<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2000
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)
MARYLAND 62-1763875
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
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)
none
(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 August 11, 2000)
118,416,095
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PRISON REALTY TRUST, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements .......................................................... 1
a) Condensed Consolidated Balance Sheets (Unaudited) as of June 30, 2000
and December 31, 1999.......................................................... 1
b) Condensed Consolidated Statements of Income (Unaudited) for the three
and six months ended June 30, 2000 and 1999.................................... 3
c) Condensed Consolidated Statements of Cash Flows (Unaudited) for the six
months ended June 30, 2000 and 1999............................................ 4
d) Notes to Condensed Consolidated Financial Statements (Unaudited)............... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................... 34
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................... 65
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.............................................................. 67
Item 2. Changes in Securities and Use of Proceeds...................................... 71
Item 3. Defaults Upon Senior Securities................................................ 71
Item 4. Submission of Matters to a Vote of Security Holders............................ 71
Item 5. Other Information.............................................................. 71
Item 6. Exhibits and Reports on Form 8-K............................................... 73
SIGNATURE
</TABLE>
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PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS.
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Real estate properties:
Correctional and detention facilities $ 2,239,087 $ 2,258,281
Less accumulated depreciation (76,104) (49,785)
----------- -----------
Net real estate properties 2,162,983 2,208,496
Cash and cash equivalents 18,366 84,493
Restricted cash 9,416 24,409
Note receivable from CCA 137,000 137,000
Investments in affiliates 115,194 118,232
Investments in direct financing leases 154,251 74,059
Receivable from CCA 17,819 28,608
Other assets 61,307 60,625
----------- -----------
Total assets $ 2,676,336 $ 2,735,922
=========== ===========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
(Continued)
1
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PRISON REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Distributions payable $ 2,150 $ 2,150
Bank credit facility 965,234 928,234
Senior notes payable 100,000 100,000
Convertible subordinated notes and other debt 72,730 70,757
Accounts payable and accrued expenses 80,886 70,911
Income taxes payable 6,245 5,476
Deferred gains on sales of contracts 100,707 106,045
Other liabilities 32,000 32,000
----------- -----------
Total liabilities 1,359,952 1,315,573
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 (one cent) par value; 20,000 shares
authorized; 4,300 shares issued and outstanding; stated at
liquidation preference of $25 (twenty-five dollars)
per share 107,500 107,500
Common stock, $.01 (one cent) par value; 300,000
shares authorized; 118,420 and 118,406 shares issued, respectively;
118,408 and 118,394 shares outstanding, respectively 1,184 1,184
Treasury stock, 12 shares, at cost (242) (242)
Additional paid-in capital 1,347,474 1,347,227
Cumulative net income (70,088) 29,824
Accumulated distributions (69,444) (65,144)
----------- -----------
Total stockholders' equity 1,316,384 1,420,349
----------- -----------
Total liabilities and stockholders' equity $ 2,676,336 $ 2,735,922
=========== ===========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
2
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PRISON REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Rental revenues $ 11,466 $ 65,828 $ 22,926 $ 129,468
Interest income 3,363 5,827 6,675 12,041
Licensing fees 2,666 2,186 5,242 4,318
--------- --------- --------- ---------
17,495 73,841 34,843 145,827
--------- --------- --------- ---------
EXPENSES:
Depreciation and amortization 13,407 10,502 26,331 20,419
General and administrative 4,051 1,725 6,594 2,607
Write-off of amounts under lease arrangements 4,416 -- 8,416 --
--------- --------- --------- ---------
21,874 12,227 41,341 23,026
--------- --------- --------- ---------
OPERATING INCOME (LOSS) (4,379) 61,614 (6,498) 122,801
Equity in earnings of subsidiaries and amortization
of deferred gains 2,874 7,476 8,987 15,157
Interest expense (34,630) (7,036) (66,424) (15,309)
Merger transaction fees (28,146) -- (28,146) --
Foreign currency transaction loss (7,530) -- (7,530) --
Loss on disposal of assets (301) (1,631) (301) (1,631)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (72,112) 60,423 (99,912) 121,018
Provision for change in tax status -- -- -- 83,200
--------- --------- --------- ---------
NET INCOME (LOSS) (72,112) 60,423 (99,912) 37,818
DIVIDENDS TO PREFERRED SHAREHOLDERS (2,150) (2,150) (4,300) (4,300)
--------- --------- --------- ---------
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS $ (74,262) $ 58,273 $(104,212) $ 33,518
========= ========= ========= =========
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS PER COMMON SHARE:
BASIC $ (0.63) $ 0.50 $ (0.88) $ 0.30
========= ========= ========= =========
DILUTED $ (0.63) $ 0.50 $ (0.88) $ 0.30
========= ========= ========= =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, BASIC 118,409 116,421 118,402 111,871
========= ========= ========= =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, DILUTED 118,409 117,763 118,402 112,687
========= ========= ========= =========
</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. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(99,912) $ 37,818
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 26,331 20,419
Amortization of debt issuance costs 6,643 1,987
Provision for change in tax status -- 83,200
Equity in earnings of unconsolidated entities and amortization
of deferred gain (8,986) (15,157)
Write-off of amounts under lease arrangements 8,416 --
Foreign currency transaction loss 7,530 --
Other noncash items 247 536
Loss on disposal of assets 301 1,631
Changes in assets and liabilities, net:
Receivable from CCA 10,789 (2,791)
Other assets 1,248 (10,013)
Accounts payable and accrued expenses 3,573 (3,844)
Income taxes payable 769 (9,220)
--------- ---------
Net cash provided by (used in) operating activities (43,051) 104,566
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment, net (70,281) (351,032)
(Increase) decrease in restricted cash and investments 14,993 (21,682)
Cash acquired in purchase of CCA Prison Realty Trust -- 21,894
Payments under lease arrangements -- (44,959)
Increase in other assets (107) (400)
Distributions from investments in PMSI and JJFMSI 6,686 7,535
Payments received on direct financing leases and notes receivable 2,296 2,827
--------- ---------
Net cash used in investing activities (46,413) (385,817)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt -- 40,000
Proceeds from line of credit, net 37,000 148,400
Proceeds from issuance of senior notes -- 100,000
Payments on debt (41) (1,286)
Payment of debt issuance costs (9,322) (12,290)
Proceeds from issuance of common stock -- 119,672
Distributions paid on common stock -- (138,075)
Proceeds from exercise of stock options and warrants -- 41
Distributions paid on preferred shares (4,300) (4,300)
--------- ---------
Net cash provided by financing activities 23,337 252,162
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (66,127) (29,089)
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD 84,493 31,141
--------- ---------
CASH AND CASH EQUIVALENTS, END OF THE PERIOD $ 18,366 $ 2,052
========= =========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
(continued)
4
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PRISON REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND AMOUNTS IN THOUSANDS)
(CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of capitalized amounts of $9.2 million and $16.4 million,
respectively) $ 53,599 $ 984
======== ===========
Income taxes $ 615 $ 9,220
======== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES-INCREASES (DECREASES) TO CASH:
A real estate property was leased subject to a direct financing lease:
Real estate properties $ 89,426 $ --
Investments in direct financing leases (89,426) --
-------- -----------
$ -- $ --
======== ===========
Notes payable were issued in exchange for accounts
payable and accrued interest:
Accounts payable and accrued expenses $ (2,014) $ --
Convertible subordinated notes and other debt 2,014 --
-------- -----------
$ -- $ --
======== ===========
Long-term debt was converted into common stock:
Other assets $ -- $ 1,161
Long-term debt -- (47,000)
Common stock -- 50
Additional paid-in capital -- 45,789
-------- -----------
$ -- $ --
======== ===========
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.
5
<PAGE> 8
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE
INDICATED)
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 ("Old Prison Realty"),
merged with and into the Company on December 31, 1998 and January 1, 1999,
respectively (collectively, the "1999 Merger"), pursuant to an Amended and
Restated Agreement and Plan of Merger by and among Old CCA, Old Prison Realty
and the Company, dated as of September 29, 1998.
The 1999 Merger has been accounted for as a reverse acquisition of the Company
by Old CCA and as an acquisition of Old Prison Realty by the Company. As such,
Old CCA's assets and liabilities have been carried forward at historical cost,
and the provisions of reverse acquisition accounting prescribe that Old CCA's
historical financial statements be presented as the Company's historical
financial statements prior to January 1, 1999. The historical equity section of
the financial statements and earnings per share have been retroactively restated
to reflect the Company's equity structure, including the exchange ratio and the
effects of the differences in par values of the respective companies' common
stock. Old Prison Realty's assets and liabilities have been recorded at fair
market value, as required by Accounting Principles Board Opinion No. 16,
"Business Combinations" ("APB 16").
OPERATIONS
Since the 1999 Merger, the Company has specialized in acquiring, developing and
owning correctional and detention facilities. Corrections Corporation of America
("CCA") is a private prison management company that operates and manages the
substantial majority of facilities owned by the Company. As a result of the 1999
Merger and certain contractual relationships existing between the Company and
CCA, the Company is dependent on its significant sources of income from CCA. In
addition, the Company pays CCA for services rendered to the Company in the
development of its correctional and detention facilities. See the information
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999, as filed with the Securities and Exchange Commission (the
"Commission") on March 30, 2000 (the "Company's Form 10-K") and Note 11 herein
for a description of the contractual relationships between the Company and CCA.
As a result of liquidity issues facing CCA and the Company, the parties have
amended the contractual
6
<PAGE> 9
agreements between the Company and CCA. For a more complete description of the
amendments, see Note 11 herein.
As required by its governing instruments and as contemplated by the proposed
Restructuring (as defined and more fully described in Note 13 hereof), the
Company currently intends to be taxed as a real estate investment trust, or
REIT, for federal income tax purposes for the year ended December 31, 1999. In
the event the Company completes the Restructuring, following required
stockholder approval in September 2000, the Company expects to be taxed as a C
corporation for the taxable year ending December 31, 2000 and thereafter. See
Note 8 for information on the Company's contingent tax liabilities. In the event
the Restructuring is not completed, the Company expects that, following required
stockholder approval, the Company will nevertheless be taxed as a C corporation
with respect to its taxable year ended December 31, 2000 and thereafter.
2. FINANCIAL CONDITION OF CCA AND THE COMPANY
Prior to completion of the Restructuring, the Company's business is and will be
the ownership, development and leasing of correctional and detention facilities
to qualified third parties and government agencies. As the lessor of
correctional and detention facilities, the Company is currently dependent upon
the ability of its tenants to make lease payments to the Company. CCA is
currently the lessee of a substantial majority of the Company's facilities. At
June 30, 2000, CCA leased 36 of the 45 operating correctional and detention
facilities owned by the Company. In addition, Prison Realty owns two office
buildings, one leased to CCA and one leased to TransCor America, LLC, a wholly
owned subsidiary of CCA. Therefore, the Company is currently dependent for a
substantial portion of its revenues on CCA's ability to make the lease payments
required under its lease arrangements with CCA (the "CCA Leases") for such
facilities. CCA incurred a net loss of $76.8 million and $139.4 million for the
three and six months ended June 30, 2000, respectively, and currently has a net
working capital deficiency and a net capital deficiency. Due to CCA's liquidity
position, CCA has been unable to make timely rental payments to the Company
under the original terms of the CCA Leases and has been required to defer the
first scheduled payment of accrued interest on the $137.0 million promissory
note payable by CCA to the Company (the "CCA Note"). As of December 31, 1999,
CCA was in default under the provisions of its bank credit facility, although
such events of default were waived subsequent to December 31, 1999. See Note 11
for a more complete description of the waiver of such defaults. As a result of
CCA's financial and liquidity condition, the independent public accountants of
CCA have indicated in their opinion on CCA's 1999 consolidated financial
statements that there is substantial doubt about CCA's ability to continue as a
going concern.
The Company and CCA have amended the original terms of the CCA Leases to defer,
with interest, rental payments originally due to the Company during the period
from January 2000 to June 2000 until September 30, 2000, with the exception of
certain scheduled payments. Pursuant to the terms of this amendment, CCA will
pay interest on such deferred rental payments, at an annual rate equal to the
current non-default rate of interest applicable to CCA's credit facility
(subject to adjustment if and to the extent that such rate of interest under
such existing bank credit facility is adjusted) from
7
<PAGE> 10
the date each such payment would have been payable under the original terms of
the CCA Leases until the date such payment is actually paid. CCA's obligation to
make payments under the CCA Leases is not secured by any of the assets of CCA,
although the obligations under the CCA Leases are cross-defaulted so that the
Company could terminate all of the CCA Leases if CCA fails to make required
lease payments. Under such circumstances, the Company would be required to find
a suitable lessee for the Company's facilities in order to generate revenue and
to maintain its ability to qualify as a REIT. Due to the unique nature of
correctional and detention facilities, the Company may be unable to locate
suitable lessees or to attract such lessees. It is anticipated, however, that
upon completion of the Restructuring, the leases between the Company and CCA, as
amended, will be terminated.
Continued operating losses by CCA, declarations of events of default and
acceleration actions by the Company's and CCA's creditors, the continued
inability of CCA to make contractual payments to the Company under the original
terms of such agreements, adverse resolution of significant outstanding
stockholder and other litigation matters, and the Company's limited resources
currently available to meet its operating, capital expenditure and debt service
requirements will have a material adverse impact on the Company's consolidated
financial position, results of operations and cash flows. These matters
concerning the Company and CCA raise substantial doubt about the Company's
ability to continue as a going concern. The Company's independent public
accountants have indicated in their opinion on the Company's 1999 consolidated
financial statements that there is substantial doubt about the Company's ability
to continue as a going concern. The condensed consolidated financial statements
do not include any adjustments relating to the recoverability of asset carrying
amounts or the amounts of liabilities that might result should the Company be
unable to continue as a going concern.
The Company has limited resources currently available to meet its operating,
capital and debt service requirements. As a result, the Company currently is,
and will continue to be, dependent on its ability to borrow funds under the
terms of its bank credit facility to meet these requirements. Due to the
Company's financial condition, the availability of borrowings under its bank
credit facility is uncertain, notwithstanding the recently obtained Waiver and
Amendment to the Company's bank credit facility. Accordingly, there can be no
assurance that the Company will be able to meet its operating, capital
expenditure and debt service requirements in the future.
LENDER CONSENTS
As a result of the financial condition of the Company and CCA, certain existing
or potential events of default arose under the provisions of the Company's
indebtedness. In addition, certain of the proposed restructuring transactions
involving the Company were not permitted under the terms of the Company's
indebtedness. The Company has obtained waivers of previously existing events of
default under, and amendments to, the provisions of its Amended Bank Credit
Facility, as hereinafter defined (the "Waiver and Amendment"), and its
convertible, subordinated notes to permit the Restructuring and the amendments
to the CCA Leases and the other contractual arrangements between the Company and
CCA. As of August 14, 2000, the waivers and amendments remained in effect, and,
as a result, the Company was not in default under the terms of its Amended Bank
Credit Facility, its 12% senior notes or its convertible, subordinated notes.
8
<PAGE> 11
AMENDMENTS TO CCA LEASES AND OTHER AGREEMENTS
On December 31, 1999, the Company and CCA amended the terms of the CCA Leases to
change the annual base rent escalation formula with respect to each facility
leased to CCA. Previously, each facility's annual base rent was subject to
increase each year in an amount equal to a percentage of the total rental
payments with respect to each facility, such percentage being the greater of:
(i) 4%; or (ii) 25% of the percentage increase of gross management revenue
derived from such facility. As a result of this amendment, each facility's
annual base rent is subject to increase each year in an amount equal to the
lesser of: (i) 4% of the annualized yearly rental payments with respect to such
facility; or (ii) 10% of the excess of CCA's aggregate gross management revenues
for the prior year over a base amount of $325.0 million.
In an effort to address the liquidity needs of CCA prior to the completion of
the Restructuring, and as permitted by the terms of the Waiver and Amendment to
the Company's bank credit facility, the Company and CCA have amended the terms
of the CCA Leases. Lease payments under the CCA Leases will be due and payable
on June 30 and December 31 of each year, instead of monthly. In addition, the
Company and CCA have agreed to defer, with interest, and with the exception of
certain scheduled payments, the first semi-annual rental payment under the
revised terms of the CCA lease agreements, due June 30, 2000, until September
30, 2000.
In connection with the amendments to the CCA Leases deferring a substantial
portion of the rental payments due to the Company thereunder, the terms of the
Waiver and Amendment to the Company's Amended Bank Credit Facility condition the
effectiveness of the Waiver and Amendment upon the deferral of the Company's
payment of fees to CCA which would otherwise be payable pursuant to the terms of
the Amended and Restated Tenant Incentive Agreement, the Business Development
Agreement and the Amended and Restated Services Agreement, each as hereinafter
defined. The Company and CCA have deferred, with interest, the payment of such
amounts. The terms of CCA's recently amended waiver and amendment to the
provisions of its bank credit facility permit the deferral of these payments.
During 2000, the Company is recognizing rental income, net of reserves, from CCA
based on the actual cash payments received with a reserve for the recognition
of any accrued interest receivable. In addition, the Company continues to record
its obligations to CCA under the various agreements discussed above.
3. 1999 MERGER TRANSACTIONS
For a complete description of the 1999 Merger transactions, please see the
information contained in the Company's Form 10-K for the year ended December 31,
1999.
4. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. Investments in majority-owned affiliates where
control does not exist, including the Company's investments in Prison Management
Services, Inc., a Tennessee corporation ("PMSI"), and Juvenile and Jail Facility
Management Services, Inc., a Tennessee corporation ("JJFMSI"), are accounted for
under the equity method. Investments in entities of less than 20% of an entity's
9
<PAGE> 12
outstanding stock and where no significant influence exists, including the
Company's investment in CCA, are accounted for under the cost method. All
material intercompany transactions and balances have been eliminated in
consolidation.
The accompanying interim condensed 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 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 Form 10-K with respect to certain significant
accounting and financial reporting policies as well as other pertinent
information of the Company.
5. REAL ESTATE PROPERTIES
At June 30, 2000, the Company owned or was in the process of developing 50
correctional and detention facilities, of which 45 facilities were operating,
two were under construction and three were in the planning stages, with a total
aggregate cost of $2.2 billion. At June 30, 2000, CCA leased 36 correctional and
detention facilities from the Company, governmental agencies leased six
facilities from the Company, and private operators leased three facilities from
the Company. In the event the Restructuring is not completed, the Company
expects to lease all of the facilities under construction or development to CCA.
At June 30, 2000, the Company also owned two corporate office buildings, one of
which is leased to CCA and one of which is leased to TransCor America, LLC, a
wholly owned subsidiary of CCA. In the event the Company and CCA combine as a
part of the Restructuring, all existing leases between the Company and CCA will
be cancelled and will be of no further force and effect. See Note 13 for a
discussion of the Restructuring.
Nine of the facilities owned by the Company are subject to options that allow
various governmental agencies to purchase these facilities. In addition, two of
the facilities are constructed on land that the Company leases from governmental
agencies under ground leases. Under the terms of those ground leases, the
facilities become the property of the governmental agencies upon expiration of
the ground leases. The Company depreciates these two properties over the term of
the ground lease.
During January 2000, the Company completed construction at a cost of
approximately $89.4 million of an 800-bed medium-security prison in Salford,
England and entered into a 25-year lease with Agecroft Prison Management, Inc.
("APM"). The Company is accounting for the lease as a direct financing lease.
APM, a joint venture owned 50% by JJFMSI and 50% by Sodexho Alliance, S.A.
("Sodexho"), is managing the operation of the prison for the U.K. government.
10
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In connection with the Company's Salford, England facility, the Company has a
direct financing lease, a note receivable and certain other short-term
receivables denominated in British pounds. Transaction gains and losses that
arise from exchange rate fluctuations on these assets are included in the
results of operations as incurred. As a result, the Company recognized foreign
currency transaction losses of $7.5 million for the three months ended June 30,
2000.
6. DEBT
THE CREDIT FACILITY AND AMENDED CREDIT FACILITY
TERMS AND CONDITIONS.
On January 1, 1999, in connection with the completion of the 1999 Merger, the
Company obtained a $650.0 million secured bank credit facility from NationsBank,
N.A., as administrative agent, and several U.S. and non-U.S. banks. The bank
credit facility included up to a maximum of $250.0 million in tranche B term
loans and $400.0 million in revolving loans, including a $150.0 million
subfacility for letters of credit. The term loan required quarterly principal
payments of $0.6 million throughout the term of the loan, with the remaining
balance maturing on January 1, 2003. The revolving loans matured on January 1,
2002. Interest rates, unused commitment fees and letter of credit fees on the
bank credit facility were subject to change based on the Company's senior debt
rating. The bank credit facility was secured by mortgages on the Company's real
property.
On August 4, 1999, the Company completed an amendment and restatement of the
bank credit facility (the "Amended Bank Credit Facility") increasing amounts
available to the Company under the original bank credit facility to $1.0 billion
through the addition of a $350.0 million tranche C term loan. The tranche C term
loan is payable in equal quarterly installments in the amount of $0.9 million
through the calendar quarter ending September 30, 2002, with the balance to be
paid in full on December 31, 2002. The maturity of the term loan under the
original bank credit facility was changed to December 31, 2002, with the
maturity of the revolving loan under the bank credit facility remaining January
1, 2002. Lehman Commercial Paper Inc. replaced NationsBank, N.A. as
administrative agent of the Amended Bank Credit Facility.
The Amended Bank Credit Facility, similar to the original bank credit facility,
provided for interest rates, unused commitment fees and letter of credit fees to
change based on the Company's senior debt rating. Similar to the terms of the
original bank credit facility, the Amended Bank Credit Facility (prior to the
execution of the Waiver and Amendment), bears interest at variable rates of
interest based on a spread over the base rate or LIBOR (as elected by the
Company), which spread is determined by reference to the Company's credit
rating. The spread ranges from 0.50% to 2.25% for base rate loans and from 2.00%
to 3.75% for LIBOR rate loans. These ranges replaced the original spread ranges
of 0.25% to 1.25% for base rate loans and 1.375% to 2.75% for LIBOR rate
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loans. The term loan portions of the Amended Bank Credit Facility bear interest
at a variable rate equal to 3.75% to 4.00% in excess of LIBOR or 2.25% to 2.50%
in excess of a base rate. This rate replaced the variable rate equal to 3.25% in
excess of LIBOR or 1.75% in excess of a base rate in the original bank credit
facility.
