% of its taxable income each year to qualify as a REIT.
Consequently, the Company will be required to rely primarily upon the
availability of debt or equity capital to fund the construction and acquisitions
of and improvements to correctional and detention facilities.
On January 1, 1999, the Company obtained the Credit Facility pursuant to the
terms of the Credit Agreement, dated as of January 1, 1999, by and among the
Company and certain of its subsidiaries and NationsBank, N.A., as Administrative
Agent, Lehman Commercial Paper Inc. as Documentation Agent, and the Bank of Nova
Scotia, as
20
<PAGE> 22
Syndication Agent. Lehman Commercial Paper Inc. is expected to replace
NationsBank, N.A. as Administrative Agent under the Credit Facility. The Credit
Facility replaced credit facilities obtained prior to the Merger by each of Old
CCA and Prison Realty. The Credit Facility includes up to a maximum of $250.0
million in term loans and $400.0 million in revolving loans, including a $150.0
million subfacility for letters of credit. The term loans require principal
quarterly payments of $625,000 throughout the term of the loan with the
remaining balance maturing on January 1, 2003 and the revolving loans maturing
on January 1, 2002. Interest rates, unused commitment fees, and letter of credit
fees on the Credit Facility are subject to change based on the Company's senior
debt rating. The Credit Facility is secured by mortgages on the Company's real
property. Borrowings under the Credit Facility are limited based on a borrowing
base formula which considers, among other things, eligible real estate. The
Credit Facility contains certain financial covenants, primarily: (a) maintenance
of a leverage, interest coverage, debt service coverage and total indebtedness
ratios, and (b) restrictions on the incurrence of additional indebtedness. At
March 31, 1999 the weighted average borrowing rate was 7.92% and the outstanding
borrowings were $620.0 million. The Company is in compliance with all covenants
under the Credit Facility.
On April 26, 1999, the Company received a commitment from Lehman Commercial
Paper Inc. and Lehman Brothers Inc. with respect to an amendment and restatement
of the Credit Facility increasing amounts available to the Company under the
Credit Facility to $1.0 billion through the addition of a $350.0 million delayed
draw term loan facility. The commitment includes customary representations and
warranties, financial covenants and closing conditions, including the absence of
a material adverse change with respect to the Company. The Company expects to
amend and restate the Credit Facility during second quarter of 1999.
On March 8, 1999, the Company issued a $20.0 million convertible subordinated
note to Sodexho pursuant to a forward contract assumed by the Company from Old
CCA in the Merger. Interest on the note was payable at LIBOR plus 1.35% and the
note was convertible into shares of the Company's common stock at a conversion
price of $7.80 per share. On March 8, 1999, Sodexho converted (i) $7.0 million
of convertible subordinated notes bearing interest at 8.5% into 1.7 million
shares of common stock at a conversion price of $4.09 per share, (ii) $20.0
million of convertible notes bearing interest at 7.5% into 700,000 shares of
common stock at a conversion price of $28.53 and (iii) $20.0 million of
convertible subordinated notes bearing interest at LIBOR plus 1.35% into 2.6
million shares of common stock at a conversion price of $7.80 per share.
In January 1999, the Company issued $20.0 million of convertible subordinated
notes due in 2009 with interest payable semi-annually at 9.5%. The notes are
convertible into shares of the Company's common stock at a conversion price of
$28.00 per share. This issuance constituted the second tranche of a commitment
by the Company to issue an aggregate of $40.0 million of convertible
subordinated notes, with the first $20.0 million tranche issued in December,
1998 under substantially similar terms.
On January 11, 1999, the Company filed a Registration Statement on Form S-3 to
register an aggregate of $1.5 billion in value of its common stock, preferred
stock, common stock rights, warrants and debt securities for sale to the public
(the "Shelf Registration Statement"). Proceeds from sales under the Shelf
Registration Statement have been and will be used for general corporate
purposes, including the acquisition and development of correction and detention
facilities. During the three months ended March 31, 1999, the Company issued and
sold approximately 4.0 million shares of its common stock under the
21
<PAGE> 23
Shelf Registration Statement, resulting in net proceeds to the Company of
approximately $75.4 million. Subsequent to March 31, 1999, and as of May 14,
1999, the Company issued and sold approximately 2.7 million shares of its common
stock under the Shelf Registration Statement resulting in net proceeds to the
Company of approximately $45.0 million.
The Company expects to meet its short-term liquidity requirements generally
through cash provided by operations and borrowings under the Credit Facility.
