<PAGE> 1
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: MARCH 31, 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 May 11, 2000)
118,409,619
<PAGE> 2
PRISON REALTY TRUST, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
a) Condensed Consolidated Balance Sheets as of March 31, 2000
(Unaudited) and December 31, 1999.........................................
b) Condensed Consolidated Statements of Income (Unaudited) for the three
months ended March 31, 2000 and 1999......................................
c) Condensed Consolidated Statements of Cash Flows (Unaudited) for three
months ended March 31, 2000 and 1999......................................
d) Notes to Condensed Consolidated Financial Statements......................
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................
Item 3. Quantitative and Qualitative Disclosures About Market Risk................
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.........................................................
Item 2. Changes in Securities and Use of Proceeds.................................
Item 3. Defaults Upon Senior Securities...........................................
Item 4. Submission of Matters to a Vote of Security Holders.......................
Item 5. Other Information.........................................................
Item 6. Exhibits and Reports on Form 8-K..........................................
SIGNATURE............................................................................
</TABLE>
1
<PAGE> 3
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>
MARCH 31, DECEMBER 31,
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
Real estate properties:
Correctional and detention facilities $ 2,216,662 $ 2,258,281
Less accumulated depreciation (62,709) (49,785)
----------- -----------
Net real estate properties 2,153,953 2,208,496
Cash and cash equivalents 12,753 84,493
Restricted cash 24,722 24,409
Note receivable from CCA 137,000 137,000
Investments in affiliates 120,974 118,232
Investments in direct financing leases 162,254 74,059
Receivable from CCA 25,839 28,608
Other assets 61,116 60,625
----------- -----------
Total assets $ 2,698,611 $ 2,735,922
=========== ===========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
(Continued)
2
<PAGE> 4
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(CONTINUED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Distributions payable $ 2,150 $ 2,150
Bank credit facility 926,734 928,234
Senior notes payable 100,000 100,000
Convertible subordinated notes and other debt 70,737 70,757
Accounts payable and accrued expenses 67,207 70,911
Income taxes payable 5,917 5,476
Deferred gains on sales of contracts 103,376 106,045
Other liabilities 32,000 32,000
----------- -----------
Total liabilities 1,308,121 1,315,573
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 (one cent) par value; 20,000 shares
authorized; 4,300 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; 118,406 shares issued;
118,394 shares outstanding, respectively 1,184 1,184
Treasury stock, 12 shares, at cost (242) (242)
Additional paid-in capital 1,347,318 1,347,227
Cumulative net income 2,024 29,824
Accumulated distributions (67,294) (65,144)
----------- -----------
Total stockholders' equity 1,390,490 1,420,349
----------- -----------
Total liabilities and stockholders' equity $ 2,698,611 $ 2,735,922
=========== ===========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
3
<PAGE> 5
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
REVENUES:
Rental revenues $ 11,460 $ 63,640
Interest income 3,312 6,214
Licensing fees 2,576 2,132
--------- ---------
17,348 71,986
--------- ---------
EXPENSES:
Depreciation and amortization 12,924 9,917
General and administrative 2,543 882
Write-off of amounts under lease arrangements 4,000 --
--------- ---------
19,467 10,799
--------- ---------
OPERATING INCOME (LOSS) (2,119) 61,187
Equity in earnings of subsidiaries and amortization
of deferred gains 6,113 7,681
Interest expense (31,794) (8,273)
--------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (27,800) 60,595
Provision for change in tax status -- 83,200
--------- ---------
NET LOSS (27,800) (22,605)
DIVIDENDS TO PREFERRED SHAREHOLDERS (2,150) (2,150)
--------- ---------
NET LOSS AVAILABLE TO COMMON
SHAREHOLDERS $ (29,950) $ (24,755)
========= =========
NET LOSS AVAILABLE TO COMMON
SHAREHOLDERS PER COMMON SHARE:
BASIC $ (0.25) $ (0.23)
========= =========
DILUTED $ (0.25) $ (0.23)
========= =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, BASIC 118,395 107,282
========= =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, DILUTED 118,395 107,282
========= =========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
4
<PAGE> 6
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (27,800) $ (22,605)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 12,924 9,917
Amortization of debt issuance costs 3,321 962
Provision for change in tax status -- 83,200
Equity in earnings of unconsolidated entities and amortization of
deferred gain (6,113) (7,681)
Write-off of amounts under lease arrangements 4,000 --
Other noncash items 90 --
Changes in assets and liabilities, net
Receivable from CCA 2,769 663
Other assets (2,682) (9,129)
Accounts payable and accrued expenses (7,704) 1,963
Income taxes payable 441 (6,769)
--------- ---------
Net cash provided by (used in) operating activities (20,754) 50,521
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment (47,799) (169,958)
Increase in restricted cash and investments (313) (74,393)
Cash acquired in purchase of CCA Prison Realty Trust -- 21,894
Increase in other assets (1,127) (3,937)
Distributions from investments in PMSI and JJFMSI 702 --
Payments received on direct financing leases and notes receivable 1,223 1,165
--------- ---------
Net cash used in investing activities (47,314) (225,229)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt -- 40,000
Payments on debt (20) (53)
Proceeds from (payments on) bank credit facility, net (1,500) 118,400
Payment of debt issuance costs (2) (8,328)
Proceeds from issuance of common stock -- 74,840
Distributions paid on common shares -- (67,818)
Distributions paid on preferred shares (2,150) (2,150)
--------- ---------
Net cash provided by (used in) financing activities (3,672) 154,891
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (71,740) (19,817)
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD 84,493 31,141
--------- ---------
CASH AND CASH EQUIVALENTS, END OF THE PERIOD $ 12,753 $ 11,324
========= =========
</TABLE>
(CONTINUED)
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
5
<PAGE> 7
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND AMOUNTS IN THOUSANDS)
(CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of capitalized amounts of $5.2 million and $7.1 million,
respectively) $ 20,895 $ 984
============== ==============
Income taxes $ 522 $ 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 $ 89,418 $ --
Investments in direct financing leases (89,418) --
-------------- --------------
$ -- $ --
============== ==============
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.
6
<PAGE> 8
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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
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 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 intend to amend the contractual
agreements between the Company and CCA. For a fuller description of the proposed
amendments, see Note 11.
As required by its governing instruments and as contemplated by the Pacific Life
Restructuring (as defined in Note 2 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 Pacific Life Restructuring under its
existing terms, following required shareholder approval in 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 Pacific Life Restructuring is not completed, the
Company expects that, following required shareholder approval, the Company will
nevertheless be taxed as a C corporation with respect to its taxable year ended
December 31, 2000 and thereafter.
7
<PAGE> 9
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
2. GOING CONCERN MATTERS
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company currently is in
default under the provisions of its senior secured bank credit facility
(outstanding balance of $926.7 million at March 31, 2000) and is in default
under the provisions of the agreements governing the Company's outstanding
convertible, subordinated notes (outstanding balance of $70.0 million at March
31, 2000). The defaults relate to the Company's failure to comply with certain
financial covenants during 1999 and 2000, 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 without the consent
of the Company's lenders, including the execution of a securities purchase
agreement in connection with a series of proposed transactions led by Pacific
Life Insurance Company ("Pacific Life"). See Note 6 for a detailed description
of each existing event of default under the provisions of the Company's
indebtedness. The Company's noncompliance with the provisions of its outstanding
obligations could result in the Company's creditors demanding immediate
repayment of these obligations. The existing events of default under the
provisions of the Company's bank credit facility and an aggregate of $40.0
million of the Company's convertible, subordinated notes have been formally
declared, but no acceleration actions have been taken by the creditors with
respect to this indebtedness. The Company has not obtained waivers of these
existing events of default. See Note 6 for a description of the Company's
attempts to obtain waivers of these existing events of default. Also, the
Company has limited resources currently available to meet its operating, capital
expenditure and debt service requirements during 2000. In addition, as discussed
in Note 8, the Company has significant outstanding shareholder and other
litigation matters.
The Company's primary lessee, CCA, on which the Company is dependent for its
major sources of income, incurred a net loss of $62.6 million for the three
months ended March 31, 2000, and has a net working capital deficiency and a net
capital deficiency at March 31, 2000. In connection with the 1999 Merger, the
Company and CCA entered into lease agreements with CCA with respect to the
correctional and detention facilities owned by the Company and operated by CCA,
as well as a series of additional agreements relating to the payment of certain
fees by the Company to CCA. As of March 31, 2000, approximately $92.2 million of
rents due from CCA to the Company under the master lease agreement and leases
with respect to each leased property between CCA and the Company (the "CCA
Leases") were unpaid. The terms of the CCA Leases provide that rental payments
are due and payable on the 25th day of each month for the current month. The CCA
Leases provide that it shall be an event of default if CCA fails to pay any
installment of rent within 15 days after notice of nonpayment from the Company.
The Company, however, has not provided a notice of nonpayment to CCA with
respect to lease payments due and payable by CCA. Subsequent to March 31, 2000,
CCA has paid $11.9 million of lease payments related to 1999 and $4.0 million
related to 2000.
CCA recently obtained a waiver of existing events of default under its revolving
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 (as defined in Note 2 and more fully described in Note 13
hereof), 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, will terminate upon the occurrence of certain events, and
the
8
<PAGE> 10
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
term of the waiver will expire on July 31, 2000. See Note 11 for a description
of these events of default and the waiver of such events of default.
As a result of CCA's current liquidity position, CCA has 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
(the "CCA Note"). Pursuant to the terms of the CCA Note, CCA was required to
make the payment on December 31, 1999; however, pursuant to the terms of a
subordination agreement, dated as of March 1, 1999, by and between the Company
and the agent of CCA's revolving credit facility (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. As
of December 31, 1999, CCA was not, and, notwithstanding the waiver discussed
above, CCA currently is not, in compliance with these financial covenants.
Consequently, CCA is prohibited from making the scheduled interest payment to
the Company. Pursuant to the terms of the Subordination Agreement, 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 revolving credit facility remains outstanding. Also as
a result of CCA's current 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 Prison Realty and CCA, declarations of events of
default and potential acceleration actions by the Company's and CCA's creditors,
the continued inability of CCA to make contractual payments to the Company, and
the Company's limited resources currently available to meet its operating,
capital expenditure and debt service requirements will have a material adverse
impact on the Company's consolidated financial position, results of operations
and cash flows. In addition, these matters concerning the Company and CCA raise
substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements do not include any adjustments relating to
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.
In response to the significant losses experienced by CCA during 1999 and by the
Company and CCA during the three months ended March 31, 2000 and in response to
the defaults under the Company's debt agreements, the Company has entered into
an agreement with respect to a series of transactions led by Pacific Life
intended to provide the Company with additional capital and a restructuring of
its indebtedness, as well as a simplification of its corporate structure and a
new management team (the "Pacific Life Restructuring"). A complete discussion of
the Pacific Life Restructuring and recent developments affecting the Pacific
Life Restructuring is included in Note 13.
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.
9
<PAGE> 11
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
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
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 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 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 March 31, 2000, the Company owned or was in the process of developing 52 real
estate properties, including 50 correctional and detention facilities and two
corporate office buildings, of which 46 properties were operating, three were
under construction or expansion and three were in the planning stages, with a
total aggregate cost of $2.2 billion. At March 31, 2000, CCA leased 37
properties from the Company, governmental agencies leased six facilities from
the Company, and private operators leased three facilities from the Company. In
the event the Pacific Life Restructuring is not completed and/or Prison Realty
and CCA do not combine, the Company expects to lease all of the facilities under
construction or development to CCA. In the event the Pacific Life Restructuring
is completed and/or Prison Realty and CCA combine, all existing leases between
Prison Realty and CCA will be cancelled and will be of no further force and
effect. See Note 13 for a discussion of the Pacific Life Restructuring.
Eight 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 to 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.
10
<PAGE> 12
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
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.
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 credit facility
(the "Credit Facility") from NationsBank, N.A., as Administrative Agent, and
several U.S. and non-U.S. banks. The Credit Facility included up to a maximum of
$250.0 million in tranche B term loans and $400.0 million in revolving loans,
including a $150.0 million subfacility for letters of credit. The term loan
required quarterly principal payments of $625 throughout the term of the loan
with the remaining balance maturing on January 1, 2003. The revolving loans
were to mature on January 1, 2002. Interest rates, unused commitment fees and
letter of credit fees on the Credit Facility were subject to change based on the
Company's senior debt rating. The Credit Facility was secured by mortgages on
the Company's real property.
On August 4, 1999, the Company completed an amendment and restatement of the
Credit Facility (the "Amended Credit Facility") increasing amounts available to
the Company under the original Credit Facility to $1.0 billion through the
addition of a $350.0 million tranche C term loan. The tranche C term loan is
payable in equal quarterly installments in the amount of $875 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 Credit Facility
was changed to December 31, 2002, with the maturity of the revolving loan under
the Credit Facility remaining January 1, 2002. Lehman Commercial Paper Inc.
replaced NationsBank, N.A. as Administrative Agent of the Amended Credit
Facility.