The rating on the Company's bank loan debt was lowered from Ba3 to Ba1 during
the first quarter of 2000. The rating on the Company's senior unsecured debt was
lowered from B1 to B2, and the rating on the series A preferred stock was
lowered from Ba3 to B3. As a result, the interest rate applicable to outstanding
amounts under the Amended Bank Credit Facility was increased by 0.50%. The
rating on the Company's debt was also lowered during the second quarter of 2000,
although no interest rate increase was attributable to the rating adjustment.
Upon the lenders' determination that the Company is in default under the terms
of the Amended Bank Credit Facility, the Company is required to pay a default
rate of interest equal to the rate of interest as determined based on the terms
described above, plus 2.00%. As discussed below, prior to the execution of the
Waiver and Amendment to the Amended Bank Credit Facility, the Company was in
default under the Amended Bank Credit Facility and, consequently, was subject to
the default rate of interest, effective from January 25, 2000 until June 9,
2000. As a result of the execution of the Waiver and Amendment, however, the
Company is no longer obligated to continue to pay the applicable default rate of
interest with respect to outstanding amounts under the Amended Bank Credit
Facility.
As a result of the Waiver and Amendment, the interest rate applicable to
outstanding borrowings under the Amended Bank Credit Facility was increased by
0.50%.
The Company incurred costs of $59.2 million during 1999 in consummating the
original bank credit facility and the Amended Bank Credit Facility transactions,
including $41.2 million related to the amendment and restatement. The Company
wrote off $9.0 million of unamortized costs as interest expense related to the
original bank credit facility upon completion of the amendment and restatement
in 1999. The Company also incurred and capitalized costs of approximately $8.6
million in consummating the June 9, 2000 Waiver and Amendment.
In accordance with the terms of the Amended Bank Credit Facility, the Company
entered into certain swap arrangements guaranteeing that it will not pay an
index rate greater than 6.51% on outstanding balances of at least (a) $325.0
million through December 31, 2001 and (b) $200.0 million through December 31,
2002.
The Amended Bank Credit Facility, similar to the terms of the original bank
credit facility, is secured by mortgages on the Company's real property.
Borrowings are limited based on a borrowing base formula that considers, among
other things, eligible real estate. Prior to execution of the Waiver and
Amendment, the Amended Bank Credit Facility contained certain financial
covenants, primarily: (a) maintenance of leverage, interest coverage, debt
service coverage and total indebtedness ratios and (b) restrictions on the
incurrence of additional indebtedness.
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The Amended Bank Credit Facility also restricted the Company's ability to make
the 1999 cash payment of a special dividend and restricts the cash payment of a
special dividend in 2000.
WAIVERS OF EVENTS OF DEFAULT UNDER, AND AMENDMENTS TO, PROVISIONS
OF THE AMENDED BANK CREDIT FACILITY
As a result of: (i) the financial condition of the Company and CCA; (ii) the
transactions undertaken by the Company and CCA in an attempt to resolve current
liquidity issues of the Company and CCA; and (iii) previously announced
restructuring transactions contemplated by agreements entered into with Pacific
Life Insurance Company ("Pacific Life"), certain existing or potential events of
default arose under the provisions of the Amended Bank Credit Facility.
Following the approval of the requisite senior lenders under its Amended Bank
Credit Facility, the Company, certain of its wholly owned subsidiaries, various
lenders and Lehman Commercial Paper Inc., as administrative agent ("Lehman"),
executed the Waiver and Amendment, dated as of June 9, 2000, to the provisions
of the Amended Bank Credit Facility. Upon effectiveness, the Waiver and
Amendment waived or addressed all existing events of default under the
provisions of the Amended Bank Credit Facility. The Waiver and Amendment also
contained certain amendments to the Amended Bank Credit Facility, including the
replacement of existing financial ratios contained in the credit facility
applicable to the Company with new financial ratios following completion of the
Restructuring. As a result of the Waiver and Amendment, the Company is required
to begin monthly payments of amounts due for interest beginning July, 2000. The
first such payment equaled $11.2 million and was made on July 31, 2000.
In obtaining the Waiver and Amendment, the Company agreed to complete certain
transactions which were incorporated as covenants in the Waiver and Amendment.
The Waiver and Amendment provides that the Company must complete the following
transactions, among others: (i) merge with CCA on or before a specified date,
upon terms and conditions specified in the Waiver and Amendment; (ii) pending
requisite stockholder approval, elect not be taxed as a REIT for federal income
tax purposes commencing with its taxable year ending December 31, 2000; (iii)
restructure existing management; and (iv) pay a dividend, in the form of
preferred stock, in satisfaction of the Company's remaining REIT distribution
requirements for the fiscal year ending December 31, 1999.
The Waiver and Amendment also provides that the Company may, but is not required
to, complete certain transactions and amends the terms of the Amended Bank
Credit Facility to permit the following transactions, among others: (i) the
amendment of the CCA Leases and the other contractual arrangements between the
Company and CCA; and (ii) the merger of each of PMSI and JJFMSI with the
Company, upon terms and conditions specified in the Waiver and Amendment.
The Waiver and Amendment also provides that, prior to the completion of the
Company's merger with CCA in connection with the Restructuring, the Company is
required to maintain certain monthly minimum liquidity thresholds. The Waiver
and Amendment provides that, following completion of the merger of the Company
with CCA, the previously existing financial covenants
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contained in the Amended Bank Credit Facility will be replaced by the following
financial covenants, each as defined in the Waiver and Amendment, designed to
reflect the Company's status as a subchapter C corporation rather than as a
REIT: (i) total leverage ratio; (ii) interest coverage ratio; (iii) fixed charge
coverage ratio; (iv) ratio of total indebtedness to total capitalization; (v)
minimum EBIDTA; and (vi) minimum occupancy percentage. The Waiver and Amendment
also provides that, in addition to quarterly consolidated financial statements,
the Company is required to provide monthly consolidated financial statements to
Lehman. The Waiver and Amendment further provides that, prior to completion of
the merger with CCA, the Company is required to provide weekly statements of
cash receipts and disbursements to Lehman. The Waiver and Amendment also
requires that the Company submit a business plan to Lehman setting forth the
Company's financial projections, planned capital expenditures and business
strategy.
The Waiver and Amendment provides that, generally, the Company will be required
to use the net cash proceeds received by the Company from certain transactions,
including the following, to repay outstanding indebtedness under the bank credit
facility: (i) any disposition of real estate assets; (ii) the securitization of
lease payments with respect to the Company's Salford, England facility; and
(iii) the sale-leaseback of the Company's headquarters. Under the terms of the
Waiver and Amendment, the Company will also be required to apply a designated
portion of its "excess cash flow," as such term is defined in the Waiver and
Amendment, to the prepayment of outstanding indebtedness under the bank credit
facility. In addition, the Company is, and after its merger with CCA, CCA will
be, required by the Waiver and Amendment to transfer certain depository and
other non-disbursement accounts to an account at a bank that is a senior lender
under the bank credit facility and to grant perfected liens in such accounts in
favor of Lehman for the benefit of the senior lenders under the bank credit
facility.
The Waiver and Amendment provides that the Company's failure to complete the
transactions required by the Waiver and Amendment will result in an event of
default under the Amended Bank Credit Facility. The Waiver and Amendment also
provides that, in addition to the existing events of default under the terms of
the Amended Bank Credit Facility prior to the Waiver and Amendment, it shall be
an event of default under the terms of the Amended Bank Credit Facility if: (i)
the Company settles its currently outstanding stockholder litigation for cash
amounts not otherwise fully covered by the Company's existing directors' and
officers' liability insurance policies; (ii) the Company declares and pays
dividends with respect to the Company's currently outstanding 8% Series A
Cumulative Preferred Stock prior to the receipt of net cash proceeds of at least
$100.0 million from the issuance of additional shares of common or preferred
stock; or (iii) CCA shall amend or refinance its bank credit facility on terms
and conditions less favorable than the existing terms of CCA's bank credit
facility.
The Company has limited resources currently available to it to meet its
operating, capital expenditure and debt service requirements. As a result, the
Company currently is, and will continue to be, dependant on its ability to
borrow funds under the terms of the Amended Bank Credit Facility to meet these
requirements. As a result of the Waiver and Amendment, the Company borrowed
$25.0 million at the time of the execution of the Waiver and Amendment and an
additional $19.7 million
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subsequently. The Company is entitled to borrow up to an additional $10.3
million under the credit facility at various times during 2000. However, the
continued effectiveness of the Waiver and Amendment is subject to the
satisfaction of certain conditions as described above. If the Company is unable
to comply with and maintain the Waiver and Amendment, the Company would be
unable to borrow additional amounts under the Amended Bank Credit Facility until
a waiver of such events of default is obtained. Accordingly, there can be no
assurance that the Company will be able to meet its operating, capital
expenditure and debt service requirements in the future. Moreover, if an event
of default arises under the terms of the Amended Bank Credit Facility, including
as a result of the termination or expiration of the Waiver and Amendment or as
the result of the acceleration of the Company's other indebtedness, the senior
lenders under the Amended Bank Credit Facility are entitled, at their
discretion, to exercise certain remedies, including acceleration of the
outstanding borrowings under the Amended Bank Credit Facility.
In addition, the Company's 12% senior notes, the Company's $40.0 million
convertible, subordinated notes and the Company's $30.0 million convertible,
subordinated notes contain provisions which allow the holders of these notes to
accelerate this debt and seek remedies if the Company has a payment default
under the Amended Bank Credit Facility or if the obligations under the Amended
Bank Credit Facility have been accelerated. If the Company were to be in default
under the Amended Bank Credit Facility, as amended by the Waiver and Amendment,
and if the senior lenders under the Amended Bank Credit Facility elected to
exercise their rights to accelerate the Company's obligations under the Amended
Bank Credit Facility, such events could result in the acceleration of all or a
portion of the outstanding principal amount of the 12% senior notes or the
convertible, subordinated notes, which would have a material adverse effect on
the Company's liquidity and financial position. The Company does not have
sufficient working capital to satisfy its debt obligations in the event of an
acceleration of all of the Company's outstanding indebtedness.
As of August 14, 2000, the Company has made all required principal and interest
payments under the Amended Bank Credit Facility.
12% SENIOR NOTES
On June 11, 1999, the Company completed its offering of $100.0 million aggregate
principal amount of 12% senior notes due 2006. Interest on the 12% senior notes
is paid semi-annually in arrears, and the 12% senior notes have a seven-year
non-callable term due June 1, 2006. Net proceeds from the offering were
approximately $95.0 million after deducting expenses payable by the Company in
connection with the offering. The Company used the net proceeds from the sale of
the 12% senior notes for general corporate purposes and to repay revolving bank
borrowings under its bank credit facility.
The Company believes that it currently is not in default under the terms of the
indenture governing its $100.0 million 12% senior notes. The terms of the
indenture governing the 12% senior notes restrict amendments to the CCA Leases,
the Amended and Restated Tenant Incentive Agreement, the Business Development
Agreement and the Amended and Restated Services Agreement without
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the delivery of an opinion as to the fairness, from a financial point of view,
to the Company of such amendments, issued by an accounting, appraisal,
consulting or investment banking firm of national standing, to the trustee under
the indenture governing the 12% senior notes. In connection with the amendments
to these agreements, the Company has delivered to the trustee under the
indenture a fairness opinion meeting the requirements of the indenture.
The indenture governing the 12% senior notes, however, contains a provision
which allows the holders thereof to accelerate the outstanding principal amount
of the 12% senior notes and to seek additional remedies if the Company has a
payment default under the Amended Bank Credit Facility or if the Company's
obligations under the Amended Bank Credit Facility have been accelerated.
However, the amounts outstanding under the 12% senior notes are effectively
subordinated to the Company's obligations under the Amended Bank Credit Facility
to the extent of the value of the assets securing the Amended Bank Credit
Facility. In the event of acceleration of outstanding principal amounts under
both the 12% senior notes and the Amended Bank Credit Facility, the lenders
under the Amended Bank Credit Facility will be entitled to proceed against the
collateral that secures the Company's obligations under the Amended Bank Credit
Facility, and such collateral will not be available to satisfy any amounts owed
under the 12% senior notes.
$40.0 MILLION CONVERTIBLE, SUBORDINATED NOTES
On January 29, 1999, the Company issued $20.0 million of convertible,
subordinated notes due in December 2008, with interest payable semi-annually at
9.5%, to MDP Ventures IV and affiliated purchasers. This issuance constituted
the second tranche of a commitment by the Company to issue an aggregate of $40.0
million of convertible, subordinated notes, with the first $20.0 million tranche
issued in December 1998 under substantially similar terms. The $40.0 million
convertible, subordinated notes require that the Company revise the conversion
price as a result of the payment of a dividend or the issuance of stock or
convertible securities below market price. As of June 30, 2000, the conversion
price for the $40.0 million convertible, subordinated notes was $23.63 per share
as compared to $28.00 per share at issuance. This conversion price of the notes,
however, is subject to adjustment in connection with the waiver and amendment to
the provisions of the note purchase agreement governing these notes described
below.
Certain existing or potential events of default arose under the provisions of
the note purchase agreement relating to the $40.0 million convertible,
subordinated notes as a result of the Company's financial condition and a
"change of control" arising from the Company's execution of certain securities
purchase agreements with respect to previously announced restructuring
transactions. This "change of control" gave rise to the right of the holders of
such notes to require the Company to repurchase the notes at a price of 105% of
the aggregate principal amount of such notes within 45 days after the provision
of written notice by such holders to the Company. In addition, the Company's
defaults under the provisions of the note purchase agreement gave rise to the
right of the holders of such notes to require the Company to pay an applicable
default rate of interest of 20%. In addition to the default rate of interest, as
a result of the default, the Company was obligated, under the original terms of
the $40.0 million convertible, subordinated notes, to pay the holders of the
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notes contingent interest sufficient to permit the holders to receive a 15% rate
of return, excluding the effect of the default rate of interest, on the $40.0
million principal amount, unless the holders of the notes elect to convert the
notes into the Company's common stock under the terms of the note agreement.
Such contingent interest is retroactive to the date of issuance of the notes.
On June 30, 2000, the Company and the holders of the notes executed a waiver and
amendment to the provisions of the note purchase agreement governing the notes.
This waiver and amendment provides for a waiver of all existing events of
default under the provisions of the note purchase agreement. In addition, the
waiver and amendment to the note purchase agreement amended the economic terms
of the notes to increase the applicable interest rate of the notes by 0.5% per
annum and adjusted the conversion price of the notes to a price equal to 125% of
the average trading price of the Company's common stock for a period of 30 days
immediately preceding the earlier of (i) October 31, 2000 or (ii) the closing
date of the merger of the Company and CCA in connection with the Restructuring.
In addition, the waiver and amendment to the note purchase agreement provides
for the replacement of financial ratios applicable to the Company.
There can be no assurance that the Company will be able to maintain the
effectiveness of this waiver and amendment to the note purchase agreement. If
the Company is unable to do so, and if the holders of these notes do not consent
to an additional proposed waiver of events of default under, and amendments to,
the note purchase agreement, the Company may be required to repurchase or redeem
the outstanding principal amount of the notes. If the aggregate principal amount
of such convertible, subordinated notes were accelerated, however, the repayment
of such amounts would be subordinate to the rights of the senior lenders under
the Amended Bank Credit Facility. Any requirement to repurchase or redeem the
outstanding principal amount of this indebtedness prior to its stated maturity
would also trigger an event of default under the provisions of the Company's
other indebtedness, including the provisions of the Amended Bank Credit
Facility.
In connection with the waiver and amendment to the note purchase agreement, the
Company issued additional convertible subordinated notes under substantially
similar terms in the aggregate principal amount of $1.1 million, which amount
represents all interest owed at the default rate of interest through June 30,
2000. After giving consideration to the issuance of these additional notes, as
of August 14, 2000, the Company has made all required interest payments under
the $40.0 million convertible, subordinated notes.
$30.0 MILLION CONVERTIBLE, SUBORDINATED NOTES
The Company's $30.0 million convertible, subordinated notes issued to PMI
Mezzanine Fund, L.P. require that the Company revise the conversion price as a
result of the payment of a dividend or the issuance of stock or convertible
securities below market price. As of June 30, 2000, the conversion price for the
$30.0 million convertible, subordinated notes was $23.63 per share as compared
to $27.42 per share at issuance. This conversion price of the notes, however, is
subject to adjustment in connection with the waiver and amendment to the
provisions of the note purchase agreement governing these notes.
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Certain existing or potential events of default arose under the provisions of
the note purchase agreement relating to the $30.0 million convertible,
subordinated notes as a result of the Company's financial condition and as a
result of the proposed Restructuring.
On June 30, 2000, the Company and the holder of the notes executed a waiver and
amendment to the provisions of the note purchase agreement governing the notes.
This waiver and amendment provides for a waiver of all existing events of
default under the provisions of the note purchase agreement. In addition, the
waiver and amendment to the note purchase agreement amended the economic terms
of the notes to increase the applicable interest rate of the notes by 0.5% per
annum and adjusted the conversion price of the notes to a price equal to 125% of
the average trading price of the Company's common stock for a period of 30 days
immediately preceding the earlier of (i) October 31, 2000 or (ii) the closing
date of the merger of the Company and CCA in connection with the Restructuring.
In addition, the waiver and amendment to the note purchase agreement provides
for the replacement of financial ratios applicable to the Company.
There can be no assurance that the Company will be able to maintain the
effectiveness of this waiver and amendment to the note purchase agreement. If
the Company is unable to do so, and if the holders of these notes do not consent
to an additional proposed waiver of any future events of default under, and
amendments to, the note purchase agreement, the Company may be required to
repurchase or redeem the outstanding principal amount of the notes. If the
aggregate principal amount of such convertible, subordinated notes were
accelerated, however, the repayment of such amounts would be subordinate to the
rights of the senior lenders under the Amended Bank Credit Facility. Any
requirement to repurchase or redeem the outstanding principal amount of this
indebtedness prior to its stated maturity would also trigger an event of default
under the provisions of the Company's other indebtedness, including the
provisions of the Amended Bank Credit Facility.
As of August 14, 2000, the Company has made all required interest payments under
the $30.0 million convertible, subordinated notes.
7. DISTRIBUTIONS TO STOCKHOLDERS
On March 22, 2000, 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, 2000. These dividends were paid on
April 17, 2000. As of August 14, 2000, the Company's board of directors has not
declared a dividend on the 8.0% Series A Cumulative Preferred Stock for the
quarter ended June 30, 2000. In connection with the Company's attainment of the
Waiver and Amendment, the Company is prohibited from declaring or paying any
dividends with respect to the Company's currently outstanding 8.0% Series A
Cumulative Preferred Stock until such time as the Company has raised at least
$100.0 million in equity. Accordingly, the Company did not make such payment
with respect to the second quarter of 2000 when such payment was due on or about
July 15, 2000. Dividends with respect to the 8.0% Series A Cumulative Preferred
Stock will continue to accrue under the terms of the Company's charter until
such time as payment of such dividends is permitted under the terms of the
Waiver and Amendment. A second quarter 2000 dividend of $.50
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per share has been accrued in the accompanying condensed consolidated balance
sheet as of June 30, 2000.
The Company, as a REIT, cannot complete any taxable year with accumulated
earnings and profits from a taxable corporation. Accordingly, the Company was
required to distribute Old CCA's earnings and profits to which it succeeded in
the 1999 Merger (the "Accumulated Earnings and Profits"). During the year ended
December 31, 1999, the Company made $217.7 million of distributions related to
its common stock and 8.0% Series A Cumulative Preferred Stock. The Company met
the above described distribution requirements by designating $152.5 million of
the total distributions in 1999 as distributions of the Accumulated Earnings and
Profits.
In addition to distributing the Accumulated Earnings and Profits, the Company,
in order to qualify for taxation as a REIT with respect to its 1999 taxable
year, is required to distribute 95% of its taxable income for 1999. Although
dividends sufficient to distribute 95% of the Company's taxable income for 1999
have not been declared as of June 30, 2000 or August 14, 2000, the Company
currently intends to pay sufficient dividends in the form of securities to
satisfy its remaining distribution requirements for qualification as a REIT for
1999 and currently estimates that approximately $150.0 million in securities
will be distributed in 2000 to meet this requirement. In January 2000, $2.2
million of distributions relating to the 8.0% Series A Cumulative Preferred
Stock, which are eligible to reduce the distribution requirement for the taxable
year ending December 31, 1999, were paid. The remaining $147.8 million of
distributions that must be paid to stockholders in 2000 in order for the Company
to maintain its status as a REIT for the taxable year ending December 31, 1999
have not been declared by the board of directors and, accordingly, have not been
accrued in the accompanying condensed consolidated balance sheets as of June 30,
2000 and December 31, 1999. Currently, the Company's governing instruments
require that it operate as a REIT. However, if the Company completes the
Restructuring following stockholder approval to modify its governing
instruments, the Company intends to be taxed as a subchapter C corporation
commencing with its taxable year ending December 31, 2000.
8. CONTINGENCIES
LITIGATION
STOCKHOLDER LITIGATION
On December 29, 1999, a purported class action lawsuit was filed on behalf of
the stockholders of the Company in the Chancery Court for Davidson County,
Tennessee. The lawsuit, captioned Bernstein v. Prison Realty Trust, et al.,
names as defendants the Company and its directors, as well certain affiliates of
Fortress Investment Group, LLC, Blackstone Realty Advisors and Bank of America
Corporation ("Fortress/Blackstone"). The lawsuit alleges that the directors of
the Company breached their fiduciary duties to the Company's stockholders by
effectively selling control of the Company for inadequate consideration and
without having adequately considered or explored all other alternatives to the
proposed restructuring involving an equity investment by
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Fortress/Blackstone or having taken steps to maximize stockholder value. The
plaintiffs seek an injunction preventing the completion of the
Fortress/Blackstone restructuring, declaratory relief and costs and fees. On
each of January 4, 2000 and January 12, 2000, nearly identical purported class
action lawsuits were filed in the same court on behalf of different purported
class representatives. The lawsuits, captioned Hardee v. Prison Realty Trust, et
al. and Holle v. Prison Realty Trust, et al., name as defendants the Company and
its directors, as well as each of Fortress, Blackstone and Bank of America.
These three actions were consolidated on February 18, 2000.
On December 30, 1999, a purported class action lawsuit was filed in federal
court in the United States District Court for the Middle District of Tennessee,
on behalf of the stockholders of the Company. The lawsuit, captioned Neiger v.
Doctor Crants, et al., names as defendants the Company, Doctor R. Crants and D.