The Company believes that its net cash provided by operations will be sufficient
to allow the Company to make distributions necessary to enable the Company to
maintain its qualification as a REIT, including the payment of a portion of the
one-time special dividend to pay out Old CCA's accumulated tax earnings and
profits in 1999. It is expected that the remaining portion of the one-time
special dividend will be funded by borrowings under the Credit Facility. The
Company intends to use the net proceeds from the sale of the Senior Notes to
repay outstanding indebtedness under the Credit Facility. There can be no
assurance, however, that the Senior Notes will be sold. All facilities owned by
the Company will be leased to third parties generally under triple net leases,
which require the lessee to pay substantially all expenses associated with the
operation of such facilities. As a result of these arrangements, the Company
does not believe it will be responsible for any significant expenses in
connection with the facilities during the terms of the New Leases. The Company
anticipates entering into similar leases with respect to all properties acquired
in the future.
The Company expects to meet its long-term liquidity requirements for the funding
of real estate property development and acquisitions (including fees for
property related services and tenant incentives to New CCA) by borrowing under
the Credit Facility and by issuing equity or debt securities in public or
private transactions. For facilities to be owned by the Company and managed by
governmental entities, the Company may elect to finance some or all of the total
project cost through non-recourse long-term debt secured by the stream of lease
payments. The Company anticipates that as a result of its initially low debt to
total capitalization ratio and its intention to maintain a debt to total
capitalization ratio of 50% or less, it will be able to obtain financing for its
long-term capital needs. However, there can be no assurance that such additional
financing or capital will be available on terms acceptable to the Company. The
Company may, under certain circumstances, borrow additional amounts in
connection with the renovation or expansion of facilities, the acquisition of
additional properties, or as necessary, to meet certain distribution
requirements imposed on REITs under the Code.
The Company, as a REIT, cannot complete any taxable year with accumulated
earnings and profits from a taxable corporation. Accordingly, to preserve its
REIT status, the Company will distribute Old CCA's accumulated earnings and
profits to which it succeeded in the Merger. The Company expects to make this
distribution to all holders of shares of its common stock in December 1999. This
total distribution is estimated at $225.0 million and has been accrued on the
Company's balance sheet at March 31, 1999 net of a quarterly prepayment of $.05
per share and aggregating $5.6 million, which was paid out on March 31, 1999.
Effective January 1, 1999, the Company and New CCA entered into the Business
Development Agreement, which provides that New CCA will perform, at the
direction of the Company, services designed to assist the Company in identifying
and obtaining new business. Such services include, but are not limited to,
marketing and other business development services designed to increase awareness
of the Company and the facility development and construction services it offers,
identifying potential facility sites and
22
<PAGE> 24
pursing all applicable zoning approvals related thereto, identifying potential
tenants for the Company's facilities and negotiating agreements related to the
acquisition of new facility management contracts for the Company's tenants.
Pursuant to the Business Development Agreement, the Company will also reimburse
New CCA for expenses related to third-party entities providing government and
community relations services to New CCA in connection with the provision of the
business development services described above. In consideration for New CCA's
performance of the business development services pursuant to the Business
Development Agreement, and in order to reimburse New CCA for the third-party
government and community relations expenses described above, the Company has
agreed to pay to New CCA a total fee equal to 4.5% of the total capital
expenditures (excluding the amount of the tenant incentive fee and the services
fee discussed above as well as the 4.5% fee herein referred to) incurred in
connection with the construction and development of each new facility, or the
construction and development of an addition to an existing facility, for which
New CCA performed business development services. The term of the agreement is
four years unless extended upon written agreement of the Company or New CCA. For
the quarter ended March 31, 1999, the Company paid New CCA business development
fees of $8.6 million.
On January 1, 1999, immediately after the Merger, the Company entered into the
Services Agreement with New CCA pursuant to which New CCA agreed to serve as a
facilitator of the construction and development of additional facilities on
behalf of the Company for a term of five years from the date of the Services
Agreement. In such capacity, New CCA agreed to perform, at the direction of the
Company, such services as are customarily needed in the construction and
development of correctional and detention facilities, including services related
to construction of the facilities, project bidding, project design, and
governmental relations. In consideration for the performance of construction and
development services by New CCA pursuant to the Services Agreement, the Company
agreed to pay a fee equal to 5% of the total capital expenditures (excluding the
incentive fee discussed below and the 5% fee herein referred to) incurred in
connection with the construction and development of a facility, plus an amount
equal to approximately $560 per bed for facility preparation services provided
by New CCA prior to the date on which inmates are first received at such
facility. The Board of Directors of the Company has authorized payments of up to
an additional 5% of the total capital expenditures (as determined above) to New
CCA if additional services are requested by the Company. For the quarter ended
March 31, 1999, the Services Agreement fees were $12.1 million.