The Amended Credit Facility, similar to the Credit Facility, provides for
interest rates, unused commitment fees and letter of credit fees to change based
on the Company's senior debt rating. Similar to the Credit Facility, the Amended
Credit Facility bears interest at variable rates of interest based on a spread
over the base rate or LIBOR (as elected by the Company), which spread is
determined by reference to the Company's credit rating. 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 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 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 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 of these rating changes, the interest rate applicable to
outstanding amounts under the Amended Credit Facility was increased by .50%
Upon the lenders' determination that the Company is in default under the terms
of the Amended 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, the Company is currently in
default under the Amended Credit Facility and, consequently, has been subject to
and has been accruing and paying the default rate of interest since January 25,
2000.
11
<PAGE> 13
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
The Company incurred costs of $59.2 million in consummating the Credit Facility
and the Amended Credit Facility transactions, including $41.2 million related to
the amendment and restatement. The Company wrote off $9.0 million of expenses
related to the Credit Facility upon completion of the amendment and restatement.
In accordance with the terms of the Amended 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
effect of these arrangements is recognized in interest expense.
The Amended Credit Facility, similar to the 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.
The Amended Credit Facility contains 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 Credit Facility also restricted the Company's ability to make the
1999 cash payment of a special dividend representing the accumulated earnings
and profits of Old CCA unless (a) the Company had liquidity of at least $75.0
million at the dividend declaration date after giving effect to the payment of
the special dividend, (b) the Company received at least $100.0 million in cash
proceeds for the issuance of equity or similar securities from a new investor
receiving representation on the Company's Board of Directors and (c) CCA
received at least $25.0 million in cash proceeds from the issuance of any
combination of equity securities and subordinated debt. The Amended Credit
Facility also restricts the cash payment of the special dividend in 2000.
SOLICITATION OF CONSENTS FOR WAIVERS OF EVENTS OF DEFAULT UNDER, AND AMENDMENTS
TO, PROVISIONS OF THE COMPANY'S AMENDED CREDIT FACILITY. As a result of: (i) the
current financial condition of the Company and CCA as described in Note 2; (ii)
the transactions undertaken by the Company and CCA, as described in Note 11, in
an attempt to resolve the current liquidity issues of the Company and CCA; and
(iii) the transactions contemplated by the proposed Pacific Life Restructuring,
as described in Note 13, certain existing or potential events of default have
arisen under the provisions of the Amended Credit Facility. Specifically, the
Company is subject to the following existing or potential events of default
under the Amended Credit Facility:
- - For the fiscal quarters ending December 31, 1999 and March 31, 2000, the
Company was not in compliance with certain financial covenants, each as
defined in the Amended Credit Facility.
- - As a result of the existence of explanatory paragraphs in the reports of
each of the Company's and CCA's reports of independent public accountants
relating to the Company's and CCA's 1999 consolidated financial statements
as to the ability of each of the Company and CCA to continue as a going
concern, the Company is in violation of the provisions of the Amended
Credit Facility.
- - As more fully described below, the Company is in default under the
provisions of the note purchase agreement relating to the Company's 9.5%
Convertible Notes (as hereinafter defined). Due to the provisions of the
Amended Credit Facility, this default under the terms of these
subordinated,
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PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
notes has resulted in an event of default under the Amended Credit Facility
since January 25, 2000.
- - The declaration and payment of a quarterly dividend on the Company's Series
A Preferred Stock for the quarter ended March 31, 2000 constituted an event
of default under the Amended Credit Facility.
- - The Amended Credit Facility contains restrictions upon the ability of the
Company to amend the terms of its agreements with CCA without the consent
of the Company's senior lenders, which would be violated upon execution of
the proposed amendments to the Company's existing agreements with CCA
described in Note 11.
- - The Amended Credit Facility contains restrictions upon the ability of the
Company to enter into any agreement constituting a "change of control"
provision, as defined in the Amended Credit Facility. The appointment of a
new Chairman of the Board of Directors and President of the Company in
December 1999 constituted a "change of control" of the Company under the
terms of the Amended Credit Facility upon the expiration of an applicable
period. In addition, the execution and performance of certain conditions
contained in the securities purchase agreement with Pacific Life
constituted a "change of control" of the Company under the terms of the
Amended Credit Facility.
- - The Amended Credit Facility provides that any non-compliance by CCA with
the provisions of CCA's revolving credit facility would constitute an event
of default under the Amended Credit Facility. Although CCA has obtained a
waiver of all events of default under its revolving credit facility, as
more fully described in Note 11, CCA's non-compliance with the provisions
of its revolving credit facility would also constitute an event of default
under the Amended Credit Facility.
- - As more fully described below, the Company is in violation of certain
financial covenants contained in the note purchase agreement relating to
the Company's 7.5% Convertible Notes (as defined below). However, the
Company is currently not in default under the provisions of this note
purchase agreement because the holder of the 7.5% Convertible Notes has not
provided the Company with written notice declaring such an event of
default. As a result, no event of default currently exists under the
provisions of the Amended Credit Facility with respect to the Company's
violation of these financial covenants. If, however, the holder of the 7.5%
Convertible Notes did provide a notice of default to the Company, upon the
expiration of an applicable period, the Company would be in default under
the provisions of the note purchase agreement, which would also give rise
to an event of default under the Amended Credit Facility.
PROPOSED WAIVERS OF EVENTS OF DEFAULT UNDER, AND AMENDMENTS TO, THE COMPANY'S
AMENDED CREDIT FACILITY. The Company, through Lehman Commercial Paper Inc., the
Administrative Agent of the Amended Credit Facility, has initiated the process
of soliciting the consent of the requisite percentage of the senior lenders
under the Amended Credit Facility for a waiver of the existing events of default
under the Amended Bank Credit Facility. Specifically, the Company has requested
a waiver of the following events of default under the Amended Credit Facility:
- - The Company's failure to comply with certain of the financial covenants
contained in the Amended Credit Facility for the fiscal quarter ended
December 31, 1999, for the fiscal quarter ended March 31, 2000 and for the
fiscal quarter ending June 30, 2000.
13
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PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
- - The Company's declaration and payment of its regular quarterly dividend on
shares of its Series A Preferred Stock for the fiscal quarter ended March
31, 2000.
- - The failure of the Company to deliver annual financial statements of the
Company and CCA unqualified as to the ability of each of the Company and
CCA to continue as a going concern.
- - The existence of certain defaults, as described below, by the Company under
the terms of the note purchase agreement relating to the Company's 9.5%
Convertible Notes (as defined herein).
The Company plans to request the consent of the requisite percentage of its
senior lenders under Amended Credit Facility for a waiver of the Amended Credit
Facility's restrictions relating to the proposed amendments of the CCA Leases,
the Amended and Restated Tenant Incentive Agreement, the Amended and Restated
Service Agreement and the Business Development Agreement (as each are
hereinafter defined) providing for the deferral of certain payments with respect
to each of these agreements. The Company plans to request the consent of such
lenders with respect to an amendment to the Amended Credit Facility changing the
definition of the Company's borrowing base under the credit facility to
alleviate the adverse effects of the deferred rental payments on the Company's
borrowing base. Additionally, the Company plans to request the consent of the
requisite percentage of its senior lenders under the Amended Credit Facility to
the appointment of a new Chairman of the Board of Directors and President of the
Company. The Company plans to request a waiver of the Amended Credit Facility's
restrictions upon a "change of control" arising from the execution and
performance of certain conditions under the securities purchase agreement with
Pacific Life. The Company anticipates that these waivers of the provisions of
the Amended Credit Facility would be conditional upon: (i) the completion of the
Pacific Life Restructuring; (ii) the termination of the securities purchase
agreement with Pacific Life; or (iii) as-yet-undetermined requirements.
The Company currently is also in discussions with Lehman Commercial Paper Inc.,
the Administrative Agent, to restructure the terms of the Amended Credit
Facility to provide that the Amended Credit Facility will continue to remain
outstanding following completion of the Pacific Life Restructuring. The Company
anticipates that Lehman Commercial Paper Inc. will solicit the consent of the
requisite percentage of the senior lenders under the Amended Credit Facility to
amend the Amended Credit Facility to provide for the restructuring and
"roll-over" of the Amended Credit Facility simultaneously with the solicitation
of the proposed waivers of the provisions of the credit facility described
above. The Company and Lehman Commercial Paper, Inc. are currently in
discussions with respect to certain terms of the restructuring of the Amended
Credit Facility, including the applicable rates of interest under the facility
and fees to be incurred by the Company in the restructuring, additional
covenants, and conditions of default that may be required. It is also
anticipated that the terms of the waiver will restrict the Company's ability to
declare and pay quarterly cash dividends on the Company's Series A Preferred
Stock until the completion of the Pacific Life Restructing.
Management of the Company expects the conditions to the effectiveness of all of
the proposed waivers of events of default under, and amendments to, the
provisions of the Amended Credit Facility will include, among other conditions:
(i) CCA maintaining in effect a waiver of certain events of default under the
provisions of its revolving credit facility; (ii) the Company having delivered
to the trustee of the Company's $100.0 million Senior Notes (as defined herein)
an opinion as to the fairness, from a financial point of view, to the Company of
the amendments to the terms of the CCA Leases and the amendments to the Amended
and Restated Tenant Incentive Agreement, the Amended and Restated Services
Agreement, and the Business Development Agreement issued by an accounting,
appraisal, consulting or investment banking firm of
14
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PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
national standing; (iii) the completion of the Pacific Life Restructuring; and
(iv) the settlement of outstanding securities litigation for an amount not to
exceed the Company's insurance coverage.
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 Credit Facility to meet these
requirements. Due to the Company's non-compliance with certain provisions of the
Amended Credit Facility, the Company is currently unable to borrow additional
amounts under the Amended Credit Facility until a waiver of the existing 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.
There can also be no assurance that the lenders under the Amended Credit
Facility will consent to any proposed waivers of events of default under, and
amendments to, the Amended Credit Facility, or will not seek to declare an event
of default prior to the execution of any proposed waiver and amendments.
Moreover, the effectiveness of the proposed waivers of events of default under,
and amendments to, the Amended Credit Facility is subject to the satisfaction of
the conditions described above. In the event the Company is unable to obtain the
necessary waivers of events of default under, or amendments to, the Amended
Credit Facility, or to comply with and maintain the proposed waivers and
amendments, or if the Company defaults under the terms of any of its other
indebtedness, and such indebtedness is accelerated, the senior lenders under the
Amended Credit Facility are entitled, at their discretion, to exercise certain
remedies, including acceleration of the outstanding borrowings under the Amended
Credit Facility.
In addition, the Company's $100.0 million Senior Notes (as defined herein), the
Company's 9.5% Convertible Notes (as defined herein) and the Company's 7.5%
Convertible Notes (as defined herein) 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 Credit Facility or if the obligations under
the Amended Credit Facility have been accelerated. If the senior lenders under
the Amended Credit Facility elect to exercise their rights to accelerate the
Company's obligations under the Amended Credit Facility, and/or if the senior
lenders do not consent to the proposed waivers and amendments (or acceptable
alternative waivers and amendments), such events could result in the
acceleration of all or a portion of the outstanding principal amount of the
Company's 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 March 31, 2000, the Company has made all required principal and interest
payments under the Amended and Restated Credit Facility.
SENIOR NOTES
On June 11, 1999, the Company completed its offering of $100.0 million aggregate
principal amount of 12% Senior Notes due 2006 (the "Senior Notes"). Interest on
the Senior Notes is paid semi-annually in arrears, and the Senior Notes have a
seven year non-callable term due June 1, 2006. Net proceeds from the offering
were approximately $95.0 million after deducting expenses payable by the Company
in connection with the offering. The Company used the net proceeds from the sale
of the Senior Notes for
15
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PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
general corporate purposes and to repay revolving bank borrowings under its
Credit Facility.
The Company currently is not in default under the terms of the Senior Notes.
However, in connection with the proposed amendments to the CCA Leases, the
Amended and Restated Tenant Incentive Agreement, the Amended and Restated
Services Agreement and the Business Development Agreement providing for the
deferral of certain payments with respect to each of these agreements, the terms
of the indenture governing the Senior Notes provide that the Company may not
effect such amendments without the prior 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 of the Senior Notes. The Company anticipates
that it will be able to deliver such an opinion to the trustee under the
indenture. In addition, the indenture governing the Senior Notes contains a
provision which allows the holders thereof to accelerate the outstanding
principal amount of the Senior Notes and to seek additional remedies if the
Company has a payment default under the Amended Credit Facility or if the
Company's obligations under the Amended Credit Facility have been accelerated.
9.5% 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 (the "9.5% Convertible Notes"), with
the first $20.0 million tranche issued in December 1998 under substantially
similar terms. The 9.5% Convertible 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 March 31, 2000, the
conversion price for the 9.5% Convertible Notes was $23.63 per share as compared
to $28.00 per share at issuance.