Robert Crants, III. The lawsuit alleges violations of federal securities laws
based on the allegation that the defendants knew or should have known that the
Company would not make any further dividend payments on its common stock,
including a special dividend, prior to the date on which it was disclosed to the
public that the Company had entered into an agreement with respect to the
Fortress/Blackstone restructuring and would not elect to be taxed as a REIT
beginning with its 1999 taxable year, and therefore, certain statements made by
the defendants prior to that time were false and misleading. The plaintiffs seek
an unspecified amount of monetary damages, equitable and/or injunctive relief
and costs and fees. On February 4, 2000, a nearly identical purported class
action lawsuit was filed in the same court on behalf of different purported
class representatives. The lawsuit, captioned Anderson v. Doctor Crants, et al.,
names as defendants the Company, Doctor R. Crants and D. Robert Crants, III. On
February 24, 2000, a nearly identical purported class action lawsuit was filed
in the same court on behalf of a different purported class representative. The
lawsuit, captioned Brody v. Prison Realty Trust, Inc., et al., names as
defendants the Company, Doctor R. Crants, and D. Robert Crants, III. These three
actions were consolidated on March 13, 2000. The plaintiffs filed a consolidated
complaint on May 30, 2000. Additionally, on March 3, 2000, a similar lawsuit was
filed on behalf of two plaintiffs in the Chancery Court for the State of
Tennessee, Twentieth Judicial District. The lawsuit, captioned Buchanan v.
Prison Realty Trust, Inc., et al., names as defendants the Company, Doctor R.
Crants, D. Robert Crants, III and Darrell K. Massengale and alleges violations
of state common and securities laws based on claims substantially identical to
those enumerated above.
The Company is also currently subject to two separate purported class actions
filed in federal court in the United States District Court for the Middle
District of Tennessee, alleging securities fraud in connection with the
agreements entered into by the Company and CCA in May 1999 to increase payments
made by the Company to CCA under the terms of certain agreements. The
plaintiffs' class in In re Old CCA Securities Litigation consists of former
shareholders of Old CCA who acquired shares of the Company as the result of the
merger of Old CCA with and into the Company. The plaintiffs' class in In re
Prison Realty Securities Litigation consists of former shareholders of Old
Prison Realty who acquired shares of the Company as the result of the merger of
Old Prison Realty with and into the Company and all persons who acquired shares
of the Company in the open market prior to May 17, 1999. Each of these actions
alleges violations of federal securities laws based, among other things, on the
allegations that the Company and the individual defendants in the actions
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knew or should have known of the increased payments to CCA prior to the date
that they were disclosed to the public, and therefore certain public filings and
representations made by the Company and certain of the defendants were false and
misleading. These two actions represent the consolidation of 16 complaints filed
in May and June 1999. On March 24, 2000, a purported class action nearly
identical to In re Prison Realty Securities Litigation was filed in the United
States District Court for the Middle District of Tennessee. It is anticipated
that the lawsuit, captioned Mikovits v. Prison Realty Trust, et. al., will be
coordinated and/or consolidated with In re Prison Realty Securities Litigation.
In addition, a purported stockholders' derivative complaint has been filed in
the Chancery Court for Davidson County, Tennessee in Nashville, captioned
Wanstrath v. Crants, et al., against the Company, CCA and persons who were
directors at the time the Company entered into the agreements regarding the
increased payments to CCA. The derivative action alleges, among other things,
that the directors of the Company violated their fiduciary duties in approving
the increased payments to CCA. The plaintiffs in this action have also moved for
a preliminary injunction to prevent the payment of certain fees in connection
with the Fortress/Blackstone restructuring and the payments to certain parties
in connection with the Pacific Life restructuring.
The Company also is subject to a complaint filed in August 1998 in the Chancery
Court for Davidson County, Tennessee, inherited from Old CCA as a result of Old
CCA's merger with and into the Company. The lawsuit, captioned Dasburg, S.A. v.
Corrections Corporation of America, et al., claims that Old CCA and the
individual named defendants violated state law by making false and misleading
statements in order to keep Old CCA's stock price at an artificially high level
during the period from April 1997 through April 1998, so that the individual
named defendants could sell shares of Old CCA stock at inflated prices.
The Company is defending vigorously its actions in each of the stockholder
lawsuits described herein. It is possible additional lawsuits will be filed, or
that the existing complaints filed in connection with the Fortress/Blackstone
restructuring and/or the Pacific Life restructuring will be amended in
connection with the proposed Restructuring. It is also possible that the
Company's liability in regard to the stockholder lawsuits will exceed the
Company's insurance coverage limits and will have a material adverse impact on
the Company's consolidated financial position, results of operations and cash
flows. It is also possible that any settlement of the stockholder lawsuits will
include the issuance by the Company of a significant amount of equity
securities, which issuance would cause dilution to the Company's existing
stockholders. In addition, as described in Note 6. herein, the terms of the
Waiver and Amendment provide that it shall be an event of default under the
Company's bank credit facility if the Company settles its currently outstanding
stockholder litigation for cash amounts not otherwise fully covered by the
Company's existing directors' and officers' liability insurance policies.
OTHER LITIGATION
The Company was the subject of a purported class action complaint filed in the
Circuit Court for Davidson County, Tennessee, on January 28, 2000. The lawsuit,
captioned White v. Prison Realty Trust, Inc., et al. alleged that the defendants
engaged in unfair and deceptive practice of permitting
21
<PAGE> 24
telephone service providers exclusive service rights in return for illegal
payments and kickbacks, which exclusive agreements allow and require the
providers to charge unconscionable fees for phone services. This complaint was
subsequently dismissed by the Circuit Court on February 23, 2000. A similar
complaint, captioned Hunt v. Prison Realty Trust, Inc., was filed on February
23, 2000 in the Circuit Court for Davidson County, Tennessee, naming as
defendants the Company, CCA, JJFMSI and PMSI. Plaintiffs are asking for
unspecified treble damages pursuant to the Tennessee Consumer Protection Act
plus restitution of the amounts collected by the defendants under such
arrangements, as well as a permanent injunction restraining the defendants from
engaging in such conduct, in addition to unspecified damages. While the outcome
of this lawsuit is not determinable, the Company does not believe that such
litigation, if resolved against the Company, would have a material adverse
effect upon it business or financial position.
At December 31, 1998, Old CCA was a party to two inmate lawsuits at the
Northeast Ohio Correctional Center for wrongful deaths. These lawsuits were
assumed by the Company in the 1999 Merger. While the outcome of these lawsuits
is not determinable, the Company does not believe that such litigation, if
resolved against the Company, would have a material adverse effect upon its
business or financial position.
On June 9, 2000, a complaint was filed in federal court in the United States
District Court for the Southern District of New York by Fortress/Blackstone to
recover in excess of $24.0 million in fees, consisting of a transaction
termination fee of $7.5 million, a $15.7 million commitment fee, and certain
expenses allegedly owed them under the terms of the Fortress/Blackstone
securities purchase agreement as the result of the companies' termination of the
agreement. The payment of these fees is also subject to certain claims in the
stockholder litigation described above.
On October 15, 1998, a complaint captioned Fredrick & May Construction Co. v.
U.S. Corrections Corporation was filed in the Circuit Court for Lee County,
Kentucky alleging a breach of contract regarding the construction of
improvements to two correctional facilities acquired when Old Prison Realty
purchased and merged with U.S. Corrections Corporation ("USCC"). Frederick & May
Construction Co. ("Fredrick & May") alleged that it had valid contracts for the
completion of the improvements and that the contracts were wrongfully
terminated. The issue of damages in this matter was tried to a jury in June
2000, subsequent to the court granting summary judgment in favor of Frederick &
May on the issue of the existence of a contract. The jury returned a verdict
against USCC in an amount of approximately $1.0 million. The plaintiff's motion
to assess and determine the amount of prejudgment interest, if any, is presently
pending before the Court. The Company has vigorously defended this action to
date and is in the process of appealing the judgment.
On September 14, 1998, a complaint captioned Thomas Horn, Ferman Heaton, Ricky
Estes, and Charles Combs, individually and on behalf of the U.S. Corrections
Corporations Employee Stock Ownership Plan and its participants v. Robert B.
McQueen, Milton Thompson, the U.S. Corrections Corporation Employee Stock
Ownership Plan, U.S. Corrections Corporation, and Corrections Corporation of
America was filed in the U.S. District Court for the Western District of
Kentucky alleging numerous violations of the Employees Retirement Income
Security Act ("ERISA"),
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<PAGE> 25
including but not limited to failure to manage the assets of the ESOP in the
sole interest of the participants, purchasing assets without undertaking
adequate investigation of the investment, overpayment for employer securities,
failure to resolve conflicts of interest, lending money between the ESOP and
employer, allowing the ESOP to borrow money other than for the acquisition of
employer securities, failure to make adequate, independent, and reasoned
investigation into the prudence and advisability of certain transaction, and
otherwise. The plaintiffs are seeking damages in excess of $30.0 million plus
prejudgment interest and attorneys' fees. It is expected that all or a portion
of any liability resulting from this claim will be covered by insurance. While
the outcome of this lawsuit is not determinable, in the event any resulting
liability is not covered by insurance proceeds, such liability would have a
material adverse effect upon the business or financial position of the Company.
INCOME TAX CONTINGENCIES
As required by its governing instruments, the Company currently intends to elect
to be taxed as a REIT for the year ended December 31, 1999. In order to qualify
as a REIT, the Company is required to distribute 95% of its taxable income for
1999. Although dividends sufficient to distribute 95% of the Company's taxable
income for 1999 have not been declared as of August 14, 2000, the Company
intends to pay sufficient dividends in securities to satisfy all distribution
requirements for qualification as a REIT for 1999 and estimates that $150.0
million will be distributed in 2000 to meet this requirement. As of December 31,
1999, $2.2 million of distributions relating to the 8.0% Series A Cumulative
Preferred Stock were declared and accrued on the Company's consolidated balance
sheet, and such distributions were paid subsequent to December 31, 1999. The
remaining $147.8 million of distributions that must be paid to stockholders in
2000 in order for the Company to qualify as a REIT have not been declared by the
board of directors and, accordingly, have not been accrued in the Company's
condensed consolidated balance sheets. The Company's failure to distribute 95%
of its taxable income for 1999 or the failure of the Company to comply with
other requirements for REIT qualification under the Code would have a material
adverse impact on the Company's consolidated financial position, results of
operations and cash flows.
If the Company elects REIT status for its taxable year ended December 31, 1999,
such election will be subject to review by the Internal Revenue Service (the
"IRS") for a period of three years from the date of filing of its 1999 tax
return. Should the IRS review the Company's election to be taxed as a REIT for
the 1999 taxable year and reach a conclusion requiring the Company to be treated
as a taxable corporation for the 1999 taxable year, the Company would be subject
to income taxes and interest on its 1999 taxable income and possibly subject to
fines and/or penalties. Income taxes for the year ended December 31, 1999 could
exceed $83.5 million, which would have an adverse impact on the Company's
consolidated financial position, results of operations and cash flows.
In connection with the 1999 Merger, the Company assumed the tax obligations of
Old CCA resulting from disputes with federal and state taxing authorities
related to tax returns filed by Old CCA in 1998 and prior taxable years. The IRS
is currently conducting an audit of Old CCA's federal tax return for the taxable
year ending December 31, 1997. The Company currently is unable to predict
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<PAGE> 26
the ultimate outcome of the IRS's audit of Old CCA's 1997 federal tax return or
the ultimate outcome of audits of other tax returns of the Company or Old CCA by
the IRS or by other taxing authorities; however, it is possible that such audits
will result in claims against the Company in excess of reserves currently
recorded by the Company. In addition, to the extent that IRS audit adjustments
increase the Accumulated Earnings and Profits of Old CCA, the Company would be
required to make timely distribution of the Accumulated Earnings and Profits of
Old CCA to stockholders. Such results would have a material adverse impact on
the Company's financial position, results of operations and cash flows.
GUARANTEES
In connection with the bond issuance of a governmental entity for which PMSI
currently provides management services at a 2,016 bed correctional facility, the
Company is obligated under a debt services deficits agreement to pay the trustee
of the bond's trust indenture (the "Trustee") amounts necessary to pay any debt
service deficits consisting of principal and interest requirements (outstanding
principal balance of $69.1 million at June 30, 2000 plus future interest
payments). In the event the State of Tennessee currently utilizing the facility
exercises its option to purchase the correctional facility, the Company is also
obligated to pay the difference between principal and interest owed on the bonds
on the date set for the redemption of the bonds and amounts paid by the State of
Tennessee for the facility and all other funds on deposit with the Trustee and
available for redemption of the bonds. The Company also maintains a restricted
cash account of approximately $7.0 million as collateral against a guarantee it
has provided for a forward purchase agreement related to the above bond
issuance.
The IRS is conducting an audit of $72.7 million in tax exempt bonds issued by
the Hardeman County Correctional Facilities Corporation ("HCCFC") in 1997, the
proceeds of which were used to construct a correctional facility in Hardeman
County, Tennessee, owned by HCCFC. At the time the bonds were issued, Old CCA
entered into a management agreement with respect to the correctional facility.
By separate agreement, Old CCA agreed to pay any debt service deficits on the
bonds. Subsequent to the issuance of the bonds, HCCFC paid Old CCA a
discretionary bonus of approximately $4.1 million. The tax-exempt nature of the
bonds is under review by the IRS. Because of the contractual relationship
between Old CCA and the correctional facility, in the event the IRS determines
that the bonds are taxable, there exists the risk that the Company as the
successor to Old CCA may be required to remit all or a portion of the bonus
received, or, in the alternative, repurchase the principal amount of the bonds,
plus accrued interest. The Company intends to contest this matter vigorously.
EMPLOYMENT AND SEVERANCE AGREEMENTS
Subsequent to June 30, 2000, the Company's board of directors terminated the
Company's chief executive officer. Under certain employment and severance
agreements, the former chief executive officer will continue to receive his
salary and health, life and disability insurance benefits for a period of three
years and will vest immediately in 140,000 shares of the Company's common stock
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<PAGE> 27
previously granted as part of a deferred stock award. The compensation expense
related to these benefits, totaling $0.7 million in cash and $1.2 million in
non-cash charges representing the unamortized portion of the deferred stock
award, will be recognized in the quarter ending September 30, 2000. The
unamortized portion is based on the common stock trading price as of the date of
grant which was during the fourth quarter of 1995.
9. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income (loss) by
the weighted average number of shares of common stock outstanding during the
year. Diluted net income (loss) per share is computed by dividing net income
(loss) (as adjusted) by the weighted average number of shares of common stock
after considering the additional dilution related to convertible preferred
stock, convertible subordinated notes, options and warrants.
For the three and six months ended June 30, 2000, the Company's stock options
and warrants and convertible subordinated notes were convertible into an
additional 3.0 million shares. These incremental shares were excluded from the
computation of diluted net income (loss) per share for the three and six months
ended June 30, 2000 as the effect of their inclusion would have been
anti-dilutive.
10. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standard requiring that
every derivative instrument be recorded in the balance sheet as either an asset
or liability measured at its fair value. SFAS 133 requires that changes in a
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS 133, as amended by Statement of
Financial Accounting Standards No 137, "Deferral of the Effective Date of SFAS
133", is effective for fiscal quarters beginning after June 15, 2000. The
Company does not believe that the impact of adoption of SFAS 133 will have a
material impact on the Company's consolidated financial position, results of
operations or cash flows.
11. RELATIONSHIP WITH CCA
CCA is a private prison management company that operates and manages the
substantial majority of facilities owned by the Company. As a result of the 1999
Merger and certain contractual relationships existing between the Company and
CCA, the Company is dependent on its significant sources of income from CCA. In
addition, the Company pays CCA tenant incentive fees and fees for services
rendered to the Company in the development of its correctional and detention
facilities. As of June 30, 2000, CCA leased 36 of the 45 operating correctional
and detention facilities owned by the Company. In addition, at June 30, 2000,
the Company owned two corporate office buildings, one of which is leased by CCA
and one of which is leased by TransCor America, LLC., a wholly owned subsidiary
of CCA. See the Company's Form 10-K for additional information with respect
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<PAGE> 28
to the contractual relationships between the Company and CCA. The following
information under this Note 11 updates the activity related to the specific
transaction and contractual relationships.
CCA NOTE
In connection with the 1999 Merger, Old CCA received the $137.0 million CCA
Note. The Company succeeded to the CCA Note as a result of the 1999 Merger.
Interest on the CCA Note is payable annually at the rate of 12%. Interest only
is payable for the first four years of the CCA Note. Principal is due in six
equal annual installments of approximately $22.8 million, beginning December 31,
2003. In addition, notwithstanding the waiver and amendment to CCA's credit
facility, as of December 31, 1999, CCA was, and CCA currently is, prohibited
under the terms of its credit facility, and a related subordination agreement,
from making the first scheduled interest payment under the terms of the CCA
Note, totaling approximately $16.4 million. The Company has fully reserved the
$16.4 million of interest accrued under the terms of the CCA Note during 1999
and the $8.2 million of interest accrued through June 30, 2000.
INVESTMENT IN CCA
For the six months ended June 30, 2000 and 1999, the Company recognized no
income or loss related to its stock ownership investment in CCA.
DEFERRED GAIN ON SALE TO CCA
No amortization of the CCA deferred gain occurred during the six months ended
June 30, 2000 and 1999.
CCA LEASES
During the month ended December 31, 1999 and the six months ended June 30, 2000,
CCA has failed to make timely contractual payments under the terms of the CCA
Leases. As of December 31, 1999, approximately $24.9 million of rents due from
CCA to the Company were unpaid. The terms of the CCA Leases provide that rental
payments were due and payable on December 25, 1999. As of August 14, 2000, CCA
has paid the $24.9 million of lease payments related to 1999 and $26.0 million
of lease payments related to 2000. For the three and six months ended June 30,
2000, the Company recognized rental revenue from CCA of $81.6 million and $161.8
million, respectively, and recorded a reserve of $72.6 million and $143.8
million, respectively, resulting in recognition of net rental revenue from CCA
of $9.0 million and $18.0 million, respectively. The reserve was recorded due to
the uncertainty regarding the collectiblity of the revenue.
The CCA Leases have been amended to defer, with interest, rental payments
originally due during the period from January 2000 to June 2000, with the
exception of certain installment payments. For the three and six months ended
June 30, 2000, the Company accrued and reserved $3.2 million and $4.6 million,
respectively, of interest due to the Company on unpaid lease payments.
Subsequent to June 30, 2000, CCA paid $20.0 million of lease payments related to
2000 in accordance with the payment schedule previously agreed upon by the
Company and CCA. At August
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14, 2000, $135.8 million of lease payments plus $4.6 million of interest
payments for the six months ended June 30, 2000 were unpaid.
For the three and six months ended June 30, 1999, the Company recognized rental
revenue from CCA of $63.2 million and $124.0 million, respectively.
The Company expects that the CCA Leases will be materially impacted by either
the Restructuring or by the renegotiation of the CCA Leases with CCA.
TENANT INCENTIVE ARRANGEMENT
For the year ended December 1999, the Company had paid tenant incentive fees
under the terms of an amended and restated tenant incentive agreement (the
"Amended and Restated Tenant Incentive Agreement") of $68.6 million, with $2.9
million of those fees amortized against rental revenues. During the fourth
quarter of 1999, the Company undertook a plan that contemplated either merging
with CCA and thereby eliminating the CCA Leases or amending the CCA Leases to
reduce the lease payments to be paid by CCA to the Company during 2000.
Consequently, the Company determined that the remaining deferred tenant
incentive fees under the existing lease arrangements at December 31, 1999 were
not realizable and wrote off fees totaling $65.7 million. During the six months
ended June 30, 2000, the Company opened two facilities that are operated and
leased by CCA. The Company expensed the tenant incentive fee due CCA, totaling
$8.4 million, but has made no payments to CCA in 2000 with respect to this
agreement. CCA and the Company have amended the Amended and Restated Tenant
Incentive Agreement to defer, with interest, payments to CCA by the Company
pursuant to this agreement. At June 30, 2000, $8.4 million of payments under the
Amended and Restated Tenant Incentive Agreement plus $0.3 million of interest
payments were accrued but unpaid under the original terms of this agreement. It
is anticipated that, in connection with the Restructuring, this agreement will
be canceled.
CCA TRADE NAME USE AGREEMENT
For the three and six months ended June 30, 2000, the Company recognized income
of $2.7 million and $5.3 million, respectively, from CCA under the terms of a
service mark and trade name use agreement (the "Trade Name Use Agreement"). As
of June 30, 2000, the Company had recorded a receivable totaling $5.3 million
from CCA for licensing fees due under the Trade Name Use Agreement, none of
which has been collected subsequent to June 30, 2000. It is anticipated that, in
connection with the Restructuring, this agreement will be canceled.
The Company recognized $2.2 million and $4.3 million in licensing fee revenues
from CCA for the three and six months ended June 30, 1999, respectively.
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CCA RIGHT TO PURCHASE AGREEMENT
Since January 1, 1999, the Company has not purchased any assets from CCA under a
right to purchase agreement by and between CCA and the Company (the "Right to
Purchase Agreement").
CCA SERVICES AGREEMENT
Costs incurred by the Company under an amended and restated services agreement
(the "Amended and Restated Services Agreement") are capitalized as part of the
facilities' development cost. Costs incurred under the Amended and Restated
Services Agreement and capitalized as part of the facilities' development cost
totaled $2.5 million and $5.5 million for the three and six months ended June
30, 2000. CCA and the Company have amended this agreement to defer, with
interest, payments to CCA by the Company pursuant to this agreement. At June 30,
2000, $5.5 million of payments under the Amended and Restated Services Agreement
plus $0.1 million of interest payments were accrued but unpaid under the
original terms of this agreement. It is anticipated that, in connection with the
Restructuring, this agreement will be canceled.
Costs incurred related to the Amended and Restated Services Agreement for the
three and six months ended June 30, 1999 were $14.4 million and $26.5 million,
respectively.
CCA BUSINESS DEVELOPMENT AGREEMENT
Costs incurred by the Company under a business development agreement (the
"Business Development Agreement") are capitalized as part of the facilities'
development cost. For the three and six months ended June 30, 2000, no costs
were incurred under the Business Development Agreement. For the three and six
months ended June 30, 1999, $3.3 million and $11.9 million, respectively, were
incurred. CCA and the Company have amended this agreement to defer, with
interest, payments to CCA by the Company pursuant to this agreement. It is
anticipated that, in connection with the Restructuring, this agreement will be
canceled.