On January 1, 1999, immediately after the Merger, the Company entered into the
Tenant Incentive Agreement with New CCA pursuant to which the Company agreed to
pay to New CCA an incentive fee to induce New CCA to enter into New CCA Leases
with respect to those facilities developed and facilitated by New CCA. The
amount of the incentive fee was set at $840 per bed for each facility leased by
New CCA for which New CCA served as developer and facilitator. This $840 per bed
incentive fee, however, did not include an allowance for rental payments to be
paid by New CCA. On May 4, 1999, the Company and New CCA entered into the
Amended and Restated Tenant Incentive Agreement, effective as of January 1,
1999, providing for (i) a tenant incentive fee of up to $4,000 per bed payable
with respect to all future facilities developed and facilitated by New CCA, as
well as certain other facilities which, although operational on January 1, 1999,
had not achieved full occupancy and (ii) an $840 per bed allowance for all beds
in operation at the beginning of January 1999, approximately 21,500 beds, that
were not subject to the tenant allowance in the first quarter of 1999. The
amount of the amended tenant incentive fee includes an allowance for rental
payments to be paid by New CCA
23
<PAGE> 25
prior to the facility reaching stabilized occupancy. The term of the Amended and
Restated Tenant Incentive Agreement is four years unless extended upon the
written agreement of the Company and New CCA.
On May 7, 1999, the Company filed a registration statement on Form S-3 with the
Commission seeking to register up to 10,000,000 shares of its common stock to be
offered and sold under the Company's Dividend Reinvestment and Stock Purchase
Plan (the "DRSPP"). Under the terms of the DRSPP, holders of the Company's
common stock may automatically have dividends paid by the Company on such stock
used to purchase shares of common stock at a discount from prevailing market
prices. In addition, persons may make optional monthly cash purchases, not to
generally exceed $5,000 per month, at a discount. The Company expects to
implement the DRSPP during the second quarter of 1999.
The Company intends to raise funds in the public capital markets through the
registration, issuance and sale, pursuant to the Shelf Registration Statement,
of approximately $300.0 million of senior notes (the "Senior Notes"). Proceeds
from this offering will be used to repay outstanding indebtedness under the
Credit Facility. The Company expects to enter into an Underwriting Agreement
with Lehman Brothers Inc. pursuant to which the Company will agree to sell to
Lehman Brothers Inc., and Lehman Brothers Inc. will agree to purchase from the
Company, all of the Senior Notes. The Company anticipates that Lehman Brothers
Inc. will pay the Company the offering price of the Senior Notes less an
underwriting discount. The Company intends to file a preliminary Prospectus
Supplement to the prospectus on or about May 17, 1999, as required by the
Commission pursuant to Rule 424(b) promulgated under the Securities Act.
YEAR 2000 COMPLIANCE.
The Company has completed an initial assessment and remediation of its key
information technology systems including its client server and minicomputer
hardware and operating systems and critical financial and nonfinancial
applications. Based on this initial assessment, the Company believes that these
key information technology systems are Year 2000 compliant. However, there can
be no assurance that coding errors or other defects will not be discovered in
the future. The Company is in the process of evaluating the remaining
noncritical information technology systems for Year 2000 compliance.
The Company depends upon the proper functioning of third-party computer and non-
information technology systems. These third parties include commercial banks and
other lenders, construction contractors, architects and engineers and vendors
such as the providers of telecommunications and utilities. The Company has
initiated communications with third parties with whom it has important financial
or operational relationships to determine the extent to which they are
vulnerable to the Year 2000 issue. The Company has not yet received sufficient
information from all parties about their remediation plans to predict the
outcome of their efforts.
The Company is currently developing a contingency plan that is expected to
address financial and operational problems that might arise on and around
January 1, 2000. This contingency plan would include establishing additional
sources of liquidity that could be drawn upon in the event of systems disruption
and identifying alternative vendors and back-up processes that do not rely on
computers, whenever possible. The Company's key information technology systems
were Year 2000 compliant when acquired in the Merger. As such, the Company has
incurred no expenses through March 31, 1999 and expects to incur no material
costs in the future on Year 2000 remediation efforts.