The provisions of the note purchase agreement relating to the 9.5% Convertible
Notes provide that the execution of the securities purchase agreement by the
Company in connection with the Pacific Life Restructuring constitutes a "change
of control" of the Company. This "change of control" gave rise to a 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. To date, the holders
of the 9.5% Convertible Notes have not provided notice to the Company that the
Company will be required to purchase all or a portion of the notes. In addition,
as of February 5, 2000, the Company was no longer in compliance with a financial
covenant contained in the note purchase agreement. As a result of the violation
of this covenant, the Company is in default under the provisions of the note
purchase agreement, and the holders of such notes may, at their option,
accelerate all or a portion of the outstanding principal amount of this
indebtedness. Moreover, during any period in which the Company is in default
under the provisions of the note purchase agreement, the holders of the notes
may 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 is obligated, under the terms of the 9.5% Convertible Notes, to pay the
holders of the notes contingent interest sufficient to permit the holders to
receive a 15% rate of return 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 9.5%
16
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PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
Convertible Notes. Lehman Commercial Paper Inc. has notified the holders of the
9.5% Convertible Notes that, under the terms of the Amended Credit Facility, the
payment of principal and interest on the notes is subordinated in right of
payment to the prior payment in full of amounts due under the Amended Credit
Facility and that, as such, the holders of the notes are prohibited from
receiving any payment of principal or interest under the terms of the notes
until the Company is in compliance with the terms of the Amended Credit
Facility.
The Company expects to initiate discussions with the holders of these notes to
waive the occurrence of a "change of control" arising from the Company's
execution of the securities purchase agreement with Pacific Life, thereby
extinguishing the Company's obligation to repurchase the notes at a premium. In
addition, the Company has previously requested that the provisions of the note
purchase agreement be amended to: (i) remove the financial covenant set forth in
the note purchase agreement; (ii) although the Company believes it currently is
in compliance with such covenant, remove a covenant requiring the Company to use
its best efforts to qualify as a REIT for federal income tax purposes; and (iii)
although the Company believes it currently is in compliance with such covenant,
remove a covenant restricting the Company's ability to conduct business other
than the financing, ownership and development of prisons and other correctional
facilities.
There can be no assurance that the holders of the 9.5% Convertible Notes will
consent to any proposed waiver of events of default under, and amendments to,
the note purchase agreement, or will not seek to declare an event of default
prior to the execution of any proposed waiver and amendments. If the holders of
these notes do not consent to the 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.
7.5% CONVERTIBLE, SUBORDINATED NOTES
The Company's $30.0 million 7.5% convertible, subordinated notes issued to PMI
Mezzanine Fund, L.P. (the "7.5% Convertible 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 March 31,
2000, the conversion price for the 7.5% Convertible Notes was $23.63 per share
as compared to $27.42 per share at issuance.
The provisions of the note purchase agreement relating to the 7.5% Convertible
Notes contain certain financial covenants. As of March 31, 2000, the Company was
not in compliance with certain of these financial covenants. However, the
Company is currently not in default under the provisions of this note purchase
agreement because the holder of the 7.5% Convertible Notes has not provided the
Company with written notice declaring such an event of default. As a result, no
event of default currently exists under the provisions of the Amended Credit
Facility with respect to the Company's violation of these financial covenants.
If, however, the holder of the 7.5% Convertible Notes did provide a notice of
default to the Company, upon the expiration of an applicable period, the Company
would be in default under the provisions of the note purchase agreement, which
would also give rise to an event of default under the Amended Credit Facility.
Lehman Commercial Paper Inc. has notified the holder of the 7.5% Convertible
Notes that, under the terms of the Amended Credit Facility, the payment of
principal and interest on the notes is subordinated in right of payment to the
prior payment in full of amounts due under the Amended Credit Facility and that,
as such, the holder of the notes is prohibited from receiving any
17
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PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
payment of principal or interest under the terms of the notes until the Company
is in compliance with the terms of the Amended Credit Facility.
The Company has initiated discussions with PMI Mezzanine Fund, L.P., the holder
of the 7.5% Convertible Notes, to obtain a waiver of events of default under, or
amendments to, the financial covenants contained in the note purchase agreement
violated by the Company. In addition, although the Company is currently in
compliance with such covenant, the Company has requested that the provisions of
the note purchase agreement be amended to remove a covenant requiring the
Company to elect to be taxed as a REIT for federal income tax purposes.
PMI Mezzanine Fund, L.P. has indicated that, subject to the completion of the
Pacific Life Restructuring, it will consent to the proposed waivers of events of
default under, and amendments to, the note purchase agreement and will not seek
to declare an event of default prior to the execution of the proposed waiver and
amendments. If, however, the Pacific Life Restructuring is not completed, there
can be no assurance that the holder of the 7.5% Convertible Notes will consent
to the proposed waivers of events of default under, or amendments to, the note
purchase agreement or that the holder of such notes will not seek to declare an
event of default and require the Company to redeem the outstanding principal
amount of the notes.
As of March 31, 2000, the Company has made all required interest payments under
the 7.5% Convertible 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 and have been accrued in the accompanying consolidated balance
sheet as of March 31, 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 March 31, 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. The Company is currently considering the exact timing and
method of the payment of these required distributions. See Note 13 for a
discussion of the Company's distribution of securities under the terms of the
Pacific Life Restructuring in satisfaction of these required distributions. The
Company may partially satisfy these requirements through the payment of a
one-time special dividend (the "Special Dividend"); however, certain provisions
of the Amended Credit Facility restrict the Company's ability to pay these
required distributions in cash. In January 2000, $2.2 million of distributions
relating to the 8.0% Series A Cumulative Preferred Shares, which are eligible to
reduce the
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PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
distribution requirement for the taxable year ended December 31, 1999, have
been paid. The remaining $147.8 million of distributions that must be paid to
shareholders in 2000 in order for the Company to maintain its status as a REIT
for the taxable year ended December 31, 1999 have not been declared by the
Board of Directors and, accordingly, have not been accrued in the accompanying
consolidated balance sheets as of March 31, 2000. Currently, the Company's
governing instruments require that it operate as a REIT. However, if the Company
completes the Pacific Life Restructuring following shareholder in 2000 approval
to modify its governing instruments, the Company intends to be taxed as a C
corporation commencing with its taxable year ending December 31, 2000. In the
event that the Pacific Life Restructuring is not completed, the Company expects
that, following required shareholder approval, the Company will nevertheless
elect to be taxed as a C corporation with respect to its taxable year ending
December 31, 2000 and thereafter.
8. CONTINGENCIES
LITIGATION
On December 29, 1999, a purported class action lawsuit was filed on behalf of
the shareholders 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
the investor under the Fortress/Blackstone Restructuring (as defined in Note
13). The lawsuit alleges that the directors breached their fiduciary duties to
the Company's shareholders by "effectively selling control" of the Company for
inadequate consideration and without having adequately considered or explored
all other alternatives to the Fortress/Blackstone Restructuring or having taken
steps to maximize stockholder value. The plaintiffs seek an injunction
preventing the completion of 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
Fortress/Blackstone. These actions were consolidated on February 18, 2000. See
Note 13 with respect to the Company's agreement to complete the Pacific Life
Restructuring and its termination of the agreement providing for the
Fortress/Blackstone Restructuring.
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 the 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 proposed not to elect to be taxed as a
REIT beginning with its 1999 taxable year and, therefore, certain statements
made by them prior to that time were false and misleading. The plaintiffs seek
an unspecified amount of monetary damages 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 complaint was filed in the same court on behalf of one plaintiff. The
lawsuit, captioned Brody, et al. v. Prison Realty Trust, Inc. et al., names as
defendants the Company, Doctor R. Crants, D. Robert Crants, III and Darrell K.
Massengale. These three actions were consolidated on March 13, 2000.
Additionally, on March 3, 2000, a similar lawsuit was filed on behalf of two
plaintiffs in
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PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
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 securities laws based on claims
substantially identical to those enumerated above. See Notes 1 and 13 with
respect to the Company's expectation that it will elect to be taxed and qualify
as a REIT for its 1999 taxable year, and see Notes 7 and 13 with respect to the
Company's satisfaction of its remaining 1999 REIT distribution requirements.
The Company is also currently subject to two separate 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 1999 Merger. 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 1999 Merger 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 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 sixteen 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
Milkovits v. Prison Realty Trust, et. al., will be 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 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 in the 1999 Merger.
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 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
20
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PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
injunction restraining the defendants from engaging in such conduct, in addition
to unspecified damages.
The Company is defending vigorously its actions in each of the various
shareholder or class action lawsuits. It is possible additional lawsuits will be
filed, or that the existing complaints filed in connection with the
Fortress/Blackstone Restructuring will be amended, in connection with the
Pacific Life Restructuring. It is also possible that the Company's liability in
regard to the shareholder or class action 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.
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 the event that
the Company completes the Pacific Life Restructuring under its existing terms,
following required shareholder approval in 2000, the Company expects to be taxed
as a C corporation for the taxable year ending December 31, 2000. In the event
the Pacific Life Restructuring is not completed, the Company expects that,
following required shareholder approval, the Company will nevertheless be taxed
as a C corporation with respect to its taxable year ending December 31, 2000 and
thereafter. As discussed in Note 7, in order to qualify as a REIT for the
taxable year ending December 31, 1999, 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 March 31,
2000, the Company intends to pay sufficient dividends to satisfy all
distribution requirements for qualification as a REIT for 1999 and estimates
that approximately $150.0 million in securities will be distributed in 2000 to
meet this requirement. The Company is currently considering the exact timing and
method of the payment of these required distributions. See Note 13 for a
discussion of the Company's distribution of securities under the terms of the
Pacific Life Restructuring in satisfaction of these required distributions. In
January 2000, $2.2 million of distributions relating to the 8.0% Series A
Cumulative Preferred Shares, 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 shareholders 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 consolidated balance
sheets as of March 31, 2000. It is likely that the consent of the Company's debt
holders would be required for the Company to make these distributions. 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 Internal Revenue Code of 1986, as amended, would have a material
adverse impact on the Company's consolidated financial position, results of
operations and cash flows.
The Company's election of REIT status for the taxable year ended December 31,
1999 will be subject to review by the Internal Revenue Service 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, excluding any interest, fines and/or penalties
for the year ended December 31, 1999 could exceed $83.5 million, which would
have a material adverse impact on the Company's consolidated financial position,
results of operations and cash flows.
21
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PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
In connection with the 1999 Merger, the Company assumed all 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 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 the Company's shareholders. Such results would have a material
adverse impact on the Company's financial position, results of operations and
cash flows.
9. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the year. Diluted earnings
per share is computed by dividing net income (as adjusted) by the weighted
average number of common shares after considering the additional dilution
related to convertible preferred stock, convertible subordinated notes, options
and warrants.
For the three months ended March 31, 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 earnings per share for the three months ended March 31, 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 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 tenant incentive fees and fees for services
rendered to the Company in the development of its correctional and detention
facilities. As of March 31, 2000, CCA leased 37 of the 46 operating properties
owned by the Company. See the Company's Form 10-K for detailed information with
respect to the contractual relationships between the Company and CCA. The
22
<PAGE> 24
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
following information under this Note 11 updates the activity or the specific
transaction and contractual relationships.
CCA NOTE
Pursuant to the terms of the CCA Note, CCA was required to make the first
scheduled payment of interest, totaling approximately $16.4 million, 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. As of December 31, 1999,
CCA was not and, notwithstanding the waiver obtained, CCA currently is not, in
compliance with these financial covenants. Consequently, CCA is prohibited from
making the scheduled interest payments to the Company. Pursuant to the terms of
the Subordination Agreement, 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 revolving
credit facility remains outstanding. During the three months ended March 31,
1999, the Company recorded $4.1 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 of interest accrued during the three months ended
March 31, 2000.
INVESTMENT IN CCA
For the three months ended March 31, 2000 and March 31, 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 three months ended
March 31, 2000 and 1999.
CCA LEASES
During the three months ended December 31, 1999 and March 31, 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. During 2000, CCA has paid the $24.9
million of lease payments related to 1999 and $4.0 million of lease payments
related to 2000. For the three months ended March 31, 2000, the Company
recognized rental revenue from CCA of $80.2 million and recorded a reserve of
$71.2 million resulting in recognition of net rental revenue from CCA of $9.0
million. The reserve was recorded due to the uncertainty regarding the
collectiblity of the revenue. In addition, the Company expects that the CCA
Leases will be materially impacted by either the Pacific Life Restructuring or
by renegotiation of the CCA Leases with CCA.
In an effort to address CCA's liquidity needs prior to the completion of the
Pacific Life Restructuring, the Company and CCA intend to amend the terms of the
CCA Leases. Pursuant to this amendment, rent is expected to be payable on June
30 and December 31 of each year, instead of monthly. In addition, the amendment
is expected to provide that CCA is required to make certain scheduled monthly
installment payments of rent to the
23
<PAGE> 25
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
Company. At the time these installment payments are made, it is anticipated that
CCA will also be required to pay interest to the Company upon such payments at a
rate equal to the then current interest rate under CCA's revolving credit
facility. These installment payments represent a portion of CCA's rental payment
obligations accruing from January 1, 2000 to June 30, 2000 under the CCA Leases.