CCA'S REVOLVING CREDIT FACILITY
On April 27, 2000, CCA obtained the consent of the requisite percentage of the
senior lenders under its bank credit facility for a waiver of its bank credit
facility's restrictions relating to:
- the Company's and CCA's amendments of the original terms of the
CCA Leases, the Amended and Restated Tenant Incentive Agreement,
the Business Development Agreement and the Amended and Restated
Services Agreement;
- CCA's violation of a net worth covenant contained in its bank
credit facility; and
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<PAGE> 31
- CCA's execution of an agreement and plan of merger with respect
to a merger of each of CCA, PMSI and JJFMSI with and into wholly
owned subsidiaries of the Company, in connection with the
proposed restructuring led by Fortress/Blackstone.
As consideration for the initial waiver, the CCA senior lenders required and
were paid a fee equal to $1.0 million in cash. The terms of the initial waiver
provided that the waiver would remain in effect until the earlier of: (i) July
31, 2000; (ii) the date the securities purchase agreement with Pacific Life, as
described in Note 13 herein, was terminated; (iii) the date CCA makes any
payments to the Company other than as set forth in the amendment to CCA's
agreements with the Company; or (iv) the date the lenders under the Company's
Amended Bank Credit Facility exercise any rights with respect to any default or
event of default under the Company's Amended Bank Credit Facility.
Because the termination of the securities purchase agreement with Pacific Life
would have resulted in a termination of the initial waiver and because CCA's
proposed execution of the merger agreement with Prison Realty as part of the
Restructuring was not addressed in the initial waiver, CCA requested that its
senior lenders amend the waiver to provide for its continuation, notwithstanding
the termination of the securities purchase agreement with Pacific Life, and to
permit CCA's execution of the amended merger agreement in connection with the
Restructuring. CCA's senior lenders refused to agree to such amendments unless
CCA paid an additional waiver fee of $1.0 million to CCA's senior lending group.
Because of the ramifications of the existence of a default under the CCA bank
credit facility, and the fact that such a default would cause an event of
default under the Company's Amended Bank Credit Facility, as amended by the
Waiver and Amendment, on June 30, 2000, CCA committed to pay its lenders the
$1.0 million fee and obtained the consent of the requisite percentage of the
senior lenders under its bank credit facility to extend the term of the initial
waiver to the earlier of September 15, 2000 and the completion of Prison
Realty's merger with CCA in connection with the Restructuring and to permit: (i)
the termination of the merger agreement relating to the proposed combination of
the Company with CCA under the Pacific Life-led restructuring; (ii) the
execution by CCA of the merger agreement related to the Restructuring; and (iii)
the termination of the securities purchase agreement with Pacific Life.
CCA FINANCIAL INFORMATION
The following summarized unaudited operating information presents CCA's results
of operations for the three and six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- -------------
(UNAUDITED AND AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues $ 142,390 $ 122,985 $ 280,342 $ 235,348
Net loss before taxes (76,772) (60,185) (139,412) (127,310)
Net loss (76,772) (37,262) (139,412) (77,028)
</TABLE>
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The following summarized unaudited balance sheet information presents CCA's
financial position as of June 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
(UNAUDITED AND AMOUNTS IN THOUSANDS)
<S> <C> <C>
Current assets $ 84,040 $ 88,647
Total assets 176,715 184,701
Current liabilities 393,472 258,421
Deferred credits 103,056 107,070
Total liabilities 496,528 365,491
Stockholders' equity (319,813) (180,790)
</TABLE>
The following summary presents CCA's cash flows for the six months ended June
30, 2000 and 1999:
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
(UNAUDITED AND AMOUNTS IN THOUSANDS)
<S> <C> <C>
Cash flows provided by operating activities $ 8,108 $ 3,091
Cash flows used in investing activities (795) (1,256)
Cash flows used in financing activities (14,811) (6,125)
-------- -------
Net decrease in cash for the six months ended $ (7,498) $(4,290)
======== =======
</TABLE>
During 2000, CCA has utilized cash from the deferral of the CCA Leases and other
contractual payments to the Company to offset its operating losses. During 1999,
CCA used cash from equity issuances and from payments from the Company for
tenant incentive arrangements and services provided to the Company to offset its
operating losses. CCA expects to continue to use cash from the deferral of its
lease and other contractual payments to the Company and its availability under a
line of credit to offset its anticipated losses from operations. No assurances
can be given, however, that these sources of cash will be sufficient to offset
all of CCA's losses. Cash used in investing activities consists of equipment
additions. Cash used in financing activities consists of line of credit issuance
fee.
The Company has included additional financial information of CCA for the six
months ended June 30, 2000 and 1999 herein under "Results of Operations"
contained in "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
12. INVESTMENTS IN AFFILIATES
In connection with the 1999 Merger, Old CCA received 100% of the non-voting
interest in PMSI and JJFMSI valued at the implied fair market values of $67.1
million and $55.9 million, respectively. The Company succeeded to these
interests as a result of the 1999 Merger. The
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Company's ownership of the non-voting common stock of PMSI and JJFMSI entitles
the Company to receive, when and if declared by the boards of directors of the
respective companies, 95% of the net income, as defined, of each company as cash
dividends. Dividends payable to the Company not declared and paid on a quarterly
basis will accrue and are cumulative. As of August 14, 2000, the Company has
received quarterly dividends in arrears from each of PMSI and JJFMSI through the
first quarter of 2000. The Company cannot, however, be assured that the board of
directors of each of PMSI and JJFMSI will continue to declare and pay dividends
to the Company. The Company's ownership of 100% of the non-voting common stock
of each of PMSI and JJFMSI does not enable the Company to vote in the election
of directors of the companies.
The following unaudited operating information presents a combined summary of the
results of operations for PMSI and JJFMSI for the three and six months ended
June 30, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- -------------
(UNAUDITED AND AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues $72,886 $70,596 $146,853 $139,678
Net income before taxes 2,038 5,059 9,609 10,335
</TABLE>
The following unaudited balance sheet information presents a combined summary of
the financial position for PMSI and JJFMSI as of June 30, 2000 and December 31,
1999:
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
(UNAUDITED AND AMOUNTS IN THOUSANDS)
<S> <C> <C>
Current assets $ 61,599 $ 60,741
Total assets 144,811 151,167
Current liabilities 31,561 31,750
Total liabilities 31,979 32,622
Stockholders' equity 112,832 118,545
</TABLE>
Equity in earnings of unconsolidated entities and amortization of deferred gains
was $2.9 and $9.0 million for the three and six months ended June 30, 2000,
respectively and $7.5 and $15.2 million for the three and six months ended June
30, 1999, respectively. For the three and six months ended June 30, 2000, the
Company recognized equity in earnings of PMSI and JJFMSI of $0.1 million and
$0.1 million, respectively, and $2.2 million and $1.5 million, respectively, and
received distributions from PMSI and JJFMSI of $3.8 million and $4.4 million,
respectively, and $2.2 million and $2.3 million, respectively. For the three and
six months ended June 30, 2000, the Company recognized amortization of deferred
gains of PMSI and JJFMSI of $1.8 million and $3.5 million, respectively, and
$0.9 million and $1.8 million, respectively.
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<PAGE> 34
13. PROSPECTIVE RESTRUCTURING TRANSACTIONS
In order to address its current liquidity and capital constraints, the Company
has entered into a series of agreements providing for a comprehensive
restructuring of the Company, including the combination of the Company and CCA,
that will result in the Company's being taxed as a subchapter C corporation,
rather than as a REIT, commencing with its 2000 taxable year (the
"Restructuring"). As a part of this Restructuring, the Company has entered into
a merger agreement with CCA providing for the merger of CCA with and into a
wholly owned subsidiary of the Company. In connection with the merger and
Restructuring, the Company is required to amend certain provisions of its
charter to permit, among other things, the Company's operation as a taxable
subchapter C corporation under the Corrections Corporation of America name.
Under the terms of the Company's agreements with its lenders, the Company will
also complete a series of additional transactions, including a restructuring of
the Company's senior management and attempting to raise additional capital
through the completion of a common stock offering.
The Restructuring was adopted by the boards of directors of the Company and CCA
as an alternative to a previously disclosed restructuring of the Company led by
Fortress/Blackstone and a previously disclosed restructuring led by Pacific
Life. The Fortress/Blackstone-led restructuring contemplated a $350.0 million
equity investment, including a $75.0 million rights offering, and the
combination of the Company, CCA, PMSI and JJFMSI into a single entity operating
as a taxable subchapter C corporation for federal income tax purposes commencing
with the Company's 1999 taxable year. The Company's board of directors
terminated its agreement with Fortress/Blackstone in favor of the proposed
Pacific Life restructuring. The Pacific Life-led restructuring contemplated a
$200.0 million equity investment, including a $200.0 million common stock rights
offering backstopped 100% by Pacific Life and the combination of the Company,
CCA, PMSI and JJFMSI into a single entity as a taxable subchapter C corporation
for federal income tax purposes commencing with the Company's 2000 taxable year.
Due to the uncertainty as to whether the Pacific Life restructuring would be
consummated, the respective boards of the companies terminated the agreement
with Pacific Life, and the Company's board and the board of CCA proposed the
current Restructuring.
The securities purchase agreement executed by the Company in connection with the
Fortress/Blackstone-led restructuring states that, based on certain conditions,
the Company may be obligated to pay to Fortress/Blackstone a $15.7 million
commitment fee and a $7.5 million transaction termination fee. In connection
with both the Fortress/Blackstone and Pacific Life restructuring, the Company
may also be obligated to reimburse these parties for certain expenses incurred.
With the termination of its agreements with Fortress/Blackstone and Pacific Life
during the three months ended June 30, 2000, the Company has accrued and
expensed a total of $28.1 million in merger transaction fees related to the
agreements with Fortress/Blackstone and Pacific Life.
The Company and CCA are each seeking stockholder approval of the Restructuring
at Special Meetings of each company's stockholders scheduled for September 12,
2000. Pending stockholder approval, the Company and CCA intend to complete the
Restructuring, including the merger of the Company and CCA, on or before
September 15, 2000. The Company has filed definitive proxy
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materials with respect to the Restructuring with the Commission and commenced
delivery of such materials to its stockholders on July 31, 2000.
For additional information regarding the prospective Restructuring, see the
Company's prospectus under Rule 424(b)(4), dated August 3, 2000, as filed with
the Commission on August 4, 2000 as a part of its Registration Statement on Form
S-4, dated July 19, 2000.
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PRISON REALTY TRUST, INC. AND SUBSIDIARIES
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 current views of Prison
Realty Trust, Inc. (the "Company"), a Maryland corporation, with respect to
future events and financial performance, and these statements can be identified,
without limitation, 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, general economic conditions, availability
of adequate cash to fund operations and the Company's obligations under
contracts and debt agreements, and other factors discussed herein. The Company
disclosed such risks in detail in its Annual Report on Form 10-K for the fiscal
year ended December 31, 1999, filed with the Commission on March 30, 2000 (File
No. 0-25245) (the "Company's Form 10-K"). 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, a Maryland corporation formed in September 1998, commenced
operations on January 1, 1999 following the merger of Corrections Corporation of
America, a Tennessee corporation ("Old CCA") and CCA Prison Realty Trust, a
Maryland real estate investment trust ("Old Prison Realty") with and into the
Company (the "1999 Merger").
The 1999 Merger has been accounted for as a reverse acquisition of the Company
by Old CCA and as an acquisition of Old Prison Realty by the Company. As such,
Old CCA's assets and liabilities have been carried forward at historical cost,
and the provisions of reverse acquisition accounting prescribe that Old CCA's
historical financial statements be presented as the Company's historical
financial statements prior to January 1, 1999. The historical equity section of
the financial statements and earnings per share have been retroactively restated
to reflect the Company's equity structure, including the exchange ratio and the
effects of the differences in par values of the respective
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companies' common stock. Old Prison Realty's assets and liabilities have been
recorded at fair market value, as required by Accounting Principles Board
Opinion No. 16, ("Business Combinations") ("APB 16").
Prior to the 1999 Merger, Old CCA operated and managed prisons and other
correctional and detention facilities and provided prisoner transportation
services for governmental agencies. Old CCA also provided a full range of
related services to governmental agencies, including managing, financing,
developing, designing and constructing new correctional and detention facilities
and redesigning and renovating older facilities. Since the 1999 Merger, the
Company has specialized in acquiring, developing and owning correctional and
detention facilities. As required by its governing instruments, the Company
currently intends to elect to be taxed as, and has operated so as to preserve
its ability to qualify as, a real estate investment trust, or REIT, for federal
income tax purposes for its taxable year ending December 31, 1999. There can be
no assurance, however, that the Company will qualify as a REIT for its 1999
taxable year. In the event the Restructuring, as hereinafter defined, is
approved by the stockholders of the Company and CCA, the Company will be taxed
as a subchapter C corporation commencing with the taxable year ended December
31, 2000.
FINANCIAL CONDITION OF CCA AND THE COMPANY
CCA is a private prison management company that operates and manages the
substantial majority of facilities owned by the Company. As a result of the 1999
Merger and certain contractual relationships existing between the Company and
CCA, the Company is dependent on its significant sources of income from CCA. In
addition, the Company pays CCA for services rendered to the Company in the
development of its correctional and detention facilities. See the information
contained elsewhere herein for a complete description of the contractual
relationships between the Company and CCA and recent amendments to these
contractual relationships.
Prior to completion of the Restructuring, the Company's business is and will be
ownership, development and leasing of correctional and detention facilities to
qualified third parties and government agencies. As the lessor of correctional
and detention facilities, the Company is currently dependent upon the ability of
its tenants to make lease payments to the Company. CCA is currently the lessee
of a substantial majority of the Company's facilities. At June 30, 2000, CCA
leased 36 of the 45 correctional and detention facilities owned by the Company.
Additionally, at June 30, 2000, CCA leased one corporate office building from
the Company and TransCor America, LLC, a wholly owned subsidiary of CCA, leased
one corporate office building from the Company. Therefore, the Company is
currently dependent for a substantial portion of its revenues on CCA's ability
to make the lease payments required under its lease arrangements with CCA (the
"CCA Leases") for such facilities. CCA incurred a net loss of $76.8 million and
$139.4 million for the three and six months ended June 30, 2000, respectively,
and currently has a net working capital deficiency and a net capital deficiency.
Due to CCA's liquidity position, CCA has been unable to make timely rental
payments to the Company under the original terms of the CCA Leases and has been
required to defer the first scheduled payment of accrued interest on the $137.0
million promissory note payable by CCA to the Company (the "CCA Note"). As of
December 31, 1999, CCA was in default
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under the provisions of its bank credit facility, although such events of
default were waived subsequent to December 31, 1999. As a result of CCA's
financial and liquidity condition, the independent public accountants of CCA
have indicated in their opinion on CCA's 1999 consolidated financial statements
that there is substantial doubt about CCA's ability to continue as a going
concern.
The Company and CCA have amended the original terms of the CCA Leases to defer,
with interest, rental payments originally due to the Company during the period
from January 2000 to June 2000 until September 30, 2000, with the exception of
certain scheduled payments. Pursuant to the terms of this amendment, CCA will
pay interest on such deferred rental payments, at an annual rate equal to the
current non-default rate of interest applicable to CCA's credit facility
(subject to adjustment if and to the extent that such rate of interest under
such existing bank credit facility is adjusted) from the date each such payment
would have been payable under the original terms of the CCA Leases until the
date such payment is actually paid. CCA's obligation to make payments under the
CCA Leases is not secured by any of the assets of CCA, although the obligations
under the CCA Leases are cross-defaulted so that the Company could terminate all
of the CCA Leases if CCA fails to make required lease payments. Under such
circumstances, the Company would be required to find a suitable lessee for the
Company's facilities in order to generate revenue and to maintain its ability to
qualify as a REIT. Due to the unique nature of correctional and detention
facilities, the Company may be unable to locate suitable lessees or to attract
such lessees. It is anticipated, however, that upon completion of the
Restructuring, the leases between the Company and CCA, as amended, will be
terminated.
Continued operating losses by CCA, declarations of events of default and
acceleration actions by the Company's and CCA's creditors, the continued
inability of CCA to make contractual payments to the Company under the original
terms of such agreements, adverse resolution of significant outstanding
stockholder and other litigation matters, and the Company's limited resources
currently available to meet its operating, capital expenditure and debt service
requirements will have a material adverse impact on the Company's consolidated
financial position, results of operations and cash flows. These matters
concerning the Company and CCA raise substantial doubt about the Company's
ability to continue as a going concern. The Company's independent public
accountants have indicated in their opinion on the Company's 1999 consolidated
financial statements that there is a substantial doubt about the Company's
ability to continue as a going concern. The Company's independent public
accountants have indicated in their opinion on the Company's 1999 consolidated
financial statements that there is a substantial doubt about the Company's
ability to continue as a going concern. The consolidated condensed financial
statements do not include any adjustments relating to the recoverability of
asset carrying amounts or the amounts of liabilities that might result should
the Company be unable to continue as a going concern.
The Company has limited resources currently available to meet its operating,
capital and debt service requirements. As a result, the Company currently is,
and will continue to be, dependent on its ability to borrow funds under the
terms of its Amended Bank Credit Facility, as hereinafter defined, to meet these
requirements. Due to the Company's financial condition, the availability of
borrowings under its bank credit facility is uncertain, notwithstanding the
recently obtained waiver of previously existing events of default under, and
amendment to the provisions of the Amended Bank Credit Facility (the "Waiver and
Amendment"). Accordingly, there can be no assurance that the Company will be
able to meet its operating, capital expenditure and debt service requirements in
the future.
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LENDER CONSENTS
As a result of the financial condition of the Company and CCA, certain existing
or potential events of default arose under the provisions of the Company's
indebtedness. In addition, certain of the proposed restructuring transactions
involving the Company were not permitted under the terms of the Company's
indebtedness. As more fully described in "-Liquidity and Capital Resources," the
Company has obtained the Waiver and Amendment and the waivers of previously
existing events of default under, and amendments to, the provisions of its
convertible, subordinated notes to permit the Restructuring transactions and the
amendments to the CCA Leases and the other contractual arrangements between the
Company and CCA. As of August 14, 2000, the waivers and amendments remained in
effect, and, as a result, the Company was not in default under the terms of its
bank credit facility, its 12% senior notes or convertible, subordinated notes.
AMENDMENTS TO CCA LEASES AND OTHER AGREEMENTS
On December 31, 1999, the Company and CCA amended the terms of the CCA Leases to
change the annual base rent escalation formula with respect to each facility
leased to CCA. Previously, each facility's annual base rent was subject to
increase each year in an amount equal to a percentage of the total rental
payments with respect to each facility, such percentage being the greater of:
(i) 4%; or (ii) 25% of the percentage increase of gross management revenue
derived from such facility. As a result of this amendment, each facility's
annual base rent is subject to increase each year in an amount equal to the
lesser of: (i) 4% of the annualized yearly rental payments with respect to such
facility; or (ii) 10% of the excess of CCA's aggregate gross management revenues
for the prior year over a base amount of $325.0 million.
In an effort to address the liquidity needs of CCA prior to the completion of
the Restructuring, and as permitted by the terms of the Waiver and Amendment to
the Amended Bank Credit Facility, the Company and CCA have amended the terms of
the CCA Leases. Lease payments under the CCA Leases will be due and payable on
June 30 and December 31 of each year, instead of monthly. In addition, the
Company and CCA have agreed to defer, with interest, and with the exception of
certain scheduled payments, the first semi-annual rental payment under the
revised terms of the CCA lease agreements, due June 30, 2000, until September
30, 2000.
In connection with the amendments to the CCA Leases deferring a substantial
portion of the rental payments due to the Company thereunder, the terms of the
Waiver and Amendment to the Company's Amended Bank Credit Facility condition the
effectiveness of the Waiver and Amendment to the Amended Bank Credit Facility
upon the deferral of the Company's payment of fees to CCA which would otherwise
be payable pursuant to the terms of the Amended and Restated Tenant Incentive
Agreement, the Business Development Agreement and the Amended and Restated
Services Agreement, each as hereinafter defined. The Company and CCA have
deferred, with interest, the payment of such amounts. The terms of CCA's
recently amended waiver and amendment to the provisions of its bank credit
facility permit the deferral of these payments.
During 2000, the Company is recognizing rental income, net of reserves, from CCA
based on the actual cash payments received with a reserve for the recognition of
any accrued interest receivable. In addition, the Company continues to record
its obligations to CCA under the various agreements discussed above.
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RESTRUCTURING
In order to address its current liquidity and capital constraints, the Company
has entered into a series of agreements providing for a comprehensive
restructuring of the Company, including the combination of the Company and CCA,
that will result in the Company's being taxed as a subchapter C corporation,
rather than as a REIT, commencing with its 2000 taxable year (the
"Restructuring"). As a part of this Restructuring, the Company has entered into
a merger agreement with CCA providing for the merger of CCA with and into a
wholly owned subsidiary of the Company. In connection with the merger and
Restructuring, the Company is required to amend certain provisions of its
charter to permit, among other things, the Company's operation as a taxable
subchapter C corporation under the Corrections Corporation of America name.
Under the terms of the Company's agreements with its lenders, the Company will
also complete a series of additional transactions, including a restructuring of
the Company's senior management and attempting to raise additional capital
through the completion of a common stock offering.
The Restructuring was adopted by the boards of directors of the Company and CCA
as an alternative to a previously disclosed restructuring of the Company led by
Fortress Investment Group, LLC, Blackstone Realty Advisors and Bank of America
Corporation ("Fortress/Blackstone") and a previously disclosed restructuring led
by Pacific Life Insurance Company ("Pacific Life"). The Fortress/Blackstone-led
restructuring contemplated a $350.0 million equity investment, including a $75.0
million rights offering, and the combination of the Company, CCA, Prison
Management Services, Inc. ("PMSI") and Juvenile and Jail Facility Management
Services, Inc. ("JJFMSI") into a single entity operating as a taxable subchapter
C corporation for federal income tax purposes commencing with the Company's 1999
taxable year. The Company's board of directors terminated its agreement with
Fortress/Blackstone in favor of the proposed Pacific Life restructuring. The
Pacific Life-led restructuring contemplated a $200.0 million equity investment,
including a $200.0 million common stock rights offering backstopped 100% by
Pacific Life and the combination of the Company, CCA, PMSI and JJFMSI into a
single entity as a taxable subchapter C corporation for federal income tax
purposes commencing with the Company's 2000 taxable year. Due to the uncertainty
as to whether the Pacific Life restructuring would be consummated, the
respective boards of the companies terminated the agreement with Pacific Life
and the Company's board and the board of CCA proposed the current Restructuring.