24
<PAGE> 26
Because New CCA is the lessee of a substantial majority of the Company's
facilities, the Company may be vulnerable to New CCA's failure to remedy its
Year 2000 issues. The failure of New CCA to remedy its Year 2000 problems could
result in the delayed collection of lease payments by the Company, potentially
resulting in liquidity stress. New CCA's Year 2000 compliance program is focused
on addressing Year 2000 readiness in the following areas: (i) New CCA's
information technology hardware and software; (ii) material non-information
technology systems; (iii) Year 2000 compliance of third parties with which
Operating Company has a material relationship; (iv) systems used to track and
report assets not owned by New CCA (e.g. inmate funds and personal effects); and
(v) development of contingency plans.
New CCA has completed an initial assessment and remediation of its key
information technology systems including its client server and minicomputer
hardware and operating systems and critical financial and nonfinancial
applications. Remediation efforts as of the date hereof include upgrades of New
CCA's minicomputer hardware and critical financial applications. Based on this
initial assessment and remediation efforts, New CCA believes that these key
information technology systems are Year 2000 compliant. However, there can be no
assurance that coding errors or other defects will not be discovered in the
future. New CCA is in the process of evaluating the remaining noncritical
information technology systems for Year 2000 compliance.
New CCA manages facilities it leases from the Company, and facilities owned by
and leased from government entities. New CCA is currently evaluating whether the
material non-information technology systems such as security control equipment,
fire suppression equipment and other physical plant equipment at the facilities
it leases from the Company are Year 2000 compliant. New CCA also intends to
request that the owners of the government facilities it manages provide Year
2000 certification for material information technology and non-information
technology systems at those facilities. All of New CCA's managed correctional
facilities, as a part of general operating policy, have existing contingency
plans that are deployed in the event key operational systems, such as security
control equipment fail (e.g. when a power failure occurs). In addition, the
correctional facilities' key security systems are "fail secure" systems which
automatically "lock down" and are then operated manually should the related
electronic components fail. Therefore, New CCA management believes no additional
material risks associated with the physical operation of its correctional
facilities are created as a result of potential Year 2000 issues.
New CCA depends upon the proper functioning of third-party computer and non-
information technology systems. These third parties include government agencies
for which New CCA provides services, commercial banks and other lenders,
construction contractors, architects and engineers, and vendors such as
providers of food supplies and services, inmate medical services,
telecommunications and utilities. New CCA has initiated communications with
third parties with whom it has important financial or operational relationships
to determine the extent to which they are vulnerable to the Year 2000 issue. New
CCA has not yet received sufficient information from all parties about their
remediation plans to predict the outcome of their efforts. If third parties with
whom New CCA interacts have Year 2000 problems that are not remedied, the
following problems could result: (i) in the case of construction contractors and
architects and engineers, in the delayed construction of correctional
facilities; (ii) in the case of vendors, in disruption of important services
upon which New CCA depends, such as medical services, food services and
supplies, telecommunications and electrical power, (iii) in the case of
government agencies, in delayed collection of accounts receivable potentially
resulting in liquidity
25
<PAGE> 27
stress, or (iv) in the case of banks and other lenders, in the disruption of
capital flows potentially resulting in liquidity stress.
New CCA is also evaluating Year 2000 compliance of other software applications
used to track and report assets that are not the property of New CCA. This
includes applications used to track and report inmate funds and the inmates'
personal effects.
New CCA is currently developing a contingency plan that is expected to address
financial and operational problems that might arise on and around January 1,
2000. This contingency plan would include establishing additional sources of
liquidity that could be drawn upon in the event of systems disruption and
identifying alternative vendors and back-up processes that do not rely on
computers, whenever possible. New CCA management expects to have the contingency
plan completed by mid-year 1999.
New CCA has incurred and expects to continue to incur expenses allocable to
internal staff, as well as costs for outside consultants, computer systems'
remediation and replacement and non-information technology systems' remediation
and replacement (including validation) in order to achieve Year 2000 compliance.
New CCA currently estimates that these costs will total approximately $4.0
million. Of this total, it is estimated that $2.5 million will be for the repair
of software problems and $1.5 million will be for the replacement of problem
systems and equipment. These costs are expensed as incurred. Management of New
CCA believes there will be no material impact on New CCA's financial condition
or results of operations resulting from other information technology projects
being delayed due to Year 2000 efforts.
The costs of New CCA's Year 2000 compliance program and the date on which New
CCA plans to complete it are based on current estimates, which reflect numerous
assumptions about future events, including the continued availability of certain
resources, the timing and effectiveness of third-party remediation plans and
other factors. New CCA can give no assurance that these estimates will be
achieved, and actual results could differ materially from New CCA's plans.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct relevant computer source codes and embedded
technology, the results of internal and external testing and the timeliness and
effectiveness of remediation efforts of third parties.