The Company is required to obtain the consent of its lenders under the terms of
the Amended Credit Facility with respect to the amendment of the CCA Leases as
discussed in Note 6 herein.
For the three months ended March 31, 1999, the Company recognized rental revenue
from CCA of $61.4 million.
TENANT INCENTIVE ARRANGEMENT
For the year ended December 31, 1999, the Company had paid tenant incentive fees
of $68.6 million (including $6.6 million during the three months ended March 31,
1999), with $2.9 million of those fees amortized against rental revenues, under
the terms of the Amended and Restated Tenant Incentive Agreement by and between
the Company and CCA (the "Amended and Restated Tenant Incentive Agreement").
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. During
the three months ended March 31, 2000, the Company opened one facility that is
operated by CCA. The Company has expensed the tenant incentive fees due CCA,
totaling $4.0 million, but has made no payments to CCA in 2000 with respect to
this agreement.
CCA TRADE NAME USE AGREEMENT
For the three months ended March 31, 2000 and 1999, the Company recognized
income of $2.6 million and $2.1 million, respectively, from CCA under the terms
of the Trade Name Use Agreement by and between the Company and CCA (the "Trade
Name Use Agreement"). At March 31, 2000, the Company had a receivable from CCA
totaling $4.8 million, of which $2.2 million has been collected subsequent to
March 31, 2000.
CCA RIGHT TO PURCHASE AGREEMENT
Since January 1, 1999, the Company has not purchased any assets from CCA under
the 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 the Amended and Restated Services Agreement
by and between the Company and CCA (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 $3.0 million and $12.1 million
for the three months ended March 31, 2000 and 1999, respectively.
24
<PAGE> 26
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
CCA BUSINESS DEVELOPMENT AGREEMENT
Costs incurred by the Company under the Business Development Agreement by and
between the Company and CCA (the "Business Development Agreement") are
capitalized as part of the facilities' development cost. For the three months
ended March 31, 2000, no costs were incurred under the Business Development
Agreement, and for the three months ended March 31, 1999, costs of $8.6 million
were incurred under the Business Development Agreement.
PROPOSED AMENDMENTS TO AGREEMENTS BETWEEN THE COMPANY AND CCA
The Company and CCA intend to amend the terms of the Amended and Restated Tenant
Incentive Agreement, the Amended and Restated Services Agreement and the
Business Development Agreement to provide for the deferral of the payment of all
fees under these agreements by the Company to CCA until September 30, 2000. The
Company is required to obtain the consent of its lenders under the terms of the
Amended Credit Facility to these amendments as discussed in Note 6 herein.
RECEIVABLE FROM CCA
As of March 31, 2000, the Company had recorded a receivable of $25.8 million
from CCA. This receivable was comprised primarily of (i) rent due under the CCA
Leases for the three months ended March 31, 2000 ($77.7 million) and a portion
of the month of December 1999 rent ($11.9 million) and (ii) licensing fees for
the fourth quarter of 1999 and the first quarter of 2000 due under the Trade
Name Use Agreement ($4.8 million). For the three months ended March 31, 2000,
the Company recognized rental revenue from CCA of $80.2 million and recorded a
reserve of $71.2 million resulting in recognition of net rental revenue from CCA
of $9.0 million. The reserve was recorded due to the uncertainty regarding the
collectibility of the revenue. Subsequent to March 31, 2000, CCA has paid for
obligations under the CCA Leases for 2000 and 1999 of $4.0 million and 11.9
million, respectively. In addition, subsequent to March 31, 2000, CCA has paid
$2.2 million for obligations due under the Trade Name Use Agreement for 1999.
CCA'S REVOLVING CREDIT FACILITY
The terms of CCA's revolving credit facility provide that CCA shall not amend or
modify the terms of the Amended and Restated Tenant Incentive Agreement, the
Amended and Restated Services Agreement, and the Business Development Agreement
in any manner which would be on terms and conditions less favorable to CCA than
are in effect immediately prior to such amendment or modification. If the
proposed amendments to these agreements are completed, CCA would be in violation
of its revolving credit facility. In addition, CCA's non-payment of amounts due
under the CCA Leases has resulted, and the proposed amendments to the CCA Leases
would result, in a violation of CCA's revolving credit facility. CCA's revolving
credit facility also requires that CCA have a net worth in excess of certain
specified amounts. On December 31, 1999 and March 31, 2000, CCA was not, and it
currently is not, in compliance with this financial covenant. The terms of CCA's
revolving credit facility also provide that CCA's execution of the agreement and
plan of merger setting forth the terms of the combination of the Company, CCA,
PMSI and JJFMSI contemplated by the Pacific Life Restructuring resulted in an
event of default under CCA's revolving credit facility.
25
<PAGE> 27
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
CCA has obtained the consent of the requisite percentage of the senior lenders
under its revolving credit facility for a waiver of its credit facility's
restrictions relating to:
- - The proposed amendments of the terms of the Amended and Restated Tenant
Incentive Agreement, the Amended and Restated Services Agreement, and the
Business Development Agreement.
- - CCA's non-payment of amounts due under the CCA Leases and the proposed
amendments to the CCA Leases.
- - CCA's violation of the net worth covenant contained in its revolving credit
facility.
- - CCA's execution of the agreement and plan of merger.
The terms of the waiver provide that the waiver shall remain in effect until
July 31, 2000. The waiver will terminate on a date which is earlier than July
31, 2000 if: (i) the Pacific Life securities purchase agreement is terminated;
(ii) CCA makes any payments to the Company other than as set forth in the
proposed amendments to CCA's agreements with the Company; or (iii) the senior
lenders under the Company's Amended Credit Facility exercise any rights with
respect to any default or event of default under the Amended Credit Facility.
There can be no assurance that CCA will be able to comply with and maintain the
waivers. In the event CCA is unable to comply with and maintain the waivers, the
senior lenders under CCA's revolving credit facility are entitled, at their
discretion, to exercise certain remedies, including acceleration of the
outstanding borrowings under the revolving credit facility. If the senior
lenders elect to exercise their rights to accelerate CCA's obligations under
CCA's revolving credit facility, such events would have a material adverse
effect on CCA's liquidity and financial position. CCA does not have sufficient
working capital in the event of an acceleration of CCA's revolving credit
facility. In addition, the terms of the Company's leases with CCA provide that
an event of default under CCA's revolving credit facility which results in the
acceleration of at least $25.0 million of CCA's indebtedness under the CCA
revolving credit facility prior to its stated maturity will result in an event
of default under the CCA Leases, which would result in an event of default under
the Company's Amended Credit Facility, also triggering defaults under the
Company's other indebtedness.
26
<PAGE> 28
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
CCA FINANCIAL INFORMATION
The following summarized unaudited operating information presents CCA's results
of operations for the three months ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
(UNAUDITED AND AMOUNTS IN THOUSANDS)
Revenues $ 137,952 $ 112,363
Net loss before taxes -- (67,124)
Net loss (62,690) (39,766)
</TABLE>
The following summarized unaudited balance sheet information presents CCA's
financial position as of March 31, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
<S> <C> <C>
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
Current assets $ 82,208 $ 88,647
Total assets 175,918 184,701
Current liabilities 313,951 258,421
Deferred credits 105,202 107,070
Total liabilities 419,153 365,491
Stockholders' equity (243,235) (180,790)
</TABLE>
The following summary presents CCA's cash flows for the three months ended March
31, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
(UNAUDITED AND AMOUNTS IN THOUSANDS)
Cash flows provided by (used in) operating activities $ 2,228 $(5,611)
Cash flows used in investing activities (415) (1,011)
Cash flows used in financing activities (10,034) (1,517)
-------- -------
Net decrease in cash for the three months ended $ (8,221) $(8,139)
======== =======
</TABLE>
During 2000, CCA has utilized cash from the deferral of its lease 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
27
<PAGE> 29
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
losses from operations. 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 three
months ended March 31, 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 Company's ownership interests
obligate PMSI and JJFMSI to make distributions to the Company equal to 95% of
their net income as determined in accordance with generally accepted accounting
principles ("GAAP") plus non-cash expenses, as defined.
The following unaudited operating information presents a combined summary of the
results of operations for PMSI and JJFMSI for the three months ended March 31,
2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
(UNAUDITED AND AMOUNTS IN THOUSANDS)
Revenues $73,967 $69,082
Net income 3,625 5,276
</TABLE>
The following unaudited balance sheet information presents a combined summary of
the financial position for PMSI and JJFMSI as of March 31, 2000 and December 31,
1999:
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- ------------------
<S> <C> <C>
(UNAUDITED AND AMOUNTS IN THOUSANDS)
Current assets $ 62,321 $ 60,741
Total assets 149,507 151,167
Current liabilities 32,707 31,750
Total liabilities 33,573 32,622
Stockholders' equity 115,934 118,545
</TABLE>
Equity in earnings of unconsolidated entities and amortization of deferred gains
was $6.1 and $7.7 million for the three months ended March 31, 2000 and March
31, 1999, respectively. For the three months ended March 31, 2000, the Company
recognized equity in earnings of PMSI and JJFMSI of $2.1 million and $1.3
million, respectively, and received distributions from PMSI and JJFMSI of $0.6
million and $0.1 million, respectively. For the three months ended March 31,
2000, the Company recognized amortization of deferred gains of PMSI and JJFMSI
of $1.8 million and $0.9 million, respectively.
For the three months ended March 31, 1999, the Company recognized equity in
earnings of PMSI and JJFMSI of $1.9 million and $3.1 million, respectively. For
the three months ended March 31, 1999, the Company recognized amortization of
deferred gains of PMSI and JJFMSI of $1.8 million and $0.9 million,
respectively. The decrease in the equity in earnings of PMSI and JJFMSI is
attributable to less favorable operating results of PMSI and JJFMSI.
13. PROSPECTIVE EQUITY INVESTMENT AND RELATED RESTRUCTURING
On April 16, 2000, the Company entered into a definitive agreement with Pacific
Life with respect to the Pacific Life Restructuring providing for a
restructuring of the Company that includes: (i) the combination
28
<PAGE> 30
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
of the Company with each of CCA, PMSI and JJFMSI; (ii) a $200.0 million equity
investment in the Company; and (iii) a restructuring of the Company's existing
board of directors and management, and intending to serve as an alternative to
an agreement entered into on December 26, 1999 with a group of investors led by
affiliates of The Fortress Investment Group LLC, The Blackstone Group and Bank
of America Corporation (collectively, "Fortress/Blackstone") also with respect
to a series of restructuring transactions (the "Fortress/Blackstone
Restructuring"). In connection with the execution of the agreement with Pacific
Life, the Company terminated its agreement with Fortress/Blackstone.
The Fortress/Blackstone securities purchase agreement provided for, as a result
of its termination and the execution of the agreement with Pacific Life, the
payment by the Company to Fortress/Blackstone of a termination fee of $7.5
million, as well as a $15.2 million commitment fee and certain expenses incurred
by Fortress/Blackstone in connection with the proposed transaction. To date, the
Company has not paid these fees. These fees totaling $22.7 million, along with
approximately $4.4 million of professional fees incurred in connection with the
Fortress/Blackstone Restructuring, will be expensed during the three months
ending June 30, 2000.
Under the terms of the Company's agreement with Pacific Life, the Company has
agreed to raise $200.0 million in additional capital by offering its existing
common shareholders transferable rights to purchase up to $200.0 million of its
common stock at a price equal to the lower of $4.00 per share and 65% of the
average market price of the Company's common stock over three trading days prior
to the commencement of the rights offering. In connection with the rights
offering, Pacific Life will provide a 100% backstop of up to $200.0 million for
any unsubscribed portion of the rights offering and will receive, in exchange
for such commitment, warrants to purchase 20.0 million shares of the Company's
common stock (or, if greater, warrants to purchase 10% of the Company's
outstanding common stock on a fully diluted basis) having a term of eight years.
The warrant exercise price will be set at a 20% premium to the average closing
market stock price over the five trading days prior to the end of the rights
offering. To the extent that the rights to purchase the Company's common stock
are not exercised in the rights offering, Pacific Life will purchase shares of
the Company's Series B convertible preferred stock equal to the difference
between $200.0 million and the gross proceeds received by the Company in the
rights offering, subject to a $10.0 million minimum investment in the shares of
Series B convertible preferred stock. The Series B convertible preferred stock
will provide for cash dividends at a rate of 6% per annum and a paid-in-kind, or
PIK, dividend at a rate of 4% per annum for the first three years following the
date of issuance, and cash dividends at a rate of 10% per annum thereafter,
payable quarterly in arrears. The Series B convertible preferred stock will be
convertible into shares of the Company's common stock at a conversion price
equal to the rights offering exercise price.