The securities purchase agreement executed by the Company in connection with the
Fortress/Blackstone-led restructuring states that, based on certain conditions,
the Company may be obligated to pay to Fortress/Blackstone a $15.7 million
commitment fee and a $7.5 million transaction termination fee. In connection
with both the Fortress/Blackstone and Pacific Life restructuring, the Company
may also be obligated to reimburse these parties for certain expenses incurred.
With the termination of its agreements with Fortress/Blackstone and Pacific Life
during the three months ended June 30, 2000, the Company has accrued and
expensed a total of $28.1 million in merger transaction fees related to the
agreements with Fortress/Blackstone and Pacific Life.
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The Company and CCA are each seeking stockholder approval of the Restructuring
at Special Meetings of each company's stockholders scheduled for September 12,
2000. Pending stockholder approval, the Company and CCA intend to complete the
Restructuring, including the merger of the Company and CCA, on or before
September 15, 2000. The Company has filed definitive proxy materials with
respect to the Restructuring with the Commission and commenced delivery of such
materials to its stockholders on July 31, 2000.
For additional information regarding the prospective Restructuring, see the
Company's prospectus under Rule 424(b)(4), dated August 3, 2000, as filed with
the Securities and Exchange Commission (the "Commission") on August 4, 2000 as a
part of its Registration Statement on Form S-4 dated July 19, 2000.
RESULTS OF OPERATIONS
The Company incurred a net loss for the three and six months ended June 30, 2000
of $72.1 million and $99.9 million, respectively, and was in default under its
Amended Bank Credit Facility (outstanding balance of $965.2 million at June 30,
2000) until June 9, 2000, when the Company and its senior lenders entered into a
waiver of existing events of default under, and amendments to, the provisions of
the Amended Bank Credit Facility. The Company also was in default under the
provisions of the agreements governing the Company's $40.0 million convertible,
subordinated notes, and its $30.0 million convertible, subordinated notes until
June 30, 2000, when the Company and the holders of such indebtedness executed
waivers of existing events of default under, and amendments to, the provisions
of such indebtedness. In addition, the Company has significant outstanding
stockholder and other litigation matters.
Further, CCA, the Company's primary lessee, on which the Company is dependent on
for its major sources of income, incurred a net loss of $202.9 million for the
year ended December 31, 1999 and a net loss of $76.8 million and $139.4 million
for the three and six months ended June 30, 2000, respectively, and currently
has a net working capital deficiency and a net capital deficiency.
As of August 14, 2000, approximately $135.8 million of 2000 rents plus $4.6
million in interest payments related to the six mouths ended June 30, 2000 were
unpaid. Prior to the amendment of the CCA Leases, the original terms of the CCA
Leases provided that rental payments were due and payable on the 25th day of
each month for the current month and that it shall be an event of default if CCA
fails to pay any installment of rent within 15 days after notice of nonpayment
from the Company. During the period in which the original terms of the CCA
Leases were in effect, the Company did not provide a notice of nonpayment to CCA
with respect to lease payments due and payable by CCA. As previously described,
the CCA Leases have been amended to provide that lease payments under the CCA
Leases will be due and payable on June 30 and December 31 of each year, instead
of monthly. In addition, the Company and CCA have agreed to defer, with
interest, and with the exception of certain scheduled payments, CCA's first
semi-annual rental payment under the revised terms of the CCA Leases until
September 30, 2000.
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On April 27, 2000, CCA obtained a waiver of existing events of default under its
bank credit facility. These events of default related to CCA's execution of an
agreement and plan of merger with respect to a proposed merger of CCA with and
into a wholly owned subsidiary of the Company in connection with the Pacific
Life restructuring, the deferral of certain of CCA's lease payments and the
payment of fees to CCA by the Company, and a financial covenant relating to
CCA's net worth. This waiver, however, was to terminate upon the occurrence of
certain events, including the termination of the Pacific Life securities
purchase agreement. On June 30, 2000, CCA obtained an amendment to its previous
waiver of events of default under, and amendments to, its bank credit facility
providing for, among other things, the amendment of the CCA Leases and other
agreements between CCA and the Company, as well as the termination of the
Pacific Life securities purchase agreement and CCA's execution of the merger
agreement.
As previously described, as a result of CCA's liquidity position, CCA has also
been required to defer the first scheduled payment of accrued interest, totaling
approximately $16.4 million, on the $137.0 million promissory note payable by
CCA to the Company. Also as a result of CCA's liquidity position, the
independent public accountants of CCA have indicated in their opinion on CCA's
1999 consolidated financial statements that there is substantial doubt about
CCA's ability to continue as a going concern.
Continued operating losses by the Company and CCA, potential declarations of
events of default and potential acceleration actions by the Company's and CCA's
creditors in the event that either the Company or CCA are unable to maintain in
effect existing waivers of events of default, the continued inability of CCA to
make contractual payments to the Company under the original terms of such
agreements, adverse resolution of significant outstanding stockholder and other
litigation matters and the Company's limited resources currently available to
meet its operating, capital expenditure and debt service requirements will have
a material adverse impact on the Company's consolidated financial position,
results of operations and cash flows.
THE THREE AND SIX MONTHS ENDED JUNE 30, 2000, AS COMPARED TO THE THREE AND SIX
MONTHS ENDED JUNE 30, 1999.
Rental Revenues. Net rental revenues were $11.5 million and $22.9 million for
the three and six months ended June 30, 2000, respectively, and were generated
from the leasing of correctional and detention facilities. For the three and six
months ended June 30, 2000, the Company reserved $72.6 million and $143.8
million, respectively, of the $81.6 million and $161.8 million, respectively, of
gross rental revenues due from CCA resulting from the uncertainty regarding the
collectibility of the payments. For the three and six months ended June 30,
1999, rental revenues were $65.8 million and $129.5 million, respectively. The
Company recorded no rental revenue reserves during the three and six months
ended June 30, 1999. The increase in gross rental revenues related to the
completion of new and expansion of existing correctional and detention
facilities and the corresponding execution of new leases.
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As of August 14, 2000, the Company has received cash payments from CCA for all
of the net rental revenues that have been recognized for the six and three
months ended June 30, 2000 related to the CCA Leases.
Interest Income. Interest income was $3.4 million and $6.7 million for the three
and six months ended June 30, 2000, respectively. For the three and six months
ended June 30, 1999, interest income was $5.8 million and $12.0 million,
respectively. Interest income is earned on the CCA Note, 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.
The decrease in interest income in 2000 in relation to 1999 is due primarily to
reserves recorded by the Company on gross interest income on the CCA Note.
Interest on the CCA Note is payable annually at the rate of 12.0%. Principal is
due in six equal annual installments beginning December 31, 2003. As previously
disclosed, as of June 30, 2000, the first scheduled payment of interest,
totaling approximately $16.4 million, on the CCA Note was unpaid. Consequently,
for the three and six months ended June 30, 2000, the Company fully reserved the
$4.1 million and $8.2 million, respectively, of interest accrued on the CCA
Note. During the fourth quarter of 1999, the Company reserved the $16.4 million
of interest accrued under the terms of the CCA Note during 1999, which included
the interest previously recognized during the three and six months ended June
30, 1999.
As of August 14, 2000, all scheduled interest payments under the CCA Note remain
unpaid.
Licensing Fees. Licensing fees were $2.7 million and $5.2 million for the three
and six months ended June 30, 2000, respectively. The licensing fees were earned
as a result of a service mark and trade name use agreement (the "Trade Name Use
Agreement") which granted 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 CCA, subject to a limitation of
2.75% of the gross revenues of the Company.
For the three and six months ended June 30, 1999, the Company recognized
licensing fees of $2.2 million and $4.3 million, respectively. The increase in
licensing fee revenue in 2000 in relation to 1999 is due to increases in the
Company's gross revenues, on which the licensing fee is based, during the
applicable periods.
As of August 14, 2000, $5.2 million in licensing fees with respect to 2000
remain unpaid.
Depreciation and Amortization. Depreciation expense was $13.4 million and $26.3
million for the three and six months ended June 30, 2000, respectively. For the
three and six months ended June 30, 1999, depreciation expense was $10.5 million
and $20.4 million, respectively. The increase in depreciation expense relates to
a greater number of correctional and detention facilities in service. The
Company uses the straight-line depreciation method over 50 and five year lives
for buildings and machinery and equipment, respectively.
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General and Administrative Expense. General and administrative expenses were
$4.0 million and $6.6 million for the three and six months ended June 30, 2000,
respectively, as compared to $1.7 million and $2.6 million for the three and six
months ended June 30, 1999, respectively. General and administrative expenses
consist primarily of management salaries and benefits, professional fees and
other administrative costs. The increase from 1999 to 2000 resulted primarily
from increases in professional fees and franchise taxes.
Write Off of Amounts Under Lease Arrangements. During 2000, the Company has
opened two new facilities that are operated and leased by CCA. Based on CCA's
financial condition as well as the proposed merger with CCA and the proposed
termination of the CCA Leases in connection therewith, the Company wrote-off the
tenant incentive fees due CCA on these two new facilities, totaling $4.4 million
and $8.4 million for the three and six months ended June 30, 2000, respectively.
During the three and six months ended June 30, 1999, tenant incentive fees paid
to CCA were capitalized. However, during the fourth quarter of 2000, the Company
wrote-off the $65.7 million of unamortized tenant incentive fees paid to CCA,
which included $6.6 million and $45.0 million of tenant incentive fees that had
been previously paid to CCA and capitalized by the Company during the three and
six months ended June 30, 1999, respectively.
As of August 14, 2000, $8.4 million in tenant incentive fees remain unpaid.
Equity In Earnings of Unconsolidated Entities and amortization of deferred
gains. Equity in earnings of unconsolidated entities and amortization of
deferred gains was $2.9 million and $9.0 million for the three and six months
ended June 30, 2000, respectively, and $7.5 million and $15.2 million for the
three and six months ended June 30, 1999, respectively. The decrease in 2000 in
relation to 1999 is due to reduced equity in earnings of PMSI and JJFMSI. For
the three and six months ended June 30, 2000, the Company recognized equity in
earnings of PMSI of $0.1 million and $2.2 million, respectively, as compared to
$2.0 million and $4.0 million for the three and six months ended June 30, 1999.
For the three and six months ended June 30, 2000, the Company recognized equity
in earnings of JJFMSI of $0.1 million and $1.5 million, respectively, as
compared to $2.8 million and $5.9 million for the three and six months ended
June 30, 1999. The reduced equity in earnings of PMSI and JJFMSI relates to
reduced net income of these entities as a result of increased operating costs
incurred by PMSI and JJFMSI.
For the three and six months ended June 30, 2000, the Company received
distributions from PMSI of $3.8 million and $4.4 million, respectively, as
compared to $3.6 million and $3.6 million for the three and six months ended
June 30, 1999. For the three and six months ended June 30, 2000 the Company
received distributions from JJFMSI of $2.2 million and $2.3 million,
respectively, as compared to $3.9 million and $3.9 million for the three and six
months ended June 30, 1999.
Interest Expense. Interest expense was $34.6 million and $66.4 million for the
three and six months ended June 30, 2000, respectively. For the three and six
months ended June 30, 1999, interest expense was $7.0 million and $15.3 million,
respectively. Interest expense is based on outstanding
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convertible notes payable balances and borrowings under the Company's bank
credit facility and the Company's senior notes, including amortization of loan
costs and unused fees. Interest expense is reported net of capitalized interest
on construction in progress of $4.1 million and $9.2 million for the three and
six months ended June 30, 2000, respectively. Capitalized interest for the three
and six months ended June 30, 1999, was $9.3 million and $16.4 million,
respectively. The increase in interest expense relates to (i) higher average
debt balances outstanding, primarily related to the bank credit facility and the
senior notes, (ii) increased interest rates due to rising market rates and due
to the amendment and restatement of the Company's bank credit facility in August
1999, (iii) increased interest rates due to the accrual of default interest on
Company's bank credit facility and default and contingent interest on the $40
million convertible notes in 2000, and (iv) less capitalized interest as a
result of fewer ongoing construction projects.
Merger Transaction Fees. In April 2000, the Company terminated its agreements
with Fortress/Blackstone in favor of a restructuring led by Pacific Life.
Subsequently, in June 2000, the Company terminated its agreements with Pacific
Life. The securities purchase agreement entered into by the Company in
connection with the Fortress/Blackstone-led restructuring states that, based on
certain conditions, the Company may be obligated to pay to Fortress/Blackstone a
$15.7 million commitment fee and a $7.5 million transaction termination fee. In
connection with both the Fortress/Blackstone and Pacific Life restructuring, the
Company may also be obligated to reimburse these parties for certain expenses
incurred. With the termination of its agreements with Fortress/Blackstone and
Pacific Life during the three months ended June 30, 2000, the Company has
accrued and expensed a total of $28.1 million in merger transaction fees related
to the agreements with Fortress/Blackstone and Pacific Life.
Foreign Currency Transaction Loss. In connection with the construction and
development of the Company's HMP Forrest Bank facility, located in Salford,
England, during the first quarter of 2000, the Company entered into a 25-year
property lease. The Company is accounting for the lease as direct financing
lease and recognized a receivable equal to the discounted cash flows to be
received by the Company over the lease term (54.3 million British pounds at June
30, 2000). The Company also has extended a working capital loan to the operator
of this facility (3.2 million British pounds at June 30, 2000). These assets
along with various other short-term receivables are denominated in British
pounds; consequently, the Company must adjust these receivables to the current
exchange rate and recognize the currency gain or loss in its current period
earnings. As a result, the Company recognized foreign currency transaction
losses of $7.5 million for the three months ended June 30, 2000. The foreign
currency transaction loss during the three months ended June 30, 2000 is due to
a significant detrimental fluctuation in the currency exchange rate between the
British pound and the U.S. dollar during the three months ended June 30, 2000.
The Company has not hedged its exposure to these foreign currency exchange rate
fluctuations.
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<PAGE> 46
Loss on Disposal of Assets. The loss on disposition of property during the three
and six months ended June 30, 2000 relates to the write-off of certain
previously capitalized costs related to a project in Georgia, which the Company
has decided not to pursue and which costs are not considered recoverable. For
the three and six months ended June 30, 1999, the loss relates to a settlement
with the State of South Carolina for a property previously owned by Old CCA.
Provision for Change in Tax Status. The Company, as the successor to Old CCA (a
taxable corporation) as a result of the 1999 Merger, intends to elect to change
its tax status from a taxable corporation to a REIT effective with the filing of
its 1999 federal income tax return. As of December 31, 1998, the Company's
balance sheet reflected $83.2 million in gross deferred tax assets. In
accordance with the provisions of Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" ("SFAS 109"), the Company provided a
provision for these deferred tax assets, excluding any estimated tax liabilities
required for prior tax periods, upon completion of the 1999 Merger and the
election to be taxed as a REIT. As such, the Company's results of operations
reflect a provision for change in tax status of $83.2 million for the six months
ended June 30, 1999.
CCA FINANCIAL INFORMATION
The following unaudited operating information presents CCA's results of
operations for the six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 2000 June 30, 1999
---------------- ----------------
(Unaudited and Amounts in Thousands)
<S> <C> <C>
REVENUES $ 280,342 $ 235,348
--------- ---------
EXPENSES:
Operating 220,404 168,502
Trade name use agreement 5,242 4,318
Lease 160,153 163,093
General and administrative 13,055 11,740
Depreciation and amortization 4,339 4,135
--------- ---------
403,193 351,788
--------- ---------
OPERATING LOSS (122,851) (116,440)
INTEREST EXPENSE, NET 16,561 10,870
--------- ---------
LOSS BEFORE INCOME TAXES (139,412) (127,310)
BENEFIT FOR INCOME TAXES -- 50,282
--------- ---------
NET LOSS $(139,412) $ (77,028)
========= =========
</TABLE>
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<PAGE> 47
The following unaudited balance sheet information presents CCA's financial
position as of June 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------- ---------
(Unaudited and Amounts in
Thousands)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,227 $ 10,725
Accounts receivable, net of allowances 73,298 66,414
Prepaid expenses 2,931 3,733
Other current assets 4,584 7,775
--------- ---------
Total current assets 84,040 88,647
PROPERTY AND EQUIPMENT, NET 18,720 19,959
OTHER ASSETS:
Investment in contracts 64,957 67,363
Other 8,998 8,732
--------- ---------
Total assets $ 176,715 $ 184,701
========= =========
CURRENT LIABILITIES:
Accounts payable $ 25,543 $ 28,938
Lease and trade name use payables to Prison Realty 161,309 27,080
Accrued salaries and wages 6,768 5,842
Accrued property taxes 9,714 9,393
Accrued interest to Prison Realty 29,268 16,440
Other accrued expenses 18,717 17,514
Short-term debt 5,153 16,214
Promissory note to Prison Realty 137,000 137,000
--------- ---------
Total current liabilities 393,472 258,421
DEFERRED LEASE INCENTIVES AND SERVICE FEES
RECEIVED FROM PRISON REALTY 103,056 107,070
--------- ---------
Total liabilities 496,528 365,491
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock-Class A; $0.01(one cent) par value; 9,349 issued and
outstanding; 100,000 shares authorized 93 93
Common stock-Class B; $0.01(one cent) par value; 981 issued and
outstanding; 100,000 shares authorized 10 10
Additional paid-in capital 25,133 25,133
Deferred compensation (2,719) (3,108)
Retained deficit (342,330) (202,918)
--------- ---------
Total stockholders' equity (319,813) (180,790)
--------- ---------
Total liabilities and stockholders' equity $ 176,715 $ 184,701
========= =========
</TABLE>
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<PAGE> 48
The following is the unaudited cash flow information for CCA for the six months
ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
(Unaudited and Amounts in
Thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(139,412) $ (77,028)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 4,339 4,135
Lease incentives and service fees received from Prison Realty 1,421 113,612
Amortization of lease incentives and service fees received from
Prison Realty (4,014) (1,763)
Deferred income taxes -- (50,282)
Other noncash items 3,608 396
Write-off of debt issuance costs -- 2,706
Loss on disposal of assets 184 --
Changes in assets and liabilities, net:
Accounts receivable (6,884) (1,130)
Prepaid expenses 802 (763)
Other current assets 1,770 (3,591)
Other assets 182 2,591
Accounts payable (3,395) (1,193)
Lease and trade name use payables to Prison Realty 134,229 2,179
Accrued salaries and wages 926 3,488
Accrued property taxes 321 440
Accrued interest to Prison Realty 12,828 8,220
Other accrued expenses 1,203 1,074
--------- ---------
Net cash provided by operating activities 8,108 3,091
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions, net (881) (1,256)
Proceeds from sale of assets 23 --
Payments received on note receivable 63 --
--------- ---------
Net cash used in investing activities (795) (1,256)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on short-term debt, net (11,061) --
Payment of debt issuance costs (3,750) (6,125)
--------- ---------
Net cash used in financing activities (14,811) (6,125)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (7,498) (4,290)
CASH AND CASH EQUIVALENTS, beginning of period 10,725 19,057
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 3,227 $ 14,767
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 537 $ 130
========= =========
Income taxes $ -- $ --
========= =========
</TABLE>
46
<PAGE> 49
Transactions with CCA. Pursuant to the terms of the CCA Note, CCA was required
to make a scheduled interest payment on December 31, 1999; however, pursuant to
the terms of the subordination agreement, CCA is prohibited from making the
scheduled interest payments on the CCA Note when CCA is not in compliance with
certain financial covenants under its bank credit facility. As of December 31,
1999, CCA was not in compliance with these financial covenants and,
consequently, was prohibited from making the scheduled interest payment to the
Company. Pursuant to the waiver and amendment to CCA's bank credit facility, CCA
continues to be prohibited from making interest payments to the Company.
Pursuant to the terms of the subordination agreement between the Company and the
agent of CCA's bank credit facility, the Company is prohibited from accelerating
payment of the principal amount of the CCA Note or taking any other action to
enforce its rights under the provisions of the CCA Note for so long as CCA's
bank credit facility remains outstanding. During the three and six months ended
June 30, 2000, the Company recorded $4.1 million and $8.2 million interest
accrued under the terms of the CCA Note. During December 1999, the Company fully
reserved the $16.4 million of interest accrued under the terms of the CCA Note
during 1999. The Company has also reserved the $4.1 million and $8.2 million of
interest accrued during the three and six months ended June 30, 2000,
respectively.
During the month ended December 31, 1999 and the six months ended June 30, 2000,
CCA has failed to make timely contractual payments under the terms of the CCA
Leases. As of December 31, 1999, approximately $24.9 million of rents due from
CCA to the Company were unpaid. The terms of the CCA Leases provide that rental
payments were due and payable on December 25, 1999. As of August 14, 2000, CCA
has paid the $24.9 million of lease payments related to 1999 and $26.0 million
of lease payments related to 2000. For the three and six months ended June 30,
2000, the Company recognized rental revenue from CCA of $81.6 million and $161.8
million, respectively, and recorded a reserve of $72.6 million and $143.8
million, respectively, resulting in recognition of net rental revenue from CCA
of $9.0 million and $18.0 million, respectively. The reserve was recorded due to
the uncertainty regarding the collectibility of the revenue. In addition, the
Company expects that the CCA Leases will be materially impacted by renegotiation
of the CCA Leases with CCA.
For the year ended December 1999, the Company had paid tenant incentive fees of
$68.6 million under the terms of an amended and restated tenant incentive
agreement (the "Amended and Restated Tenant Incentive Agreement"), with $2.9
million of those fees amortized against rental revenues. During the fourth
quarter of 1999, the Company undertook a plan that contemplates either merging
with CCA and thereby eliminating the CCA Leases or amending the CCA Leases to
reduce the lease payments to be paid by CCA to the Company during 2000.
Consequently, the Company determined that the remaining deferred tenant
incentive fees under the existing lease arrangements at December 31, 1999 were
not realizable and wrote off fees totaling $65.7 million as of December 31,
1999. During the six months ended June 30, 2000, the Company opened two
facilities that are operated by CCA. The Company wrote-off the tenant incentive
fee due CCA, totaling $8.4 million, but has made no payments to CCA in 2000 with
respect to this agreement. During 2000, CCA and the Company amended the Amended
and Restated Tenant Incentive Agreement to defer, with interest, payments
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<PAGE> 50
to CCA by the Company pursuant to this agreement. At August 14, 2000, $8.4
million of payments under the Amended and Restated Tenant Incentive Agreement
were accrued but unpaid under the original terms of this agreement. It is
anticipated that, in connection with the Restructuring, this agreement will be
canceled.