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 generally accepted accounting principles ("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
26
<PAGE> 28
should not be considered as an alternative to net income (determined in
accordance with GAAP) as an indication of the Company's financial performance or
to cash flows from operating activities (determined in accordance with GAAP) as
a measure of the Company's liquidity, nor is it indicative of funds available to
fund the Company's cash needs, including its ability to make distributions. The
Company believes that in order to facilitate a clear understanding of the
consolidated operating results of the Company, Funds from Operations should be
examined in conjunction with net income as presented in the consolidated
financial statements.
The following table presents the Company's Funds from Operations for the three
months ended March 31, 1999:
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
ENDED
MARCH 31, 1999
--------------
<S> <C>
Funds from Operations:
Net Loss Available to Common Shareholders.............. $(24,755)
Plus real estate depreciation.......................... 9,917
Add back non-recurring items:
Change in tax status................................... 83,200
--------
$ 68,362
========
</TABLE>
CASH FLOW FROM OPERATING, INVESTING AND FINANCING ACTIVITIES
The Company's cash flow provided from operating activities was $49.6 million for
the three months ended March 31, 1999 and represents 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 $225.2 million
for the three months ended March 31, 1999 and represents acquisitions of real
estate properties. The Company's cash flow provided by financing activities was
$155.9 million for the three months ended March 31, 1999 and represents proceeds
from the issuance of common stock, issuance of long-term debt, borrowings under
the Credit Facility, and payments of dividends on the preferred and common
shares.
INFLATION
The Company does not believe that inflation has had or will have a direct
adverse effect on its operations. The New CCA Leases generally contain
provisions which will mitigate the adverse impact of inflation on net income.
These provisions include clauses enabling the Company to pass through to New CCA
certain operating costs, including real estate taxes, utilities and insurance,
thereby reducing the Company's exposure to increases in costs and operating
expenses resulting from inflation. Additionally, the New CCA Leases contain
provisions which provide the Company with the opportunity to achieve increases
in rental income in the future.
27
<PAGE> 29
ITEM 3. -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's primary market risk exposure is to changes in U.S. interest rates.
The Company is exposed to market risk related to its 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 Credit Facility and such other indebtedness is
subject to fluctuations in the market. If the interest rate for the Credit
Facility debt was 100 basis points higher or lower during the three months ended
March 31, 1999, the Company's interest expense net of amounts capitalized would
have been increased or decreased by approximately $0.7 million.
As of May 14, 1999, the Company had outstanding $40.0 million of convertible
notes with a fixed interest rate of 9.5%, $30.0 million of convertible notes
with a fixed interest rate of 7.5% and $103.4 million of preferred stock with a
fixed dividend rate of 8%. Similarly, as of May 14, 1999, the Company had a note
receivable in the amount of $137.0 million with a fixed interest rate of 12%.
Because the interest and dividend rates with respect to these instruments are
fixed, a hypothetical 10 percent decrease in market interest rates would not
have a material impact on the Company.
Additionally, the Company may, from time to time, invest its cash in a variety
of short-term financial instruments. These instruments generally consist of
highly liquid investments with original maturities at the date of purchase
between three and 12 months. While these investments are subject to interest
rate risk and will decline in value if market interest rates increase, a
hypothetical 10 percent increase in market interest rates would not materially
affect the value of these investments.
The Company also uses, or intends to use, long-term and medium-term debt as a
source of capital. These debt instruments, if issued, will typically bear fixed
interest rates. When these debt instruments mature, the Company may refinance
such debt at then-existing market interest rates which may be more or less than
the interest rates on the maturing debt. In addition, the Company may attempt to
reduce interest rate risk associated with a forecasted issuance of new debt. In
order to reduce interest rate risk associated with these transactions, the
Company may occasionally enter into interest rate protection agreements.
The Company does not believe it has any other material exposure to market risks
associated with interest rates.
The Company does not have a material exposure to risks associated with foreign
currency fluctuations related to its operations. The Company does not use
derivative financial instruments in its operations or investment portfolio.
28
<PAGE> 30
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
At the Company's 1999 Annual Meeting of Stockholders held on May 11, 1999,
holders of the Company's common stock approved a proposal to change the name of
the Company to Prison Realty Trust, Inc. To effect the change in corporate name,
the Company filed Articles of Amendment to its Charter with the Department of
Assessments and Taxation of the State of Maryland on May 11, 1999. A copy of
such Articles of Amendment are included as Exhibits 3.1 hereto. Shares of the
Company's common stock and 8.0% Series A Preferred Stock continue to trade on
the New York Stock Exchange under the symbols "PZN" and "PZN PrA," respectively.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a). Exhibits
3.1 Articles of Amendment of Charter of Prison Realty Corporation.
4.1 Prison Realty Trust, Inc. Dividend Reinvestment and Stock Purchase Plan
(previously filed as Exhibit 4.2 to the Company's Registration Statement
on Form S-3 (Reg no. 333-78023), as filed with the Securities and Exchange
Commission on May 7, 1999 and incorporated herein by reference).