Under the terms of the Company's agreement with Pacific Life, the Company
intends to elect to be taxed as a REIT for its taxable year ending 1999 and, in
satisfaction of the Company's remaining REIT distribution requirements, will
distribute to all common shareholders approximately $150.0 million of 12% PIK
Series C convertible preferred stock. The Series C convertible preferred stock
will be convertible into shares of the Company's common stock during certain
specified periods at prescribed prices based on 100% of an average trading
price.
Upon completion of the Pacific Life Restructuring the board of directors of the
Company will be fixed at ten members, comprised of four members from the
Company's existing board, four members designated by Pacific Life and two
independent directors designated jointly by Pacific Life and the Company's
29
<PAGE> 31
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
existing board. An investment committee of the board of directors will also be
created, to be comprised of seven directors, with four designated by Pacific
Life, one non-executive director, one executive director and one outside
director jointly selected by the board of directors and Pacific Life. The
investment committee will, among other things, approve the selection of a new
chief executive officer and chief financial officer of the Company.
It is a condition to the obligations of Pacific Life under the Pacific Life
Restructuring that the existing securities litigation against the Company
described in Note 8 be finally settled on terms and conditions satisfactory to
Pacific Life or, in the alternative, that liability insurance be obtained by the
Company providing coverage for such potential liability. It is also a condition
to the obligations of Pacific Life that the Company's existing senior
indebtedness be refinanced or "rolled-over" by the existing lending group. The
completion of the transactions contemplated by the Pacific Life Restructuring,
including the issuance of the Series B convertible preferred stock and the
warrant, and the Company's election not to be taxed as a REIT commencing with
its 2000 taxable year, is subject to the approval of the Company's shareholders.
There can be no assurance that any or all of such conditions will be met or
that, if any of such conditions are not met, Pacific Life will waive such
conditions. In the event any such conditions are not met and are not waived by
Pacific Life, the Pacific Life Restructuring will not be completed, and the
Company's Board of Directors will be required to determine the best alternative
for the Company and its shareholders. The Company's Board of Directors expects
that if the Pacific Life Restructuring is not completed, the Company will
complete the merger with CCA provided (i) each of the Company and CCA obtain the
requisite shareholder approval, (ii) the Company is able to restructure the
terms of its indebtedness in a satisfactory manner, and (iii) the Board of
Directors of each of the companies determines that a combination without
additional equity is more favorable to such company and its respective
shareholders than seeking protection under the federal bankruptcy laws.
30
<PAGE> 32
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 Company's current views
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
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").
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 and as
31
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PRISON REALTY TRUST, INC. AND SUBSIDIARIES
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
contemplated by the Pacific Life Restructuring (as defined herein under
"Prospective Restructuring and Related Equity Investment"), 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 Pacific Life Restructuring under its existing terms,
following required shareholder approval in 2000, the Company expects to be taxed
as a C corporation in the taxable year ending December 31, 2000 and thereafter.
In the event the Pacific Life Restructuring does not occur, the Company expects
that following required shareholder approval, the Company nevertheless will be
taxed as a C corporation with respect to its taxable year ending December 31,
2000 and thereafter.
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
development of its correctional and detention facilities. See the information
contained in the Company's Form 10-K for a complete description of the
contractual relationships between the Company and CCA.
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.
At March 31, 2000, CCA leased 37 of the 46 operating properties owned by 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 the
master lease agreement and leases with respect to each leased property between
CCA and the Company (the "CCA Leases") for such facilities. As discussed herein
under "- Results of Operations", CCA has incurred substantial losses from
operations through the fourth quarter of 1999 and first quarter of 2000. In an
effort to address CCA's liquidity, the Company and CCA intend to amend the terms
of the CCA Leases as described herein under the heading "Relationship with CCA"
to restructure the payments due the Company under the CCA Leases. 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 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 continue to
generate revenue. Due to the unique nature of correctional and detention
facilities, the Company may be unable to locate suitable lessees or to attract
such lessees.
PROSPECTIVE RESTRUCTURING AND RELATED EQUITY INVESTMENT
In order to address the capital and liquidity constraints facing the Company and
CCA, as well as concerns regarding the corporate structure and management of the
Company, the Company intends to complete a comprehensive restructuring under the
terms of an agreement with Pacific Life providing for, among other things: (i)
the combination of the Company with each of CCA, PMSI and JJFMSI; (ii) a $200.0
million equity investment in the Company; and (iii) a restructuring of the
Company's existing board of directors and management (the "Pacific Life
Restructuring"). These transactions are intended to serve as an alternative to a
series of restructuring transactions (the "Fortress/Blackstone Restructuring")
provided for under an agreement entered into on December 26, 1999 with a group
of investors led by affiliates of The Fortress Investment Group LLC, The
Blackstone Group and Bank of America Corporation (collectively,
"Fortress/Blackstone").
Under the terms of the Company's agreement with Pacific Life, the Company has
agreed to raise $200.0 million in additional capital by offering its existing
common shareholders transferable rights to purchase up to $200.0 million of its
common stock at a price equal to the lower of $4.00 per share and 65% of the
average market price of the Company's common stock over three trading days prior
to the
32
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PRISON REALTY TRUST, INC. AND SUBSIDIARIES
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
commencement of the rights offering. In connection with the rights offering,
Pacific Life will provide a 100% backstop of up to $200.0 million for any
unsubscribed portion of the rights offering and will receive, in exchange for
such commitment, warrants to purchase 20.0 million shares of the Company's
common stock (or, if greater, warrants to purchase 10% of the Company's
outstanding common stock on a fully diluted basis) having a term of eight years.
The warrant exercise price will be set at a 20% premium to the average closing
market stock price over the five trading days prior to the end of the rights
offering. To the extent that the rights to purchase the Company's common stock
are not exercised in the rights offering, Pacific Life will purchase shares of
the Company's Series B convertible preferred stock equal to the difference
between $200.0 million and the gross proceeds received by the Company in the
rights offering, subject to a $10.0 million minimum investment in the shares of
Series B convertible preferred stock. The Series B convertible preferred stock
will provide for cash dividends at a rate of 6% per annum and a paid-in-kind, or
PIK, dividend at a rate of 4% per annum for the first three years following the
date of issuance, and cash dividends at a rate of 10% per annum thereafter,
payable quarterly in arrears. The Series B convertible preferred stock will be
convertible into shares of the Company's common stock at a conversion price
equal to the rights offering exercise price.
Under the terms of the Company's agreement with Pacific Life, the Company
intends to elect to be taxed as a REIT for its taxable year ended 1999 and, in
satisfaction of the Company's remaining REIT distribution requirements, will
distribute to all common shareholders approximately $150.0 million of 12% PIK
Series C convertible preferred stock. The Series C convertible preferred stock
will be convertible into shares of the Company's common stock during certain
specified periods at prescribed prices based on 100% of an average trading
price.
Upon completion of the Pacific Life Restructuring the board of directors of the
Company will be fixed at ten members, comprised of four members from the
Company's existing board, four members designated by Pacific Life and two
independent directors designated jointly by Pacific Life and the Company's
existing board. An investment committee of the board of directors will also be
created comprised of seven directors, with four designated by Pacific Life, one
non-executive director, one executive director and one outside director jointly
selected by the board of directors and Pacific Life. The investment committee
will, among other things, approve the selection of a new chief executive officer
and chief financial officer of the Company.
It is a condition to the obligations of Pacific Life under the Pacific Life
Restructuring that the existing securities litigation against the Company be
finally settled on terms and conditions satisfactory to Pacific Life or, in the
alternative, that liability insurance be obtained by the Company providing
coverage for such potential liability. It is also a condition to the obligations
of Pacific Life that the Company's existing senior indebtedness be refinanced or
"rolled-over" by the existing lending group. The completion of the transactions
contemplated by the Pacific Life Restructuring, including the issuance of the
Series B convertible preferred stock and the warrant, and the Company's election
not to be taxed as a REIT commencing with its 2000 taxable year, is subject to
the Company shareholder approval.
There can be no assurance that any or all of such conditions will be met or
that, if any of such conditions are not met, Pacific Life will waive such
conditions. In the event any such conditions are not met and are not waived by
Pacific Life, the Pacific Life Restructuring will not be completed, and the
Company's Board of Directors will be required to determine the best alternative
for the Company and its shareholders. The Company's Board of Directors expects
that if the Pacific Life Restructuring is not completed, the Company will
complete the merger with CCA provided (i) each of the Company and CCA obtain the
requisite shareholder approval, (ii) the Company is able to restructure the
terms of its indebtedness in a satisfactory manner, and (iii) the Board of
Directors of each of the companies determines that a
33
<PAGE> 35
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
combination without additional equity is more favorable to such company and its
respective shareholders than seeking protection under the federal bankruptcy
laws.
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.
As of March 31, 2000, approximately $80.2 million of rents due from CCA to the
Company were unpaid. In an effort to address the liquidity needs of CCA prior to
the completion of the Pacific Life Restructuring, the Company and CCA intend to
amend the terms of the CCA Leases. Pursuant to this proposed amendment, rent
will be payable on June 30 and December 31 of each year, instead of monthly. In
addition, the amendment will provide that CCA is required to make certain
scheduled monthly installment payments to the Company. At the time these
installment payments are made, it is anticipated that CCA will also be required
to pay interest to the Company upon such payments at a rate equal to the then
current interest rate under CCA's revolving credit facility. These installment
payments represent a portion of CCA's rental payment obligations accruing from
January 1, 2000 to June 30, 2000 under the CCA Leases. CCA paid $4.0 million of
2000 rents subsequent to March 31, 2000.
The Company and CCA also intend to amend the terms of the Business Development
Agreement, the Amended and Restated Services Agreement, and the Amended and
Restated Tenant Incentive Agreement to provide for the deferral of the payment
of all fees under these agreements by the Company to CCA until September 30,
2000.
LENDER CONSENTS
The effected and proposed amendments to the contractual agreements between the
Company and CCA as previously described are subject to the consent of the
Company's senior lenders. The consummation of the Pacific Life Restructuring
also is subject to the consent of the Company's lenders. The actions of the
Company with respect to the solicitation of the consent of the Company's lenders
with respect to these matters is described under "Liquidity and Capital
Resources."
RESULTS OF OPERATIONS
The Company incurred a net loss for the three months ended March 31, 2000 of
$30.0 million and has been in default under its senior secured bank credit
facility (outstanding balance of $926.7 million at March 31, 2000) and is in
default under the provisions of the agreements governing the Company's 9.5%
Convertible Notes, as hereinafter defined (outstanding balance of $40.0 million
at March 31, 2000), and its 7.5% Convertible Notes, as hereinafter defined
(outstanding balance of $30.0 million at March 31, 2000). In addition, the
Company has significant outstanding shareholder and other litigation matters.
For a fuller description of the Company's non-compliance with the terms and
covenants of its indebtedness
34
<PAGE> 36
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
and events of default thereunder, as well as the Company's actions with respect
to obtaining waivers of these matters, see " Liquidity and Capital Resources"
herein.
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 $62.6 million for the three
months ended March 31, 2000, and has a net working capital deficiency and a net
capital deficiency at March 31, 2000.
As of March 31, 2000, approximately $92.2 million of rents due from CCA to the
Company under the CCA Leases were unpaid. The terms of the CCA Leases provide
that rental payments are due and payable on the 25th day of each month for the
current month. The CCA Leases provide that it shall be an event of default if
CCA fails to pay any installment of rent within 15 days after notice of
nonpayment from the Company. The Company, however, has not provided a notice of
nonpayment to CCA with respect to lease payments due and payable by CCA.
Subsequent to March 31, 2000, CCA has paid $11.9 million of lease payments
related to 1999 and $4.0 million related to 2000.
CCA recently obtained a waiver of existing events of default under its revolving
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, will terminate upon the occurrence of
certain events, and the term of the waiver will expire upon July 31, 2000. See
"Liquidity and Capital Resources" for a description of these events of default
and the waiver of such events of default.
As a result of CCA's current liquidity position, CCA has 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
(the "CCA Note"). Pursuant to the terms of the CCA Note, CCA was required to
make the payment on December 31, 1999; however, pursuant to the terms of a
subordination agreement, dated as of March 1, 1999, by and between the Company
and the agent of CCA's revolving credit facility (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. As
of December 31, 1999, CCA was not, and, notwithstanding the waiver discussed
above, CCA currently is not in compliance with these financial covenants.
Consequently, CCA is prohibited from making the scheduled interest payment to
the Company. Pursuant to the terms of the Subordination Agreement, 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 revolving credit facility remains outstanding. Also as
a result of CCA's current 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 Prison Realty and CCA, declarations of events of
default and potential acceleration actions by the Company's and CCA's creditors,
the continued inability of CCA to make contractual payments to the Company, 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.