Costs incurred by the Company under the terms of an amended and restated
services agreement (the "Amended and Restated Services Agreement") are
capitalized as part of the facilities' development cost. Costs incurred under
the Amended and Restated Services Agreement and capitalized as part of the
facilities' development cost totaled $2.5 million and $5.5 million for the three
and six months ended June 30, 2000. CCA and the Company amended this agreement
to defer, with interest, payments to CCA by the Company pursuant to this
agreement. At August 14, 2000, $5.5 million of payments under the amended and
restated services agreement were accrued but unpaid under the original terms of
this agreement. It is anticipated that, in connection with the Restructuring,
this agreement will be canceled.
Costs incurred by the Company under a business development agreement (the
"Business Development Agreement") are capitalized as part of the facilities'
development cost. For the three and six months ended June 30, 2000, no costs
were incurred under the Business Development Agreement.
Impairment loss. SFAS 121, "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed Of," requires impairment losses to be
recognized for long-lived assets used in operations when indications of
impairment are present and the estimate of undiscounted future cash flows is not
sufficient to recover asset carrying amounts. In December 1999, the poor
financial position, results of operations and cash flows of CCA indicated to
management that certain of its correctional and detention facilities might be
impaired. In accordance with SFAS 121, the Company estimated the undiscounted
net cash flows for each of its properties and compared the sum of those
undiscounted net cash flows to the Company's investment in that property.
Through its analysis, the Company determined that three of its correctional and
detention facilities in the state of Kentucky had been impaired. For these three
properties, the Company reduced the carrying values of the underlying assets to
their estimated fair values, as determined based on anticipated future cash
flows discounted at rates commensurate with the risks involved. The resulting
impairment loss totaled $76.4 million and was recognized in the year ended
December 31, 1999.
PMSI AND JJFMSI FINANCIAL INFORMATION
The Company owns 100% of the non-voting common stock of each of PMSI and JJFMSI,
which manage certain government-owned prison and jail facilities under the
"Corrections Corporation of America" name. The Company's ownership of the
non-voting common stock of PMSI and JJFMSI entitles the Company to receive, when
and if declared by the boards of directors of the respective companies, 95% of
the net income, as defined, of each company as cash dividends. Dividends payable
to the Company not declared and paid on a quarterly basis will accrue and are
cumulative. As of August 14, 2000, the Company has received quarterly dividends
in arrears from each of PMSI
48
<PAGE> 51
and JJFMSI through the first quarter of 2000. The Company cannot, however, be
assured that the board of directors of each of PMSI and JJFMSI will continue to
declare and pay dividends to the Company. The Company's ownership of 100% of the
non-voting common stock of each of PMSI and JJFMSI does not enable the Company
to vote in the election of directors of the companies.
The following unaudited operating information presents a combined summary of the
results of operations for PMSI and JJFMSI for the three and six months ended
June 30, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $72,886 $70,596 $146,853 $139,678
Net income before taxes 2,038 5,059 9,609 10,335
</TABLE>
The following unaudited balance sheet information presents a combined summary of
the financial position for PMSI and JJFMSI as of June 30, 2000 and December 31,
1999:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---- ----
(UNAUDITED AND AMOUNTS
IN THOUSANDS)
<S> <C> <C>
Current assets $ 61,599 $ 60,741
Total assets 144,811 151,167
Current liabilities 31,561 31,750
Total liabilities 31,979 32,622
Stockholders' equity 112,832 118,545
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Substantially all of the Company's revenues are derived from: (i) rents received
under triple net leases of correctional and detention facilities, including the
CCA Leases; (ii) dividends from investments in the non-voting stock of certain
subsidiaries; (iii) interest income on the CCA Note; and (iv) license fees
earned under the terms of the Trade Name Use Agreement. As of June 30, 2000, CCA
leased 36 of the Company's 45 operating correctional and detention facilities
pursuant to the CCA Leases. CCA also leased one corporate office building from
the Company, and TransCor America, LLC, a wholly owned subsidiary of CCA leased
one office building from the Company. The Company, therefore, is dependent for
its rental revenues upon CCA's ability to make the lease payments required under
the CCA Leases for such facilities.
The Company and CCA have amended the original terms of the CCA Leases to defer,
with interest, rental payments originally due to the Company during the period
from January 2000 to June 2000 until September 30, 2000, with the exception of
certain scheduled payments. Pursuant to the terms of this amendment, CCA shall
pay interest on such deferred rental payments, at an annual rate equal
49
<PAGE> 52
to the current non-default rate of interest applicable to CCA's credit facility
(subject to adjustment if and to the extent that such rate of interest under
such existing bank credit is adjusted) from the date each such payment would
have been payable under the original terms of the CCA Leases until the date such
payment is actually paid. CCA's obligation to make payments under the CCA Leases
is not secured by any of the assets of CCA, although the obligations under the
CCA Leases are cross- defaulted so that the Company could terminate all of the
CCA Leases if CCA fails to make required lease payments. Under such
circumstances, the Company would be required to find a suitable lessee for the
Company's facilities in order to generate revenue and to maintain its ability to
qualify as a REIT. Due to the unique nature of correctional and detention
facilities, the Company may be unable to locate suitable lessees or to attract
such lessees. It is anticipated, however, that upon the completion of the
Restructuring, the CCA Leases, as amended, will be terminated.
The Company incurred a net loss for the three and six months ended June 30, 2000
of $72.1 million and $99.9 million, respectively. Prior to the effectiveness of
the Waiver and Amendment, the Company was in default under its Amended Bank
Credit Facility (outstanding balance of $965.2 million at June 30, 2000). In
addition, prior to obtaining waivers of events of default under, and amendments
to, the provisions of the agreements governing such indebtedness on June 30,
2000, the Company was in default under the provisions of the agreements
governing the Company's $40.0 million convertible, subordinated notes, and its
$30.0 million convertible, subordinated notes. The defaults related to the
Company's failure to comply with certain financial covenants, the issuance of a
going concern opinion qualification with respect to the Company's 1999
consolidated financial statements, and certain transactions effected by the
Company, including the execution of the Pacific Life securities purchase
agreement.
The Company's noncompliance with the provisions of its outstanding obligations
could have resulted, and the termination or expiration of the existing waivers
and amendments relating to such obligations could result, in the Company's
creditors demanding immediate repayment of these obligations. In addition, the
Company has significant outstanding stockholder and other litigation matters.
CCA incurred a net loss of $202.9 million for the year ended December 31, 1999
and a net loss of $76.8 million and $139.4 million for the three and six months
ended June 30, 2000, and currently has a net working capital deficiency and a
net capital deficiency, and prior to its execution of a waiver of existing
events of default under, and amendments to, its bank credit facility, was in
default under the provisions of its credit facility. CCA's default under its
revolving credit facility related to a failure to comply with certain financial
covenants. In addition, CCA is currently in default under the CCA Note as a
result of CCA's failure to pay the first scheduled interest payment under the
terms of the CCA Note. CCA has also not made certain scheduled lease payments to
the Company pursuant to the original terms of the CCA Leases. The Company and
CCA have amended the original terms of the CCA Leases to defer, with interest,
rental payments originally due to the Company during the period from January
2000 to June 2000 until September 30, 2000, with the exception of certain
scheduled payments.
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<PAGE> 53
In response to the significant losses experienced by the Company and by CCA and
in response to the then-existing defaults under the Company's debt agreements,
the Company had entered into an agreement with Pacific Life with respect to a
comprehensive restructuring of the Company. Effective June 30, 2000, the
Company, CCA, PMSI and JJFMSI entered into a mutual termination of the Pacific
Life securities purchase agreement, and the Company and CCA subsequently entered
into an agreement and plan of merger contemplating the merger of CCA with and
into a wholly owned subsidiary of the Company. The recently obtained waivers and
amendments relating to each of the Company's and CCA's indebtedness contemplated
these transactions, and, as a result, the termination of the Pacific Life
securities purchase agreement and the execution of the agreement and plan of
merger did not result in an event of default under the provisions of the
Company's and CCA's indebtedness.
CASH FLOW FROM OPERATING, INVESTING AND FINANCING ACTIVITIES.
The Company's cash flow used in operating activities was $43.1 million and cash
flow provided by operating activities was $104.6 million for the six months
ended June 30, 2000 and 1999, respectively, and represents net income plus
depreciation and amortization and other non-cash charges and changes in the
various components of working capital. The Company's cash flow used in investing
activities was $46.4 million and $385.8 million for the six months ended June
30, 2000 and 1999, respectively, and represents acquisitions of real estate
properties and increase in restricted cash. The Company's cash flow provided by
financing activities was $23.3 million and $252.2 million for the six months
ended June 30, 2000 and 1999, respectively, and represents payments of debt,
payments of dividends on shares of the Company's preferred and common stock, and
proceeds from issuance of debt and common stock.
DEBT STRUCTURE
The Company's Bank Credit Facility. On January 1, 1999, in connection with the
completion of the 1999 Merger, the Company obtained a $650.0 million secured
bank credit facility from NationsBank, N.A., as administrative agent, and
several U.S. and non-U.S. banks. The bank credit facility included up to a
maximum of $250.0 million in tranche B term loans and $400.0 million in
revolving loans, including a $150.0 million subfacility for letters of credit.
The term loan required quarterly principal payments of $0.6 million throughout
the term of the loan, with the remaining balance maturing on January 1, 2003.
The revolving loans matured on January 1, 2002. Interest rates, unused
commitment fees and letter of credit fees on the bank credit facility were
subject to change based on the Company's senior debt rating. The bank credit
facility was secured by mortgages on the Company's real property.
On August 4, 1999, the Company completed an amendment and restatement of the
bank credit facility (the "Amended Bank Credit Facility") increasing amounts
available to the Company under the original bank credit facility to $1.0 billion
through the addition of a $350.0 million tranche C term loan. The tranche C term
loan is payable in equal quarterly installments in the amount of $0.9 million
through the calendar quarter ending September 30, 2002, with the balance to be
paid in full
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<PAGE> 54
on December 31, 2002. The maturity of the term loan under the original bank
credit facility was changed to December 31, 2002, with the maturity of the
revolving loan under the bank credit facility remaining January 1, 2002. Lehman
Commercial Paper Inc. replaced NationsBank, N.A. as administrative agent of the
Amended Bank Credit Facility.
The Amended Bank Credit Facility, similar to the original bank credit facility,
provided for interest rates, unused commitment fees and letter of credit fees to
change based on the Company's senior debt rating. Similar to the terms of the
original bank credit facility, the Amended Bank Credit Facility (prior to the
execution of the Waiver and Amendment), bears interest at variable rates of
interest based on a spread over the base rate or LIBOR (as elected by the
Company), which spread is determined by reference to the Company's credit
rating. The spread ranges from 0.50% to 2.25% for base rate loans and from 2.00%
to 3.75% for LIBOR rate loans. These ranges replaced the original spread ranges
of 0.25% to 1.25% for base rate loans and 1.375% to 2.75% for LIBOR rate loans.
The term loan portions of the Amended Bank Credit Facility bear interest at a
variable rate equal to 3.75% to 4.00% in excess of LIBOR or 2.25% to 2.50% in
excess of a base rate. This rate replaced the variable rate equal to 3.25% in
excess of LIBOR or 1.75% in excess of a base rate in the original bank credit
facility.
The rating on the Company's bank loan debt was lowered from Ba3 to Ba1 during
the first quarter of 2000. The rating on the Company's senior unsecured debt was
lowered from B1 to B2, and the rating on the series A preferred stock was
lowered from Ba3 to B3. As a result, the interest rate applicable to outstanding
amounts under the Amended Bank Credit Facility was increased by 0.50%. The
rating on the Company's debt was also lowered during the second quarter of 2000,
although no interest rate increase was attributable to the rating adjustment.
Upon the lenders' determination that the Company is in default under the terms
of the Amended Bank Credit Facility, the Company is required to pay a default
rate of interest equal to the rate of interest as determined based on the terms
described above, plus 2.00%. As discussed below, prior to the execution of the
Waiver and Amendment, as hereinafter defined, to the Amended Bank Credit
Facility, the Company was in default under the Amended Bank Credit Facility and,
consequently, was subject to the default rate of interest, effective from
January 25, 2000 until June 9, 2000. As a result of the execution of the Waiver
and Amendment, however, the Company is no longer obligated to continue to pay
the applicable default rate of interest with respect to outstanding amounts
under the Amended Bank Credit Facility.
As a result of the Waiver and Amendment, the interest rate applicable to
outstanding borrowings under the Amended Bank Credit Facility was increased by
0.50%.
The Company incurred costs of $59.2 million during 1999 in consummating the
original bank credit facility and the Amended Bank Credit Facility transactions,
including $41.2 million related to the amendment and restatement. The Company
wrote off $9.0 million of expenses related to the original bank credit facility
upon completion of the amendment and restatement in 1999. The Company also
52
<PAGE> 55
incurred and capitalized costs of approximately $8.6 million in consummating the
June 9, 2000 Waiver and Amendment. The effect of these arrangements is
recognized in interest expense.
In accordance with the terms of the Amended Bank Credit Facility, the Company
entered into certain swap arrangements guaranteeing that it will not pay an
index rate greater than 6.51% on outstanding balances of at least (a) $325.0
million through December 31, 2001 and (b) $200.0 million through December 31,
2002.
The Amended Bank Credit Facility, similar to the terms of the original bank
credit facility, is secured by mortgages on the Company's real property.
Borrowings are limited based on a borrowing base formula that considers, among
other things, eligible real estate. Prior to execution of the Waiver and
Amendment, the Amended Bank Credit Facility contained certain financial
covenants, primarily: (a) maintenance of leverage, interest coverage, debt
service coverage and total indebtedness ratios and (b) restrictions on the
incurrence of additional indebtedness.
The Amended Bank Credit Facility also restricted the Company's ability to make
the 1999 cash payment of a special dividend and restricts the cash payment of a
special dividend in 2000.
Waivers of Events of Default Under, and Amendments to, Provisions of the Amended
Bank Credit Facility. As a result of: (i) the financial condition of the Company
and CCA; (ii) the transactions undertaken by the Company and CCA in an attempt
to resolve current liquidity issues of the Company and CCA; and (iii) previously
announced restructuring transactions contemplated by agreements entered into
with Pacific Life, certain existing or potential events of default arose under
the provisions of the Amended Bank Credit Facility.
Following the approval of the requisite senior lenders under its Amended Bank
Credit Facility, the Company, certain of its wholly owned subsidiaries, various
lenders and Lehman Commercial Paper Inc., as administrative agent ("Lehman"),
executed the Waiver and Amendment, dated as of June 9, 2000, to the provisions
of the Amended Bank Credit Facility. Upon effectiveness, the Waiver and
Amendment waived or addressed all existing events of default under the
provisions of the Amended Bank Credit Facility. The Waiver and Amendment also
contained certain amendments to the credit facility, including the replacement
of existing financial ratios contained in the credit facility applicable to the
Company with new financial ratios following completion of the Restructuring. As
a result of the Waiver and Amendment, the Company is required to begin monthly
payments of amounts due for interest beginning July, 2000. The first such
payment equaled $11.2 million and was made on July 31, 2000.
In obtaining the Waiver and Amendment, the Company agreed to complete certain
transactions which were incorporated as covenants in the Waiver and Amendment.
The Waiver and Amendment provides that the Company must complete the following
transactions, among others: (i) merge with CCA on or before a specified date,
upon terms and conditions specified in the Waiver and Amendment; (ii) pending
requisite stockholder approval, elect not be taxed as a REIT for federal income
tax purposes commencing with its taxable year ending December 31, 2000; (iii)
restructure
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<PAGE> 56
existing management; and (iv) pay a dividend, in the form of preferred stock, in
satisfaction of the Company's remaining REIT distribution requirements for the
fiscal year ending December 31, 1999.
The Waiver and Amendment also provides that the Company may, but is not required
to, complete certain transactions and amends the terms of the Amended Bank
Credit Facility to permit the following transactions, among others: (i) the
amendment of the CCA Leases and the other contractual arrangements between the
Company and CCA; and (ii) the merger of each of PMSI and JJFMSI with the
Company, upon terms and conditions specified in the Waiver and Amendment.
The Waiver and Amendment also provides that, prior to the completion of the
Company's merger with CCA in connection with the Restructuring, the Company is
required to maintain certain monthly minimum liquidity thresholds. The Waiver
and Amendment provides that, following completion of the merger of the Company
with CCA in connection with the Restructuring, the previously existing financial
covenants contained in the Amended Bank Credit Facility will be replaced by the
following financial covenants, each as defined in the Waiver and Amendment,
designed to reflect the Company's status as a subchapter C corporation rather
than as a REIT: (i) total leverage ratio; (ii) interest coverage ratio; (iii)
fixed charge coverage ratio; (iv) ratio of total indebtedness to total
capitalization; (v) minimum EBIDTA; and (vi) minimum occupancy percentage. The
Waiver and Amendment also provides that, in addition to quarterly consolidated
financial statements, the Company is required to provide monthly consolidated
financial statements to Lehman. The Waiver and Amendment further provides that,
prior to completion of the merger with CCA, the Company is required to provide
weekly statements of cash receipts and disbursements to Lehman. The Waiver and
Amendment also requires that the Company submit a business plan to Lehman
setting forth the Company's financial projections, planned capital expenditures
and business strategy.
The Waiver and Amendment provides that, generally, the Company will be required
to use the net cash proceeds received by the Company from certain transactions,
including the following, to repay outstanding indebtedness under the bank credit
facility: (i) any disposition of real estate assets; (ii) the securitization of
lease payments with respect to the Company's Salford, England facility; and
(iii) the sale-leaseback of the Company's headquarters. Under the terms of the
Waiver and Amendment, the Company will also be required to apply a designated
portion of its "excess cash flow," as such term is defined in the Waiver and
Amendment, to the prepayment of outstanding indebtedness under the bank credit
facility. In addition, the Company is, and after its merger with CCA, CCA will
be, required by the Waiver and Amendment to transfer certain depository and
other non-disbursement accounts to an account at a bank that is a senior lender
under the bank credit facility and to grant perfected liens in such accounts in
favor of Lehman for the benefit of the senior lenders under the bank credit
facility.
The Waiver and Amendment provides that the Company's failure to complete the
transactions required by the Waiver and Amendment will result in an event of
default under the Amended Bank Credit Facility. The Waiver and Amendment also
provides that, in addition to the existing events of default under the terms of
the Amended Bank Credit Facility prior to the Waiver and Amendment,
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it shall be an event of default under the terms of the Amended Bank Credit
Facility if: (i) the Company settles its currently outstanding stockholder
litigation for cash amounts not otherwise fully covered by the Company's
existing directors' and officers' liability insurance policies; (ii) the Company
declares and pays dividends with respect to the Company's currently outstanding
8% Series A Cumulative Preferred Stock prior to the receipt of net cash proceeds
of at least $100.0 million from the issuance of additional shares of common or
preferred stock; or (iii) CCA shall amend or refinance its bank credit facility
on terms and conditions less favorable than the existing terms of CCA's bank
credit facility.
The Company has limited resources currently available to it to meet its
operating, capital expenditure and debt service requirements. As a result, the
Company currently is, and will continue to be, dependant on its ability to
borrow funds under the terms of the Amended Bank Credit Facility to meet these
requirements. As a result of the Waiver and Amendment, the Company borrowed
$25.0 million at the time of the execution of the Waiver and Amendment and an
additional $19.7 million subsequently. The Company is entitled to borrow up to
an additional $10.3 million under the Amended Bank Credit Facility at various
times during 2000. However, the continued effectiveness of the Waiver and
Amendment is subject to the satisfaction of certain conditions described above.
If the Company is unable to comply with and maintain the Waiver and Amendment,
the Company would be unable to borrow additional amounts under the Amended Bank
Credit Facility until a waiver of such events of default is obtained.
Accordingly, there can be no assurance that the Company will be able to meet its
operating, capital expenditure and debt service requirements in the future.
Moreover, if an event of default arises under the terms of the Amended Bank
Credit Facility, including as a result of the termination or expiration of the
Waiver and Amendment or as the result of the acceleration of the Company's other
indebtedness, the senior lenders under the Amended Bank Credit Facility are
entitled, at their discretion, to exercise certain remedies, including
acceleration of the outstanding borrowings under the Amended Bank Credit
Facility.
In addition, the Company's 12% senior notes, the Company's $40.0 million
convertible, subordinated notes and the Company's $30.0 million convertible,
subordinated notes contain provisions which allow the holders of these notes to
accelerate this debt and seek remedies if the Company has a payment default
under the Amended Bank Credit Facility or if the obligations under the Amended
Bank Credit Facility have been accelerated. If the Company were to be in default
under the Amended Bank Credit Facility, as amended, and if the senior lenders
under the Amended Bank Credit Facility elected to exercise their rights to
accelerate the Company's obligations under the Amended Bank Credit Facility,
such events could result in the acceleration of all or a portion of the
outstanding principal amount of the senior notes or its convertible,
subordinated notes, which would have a material adverse effect on the Company's
liquidity and financial position. The Company does not have sufficient working
capital to satisfy its debt obligations in the event of an acceleration of all
of the Company's outstanding indebtedness.
As of August 14, 2000, the Company has made all required principal and interest
payments under the Amended Bank Credit Facility.
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12% Senior Notes. On June 11, 1999, the Company completed its offering of $100.0
million aggregate principal amount of 12% senior notes due 2006. Interest on the
12% senior notes is paid semi-annually in arrears, and the 12% senior notes have
a seven-year non-callable term due June 1, 2006. Net proceeds from the offering
were approximately $95.0 million after deducting expenses payable by the Company
in connection with the offering. The Company used the net proceeds from the sale
of the 12% senior notes for general corporate purposes and to repay revolving
bank borrowings under its bank credit facility.
The Company believes that it currently is not in default under the terms of the
indenture governing its $100.0 million 12% senior notes. The terms of the
indenture governing the 12% senior notes restrict amendments to the CCA Lease,
the amended and restated tenant incentive agreement, the business development
agreement and the amended and restated services agreement without the delivery
of an opinion as to the fairness, from a financial point of view, to the Company
of such amendments, issued by an accounting, appraisal, consulting or investment
banking firm of national standing, to the trustee under the indenture of the 12%
senior notes. In connection with the amendments to these agreements, the Company
has delivered to the trustee under the indenture a fairness opinion meeting the
requirements of the indenture.