10.1 Amended and Restated Tenant Incentive Agreement by and between the Company
and New CCA.
10.2 Business Development Agreement by and between the Company and New CCA.
27.1 Financial Data Schedule (for SEC use only).
(b). Reports on Form 8-K
The Company's Current Report on Form 8-K, as filed with the Commission on
January 6, 1999 (File no 0-25245), relating to the completion of the Merger and
the completion of transactions related thereto.
29
<PAGE> 31
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PRISON REALTY TRUST, INC.
Date: May 14, 1999
/s/ Vida H. Carroll
--------------------------------------
Vida H. Carroll
Chief Financial Officer/
Chief Accounting Officer
30
<PAGE> 1
EXHIBIT 3.1
PRISON REALTY CORPORATION
ARTICLES OF AMENDMENT
PRISON REALTY CORPORATION, a Maryland corporation (the "Corporation"),
hereby certifies to the State Department of Assessments and Taxation of Maryland
that:
FIRST: The Charter of the Corporation is hereby amended by deleting
Article SECOND in its entirety and inserting the following in place thereof:
"SECOND: Name.
The name of this corporation shall be Prison Realty Trust, Inc.
(the "Corporation").";
SECOND: The amendment does not increase the authorized stock of the
Corporation; and
THIRD: The foregoing amendment to the Charter of the Corporation has
been advised by the Board of Directors of the Corporation and approved by the
stockholders of the Corporation.
IN WITNESS WHEREOF, Prison Realty Corporation has caused these presents
to be signed in its name and on its behalf by its President and witnessed by its
Secretary on May 11, 1999.
WITNESS: PRISON REALTY CORPORATION
/s/ Vida H. Carroll By: /s/ D. Robert Crants, III
------------------------------- --------------------------------
Vida H. Carroll, Secretary D. Robert Crants, III, President
THE UNDERSIGNED, President of the Corporation, who executed on behalf
of the Corporation the foregoing Articles of Amendment of which this certificate
is made a part, hereby acknowledges in the name and on behalf of the Corporation
the foregoing Articles of Amendment to be the corporate act of the Corporation
and hereby certifies that, to the best of his knowledge, information and belief
and under the penalties for perjury, the matters and facts set forth therein
with respect to the authorization and approval thereof are true in all material
respects.
/s/ D. Robert Crants, III
--------------------------------
D. Robert Crants, III, President
<PAGE> 1
EXHIBIT 10.1
AMENDED AND RESTATED TENANT INCENTIVE AGREEMENT
THIS AMENDED AND RESTATED TENANT INCENTIVE AGREEMENT (the
"Agreement") is entered into on this 4th day of May, 1999, by and between PRISON
REALTY CORPORATION, a Maryland corporation (the "Company"), and CORRECTIONAL
MANAGEMENT SERVICES CORPORATION, a Tennessee corporation ("CMSC").
W I T N E S S E T H:
WHEREAS, the Company and CMSC are parties to that certain Tenant
Incentive Agreement, dated as of January 1, 1999 (the "Tenant Incentive
Agreement"), pursuant to which the Company agreed to make certain incentive
payments to CMSC;
WHEREAS, the purpose of the Tenant Incentive Agreement was to induce
CMSC to lease from the Company certain operational correctional and detention
facilities (individually, a "Facility" and, collectively, the "Facilities")
and certain start-up and additional facilities (individually, an "Additional
Facility" and, collectively, the "Additional Facilities"); and
WHEREAS, the Company and CMSC desire to amend and restate the Tenant
Incentive Agreement to clarify and amend certain terms and provisions thereof.
NOW, THEREFORE, in consideration for the foregoing and for other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree that the Tenant Incentive Agreement is
amended and restated as follows:
1. Tenant Incentive. As an incentive to CMSC to lease and continue to
lease the Facilities and Additional Facilities from the Company, the Company
agrees to pay to CMSC a fee equal to (a) $840 multiplied by the total number of
beds at each Facility leased by CMSC, and (b) $4,000 multiplied by the total
number of beds at each Additional Facility leased by CMSC. The amount of such
fees shall be payable in cash upon execution of the applicable lease agreement
or at such other time as agreed upon by the parties. The amount of the incentive
fee referenced in clause (b) of the first sentence hereof is intended to
approximate the cost of preparing each Additional Facility for use by CMSC,
including without limitation costs incurred by CMSC in ramping the facility to
full occupancy.