35
<PAGE> 37
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AS COMPARED TO THE THREE MONTHS ENDED MARCH
31, 1999
RENTAL REVENUES
Rental revenues were $11.5 and $63.6 million for the three months ended March
31, 2000 and 1999, respectively and were generated from the leasing of
correctional and detention facilities. The Company reserved $71.2 million of the
$80.2 million in total rental revenue for the three months ended March 31, 2000
due from CCA resulting from the uncertainty regarding the collectibility of the
payments.
INTEREST INCOME
Interest income was $3.3 and $6.2 million for the three months ended March 31,
2000 and 1999, respectively. This amount was a result of interest 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.
Interest on the CCA Note is payable annually at the rate of 12%. Principal is
due in six equal annual installments beginning December 31, 2003. As previously
described, as of March 31, 2000, the first scheduled payment of interest,
totaling approximately $16.4 million, on the CCA Note was unpaid. The Company
has fully reserved the $16.4 million of interest accrued under the terms of the
CCA Note during 1999 as well as the $4.1 million of interest accrued during the
first quarter of 2000. The $6.2 million of interest income for the three months
ended March 31, 1999 included $4.1 million of interest income related to the CCA
Note which was reserved for in the fourth quarter of 1999 due to CCA not making
the scheduled interest payment.
LICENSING FEES
Licensing fees were $2.6 and $2.1 million for the three months ended March 31,
2000 and 1999, respectively. The licensing fees were earned as a result of 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 "Trade Name Use Agreement"). The fee
is based upon gross revenues of CCA, subject to a limitation of 2.75% of the
gross revenues of the Company.
DEPRECIATION AND AMORTIZATION
Depreciation expense was $12.9 and $9.9 million for the three months ended March
31, 2000 and 1999, respectively. Depreciation expense as a percentage of gross
rental revenues was 16.1% and 15.6% for the three months ended March 31, 2000
and 1999, 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 of
buildings and machinery and equipment, respectively.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expenses were $2.5 and $0.9 million for the three
months ended March 31, 2000 and 1999, respectively. General and administrative
expense as a percentage of gross rental revenues was 3.2% and 1.4% for the three
months ended March 31, 2000 and 1999, respectively. General and administrative
expenses consist primarily of management salaries and benefits, legal and other
36
<PAGE> 38
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
administrative costs. The increase of $1.6 million resulted primarily from an
increase of $0.9 million in legal fees and $0.6 million in franchise taxes.
WRITE-OFF OF AMOUNTS UNDER LEASE ARRANGEMENTS
During the three months ended March 31, 2000, the Company opened one facility
that is operated by CCA. The Company has expensed the tenant incentive fees due
CCA, totalling $4.0 million, but has made no payments to CCA in 2000 with
respect to this agreement.
EQUITY IN EARNINGS OF UNCONSOLIDATED ENTITIES AND AMORTIZATION OF DEFERRED GAINS
Equity in earnings of unconsolidated entities and amortization of deferred gains
was $6.1 and $7.7 million for the three months ended March 31, 2000 and March
31, 1999, respectively. For the three months ended March 31, 2000, the Company
recognized equity in earnings of Prison Management Services, Inc. ("PMSI") and
Juvenile and Jail Facility Management Services, Inc. ("JJFMSI") of $2.1 million
and $1.3 million, respectively, and received distributions from PMSI and JJFMSI
of $0.6 million and $0.1 million, respectively. For the three months ended March
31, 2000, the Company recognized amortization of deferred gains of PMSI and
JJFMSI of $1.8 million and $0.9 million, respectively.
For the three months ended March 31, 1999, the Company recognized equity in
earnings of PMSI and JJFMSI of $1.9 million and $3.1 million, respectively. For
the three months ended March 31, 1999, the Company recognized amortization of
deferred gains of PMSI and JJFMSI of $1.8 million and $0.9 million,
respectively. The decrease in the equity in earnings of PMSI and JJFMSI is
attributable to less favorable operating results of PMSI and JJFMSI.
INTEREST EXPENSE
Interest expense was $31.8 million and $8.3 million for the three months ended
March 31, 2000 and 1999, respectively. Interest expense is based on outstanding
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 $5.2 million and $7.1 million for the three
months ended March 31, 2000 and 1999, respectively. The increase in interest
expense resulted from increased borrowings of $406.7 million from March 31, 1999
to March 31, 2000, increased interest rates due to rising market rates, the 2.0%
default rate on the Amended Credit Facility, the default rate and contingent
interest on the $40 million convertible notes and less capitalized interest.
PROVISION FOR CHANGE IN TAX STATUS
The Company, as the successor to Old CCA (a taxable corporation) as the 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 three months ended March 31, 1999.
37
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PRISON REALTY TRUST, INC. AND SUBSIDIARIES
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CCA FINANCIAL INFORMATION
The following unaudited operating information presents CCA's results of
operations for the three months ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
------------------ ------------------
<S> <C> <C>
(UNAUDITED AND AMOUNTS IN THOUSANDS)
REVENUES $ 137,952 $ 112,363
----------- --------------
EXPENSES:
Operating 105,485 82,170
Trade name use agreement 2,576 2,139
Lease 79,314 80,735
General and administrative 6,159 5,775
Depreciation and amortization 2,170 2,062
----------- --------------
195,704 172,881
----------- --------------
OPERATING LOSS (57,752) (60,518)
Interest expense, net 4,888 6,606
----------- --------------
LOSS BEFORE INCOME TAXES (62,640) (67,124)
BENEFIT FOR INCOME TAXES -- (27,358)
----------- --------------
NET LOSS $ (62,640) $ (39,766)
=========== ==============
</TABLE>
The following balance sheet information presents CCA's financial position as of
March 31, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
<S> <C> <C>
(UNAUDITED AND AMOUNTS IN THOUSANDS)
CURRENT ASSETS:
Cash and cash equivalents $ 2,504 $ 10,725
Accounts receivable, net of allowances 71,710 66,414
Prepaid expenses 3,196 3,733
Other current assets 4,798 7,775
---------- ----------
Total current assets 82,208 88,647
PROPERTY AND EQUIPMENT, NET 19,453 19,959
OTHER LONG-TERM ASSETS:
Investment in contracts 66,160 67,363
Other 8,097 8,732
---------- ----------
Total assets $ 175,918 $ 184,701
========== ==========
</TABLE>
(CONTINUED)
38
<PAGE> 40
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
The following balance sheet information presents CCA's financial position as of
March 31, 2000 and December 31, 1999: (Continued):
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
<S> <C> <C>
(CONTINUED) (UNAUDITED AND AMOUNTS IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 23,319 $ 28,938
Lease and trade name use payables to Prison Realty 96,915 27,080
Accrued salaries and wages 5,658 5,842
Accrued property taxes 7,822 9,393
Accrued interest to Prison Realty 20,539 16,440
Short-term debt 6,180 16,214
Promissory note to Prison Realty 137,000 137,000
Other accrued expenses 16,518 17,514
----------- -----------
Total current liabilities 313,951 258,421
DEFERRED CREDITS 105,202 107,070
----------- -----------
Total liabilities 419,153 365,491
----------- -----------
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 (2,913) (3,108)
Retained deficit (265,558) (202,918)
----------- -----------
Total stockholders' equity (243,235) (180,790)
----------- -----------
Total liabilities and stockholders' equity $ 175,918 $ 184,701
=========== ===========
</TABLE>
39
<PAGE> 41
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
The following is the unaudited cash flow statement for CCA for the three months
ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
(UNAUDITED AND AMOUNTS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITES:
Net loss $(62,640) $(39,766)
Adjustments to reconcile net loss to net cash provided by
Operating activities
Depreciation and amortization 2,170 2,062
Amortization of deferred credits (1,868) (160)
Deferred income taxes -- (27,358)
Deferred credit payments received from Prison Realty 1,421 59,259
Other noncash items 786 195
Write off of debt issuance costs -- 2,706
Gain on sale of asset (2) --
Changes in assets and liabilities, net
Trade accounts receivable (5,296) 6,244
Prepaid expenses 537 149
Other current assets 1,556 (16,872)
Other assets -- 172
Accounts payable (5,619) 1,867
Lease and trade name use payables to Prison Realty 69,835 --
Accrued salaries and wages (184) 3,634
Accrued property taxes (1,571) (316)
Accrued interest to Prison Realty 4,099 4,110
Other accrued expenses (996) (1,537)
-------- --------
Net cash provided by operating activities 2,228 (5,611)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions, net (472) (1,020)
Proceeds from sale of assets 23 --
Payments received on note receivable 34 9
-------- --------
Net cash used in investing activities (415) (1,011)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of debt issuance costs -- (1,517)
Payments on short-term debt, net (10,034) --
-------- --------
Net cash used in financing activities (10,034) (1,517)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (8,221) (8,139)
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD 10,725 19,057
-------- --------
CASH AND CASH EQUIVALENTS, END OF THE PERIOD $ 2,504 $ 10,918
======== ========
</TABLE>
40
<PAGE> 42
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
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. As of December 31, 1999, CCA was not, and CCA currently is not, in
compliance with these financial covenants and, consequently, is prohibited from
making the scheduled interest payment to the Company. Pursuant to the terms of
the Subordination Agreement, 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 revolving
credit facility remains outstanding. During the three months ended March 31,
1999, the Company recorded $4.1 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 of interest accrued during the three months ended
March 31, 2000.
CCA failed to make timely contractual payments under 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. During 2000, CCA has paid $12.9
million of lease payments related to 1999 and $4.0 million in May of 2000
related to 2000. For the three months ended March 31, 2000, the Company
recognized rental revenue from CCA of $80.2 million and recorded a reserve of
$71.2 million resulting in recognition of net rental revenue from CCA of $9.0
million. The reserve was recorded due to the uncertainty regarding the
collectiblity of the revenue.
Costs incurred by the Company under the Amended and Restated Services Agreement
by and between the Company and CCA are capitalized as part of the facilities'
development cost. Costs incurred under the CCA Services Agreement and
capitalized as part of the facilities' development cost totaled $3.0 million and
$12.1 million for the three months ended March 31, 2000 and 1999, respectively.
Costs incurred by the Company under the Business Development Agreement by and
between the Company and CCA are capitalized as part of the facilities'
development cost. For the three months ended March 31, 2000, no costs were
incurred under the Business Development Agreement, and for the three months
ended March 31, 1999, $8.6 million were incurred under the Business Development
Agreement.
As of March 31, 2000, the Company had recorded a receivable of $25.8 million
from CCA. This receivable was comprised primarily of (i) rent due under the CCA
Leases for the three months ended March 31, 2000 ($80.2 million) and a portion
of the month of December 1999 ($20.9 million) and (ii) licensing fees for the
fourth quarter of 1999 and the first quarter of 2000 due under the Trade Name
Use Agreement ($4.8 million). For the three months ended March 31, 2000, the
Company recognized rental revenue from CCA of $80.2 million and recorded a
reserve of $71.2 million resulting in recognition of net rental revenue from CCA
of $9.0 million. The reserve was recorded due to the uncertainty regarding the
collectablity of the revenue. Subsequent to March 31, 2000, CCA has paid for
obligations under the CCA Leases for 2000 and 1999 of $4.0 million and $11.9
million, respectively. In addition, subsequent to March 31, 2000, CCA has paid
$2.2 million for obligations under the Trade Name Use Agreement for 1999.
PMSI AND JJFMSI FINANCIAL INFORMATION
The Company owns 100% of the non-voting stock of each of PMSI and JJFMSI, which
manage certain government-owned prison and jail facilities under the
"Corrections Corporation of America" name. On a
41
<PAGE> 43
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
quarterly basis, the Company receives 95% of the net income, as defined, of each
of PMSI and JJFMSI through ownership of the non-voting stock.
The following unaudited operating information presents a combined summary of the
results of operations for PMSI and JJFMSI for the three months ended March 31,
2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
(UNAUDITED AND AMOUNTS IN THOUSANDS)
Revenues $73,967 $69,082
Net income 3,625 5,276
</TABLE>
The following unaudited balance sheet information presents a combined summary of
the financial position for PMSI and JJFMSI as of March 31, 2000 and December 31,
1999:
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- ------------------
<S> <C> <C>
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
Current assets $ 62,321 $ 60,741
Total assets 149,507 151,167
Current liabilities 32,707 31,750
Total liabilities 33,573 32,622
Stockholders' equity 115,934 118,545
</TABLE>
42
<PAGE> 44
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
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. CCA currently leases 37
of the Company's 46 operating properties pursuant to the CCA Leases. 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. 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 the leases if CCA fails to make required
lease payments. If this were to happen, however, the Company would be required
to renegotiate existing leases or incentive fee arrangements, to find other
suitable lessees.