The indenture governing the 12% senior notes, however, contains a provision
which allows the holders thereof to accelerate the outstanding principal amount
of the 12% senior notes and to seek additional remedies if the Company has a
payment default under the Amended Bank Credit Facility or if the Company's
obligations under the Amended Bank Credit Facility have been accelerated.
However, the amounts outstanding under the 12% senior notes are effectively
subordinated to the Company's obligations under the Amended Bank Credit Facility
to the extent of the value of the assets securing the bank credit facility. In
the event of acceleration of outstanding principal amounts under both the 12%
senior notes and the Amended Bank Credit Facility, the lenders under the Amended
Bank Credit Facility will be entitled to proceed against the collateral that
secures the Company's obligations under the Amended Bank Credit Facility, and
such collateral will not be available to satisfy any amounts owed under the 12%
senior notes.
$40.0 Million Convertible, Subordinated Notes. On January 29, 1999, the Company
issued $20.0 million of convertible, subordinated notes due in December 2008,
with interest payable semi-annually at 9.5%, to MDP Ventures IV and affiliated
purchasers. This issuance constituted the second tranche of a commitment by the
Company to issue an aggregate of $40.0 million of convertible, subordinated
notes, with the first $20.0 million tranche issued in December 1998 under
substantially similar terms. The $40.0 million convertible, subordinated notes
require that the Company revise the conversion price as a result of the payment
of a dividend or the issuance of stock or convertible securities below market
price. As of June 30, 2000, the conversion price for the $40.0 million
convertible, subordinated notes was $23.63 per share as compared to $28.00 per
share at issuance. This conversion price of the notes, however, is subject to
adjustment in connection with the waiver and amendment to the provisions of the
note purchase agreement governing these notes described below.
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Certain existing or potential events of default arose under the provisions of
the note purchase agreement relating to the $40.0 million convertible,
subordinated notes as a result of the Company's financial condition and a
"change of control" arising from the Company's execution of certain securities
purchase agreements with respect to previously announced restructuring
transactions. This "change of control" gave rise to the right of the holders of
such notes to require the Company to repurchase the notes at a price of 105% of
the aggregate principal amount of such notes within 45 days after the provision
of written notice by such holders to the Company. In addition, the Company's
defaults under the provisions of the note purchase agreement gave rise to the
right of the holders of such notes to require the Company to pay an applicable
default rate of interest of 20%. In addition to the default rate of interest, as
a result of the default, the Company was obligated, under the original terms of
the $40.0 million convertible, subordinated notes, to pay the holders of the
notes contingent interest sufficient to permit the holders to receive a 15% rate
of return, excluding the effect of the default rate of interest, on the $40.0
million principal amount, unless the holders of the notes elect to convert the
notes into the Company's common stock under the terms of the note agreement.
Such contingent interest is retroactive to the date of issuance of the notes.
On June 30, 2000, the Company and the holders of the notes executed a waiver and
amendment to the provisions of the note purchase agreement governing the notes.
This waiver and amendment provides for a waiver of all existing events of
default under the provisions of the note purchase agreement. In addition, the
waiver and amendment to the note purchase agreement amended the economic terms
of the notes to increase the applicable interest rate of the notes by 0.5% per
annum and adjusted the conversion price of the notes to a price equal to 125% of
the average trading price of the Company's common stock for a period of 30 days
immediately preceding the earlier of (i) October 31, 2000 or (ii) the closing
date of the merger of the Company and CCA in connection with the Restructuring.
In addition, the waiver and amendment to the note purchase agreement provides
for the replacement of financial ratios applicable to the Company.
There can be no assurance that the Company will be able to maintain the
effectiveness of this waiver and amendment to the note purchase agreement. If
the Company is unable to do so, and if the holders of these notes do not consent
to an additional proposed waiver of events of default under, and amendments to,
the note purchase agreement, the Company may be required to repurchase or redeem
the outstanding principal amount of the notes. If the aggregate principal amount
of such convertible, subordinated notes were accelerated, however, the repayment
of such amounts would be subordinate to the rights of the senior lenders under
the Amended Bank Credit Facility. Any requirement to repurchase or redeem the
outstanding principal amount of this indebtedness prior to its stated maturity
would also trigger an event of default under the provisions of the Company's
other indebtedness, including the provisions of the Amended Bank Credit
Facility.
In connection with the waiver and amendment to the note purchase agreement, the
Company issued additional convertible, subordinated notes in the aggregate
principal amount of $1.1 million, which amount represents all interest owed at
the default rate of interest through June 30, 2000. After giving consideration
to the issuance of these additional notes, as of August 14, 2000, the Company
has made all required interest payments under the $40.0 million convertible,
subordinated notes.
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$30.0 Million Convertible, Subordinated Notes. The Company's $30.0 million
convertible, subordinated notes issued to PMI Mezzanine Fund, L.P. require that
the Company revise the conversion price as a result of the payment of a dividend
or the issuance of stock or convertible securities below market price. As of
June 30, 2000, the conversion price for the $30.0 million convertible,
subordinated notes was $23.63 per share as compared to $27.42 per share at
issuance. This conversion price of the notes, however, is subject to adjustment
in connection with the waiver and amendment to the provisions of the note
purchase agreement governing these notes.
Certain existing or potential events of default arose under the provisions of
the note purchase agreement relating to the $30.0 million convertible,
subordinated notes as a result of the Company's financial condition and as a
result of the proposed Restructuring.
On June 30, 2000, the Company and the holder of the notes executed a waiver and
amendment to the provisions of the note purchase agreement governing the notes.
This waiver and amendment provides for a waiver of all existing events of
default under the provisions of the note purchase agreement. In addition, the
waiver and amendment to the note purchase agreement amended the economic terms
of the notes to increase the applicable interest rate of the notes by 0.5% per
annum and adjusted the conversion price of the notes to a price equal to 125% of
the average trading price of the Company's common stock for a period of 30 days
immediately preceding the earlier of (i) October 31, 2000 or (ii) the closing
date of the merger of the Company and CCA in connection with the Restructuring.
In addition, the waiver and amendment to the note purchase agreement provides
for the replacement of financial ratios applicable to the Company.
There can be no assurance that the Company will be able to maintain the
effectiveness of this waiver and amendment to the note purchase agreement. If
the Company is unable to do so, and if the holders of these notes do not consent
to an additional proposed waiver of events of default under, and amendments to,
the note purchase agreement, the Company may be required to repurchase or redeem
the outstanding principal amount of the notes. If the aggregate principal amount
of such convertible, subordinated notes were accelerated, however, the repayment
of such amounts would be subordinate to the rights of the senior lenders under
the Amended Bank Credit Facility. Any requirement to repurchase or redeem the
outstanding principal amount of this indebtedness prior to its stated maturity
would also trigger an event of default under the provisions of the Company's
other indebtedness, including the provisions of the Amended Bank Credit
Facility.
As of August 14, 2000, the Company has made all required interest payments under
the $30.0 million convertible, subordinated notes.
CCA's Revolving Credit Facility. On April 27, 2000, CCA obtained the consent of
the requisite percentage of the senior lenders under its bank credit facility
for a waiver of its bank credit facility's restrictions relating to:
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- the Company's and CCA's amendments of the original terms of
the CCA Leases, the Amended and Restated Tenant Incentive
Agreement, the Business Development Agreement and the Amended
and Restated Services Agreement;
- CCA's violation of a net worth covenant contained in its bank
credit facility; and
- CCA's execution of an agreement and plan of merger with
respect to a merger of each of CCA, PMSI and JJFMSI with and
into wholly owned subsidiaries of the Company, in connection
with the proposed restructuring led by Fortress/Blackstone.
As consideration for the initial waiver, the CCA senior lenders required and
were paid a fee equal to $1.0 million in cash. The terms of the initial waiver
provided that the waiver would remain in effect until the earlier of : (i) July
31, 2000; (ii) the date the securities purchase agreement with Pacific Life, as
described in note 13 herein, was terminated; (iii) the date CCA makes any
payments to the Company other than as set forth in the amendment to CCA's
agreement with the Company; or (iv) the date the lenders under the Company's
Amended Bank Credit Facility exercise any rights with respect to any default or
event of default under the Company's Amended Bank Credit Facility.
Because the termination of the securities purchase agreement with Pacific Life
resulted in a termination of the initial waiver and because CCA's proposed
execution of the merger agreement with Prison Realty as part of the
Restructuring was not addressed in the initial waiver, CCA requested that its
senior lenders amend the waiver to provide for its continuation, notwithstanding
the termination of the securities purchase agreement with Pacific Life, and to
permit CCA's execution of the amended merger agreement in connection with the
Restructuring. CCA's senior lenders refused to agree to such amendments unless
CCA paid an additional waiver fee of $1.0 million to CCA's senior lending group.
Because of the ramifications of the existence of a default under the CCA bank
credit facility, and the fact that such a default would cause an event of
default under the Company's Amended Bank Credit Facility as amended by the
Waiver and Amendment, on June 30, 2000, CCA committed to pay its lenders the
$1.0 million fee and obtained the consent of the requisite percentage of the
senior lenders under its bank credit facility to extend the term of the initial
waiver to the earlier of September 15, 2000 and the completion of Prison
Realty's merger with CCA in connection with the Restructuring and to permit the:
(i) termination of the merger agreement relating to the proposed combination of
the Company with CCA under the Pacific Life led restructuring; (ii) the
execution by CCA of the merger agreement related to the Restructuring; and (iii)
the termination of the securities purchase agreement with Pacific Life.
DISTRIBUTIONS TO STOCKHOLDERS
The Company, as a REIT, cannot complete any taxable year with accumulated
earnings and profits from a taxable corporation. Accordingly, the Company was
required to distribute Old CCA's earnings and profits to which it succeeded in
the 1999 Merger (the "Accumulated Earnings and Profits"). During the year ended
December 31, 1999, the Company made $217.7 million of distributions related to
its common stock and series A preferred stock. The Company met the
above-
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described distribution requirements by designating $152.5 million of the total
distributions in 1999 as distributions of the Accumulated Earnings and Profits.
In addition to distributing the Accumulated Earnings and Profits, the Company,
in order to qualify for taxation as a REIT with respect to its 1999 taxable
year, is required to distribute 95% of its taxable income for 1999. Although
dividends sufficient to distribute 95% of the Company's taxable income for 1999
have not been declared as of June 30, 2000 or August 14, 2000, the Company
currently intends to pay sufficient dividends in securities to satisfy its
remaining distribution requirements for qualification as a REIT for 1999 and
currently estimates that approximately $150.0 million in securities will be
distributed in 2000 to meet this requirement. In January 2000, $2.2 million of
distributions relating to the 8.0% Series A Cumulative Preferred Stock, which
are eligible to reduce the distribution requirement for the taxable year ending
December 31, 1999, have been paid. The remaining $147.8 million of distributions
that must be paid to stockholders in 2000 in order for the Company to maintain
its status as a REIT for the taxable year ending December 31, 1999 have not been
declared by the board of directors and, accordingly, have not been accrued in
the accompanying condensed consolidated balance sheets as of June 30, 2000 and
December 31, 1999. Currently, the Company's governing instruments require that
it operate as a REIT. However, if the Company completes the restructuring
following stockholder approval to modify its governing instruments, the Company
intends to be taxed as a subchapter C corporation commencing with its taxable
year ending December 31, 2000.
COMMITMENTS AND CONTINGENCIES
Litigation. The Company is subject to a variety of legal proceedings, some of
which if resolved against the Company, could have a material adverse effect upon
the business and financial position of the Company. A complete description of
the litigation currently commenced against the Company, including certain
stockholder litigation, is set forth elsewhere herein.
Income Tax Contingencies. As required by its governing instruments, the Company
currently intends to elect to be taxed as a REIT for the year ended December 31,
1999. In order to qualify as a REIT, the Company is required to distribute 95%
of its taxable income for 1999. Although dividends sufficient to distribute 95%
of the Company's taxable income for 1999 have not been declared as of August 14,
2000, the Company intends to pay sufficient dividends in securities to satisfy
all distribution requirements for qualification as a REIT for 1999 and estimates
that $150.0 million will be distributed in 2000 to meet this requirement. As of
December 31, 1999, $2.2 million of distributions relating to the 8.0% Series A
Cumulative Preferred Stock were declared and accrued on the Company's
consolidated balance sheet, and such distributions were paid subsequent to
December 31, 1999. The remaining $147.8 million of distributions that must be
paid to stockholders in 2000 in order for the Company to qualify as a REIT have
not been declared by the board of directors and, accordingly, have not been
accrued in the Company's condensed consolidated balance sheets. The Company's
failure to distribute 95% of its taxable income for 1999 or the failure of the
Company to comply with other requirements for REIT qualification under the Code
would have a
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material adverse impact on the Company's consolidated financial position,
results of operations and cash flows.
If the Company elects REIT status for its taxable year ended December 31, 1999,
such election will be subject to review by the IRS for a period of three years
from the date of filing of its 1999 tax return. Should the IRS review the
Company's election to be taxed as a REIT for the 1999 taxable year and reach a
conclusion requiring the Company to be treated as a taxable corporation for the
1999 taxable year, the Company would be subject to income taxes and interest on
its 1999 taxable income and possibly subject to fines and/or penalties. Income
taxes for the year ended December 31, 1999 could exceed $83.5 million, which
would have an adverse impact on the Company's consolidated financial position,
results of operations and cash flows.
In connection with the 1999 Merger, the Company assumed the tax obligations of
Old CCA resulting from disputes with federal and state taxing authorities
related to tax returns filed by Old CCA in 1998 and prior taxable years. The IRS
is currently conducting an audit of Old CCA's federal tax return for the taxable
year ending December 31, 1997. The Company currently is unable to predict the
ultimate outcome of the IRS's audit of Old CCA's 1997 federal tax return or the
ultimate outcome of audits of other tax returns of the Company or Old CCA by the
IRS or by other taxing authorities; however, it is possible that such audits
will result in claims against the Company in excess of the reserve currently
recorded by the Company. In addition, to the extent that IRS audit adjustments
increase the Accumulated Earnings and Profits of Old CCA, the Company would be
required to make timely distribution of the Accumulated Earnings and Profits of
Old CCA to stockholders. Such results would have a material adverse impact on
the Company's financial position, results of operations and cash flows.
Guarantees. In connection with the bond issuance of a governmental entity for
which PMSI currently provides management services at a 2,016 bed correctional
facility, the Company is obligated under a debt services deficits agreement to
pay the trustee of the bond's trust indenture (the "Trustee") amounts necessary
to pay any debt service deficits consisting of principal and interest plus
future interest payments requirements (outstanding balance of $69.1 million at
June 30, 2000 plus future interest payments). In the event the State of
Tennessee currently utilizing the facility exercises its option to purchase the
correctional facility, the Company is also obligated to pay the difference
between principal and interest owed on the bonds on the date set for the
redemption of the bonds and amounts paid by the State of Tennessee for the
facility and all other funds on deposit with the Trustee and available for
redemption of the bonds. The Company also maintains a restricted cash account of
approximately $7.0 million as collateral against a guarantee it has provided for
a forward purchase agreement related to the above bond issuance.
The IRS is conducting an audit of $72.7 million in tax exempt bonds issued by
the Hardeman County Correctional Facilities Corporation ("HCCFC") in 1997, the
proceeds of which were used to construct a correctional facility in Hardeman
County, Tennessee, owned by HCCFC. At the time the bonds were issued, Old CCA
entered into a management agreement with respect to the correctional facility.
By separate agreement, Old CCA agreed to pay any debt service deficits on the
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bonds. Subsequent to the issuance of the bonds, HCCFC paid Old CCA a
discretionary bonus of approximately $4.1 million. The tax-exempt nature of the
bonds is under review by the IRS. Because of the contractual relationship
between Old CCA and the correctional facility, in the event the IRS determines
that the bonds are taxable, there exists the risk that the Company as the
successor to Old CCA may be required to remit all or a portion of the bonus
received, or, in the alternative, repurchase the principal amount of the bonds,
plus accrued interest. The Company intends to contest this matter vigorously.
Employment and Severance Agreements. Subsequent to June 30, 2000, the Company's
board of directors terminated the Company's chief executive officer. Under
certain employment and severance agreements, the former chief executive officer
will continue to receive his salary and health, life and disability insurance
benefits for a period of three years and will vest immediately in 140,000 shares
of the Company's common stock previously granted as part of a deferred stock
award. The compensation expense related to these benefits, totaling $0.7 million
in cash and $1.2 million in non-cash charges representing the unamortized
portion of the deferred stock award, will be recognized in the quarter ending
September 30, 2000. The unamortized portion is based on the common stock trading
price as of the date of grant which was during the fourth quarter of 1995.
YEAR 2000 COMPLIANCE
In 1999, the Company completed an assessment of its key information technology
systems, including its client server and minicomputer hardware and operating
systems and critical financial and non-financial applications, in order to
ensure that these date sensitive critical information systems would properly
recognize the Year 2000 as a result of the century change on January 1, 2000.
Based on this assessment, the Company determined that these key information
systems were Year 2000 compliant. The Company also evaluated its non-critical
information technology systems for Year 2000 compliance and determined that such
non-critical systems were compliant. The Company's systems did not subsequently
experience any significant disruptions as a result of the century change on
January 1, 2000. In 1999, the Company also completed communications with third
parties with whom it has important financial or operational relationships,
including CCA, the lessee of the substantial majority of the Company's
facilities, to determine the extent to which they were vulnerable to the Year
2000 issue. Based on responses from these third parties, including CCA, the
Company determined that there were no third party related Year 2000
noncompliance issues that would have a material adverse impact on the Company's
operations. These third parties, including CCA, did not subsequently experience
any significant disruptions as a result of the century change on January 1, 2000
that had a material adverse impact on the Company's operations.
The Company's information systems were Year 2000 compliant when acquired in the
1999 Merger, and as such, the Company incurred no significant expenses through
June 30, 2000, and the Company does not expect to incur any significant costs in
connection with the Year 2000 subsequent to June 30, 2000.
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CCA incurred 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). Through
June 30, 2000, CCA spent approximately $6.4 million which included $3.4 million
related to the replacement of leased equipment, $2.4 million for travel and
services and $0.6 million for software. These costs were expensed as incurred.
CCA does not expect to incur any significant costs in connection with the Year
2000 subsequent to June 30, 2000.
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 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
and six months ended June 30, 2000 and 1999:
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<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
---- ---- ---- ----
(UNAUDITED AND AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
FUNDS FROM OPERATIONS:
Net loss available to common shareholders $(74,262) $ 58,273 $(104,212) $ 33,518
Plus: real estate depreciation 13,407 10,502 26,331 20,419
Add back: provision for change in tax status -- -- -- 83,200
-------- -------- --------- --------
$(60,855) $ 68,775 $ (77,881) $137,137
======== ======== ========= ========
</TABLE>
INFLATION
The Company does not believe that inflation has had or will have a direct
adverse effect on its operations. The 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 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 CCA Leases contain provisions which
provide the Company with the opportunity to achieve increases in rental income
in the future. It is anticipated that, in connection with the Restructuring,
this agreement will be canceled.
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PRISON REALTY TRUST, INC. AND SUBSIDIARIES
ITEM 3. -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's primary market risk exposures are to changes in U.S. interest
rates and foreign currency exchange rates. The Company is exposed to interest
rate risk related to its Amended Bank Credit Facility and certain other
indebtedness as discussed herein in "Management's Discussion and Analysis of
Financial Condition and Results of Operation -- Liquidity and Capital
Resources." The interest on the Amended Bank Credit Facility and such other
indebtedness is subject to fluctuations in the market. If the interest rate for
the Company's outstanding indebtedness under the Amended Bank Credit Facility
was 100 basis points higher or lower, for the three and six months ended June
30, 2000, the Company's interest expense, net of amounts capitalized, would have
been increased or decreased by approximately $2.9 million and $5.8 million,
respectively.
At June 30, 2000, the Company had outstanding $100.0 million of its 12% senior
notes with a fixed interest rate of 12.0%, $40.0 million of convertible notes
with a fixed interest rate of 9.5% (which, subsequent to June 30, 2000, was
increased by 0.5%), $30.0 million of convertible notes with a fixed interest
rate of 7.5% (which, subsequent to June 30, 2000, was increased by 0.5%), and
$107.5 million of preferred stock with a fixed dividend rate of 8%. Similarly,
as of June 30, 2000, 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% decrease
in market interest rates would not have a material impact on the Company. The
Company's bank credit facility required the Company to hedge $325.0 million of
its floating rate debt on or before August 16, 1999. The Company has entered
into certain swap arrangements guaranteeing that it will not pay an index rate
greater than 6.51% on outstanding balances of at least (a) $325.0 million
through December 31, 2001 and (b) $200.0 million through December 31, 2002.
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% 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.
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The Company's exposure to foreign currency exchange rate risk relates to its
construction, development and leasing of the HMP Forrest Bank facility, located
in Salford, England. The Company entered into a 25-year lease and recognized a
receivable equal to the discounted cash flows to be received by the Company over
the lease term. The Company also has extended a working capital loan to the
operator of this facility. Under the terms of the agreements relating to such
payments, such payments to the Company are denominated in British pounds, rather
than in U.S. dollars. As a result, the Company bears the risk of fluctuations in
the relative exchange rate between the British pound and the U.S. dollar. At
June 30, 2000, the receivables due the Company and denominated in British pounds
totaled 58.7 million British pounds. A hypothetical 10% increase in the relative
exchange rate would have resulted in an additional $8.9 million increase in
value of these receivables and gain on foreign currency transaction, and a
hypothetical 10% decrease in the relative exchange rate would have resulted in
an additional $8.9 million decrease in value of these receivables and loss on
foreign currency transaction.
The Company has not hedged its exposure to these foreign currency exchange rate
fluctuations.