2. Term. This Agreement shall expire on January 1, 2003, unless the
parties hereto have agreed to extend this Agreement pursuant to the terms
mutually acceptable to the parties.
3. Authorization. Each party to the Agreement hereby represents and
warrants that the execution, delivery, and performance of the Agreement are
within the powers of each party and have been duly authorized by the party; the
execution and performance of this Agreement by each party have been duly
authorized by all applicable laws and regulations; and this Agreement
constitutes the valid and enforceable obligation of each party in accordance
with its terms.
<PAGE> 2
4. Amendment. This Agreement may be amended only with the written
consent of both parties hereto.
5. Notices. Any notice required or permitted herein to be given shall
be given in writing and shall be delivered by United States mail, first class
postage prepaid return receipt requested, as set forth below:
If to the Company:
Prison Realty Corporation
10 Burton Hills Boulevard
Nashville, TN 37215
Attn: Michael W. Devlin, Chief Operating Officer
If to CMSC:
Correctional Management Services Corporation
10 Burton Hills Boulevard
Nashville, TN 37215
Attn: Darrell K. Massengale, Chief Financial Officer
6. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, and all of which shall
together constitute one agreement.
7. Headings. Section headings are for convenience or reference only and
shall not be used to construe the meaning of any provision in this Agreement.
8. Law. This Agreement shall be construed in accordance with the laws
of the State of Tennessee.
9. Severability. Should any part of this Agreement be invalid or
unenforceable, such invalidity or unenforceability shall not affect the validity
and enforceability of the remaining portion.
10. Successors. This Agreement shall be binding upon and inure to the
benefit of the respective parties and their permitted assigns and successors in
interest.
11. Waivers. No waiver of any breach of any of the terms or conditions
of this Agreement shall be held to be a waiver of any other or subsequent
breach; nor shall any waiver be valid or binding unless the same shall be in
writing and signed by the party alleged to have granted the waiver.
2
<PAGE> 3
12. Entire Agreement. This Agreement constitutes the entire agreement
of the parties hereto and supersedes all prior agreements and presentations with
respect to the subject matter hereof.
[remainder of page left intentionally blank]
3
<PAGE> 4
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
PRISON REALTY CORPORATION, a
Maryland corporation
By: /s/ D. Robert Crants, III
----------------------------------
Its: President
---------------------------------
CORRECTIONAL MANAGEMENT
SERVICES CORPORATION, a Tennessee
corporation
By: /s/ Doctor R. Crants
----------------------------------
Its: Chief Executive Officer
---------------------------------
4
<PAGE> 1
EXHIBIT 10.2
BUSINESS DEVELOPMENT AGREEMENT
This BUSINESS DEVELOPMENT AGREEMENT (the "Agreement") is entered into
on this 4th day of May, 1999, by and between PRISON REALTY CORPORATION, a
Maryland corporation (the "Company"), and CORRECTIONAL MANAGEMENT SERVICES
CORPORATION, a Tennessee corporation ("Operating Company").
WITNESSETH:
WHEREAS, the Company, the owner of various correctional and detention
facilities which are leased to certain government entities and to certain
private prison management companies, including Operating Company, desires to
construct additional correctional and detention facilities (the "New
Facilities") for lease to its current, and potentially future, tenants and to
construct additions to certain correctional and detention facilities it
currently owns (the "Additions");
WHEREAS, the Company wishes to engage Operating Company to perform
certain services, on an as-needed basis, designed to assist the Company in
identifying and contracting for new business, specifically including: (i)
marketing and other business development services designed to increase awareness
of the Company and the services it offers to government entities; (ii)
identifying potential facility sites and pursuing all applicable zoning
approvals related thereto; (iii) identifying potential tenants for the Company's
facilities; (iv) negotiating certain agreements related to the acquisition of
new facility management contracts for the Company's tenants; and (v) such other
services as may be requested by the Company from time to time (collectively, the
"Business Development Services"), and to reimburse Operating Company for certain
expenses incurred by Operating Company in providing the Business Development
Services, specifically including expenses related to the retention of lobbying
firms, consulting firms and other third-party entities providing government and
community relations services to Operating Company;
WHEREAS, Operating Company wishes to provide the Business Development
Services to the Company.