The Company incurred a net loss for the three months ended March 31, 2000 of
$30.0 million and has been in default under its senior secured bank credit
facility (outstanding balance of $926.7 million at March 31, 2000) and is in
default under the provisions of the agreements governing the Company's 9.5%
convertible, subordinated notes (outstanding balance of $40.0 million at March
31, 2000), and its 7.5% convertible, subordinated notes (outstanding balance of
$30.0 million at March 31, 2000). The defaults relate 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 a securities purchase agreement in connection with the Pacific Life
Restructuring. See "- Debt Structure." The Company's noncompliance with the
provisions of its outstanding obligations could result in the Company's
creditors demanding immediate repayment of these obligations. The events of
default under the provisions of the Company's bank credit facility and an
aggregate of $40.0 million of the Company's convertible, subordinated notes have
been formally declared, but no acceleration actions have been taken by the
creditors with respect to this indebtedness. The Company has acknowledged to the
senior lenders under its bank credit facility that an event of default exists
under the bank credit facility and, as such, the Company has been paying
interest at the default rate thereunder since January 25, 2000. The Company has
not obtained waivers of these existing events of default. In addition, the
Company has significant outstanding shareholder and other litigation matters.
For a fuller description of the Company's non-compliance with the terms and
covenants of its indebtedness and events of default thereunder, as well as the
Company's actions with respect to obtaining waivers of these matters, see "-
Debt Structure" hereunder.
In 1999, the Company's growth strategy included acquiring, developing and
expanding correctional and detention facilities as well as other properties.
Because the Company was required to distribute to its stockholders at least 95%
of its taxable income to qualify as a REIT for 1999, the Company relied
primarily upon the availability of debt or equity capital to fund the
construction and acquisitions of and improvements to correctional and detention
facilities.
In response to the significant losses experienced by the Company and by CCA
during 1999 and in response to the defaults under the Company's debt agreements,
the Company had entered into an agreement with respect to the Pacific Life
Restructuring. For a complete description of the Pacific Life Restructuring, see
"Prospective Restructuring and Equity Investment" herein.
43
<PAGE> 45
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
DEBT STRUCTURE
THE AMENDED CREDIT FACILITY. On January 1, 1999, in connection with the
completion of the 1999 Merger, the Company obtained a $650.0 million secured
credit facility (the "Credit Facility") from NationsBank, N.A., as
Administrative Agent, and several U.S. and non-U.S. banks. The Credit Facility
included up to a maximum of $250.0 million in tranche B term loans and $400.0
million in revolving loans, including a $150.0 million subfacility for letters
of credit. The term loan requires quarterly principal payments of $625,000
throughout the term of the loan, with the remaining balance maturing on December
31, 2002. The revolving loans mature on January 1, 2002. Interest rates, unused
commitment fees and letter of credit fees on the Credit Facility were subject to
change based on the Company's senior debt rating. The Credit Facility was
secured by mortgages on the Company's real property.
On August 4, 1999, the Company completed an amendment and restatement of the
Credit Facility (the "Amended Credit Facility") increasing amounts available to
the Company under the original Credit Facility to $1.0 billion through the
addition of a $350.0 million tranche C term loan. The tranche C term loan is
payable in equal quarterly installments in the amount of $875,000 through the
calendar quarter ending September 30, 2002, with the balance to be paid in full
on December 31, 2002. The maturity of the term loan under the Credit Facility
was changed to December 31, 2002, with the maturity of the revolving loan under
the Credit Facility remaining January 1, 2002. Lehman Commercial Paper Inc.
replaced NationsBank, N.A. as Administrative Agent of the Amended Credit
Facility.
The Amended Credit Facility, similar to the Credit Facility, provides for
interest rates, unused commitment fees and letter of credit fees to change based
on the Company's senior debt rating. Similar to the Credit Facility, the Amended
Credit Facility bears interest at variable rates of interest based on a spread
over the base rate or LIBOR (as elected by the Company), which spread is
determined by reference to the Company's credit rating. 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 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 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 of these rating changes, the interest rate
applicable to outstanding amounts under the Amended Credit Facility was
increased by .50%
Upon the lenders' determination that the Company is in default under the terms
of the Amended 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, the Company is currently in
default under the Amended Credit Facility and, consequently, has been subject to
the default rate of interest, effective since January 25, 2000.
The Company incurred costs of $59.2 million in consummating the Credit Facility
and the Amended Credit Facility transactions, including $41.2 million related to
the amendment and restatement. The Company wrote off $9.0 million of expenses
related to the Credit Facility upon completion of the amendment and restatement.
44
<PAGE> 46
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
In accordance with the terms of the Amended 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
effect of these arrangements is recognized in interest expense.
The Amended Credit Facility, similar to the 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.
The Amended Credit Facility contains 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 Credit Facility also restricted the Company's ability to make the
1999 cash payment of a special dividend unless (a) the Company had liquidity of
at least $75.0 million at the dividend declaration date after giving effect to
the payment of the special dividend, (b) the Company received at least $100.0
million in cash proceeds for the issuance of equity or similar securities from a
new investor receiving representation on the Company's Board of Directors and
(c) CCA received at least $25.0 million in cash proceeds from the issuance of
any combination of equity securities and subordinated debt. The Amended Credit
Facility also restricts the cash payment of a special dividend in 2000.
SOLICITATION OF CONSENTS FOR WAIVERS OF EVENTS OF DEFAULT UNDER, AND AMENDMENTS
TO, PROVISIONS OF THE COMPANY'S AMENDED CREDIT FACILITY. As a result of: (i) the
current 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) the transactions contemplated by the
proposed Pacific Life, certain existing or potential events of default have
arisen under the provisions of the Amended Credit Facility. Specifically, the
Company is subject to the following existing or potential events of default
under the Amended Credit Facility:
- - For the fiscal quarters ending December 31, 1999 and March 31, 2000, the
Company was not in compliance with certain financial covenants, each as
defined in the Amended Credit Facility.
- - As a result of the existence of explanatory paragraphs in the reports of
each of the Company's and CCA's reports of independent public accountants
relating to the Company's and CCA's 1999 consolidated financial statements
as to the ability of each of the Company and CCA to continue as a going
concern, the Company is in violation of the provisions of the Amended
Credit Facility.
- - As more fully described below, the Company is in default under the
provisions of the note purchase agreement relating to the Company's 9.5%
Convertible Notes (as defined herein). Due to the provisions of the Amended
Credit Facility, this default under the terms of these notes has resulted
in an event of default under the Amended Credit Facility since January 25,
2000.
- - The declaration and payment of a quarterly dividend on the Company's Series
A Cumulative Preferred Stock for the quarter ended March 31, 2000
constituted an event of default under the Amended Credit Facility.
- - The Amended Credit Facility contains restrictions upon the ability of the
Company to amend the terms of its agreements with CCA without the consent
of the Company's senior lenders, which would be violated upon execution of
the proposed amendments to the Company's existing agreements with
45
<PAGE> 47
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
CCA.
- - The Amended Credit Facility contains restrictions upon the ability of the
Company to enter into any agreement constituting a "change of control"
provision, as defined in the Amended Credit Facility. The appointment of a
new Chairman of the Board of Directors and President of the Company in
December 1999 constituted a "change of control" of the Company under the
terms of the Amended Credit Facility upon the expiration of an applicable
period. In addition, the execution and performance of certain conditions
contained in the securities purchase agreement with Pacific Life
constituted a "change of control" of the Company under the terms of the
Amended Credit Facility.
- - The Amended Credit Facility provides that any non-compliance by CCA with
the provisions of CCA's revolving credit facility would constitute an
event of default under the Amended Credit Facility. Although CCA has
obtained a waiver of all events of default under its revolving credit
facility, CCA's non-compliance with the provisions of its revolving credit
facility would also constitute an event of default under the Amended Credit
Facility.
- - As more fully described below, the Company is in violation of certain
financial covenants contained in the note purchase agreement relating to
the Company's 7.5% Convertible Notes (as hereinafter defined). However, the
Company is currently not in default under the provisions of this note
purchase agreement because the holder of the 7.5% Convertible Notes has not
provided the Company with written notice declaring such an event of
default. As a result, no event of default currently exists under the
provisions of the Amended Credit Facility with respect to the Company's
violation of these financial covenants. If, however, the holder of the 7.5%
Convertible Notes did provide a notice of default to the Company, upon the
expiration of an applicable period, the Company would be in default under
the provisions of the note purchase agreement, which would also give rise
to an event of default under the Amended Credit Facility.
PROPOSED WAIVERS OF EVENTS OF DEFAULT UNDER, AND AMENDMENTS TO, THE COMPANY'S
AMENDED CREDIT FACILITY. The Company, through Lehman Commercial Paper Inc., the
administrative agent of the Amended Credit Facility, has initiated the process
of soliciting the consent of the requisite percentage of the senior lenders
under the Amended Credit Facility for a waiver of the existing events of default
under the Amended Credit Facility. Specifically, the Company anticipates
requesting a waiver of the following events of default under the Amended Credit
Facility:
- - The Company's failure to comply with certain of the financial covenants
contained in the Amended Credit Facility for the fiscal quarter ended
December 31, 1999, for the fiscal quarter ended March 31, 2000 and for the
fiscal quarter ending June 30, 2000.
- - The Company's declaration and payment of its regular quarterly dividend on
shares of its Series A Preferred Stock for the fiscal quarter ended March
31, 2000.
- - The failure of the Company to deliver annual financial statements of the
Company and CCA unqualified as to the ability of each of the Company and
CCA to continue as a going concern.
- - The existence of certain defaults, as described below, by the Company under
the terms of the note purchase agreement relating to the Company's $40.0
million 9.5% Convertible Notes.
46
<PAGE> 48
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
The Company also plans to request the consent of the requisite percentage of its
senior lenders under the Amended Credit Facility for a waiver of the Amended
Credit Facility's restrictions relating to the proposed amendments of the CCA
Leases, the Amended and Restated Tenant Incentive Agreement, the Amended and
Restated Service Agreement and the Business Development Agreement providing for
the deferral of certain payments with respect to each of these agreements. The
Company plan to request the consent of such lenders with respect to an amendment
to the Amended Credit Facility changing the definition of the Company's
borrowing base under the credit facility to alleviate the adverse effects of the
deferred rental payments on the Company's borrowing base. Additionally, the
Company plans to request the consent of the requisite percentage of its senior
lenders under the Amended Credit Facility to the appointment of a new Chairman
of the Board of Directors and President of the Company. The Company plans to
request a waiver of the Amended Credit Facility's restrictions upon a "change of
control" arising from the execution and performance of certain conditions under
the securities purchase agreement with Pacific Life. The Company anticipates
that these waivers of the provisions of the Amended Credit Facility would remain
the conditioned upon: (i) the completion of the restructuring transactions; (ii)
the termination of the securities purchase agreement with Pacific Life; or (iii)
as-yet-undetermined requirements.
The Company currently is also in discussions with Lehman Commercial Paper Inc.,
the Administrative Agent, to restructure the terms of the Amended Credit
Facility to provide that the Amended Credit Facility will continue to remain
outstanding following completion of the Pacific Life Restructuring. The Company
anticipates that Lehman Commercial Paper Inc. will solicit the consent of the
requisite percentage of the senior lenders under the Amended Credit Facility to
amend the Amended Credit Facility to provide for the restructuring and
"roll-over" of the Amended Credit Facility simultaneously with the solicitation
of the proposed waivers of the provisions of the credit facility described
above. The Company and Lehman Commercial Paper, Inc. are currently in
discussions with respect to certain terms of the restructuring of the Amended
Credit Facility, including the applicable rates of interest under the facility,
fees to be incurred by the Company in the restructuring additional convenants,
and conditions of default that may be restricted. It is also anticipated that
the terms of the waiver will restrict the Company's ability to declare and pay
quarterly cash dividends on the Company's Series A Preferred Stock until the
completion of the Pacific Life Restructuring.
Management of the Company expects the conditions to the effectiveness of all of
the proposed waivers of events of default under, and amendments to, the
provisions of the Amended Credit Facility will include, among other conditions:
(i) CCA maintaining in effect a waiver of certain events of default under the
provisions of its revolving credit facility; (ii) the Company having delivered
to the trustee of the Company's $100.0 million Senior Notes (as defined herein)
an opinion as to the fairness, from a financial point of view, to the Company of
the amendments to the terms of the CCA Leases and the amendments to the Amended
and Restated Tenant Incentive Agreement, the Amended and Restated Services
Agreement, and the Business Development Agreement issued by an accounting,
appraisal, consulting or investment banking firm of national standing; (iii) the
completion of the Pacific Life Restructuring; and (iv) the settlement of
outstanding securities litigation for an amount not to exceed the Company's
insurance coverage.
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 Credit Facility to meet these
requirements. Due to the Company's non-compliance with certain provisions of the
Amended Credit Facility, the Company is currently unable to borrow additional
amounts under the Amended Credit Facility until a waiver of the existing 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.
47
<PAGE> 49
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
There can also be no assurance that the lenders under the Amended Credit
Facility will consent to any proposed waivers of events of default under, and
amendments to, the Amended Credit Facility, or will not seek to declare an event
of default prior to the execution of any proposed waiver and amendments.