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PRISON REALTY TRUST, INC. AND SUBSIDIARIES
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
STOCKHOLDER LITIGATION
On December 29, 1999, a purported class action lawsuit was filed on behalf of
the stockholders of the Company in the Chancery Court for Davidson County,
Tennessee. The lawsuit, captioned Bernstein v. Prison Realty Trust, et al.,
names as defendants the Company and its directors, as well certain affiliates of
Fortress Investment Group, LLC, Blackstone Realty Advisors and Bank of America
Corporation ("Fortress/Blackstone"). The lawsuit alleges that the directors of
the Company breached their fiduciary duties to the Company's stockholders by
effectively selling control of the Company for inadequate consideration and
without having adequately considered or explored all other alternatives to the
proposed restructuring involving an equity investment by Fortress/Blackstone or
having taken steps to maximize stockholder value. The plaintiffs seek an
injunction preventing the completion of the Fortress/Blackstone restructuring,
declaratory relief and costs and fees. On each of January 4, 2000 and January
12, 2000, nearly identical purported class action lawsuits were filed in the
same court on behalf of different purported class representatives. The lawsuits,
captioned Hardee v. Prison Realty Trust, et al. and Holle v. Prison Realty
Trust, et al., name as defendants the Company and its directors, as well as each
of Fortress, Blackstone and Bank of America. These three actions were
consolidated on February 18, 2000.
On December 30, 1999, a purported class action lawsuit was filed in federal
court in the United States District Court for the Middle District of Tennessee,
on behalf of the stockholders of the Company. The lawsuit, captioned Neiger v.
Doctor Crants, et al., names as defendants the Company, Doctor R. Crants and D.
Robert Crants, III. The lawsuit alleges violations of federal securities laws
based on the allegation that the defendants knew or should have known that the
Company would not make any further dividend payments on its common stock,
including a special dividend, prior to the date on which it was disclosed to the
public that the Company had entered into an agreement with respect to the
Fortress/Blackstone restructuring and would not elect to be taxed as a REIT
beginning with its 1999 taxable year, and therefore, certain statements made by
the defendants prior to that time were false and misleading. The plaintiffs seek
an unspecified amount of monetary damages, equitable and/or injunctive relief
and costs and fees. On February 4, 2000, a nearly identical purported class
action lawsuit was filed in the same court on behalf of different purported
class representatives. The lawsuit, captioned Anderson v. Doctor Crants, et al.,
names as defendants the Company, Doctor R. Crants and D. Robert Crants, III. On
February 24, 2000, a nearly identical purported class action lawsuit was filed
in the same court on behalf of a different purported class representative. The
lawsuit, captioned Brody v. Prison Realty Trust, Inc. et al., names as
defendants the Company, Doctor R. Crants, and D. Robert Crants, III. These three
actions were consolidated on March 13, 2000. The plaintiffs filed a consolidated
complaint on May 30, 2000. Additionally, on March 3, 2000, a similar lawsuit was
filed on behalf of two plaintiffs in the
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Chancery Court for the State of Tennessee, Twentieth Judicial District. The
lawsuit, captioned Buchanan v. Prison Realty Trust, Inc., et al., names as
defendants the Company, Doctor R. Crants, D. Robert Crants, III and Darrell K.
Massengale and alleges violations of state common and securities laws based on
claims substantially identical to those enumerated above.
The Company is also currently subject to two separate purported class actions
filed in federal court in the United States District Court for the Middle
District of Tennessee, alleging securities fraud in connection with the
agreements entered into by the Company and CCA in May 1999 to increase payments
made by the Company to CCA under the terms of certain agreements. The
plaintiffs' class in In re Old CCA Securities Litigation consists of former
shareholders of Old CCA who acquired shares of the Company as the result of the
merger of Old CCA with and into the Company. The plaintiffs' class in In re
Prison Realty Securities Litigation consists of former shareholders of Old
Prison Realty who acquired shares of the Company as the result of the merger of
Old Prison Realty with and into the Company and all persons who acquired shares
of the Company in the open market prior to May 17, 1999. Each of these actions
alleges violations of federal securities laws based, among other things, on the
allegations that the Company and the individual defendants in the actions knew
or should have known of the increased payments to CCA prior to the date that
they were disclosed to the public, and therefore certain public filings and
representations made by the Company and certain of the defendants were false and
misleading. These two actions represent the consolidation of 16 complaints filed
in May and June 1999. On March 24, 2000, a purported class action nearly
identical to In re Prison Realty Securities Litigation was filed in the United
States District Court for the Middle District of Tennessee. It is anticipated
that the lawsuit, captioned Mikovits v. Prison Realty Trust, et. al., will be
coordinated and/or consolidated with In re Prison Realty Securities Litigation.
In addition, a purported stockholders' derivative complaint has been filed in
the Chancery Court for Davidson County, Tennessee in Nashville, captioned
Wanstrath v. Crants, et al., against the Company, CCA and persons who were
directors at the time the Company entered into the agreements regarding the
increased payments to CCA. The derivative action alleges, among other things,
that the directors of the Company violated their fiduciary duties in approving
the increased payments to CCA. The plaintiffs in this action have also moved for
a preliminary injunction to prevent the payment of certain fees in connection
with the Fortress/Blackstone restructuring and the payments to certain parties
in connection with the Pacific Life restructuring.
The Company also is subject to a complaint filed in August 1998 in the Chancery
Court for Davidson County, Tennessee, inherited from Old CCA as a result of Old
CCA's merger with and into the Company. The lawsuit, captioned Dasburg, S.A. v.
Corrections Corporation of America, et al., claims that Old CCA and the
individual named defendants violated state law by making false and misleading
statements in order to keep Old CCA's stock price at an artificially high level
during the period from April 1997 through April 1998, so that the individual
named defendants could sell shares of Old CCA stock at inflated prices.
The Company is defending vigorously its actions in each of the stockholder
lawsuits described herein. It is possible additional lawsuits will be filed, or
that the existing complaints filed in
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connection with the Fortress/Blackstone restructuring and/or the Pacific Life
restructuring will be amended in connection with the proposed restructuring
transactions. It is also possible that the Company's liability in regard to the
stockholder lawsuits will exceed the Company's insurance coverage limits and
will have a material adverse impact on the Company's consolidated financial
position, results of operations and cash flows. It is also possible that any
settlement of the stockholder lawsuits will include the issuance by the Company
of a significant amount of equity securities which issuance would cause dilution
to the Company's existing stockholders. In addition, as previously described,
the terms of the Waiver and Amendment provide that it shall be an event of
default under the Amended Bank Credit Facility if the Company settles its
currently outstanding stockholder litigation for cash amounts not otherwise
fully covered by the Company's existing directors' and officers' liability
insurance policies.
OTHER LITIGATION
The Company. The Company was the subject of a purported class action complaint
filed in the Circuit Court for Davidson County, Tennessee, on January 28, 2000.
The lawsuit, captioned White v. Prison Realty Trust, Inc., et al. alleged that
the defendants engaged in unfair and deceptive practice of permitting telephone
service providers exclusive service rights in return for illegal payments and
kickbacks, which exclusive agreements allow and require the providers to charge
unconscionable fees for phone services. This complaint was subsequently
dismissed by the Circuit Court on February 23, 2000. A similar complaint,
captioned Hunt v. Prison Realty Trust, Inc., was filed on February 23, 2000 in
the Circuit Court for Davidson County, Tennessee, naming as defendants the
Company, CCA, JJFMSI and PMSI. Plaintiffs are asking for unspecified treble
damages pursuant to the Tennessee Consumer Protection Act plus restitution of
the amounts collected by the defendants under such arrangements, as well as a
permanent injunction restraining the defendants from engaging in such conduct,
in addition to unspecified damages. While the outcome of this lawsuit is not
determinable, the Company does not believe that such litigation, if resolved
against the Company, would have a material adverse effect upon it business or
financial position.
At December 31, 1998, Old CCA was a party to two inmate lawsuits at the
Northeast Ohio Correctional Center for wrongful deaths. These lawsuits were
assumed by the Company in the 1999 Merger. While the outcome of these lawsuits
is not determinable, the Company does not believe that such litigation, if
resolved against the Company, would have a material adverse effect upon its
business or financial position.
On June 9, 2000, a complaint was filed in federal court in the United States
District Court for the Southern District of New York by Fortress/Blackstone to
recover in excess of $24.0 million in fees, consisting of a transaction
termination fee of $7.5 million, a $15.7 million commitment fee, and certain
expenses allegedly owed them under the terms of the Fortress/Blackstone
securities purchase agreement as the result of the companies' termination of the
agreement. The payment of these fees is also subject to certain claims in the
stockholder litigation described above.
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On October 15, 1998, a complaint captioned Fredrick & May Construction Co. v.
U.S. Corrections Corporation was filed in the Circuit Court for Lee County,
Kentucky alleging a breach of contract regarding the construction of
improvements to two correctional facilities acquired when Old Prison Realty
purchased and merged with U.S. Corrections Corporation ("USCC"). Frederick & May
Construction Co. ("Fredrick & May") alleged that it had valid contracts for the
completion of the improvements and that the contracts were wrongfully
terminated. The issue of damages in this matter was tried to a jury in June
2000, subsequent to the court granting summary judgment in favor of Frederick &
May on the issue of the existence of a contract. The jury returned a verdict
against USCC in an amount of approximately $1.0 million. The plaintiff's motion
to assess and determine the amount of prejudgment interest, if any, is presently
pending before the Court. The Company has vigorously defended this action to
date and is in the process of appealing the judgment.
On September 14, 1998, a complaint captioned Thomas Horn, Ferman Heaton, Ricky
Estes, and Charles Combs, individually and on behalf of the U.S. Corrections
Corporations Employee Stock Ownership Plan and its participants v. Robert B.
McQueen, Milton Thompson, the U.S. Corrections Corporation Employee Stock
Ownership Plan, U.S. Corrections Corporation, and Corrections Corporation of
America was filed in the U.S. District Court for the Western District of
Kentucky alleging numerous violations of the Employees Retirement Income
Security Act ("ERISA"), including but not limited to failure to manage the
assets of the ESOP in the sole interest of the participants, purchasing assets
without undertaking adequate investigation of the investment, overpayment for
employer securities, failure to resolve conflicts of interest, lending money
between the ESOP and employer, allowing the ESOP to borrow money other than for
the acquisition of employer securities, failure to make adequate, independent,
and reasoned investigation into the prudence and advisability of certain
transaction, and otherwise. The plaintiffs are seeking damages in excess of
$30.0 million plus prejudgment interest and attorneys' fees. It is expected that
all or a portion of any liability resulting from this claim will be covered by
insurance. While the outcome of this lawsuit is not determinable, in the event
any resulting liability is not covered by insurance proceeds, such liability
would have a material adverse effect upon the business or financial position of
the Company.
CCA. In February 2000, a complaint was filed in federal court in the United
States District Court for the Western District of Texas against CCA's inmate
transportation subsidiary TransCor America, LLC ("TransCor"). The lawsuit,
captioned Cheryl Schoenfeld v. TransCor America, Inc., et. al., names as
defendants TransCor and its directors. The lawsuit alleges that two drivers
sexually assaulted and raped the plaintiff during her transportation to a
facility in Texas. While the case is in the very early stages of discovery, the
plaintiff recently submitted a $21.0 million settlement demand. CCA and TransCor
intend to defend the action vigorously. It is expected that a portion of any
liabilities resulting from this litigation will be covered by liability
insurance.
CCA and/or its officers and directors are also subject to certain of the
stockholder and other litigation previously described which, if resolved against
CCA, could result in a material adverse effect upon its business or financial
position.
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With the exception of the foregoing matters, neither the Company nor CCA is
presently subject to any material litigation nor, to the Company's of CCA's
knowledge, is any litigation threatened against the Company or CCA, other than
routine litigation arising in the ordinary course of business, some of which is
expected to be covered by liability insurance, and all of which collectively is
not expected to have a material adverse effect on the consolidated financial
statements of the Company and/or CCA.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
At June 30, 2000, the Company was not, and the Company is not currently, in
default under the terms of its indebtedness as the result of the obtainment of
the waivers and amendment to such indebtedness described in Items 1. and 2. of
Part I herein.
In connection with the Company's attainment of the Waiver and Amendment, the
Company is prohibited from declaring or paying any dividends with respect to the
Company's currently outstanding 8.0% Series A Cumulative Preferred Stock until
such time as the Company has raised at least $100.0 million in equity.
Accordingly, the Company did not make such payment with respect to the second
quarter of 2000 when such payment was due on or about July 15, 2000. Dividends
with respect to the 8.0% Series A Cumulative Preferred Stock will continue to
accrue under the terms of the Company's charter until such time as payment of
such dividends is permitted under the terms of the Waiver and Amendment.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On Monday, July 31, 2000, the Company filed definitive proxy materials with the
Commission with respect to the restructuring. The Company is seeking the
approval of its stockholders with respect to the completion of the Restructuring
at a special meeting of its stockholders scheduled for Tuesday, September 15,
2000. The Company commenced mailing of the proxy materials to its stockholders
on July 31, 2000.
ITEM 5. OTHER INFORMATION.
APPOINTMENT OF CHIEF EXECUTIVE OFFICER
On Friday, August 4, 2000, the board of directors of the Company named John D.
Ferguson as the chief executive officer and president of the Company. The
Company's board of directors also elected Mr. Ferguson to the board of directors
of the Company and to serve as its vice-chairman. On August 4, 2000, the board
of directors of CCA also named Mr. Ferguson as the chief executive officer and
president of CCA and elected him to its board of directors. Mr. Ferguson
replaced
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Thomas W. Beasley as the interim chief executive officer of the Company and CCA.
Mr. Beasley was named as interim chief executive officer of the companies after
the termination of Doctor R. Crants on July 28, 2000. Mr. Ferguson also replaced
J. Michael Quinlan as the president of the companies. Mr. Quinlan will continue
to serve as the chief operating officer of the companies, as well as the
executive vice president of each of the companies. The Company now intends to
commence the search for a new chief financial officer of the Company.
In connection with Mr. Ferguson's appointment as the chief executive officer and
president of the Company, the Company entered into an employment agreement with
Mr. Ferguson, dated August 4, 2000 (the "Employment Agreement"). The Employment
Agreement is included herewith as Exhibit 10.1, and is incorporated herein in
its entirety. Under the terms of the Employment Agreement, the Company has
issued Mr. Ferguson the option to purchase an aggregate of 2,000,000 shares of
the Company's common stock. Options to purchase 500,000 shares of common stock
at an exercise price of $2.38 per share vested on the date of the Employment
Agreement, options to purchase 500,000 shares of common stock at an exercise
price of $2.38 per share will vest on the first anniversary of the date of the
Employment Agreement; options to purchase 500,000 shares of common stock at an
exercise price of $5.00 per share will vest on the second anniversary of the
date of the Employment Agreement; and options to purchase 500,000 shares of
common stock at an exercise price of $7.50 per share will vest on the third
anniversary of the date of the Employment Agreement. Under the terms of the
Employment Agreement and related option agreement, certain of these options may
be forfeited by Mr. Ferguson upon the termination of his employment with the
Company. The form of option agreement entered into with Mr. Ferguson is attached
as an exhibit to the Employment Agreement and is incorporated herein in its
entirety.
APPOINTMENT OF CHAIRMAN OF THE BOARD OF DIRECTORS
On Tuesday, August 8, 2000, William F. Andrews was elected to serve as a member
of the board of directors of the Company and to serve as its chairman. Mr.
Andrews replaced Thomas W. Beasley as the chairman of the board of directors of
the Company. Mr. Beasley will continue to serve as a director of the Company.
As the result of the election of Mr. Andrews to the board of directors of the
Company, as well as the election of Mr. Ferguson previously discussed, the board
of directors of the Company currently consists of the following eight members:
William F. Andrews, chairman, Thomas W. Beasley, C. Ray Bell, Jean-Pierre Cuny,
Ted Feldman, John D. Ferguson, Joseph V. Russell, and Charles W. Thomas. Under
Maryland law, each of Messrs. Andrews and Ferguson will be required to stand for
election at the next annual meeting of the stockholders of the Company currently
scheduled for November or December, 2000.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
2.1 Agreement and Plan of Merger, dated as of June 30, 2000, by
and among Prison Realty Trust, Inc. (the "Company"), CCA
Acquisition Sub, Inc. and Corrections Corporation of America
("CCA"). (previously filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K filed with the Commission on July
3, 2000 and incorporated herein by this reference) (certain
schedules and exhibits to this document were omitted from this
filing, and the Company has agreed to furnish supplementally a
copy of any omitted schedule or exhibit to the Commission upon
request).
10.1 Employment Agreement, dated August 4, 2000, by and between the
Company and John D. Ferguson, with form of option agreement
included as an exhibit thereto.
10.2 Securities Purchase Agreement as executed by the Company, CCA,
Prison Management Services, Inc. ("PMSI") and Juvenile and
Jail Facility Management Services, Inc. ("JJFMSI") on April
16, 2000 with the following exhibits attached: (i) as Exhibit
A thereto, Agreement and Plan of Merger, dated as of December
26, 1999, by and among Prison Realty, CCA Acquisition Sub,
Inc., PMSI Acquisition Sub, Inc. and JJFMSI Acquisition Sub,
Inc., and CCA, PMSI and JJFMSI; (ii) as Exhibit B thereto, the
Form of Articles of Amendment and Restatement of Prison
Realty; (iii) as Exhibit C thereto, the Amended and Restated
Bylaws of Prison Realty ; (iv) as Exhibit D thereto, the Form
of Articles Supplementary for Series C Cumulative Convertible
Preferred Stock (filed herewith); (v) as Exhibit E thereto,
the Form of Articles Supplementary for Series B Cumulative
Convertible Preferred Stock; (vi) as Exhibit F thereto, the
Form of Warrant; and (vii) as Exhibit G thereto, the Form of
Registration Rights Agreement (the Securities Purchase
Agreement, together with items (i), (iii), (iv), (v), (vi),
(vii), have been previously filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K filed with the Commission
on April 18, 2000 and incorporated herein by this reference,
with the Agreement and Plan of Merger having been previously
filed as Exhibit 2.1 to the Company's Current Report on Form
8-K filed with the Commission on December 28, 1999 and
incorporated herein by this reference).
10.3 Waiver and Amendment, dated as of June 9, 2000, by and among
the Company, as Borrower, certain of the Company's
subsidiaries as Subsidiary Guarantors, the Lenders, and Lehman
Commercial Paper Inc., as Administrative Agent (the "Waiver
and Amendment") (previously filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K filed with the Commission
on June 13, 2000 and incorporated herein by this reference).
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10.4 Second Master Amendment to Lease Agreements, dated June 9,
2000, by and between the Company and CCA (previously filed as
Exhibit 10.2 to the Company's Current Report on Form 8-K filed
with the Commission on June 13, 2000 and incorporated herein
by this reference).
10.5 Amendment Number One to Amended and Restated Tenant Incentive
Agreement, dated June 9, 2000, by and between the Company and
CCA (previously filed as Exhibit 10.3 to the Company's Current
Report on Form 8-K filed with the Commission on June 12, 2000
and incorporated herein by this reference).
10.6 Amendment Number One to Business Development Agreement, dated
June 9, 2000, by and between the Company and CCA (previously
filed as Exhibit 10.4 to the Company's Current Report on Form
8-K filed with the Commission on June 13, 2000 and
incorporated herein by this reference).
10.7 Amendment Number One to Amended and Restated Services
Agreement, dated June 9, 2000, by and between the Company and
CCA (previously filed as Exhibit 10.5 to the Company's Current
Report on Form 8-K filed with the Commission on June 13, 2000
and incorporated herein by this reference).
10.8 Mutual Termination and Release Agreement dated June 30, 2000,
by and among the Company, CCA, PMSI, and JJFMSI, on the one
hand, and Pacific Life Insurance Company ("Pacific Life"), on
the other hand (previously filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K filed with the Commission
on July 3, 2000 and incorporated herein by this reference).
10.9 Mutual Written Consent to Terminate Agreement and Plan of
Merger, dated as of June 30, 2000, by and among the Company,
CCA Acquisition Sub, Inc., PMSI Acquisition Sub, Inc., JJFMSI
Acquisition Sub, Inc., CCA, PMSI, and JJFMSI (previously filed
as Exhibit 10.2 to the Company's Current Report on Form 8-K
filed with the Commission on July 3, 2000 and incorporated
herein by this reference).
10.10 Stock Purchase Agreement, dated as of June 30, 2000, by and
between the Company and Baron Asset Fund, and all series
thereof, on behalf of itself and one or more mutual funds
managed by it, or its affiliates (previously filed as Exhibit
10.3 to the Company's Current Report on Form 8-K filed with
the Commission on July 3, 2000 and incorporated herein by this
reference).
10.11 Form of Waiver and Amendment, dated as of June 30, 2000, by
and between the Company and MDP Ventures IV LLC, with form of
replacement note and PIK note attached thereto as Exhibit B
and D, respectively, (previously filed as Exhibit 10.4 to the
Company's Current Report on Form 8-K filed with the Commission
on July
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3, 2000 and incorporated herein by this reference) (certain
additional exhibits to this document were omitted from this
filing, and the Company has agreed to furnish supplementally a
copy of any omitted schedule or exhibit to the Commission upon
request).
10.12 Waiver and Amendment, dated as of June 30, 2000, by and
between the Company and PMI Mezzanine Fund, L.P., with form of
replacement note attached thereto as Exhibit B. (previously
filed as Exhibit 10.5 to the Company's Current Report on Form
8-K filed with the Commission on July 3, 2000 and incorporated
herein by this reference) (certain additional exhibits to this
document were omitted from this filing, and the Company has
agreed to furnish supplementally a copy of any omitted
schedule or exhibit to the Commission upon request).
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 April 10, 2000 (File no. 0-25245), relating to the Company's receipt
of a definitive agreement executed by Pacific Life with respect to a
transaction intended to serve as an alternative to the previously
announced restructuring transaction led by Fortress/Blackstone and the
Company's submission of such agreement to Fortress/Blackstone pursuant
to their right to match the terms of such agreement.
The Company's Current Report on Form 8-K, as filed with the Commission
on April 18, 2000 (File no. 0-25245), relating to the Company's
execution of the securities purchase agreement with Pacific Life and
the Company's termination of the Fortress/Blackstone securities
purchase agreement.
The Company's Current Report on Form 8-K, as filed with the Commission
on June 13, 2000 (File no. 0-25245), relating to the Company's receipt
of the Waiver and Amendment.
The Company's Current Report on Form 8-K, as filed with the Commission
on July 3, 2000 (File no. 0-25245), relating to the termination of the
Pacific Life securities purchase agreement and the Restructuring.
The Company's Current Report on Form 8-K, as filed with the Commission
on July 31, 2000 (File no. 0-25245), relating to the Company's the
termination of Doctor R. Crants as its chief executive officer.
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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: August 14, 2000 /S/ Vida H. Carroll
------------------------------------------
Vida H. Carroll
Chief Financial Officer/
Chief Accounting Officer
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