NOW, THEREFORE, in consideration of the foregoing, the mutual covenants
and agreements of the parties herein set forth, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
1. Services; Consideration.
(a) Services. Operating Company agrees to provide the Business
Development Services to the Company, at such times as, and to the
extent that, the Company may request such services. Operating Company
shall make such expenditures, and take such other actions, as the
Company may deem necessary or desirable to carry out the performance of
the Business Development Services.
<PAGE> 2
(b) Consideration. In consideration for the performance of the
Business Development Services by Operating Company, the Company shall
pay, and Operating Company is entitled to receive, a fee equal to four
and one-half percent (4 1/2%) of the total capital expenditures
(excluding the amount of the tenant incentive fee described in that
certain Tenant Incentive Agreement, dated as of January 1, 1999, by and
between the Company and Operating Company, as amended, the amount of
fees described in that certain Services Agreement, dated as of January
1, 1999, by and between the Company and Operating Company and the
amount of the 4 1/2% fee herein referred to) incurred in connection
with the construction and development of each New Facility, or the
construction and development of each Addition, for which Operating
Company performed Business Development Services for and on behalf of
the Company. The fees payable hereunder shall be payable in cash or by
such other means as approved by Operating Company.
2. Term. This Agreement shall terminate on the fourth (4th) anniversary
of the date of this Agreement, unless extended upon the written agreement of the
parties.
3. Authorization. Each party to this Agreement hereby represents and
warrants that: the execution, delivery and performance of this Agreement are
within the powers of each party and have been duly authorized by each party and
its board of directors; the execution and performance of this Agreement by each
party have been duly authorized by all applicable laws and regulations; and this
Agreement constitutes the valid and enforceable obligation of each party in
accordance with its terms.
4. Amendment. This Agreement may be amended only with the written
consent of both parties hereto.
5. Notices. Any notice required or permitted herein to be given shall
be given in writing and shall be delivered by United States mail, first class
postage prepaid, return receipt requested, as set forth below:
If to the Company:
10 Burton Hills Boulevard, Suite 100
Nashville, TN 37215
Attn: Michael W. Devlin, Chief Operating Officer
If to Operating Company:
10 Burton Hills Boulevard
Nashville, TN 37215
Attn: Darrell K. Massengale, Chief Financial Officer
2
<PAGE> 3
6. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, and all of which shall
together constitute one agreement.
7. Headings. Section headings are for convenience or reference only and
shall not be used to construe the meaning of any provision in this Agreement.
8. Governing Law. This Agreement shall be construed in accordance with
the laws of the State of Tennessee.
9. Severability. Should any part of this Agreement be invalid or
unenforceable, such invalidity or unenforceability shall not affect the validity
and enforceability of the remaining portion.
10. Successors. This Agreement shall be binding upon and inure to the
benefit of the respective parties and their permitted assigns and successors in
interest.
11. Waivers. No waiver of any breach of any of the terms or conditions
of this Agreement shall be held to be a waiver of any other or subsequent
breach; nor shall any waiver be valid or binding unless the same shall be in
writing and signed by the party alleged to have granted the waiver.
12. Entire Agreement. This Agreement constitutes the entire agreement
of the parties hereto and supersedes all prior agreements and presentations with
respect to the subject matter hereof.
[remainder of page left intentionally blank]
3
<PAGE> 4
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
PRISON REALTY CORPORATION, a
Maryland corporation
By: /s/ D. Robert Crants, III
--------------------------------
Its: President
-------------------------------
CORRECTIONAL MANAGEMENT
SERVICES CORPORATION, a Tennessee
corporation
By: /s/ Doctor R. Crants
--------------------------------
Its: Chief Executive Officer
-------------------------------
4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CCA PRISON REALTY TRUST FOR THE THREE MONTHS ENDED MARCH
31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 102,905
<SECURITIES> 0
<RECEIVABLES> 151,060
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 120,360
<PP&E> 2,031,019
<DEPRECIATION> 19,192
<TOTAL-ASSETS> 2,494,445
<CURRENT-LIABILITIES> 351,238
<BONDS> 690,780
0
43
<COMMON> 1,144
<OTHER-SE> 1,320,231
<TOTAL-LIABILITY-AND-EQUITY> 2,494,445
<SALES> 63,640
<TOTAL-REVENUES> 79,667
<CGS> 9,917
<TOTAL-COSTS> 19,072
<OTHER-EXPENSES> 83,200
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,273
<INCOME-PRETAX> (24,755)
<INCOME-TAX> 0
<INCOME-CONTINUING> (24,755)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24,755)
<EPS-PRIMARY> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