Moreover, the effectiveness of the proposed waivers of events of default under,
and amendments to, the Amended Credit Facility is subject to the satisfaction of
the conditions described above. In the event the Company is unable to obtain the
necessary waivers of events of default under, or amendments to, the Amended
Credit Facility, or to comply with and maintain the proposed waivers and
amendments, or if the Company defaults under the terms of any of its other
indebtedness, and such indebtedness is accelerated, the senior lenders under the
Amended Credit Facility are entitled, at their discretion, to exercise certain
remedies, including acceleration of the outstanding borrowings under the Amended
Credit Facility.
In addition, the Company's $100.0 million Senior Notes (as defined herein), the
Company's 9.5% Convertible Notes (as defined herein) and the Company's 7.5%
Convertible Notes (as defined herein) 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 Credit Facility or if the obligations under
the Amended Credit Facility have been accelerated. If the senior lenders under
the Amended Credit Facility elect to exercise their rights to accelerate the
Company's obligations under the Amended Credit Facility, and/or if the senior
lenders do not consent to the proposed waivers and amendments (or acceptable
alternative waivers and amendments), such events could result in the
acceleration of all or a portion of the outstanding principal amount of the
Company's 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 March 31, 2000, the Company has made all required principal and interest
payments under the Amended and Restated Credit Facility.
SENIOR NOTES
On June 11, 1999, the Company completed its offering of $100.0 million aggregate
principal amount of 12% Senior Notes due 2006 (the "Senior Notes"). Interest on
the Senior Notes is paid semi-annually in arrears, and the Senior Notes have a
seven year non-callable term due June 1, 2006. Net proceeds from the offering
were approximately $95.0 million after deducting expenses payable by the Company
in connection with the offering. The Company used the net proceeds from the sale
of the Senior Notes for general corporate purposes and to repay revolving bank
borrowings under its Credit Facility.
The Company currently is not in default under the terms of the Senior Notes.
However, in connection with the proposed amendments to the CCA Leases, the
Amended and Restated Tenant Incentive Agreement, the Amended and Restated
Services Agreement and the Business Development Agreement providing for the
deferral of certain payments with respect to each of these agreements, the terms
of the indenture governing the Senior Notes provide that the Company may not
effect such amendments without the prior 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 of the Senior Notes. The Company anticipates
that it will be able to deliver such an opinion to the trustee under the
indenture. In addition, the indenture governing the Senior Notes contains a
provision which allows the holders thereof to accelerate the outstanding
principal amount of the Senior Notes and to seek additional remedies if the
Company has a payment default under the Amended Credit Facility or if the
Company's obligations under the Amended Credit Facility have been
48
<PAGE> 50
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
accelerated.
9.5% 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 (the "9.5% Convertible Notes"), with
the first $20.0 million tranche issued in December 1998 under substantially
similar terms. The 9.5% Convertible 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 March 31, 2000, the
conversion price for the 9.5% Convertible Notes was $23.63 per share as compared
to $28.00 per share at issuance.
The provisions of the note purchase agreement relating to the 9.5% Convertible
Notes provide that the execution of the securities purchase agreement by the
Company in connection with the Pacific Life Restructuring constitutes a "change
of control" of the Company. This "change of control" gave rise to a 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. To date, the holders
of the 9.5% Convertible Notes have not provided notice to the Company that the
Company will be required to purchase all or a portion of the notes. In addition,
as of February 5, 2000, the Company was no longer in compliance with a financial
covenant contained in the note purchase agreement. As a result of the violation
of this covenant, the Company is in default under the provisions of the note
purchase agreement, and the holders of such notes may, at their option,
accelerate all or a portion of the outstanding principal amount of this
indebtedness. Moreover, during any period in which the Company is in default
under the provisions of the note purchase agreement, the holders of the notes
may 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 is obligated, under the terms of the 9.5% Convertible Notes, to pay the
holders of the notes contingent interest sufficient to permit the holders to
receive a 15% rate of return 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 9.5% Convertible Notes. Lehman Commercial Paper
Inc. has notified the holders of the 9.5% Convertible Notes that, under the
terms of the Amended Credit Facility, the payment of principal and interest on
the notes is subordinated in right of payment to the prior payment in full of
amounts due under the Amended Credit Facility and that, as such, the holders of
the notes are prohibited from receiving any payment of principal or interest
under the terms of the notes until the Company is in compliance with the terms
of the Amended Credit Facility.
The Company expects to initiate discussions with the holders of these notes to
waive the occurrence of a "change of control" arising from the Company's
execution of the securities purchase agreement with Pacific Life, thereby
extinguishing the Company's obligation to repurchase the notes at a premium. In
addition, the Company has previously requested that the provisions of the note
purchase agreement be amended to: (i) remove the financial covenant set forth in
the note purchase agreement; (ii) although the Company believes it currently is
in compliance with such covenant, remove a covenant requiring the Company to use
its best efforts to qualify as a REIT for federal income tax purposes; and (iii)
although the Company believes it currently is in compliance with such covenant,
remove a covenant restricting the Company's ability to conduct business other
than the financing,
49
<PAGE> 51
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
ownership and development of prisons and other correctional facilities.
There can be no assurance that the holders of the 9.5% Convertible Notes will
consent to any proposed waiver of events of default under, and amendments to,
the note purchase agreement, or will not seek to declare an event of default
prior to the execution of any proposed waiver and amendments. If the holders of
these notes do not consent to the 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.
7.5% CONVERTIBLE, SUBORDINATED NOTES
The Company's $30.0 million 7.5% convertible, subordinated notes issued to PMI
Mezzanine Fund, L.P. (the "7.5% Convertible 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 March 31,
2000, the conversion price for the 7.5% Convertible Notes was $23.63 per share
as compared to $27.42 per share at issuance.
The provisions of the note purchase agreement relating to the 7.5% Convertible
Notes contain certain financial covenants. As of March 31, 2000, the Company was
not in compliance with certain of these financial covenants. However, the
Company is currently not in default under the provisions of this note purchase
agreement because the holder of the 7.5% Convertible Notes has not provided the
Company with written notice declaring such an event of default. As a result, no
event of default currently exists under the provisions of the Amended Credit
Facility with respect to the Company's violation of these financial covenants.
If, however, the holder of the 7.5% Convertible Notes did provide a notice of
default to the Company, upon the expiration of an applicable period, the Company
would be in default under the provisions of the note purchase agreement, which
would also give rise to an event of default under the Amended Credit Facility.
Lehman Commercial Paper Inc. has notified the holder of the 7.5% Convertible
Notes that, under the terms of the Amended Credit Facility, the payment of
principal and interest on the notes is subordinated in right of payment to the
prior payment in full of amounts due under the Amended Credit Facility and that,
as such, the holder of the notes is prohibited from receiving any payment of
principal or interest under the terms of the notes until the Company is in
compliance with the terms of the Amended Credit Facility.
The Company has initiated discussions with PMI Mezzanine Fund, L.P., the holder
of the 7.5% Convertible Notes, to obtain a waiver of events of default under, or
amendments to, the financial covenants contained in the note purchase agreement
violated by the Company. In addition, although the Company is currently in
compliance with such covenant, the Company has requested that the provisions of
the note purchase agreement be amended to remove a covenant requiring the
Company to elect to be taxed as a REIT for federal income tax purposes.
PMI Mezzanine Fund, L.P. has indicated that, subject to the completion of the
Pacific Life Restructuring, it will consent to the proposed waivers of events of
default under, and amendments to, the note purchase agreement and will not seek
to declare an event of default prior to the execution of the proposed waiver and
amendments. If, however, the Pacific Life Restructuring is not completed, there
can be no assurance that the holder of the 7.5% Convertible Notes will consent
to the proposed waivers of events of default under, or amendments to, the note
purchase agreement or that the holder of such notes will not seek to declare an
event of default and require the Company to redeem the outstanding principal
amount of the notes.
As of March 31, 2000, the Company has made all required interest payments
under the 7.5% Convertible Notes.
50
<PAGE> 52
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
CCA'S REVOLVING CREDIT FACILITY
The terms of CCA's revolving credit facility provide that CCA shall not amend or
modify the terms of the Amended and Restated Tenant Incentive Agreement, the
Amended and Restated Services Agreement, and the Business Development Agreement
in any manner which would be on terms and conditions less favorable to CCA than
are in effect immediately prior to such amendment or modification. If the
proposed amendments to these agreements are completed, CCA would be in violation
of its revolving credit facility. In addition, CCA's non-payment of amounts due
under the CCA Leases has resulted, and the proposed amendments to the CCA Leases
would result, in a violation of CCA's revolving credit facility. CCA's revolving
credit facility also requires that CCA have a net worth in excess of certain
specified amounts. On December 31, 1999 and March 31, 2000, CCA was not, and it
currently is not, in compliance with this financial covenant. The terms of CCA's
revolving credit facility also provide that CCA's execution of the agreement and
plan of merger setting forth the terms of the combination of the Company, CCA,
PMSI and JJFMSI contemplated by the Pacific Life Restructuring resulted in an
event of default under CCA's revolving credit facility.
CCA has obtained the consent of the requisite percentage of the senior lenders
under its revolving credit facility for a waiver of its credit facility's
restrictions relating to:
- - The proposed amendments of the terms of the Amended and Restated Tenant
Incentive Agreement, the Amended and Restated Services Agreement, and the
Business Development Agreement.
- - CCA's non-payment of amounts due under the CCA Leases and the proposed
amendments to the CCA Leases.
- - CCA's violation of the net worth covenant contained in its revolving credit
facility.
- - CCA's execution of the agreement and plan of merger.
The terms of the waiver provide that the waiver shall remain in effect until
July 31, 2000. The waiver will terminate on a date which is earlier than July
31, 2000 if: (i) the Pacific Life securities purchase agreement is terminated;
(ii) CCA makes any payments to the Company other than as set forth in the
proposed amendments to CCA's agreements with the Company; or (iii) the senior
lenders under the Company's Amended Credit Facility exercise any rights with
respect to any default or event of default under the Amended Credit Facility.
There can be no assurance that CCA will be able to comply with and maintain the
waivers. In the event CCA is unable to comply with and maintain the waivers, the
senior lenders under CCA's revolving credit facility are entitled, at their
discretion, to exercise certain remedies, including acceleration of the
outstanding borrowings under the revolving credit facility. If the senior
lenders elect to exercise their rights to accelerate CCA's obligations under
CCA's revolving credit facility, such events would have a material adverse
effect on CCA's liquidity and financial position. CCA does not have sufficient
working capital in the event of an acceleration of CCA's revolving credit
facility. In addition, the terms of the Company's leases with CCA provide that
an event of default under CCA's revolving credit facility which results in the
acceleration of at least $25.0 million of CCA's indebtedness under the CCA
revolving credit facility prior to its stated maturity will result in an event
of default under the CCA Leases, which would result in an event of default under
the Company's Amended Credit Facility, also triggering defaults under the
Company's other indebtedness.
51
<PAGE> 53
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
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 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 March 31, 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. The Company is currently considering the exact timing and
method of the payment of these required distributions. See "Proposed
Restructuring and Equity Investment" for a discussion of the Company's
distribution of securities under the terms of the Pacific Life Restructuring in
satisfaction of these required distributions. The Company may partially satisfy
these requirements through the payment of a one-time special dividend (the
"Special Dividend"); however, certain provisions of the Amended Credit Facility
restrict the Company's ability to pay these required distributions in cash. In
January 2000, $2.2 million of distributions relating to the 8.0% Series A
Cumulative Preferred Shares, 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 shareholders 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 consolidated balance
sheets as of March 31, 2000. Currently, the Company's governing instruments
require that it operate as a REIT. However, if the Company completes the Pacific
Life Restructuring following shareholder in 2000 approval to modify its
governing instruments, the Company intends to be taxed as a C corporation
commencing with its taxable year ending December 31, 2000. In the event that the
Pacific Life Restructuring is not completed, the Company expects that, following
required shareholder approval, the Company will nevertheless elect to be taxed
as a C corporation with respect to its taxable year ending December 31, 2000 and
thereafter.
CASH FLOW FROM OPERATING, INVESTING AND FINANCING ACTIVITIES
The Company's cash flow used in operating activities was $20.8 million and cash
flow provided by operating activities was $50.5 million for the three months
ended March 31, 2000 and 1999, respectively, and represents net income plus
depreciation and amortization and other non-cash changes and changes in the
various components of working capital. The Company's cash flow used in investing
activities was $47.3 million and $225.2 million for the three months ended March
31, 2000 and 1999, respectively, and represents acquisitions of real estate
properties and increase in restricted cash. The Company's cash flow used in
financing activities was $3.7 million and cash flow provided by financing
activities was $154.9 million for the three months ended March 31, 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.
52
<PAGE> 54
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
PROSPECTIVE EQUITY INVESTMENT AND RELATED RESTRUCTURING
As previously discussed in more detail hereunder "Prospective Restructuring and
Related Equity Investment", in order to address the capital and liquidity
constraints facing the Company and CCA, as well as concerns regarding the
corporate structure and management of the Company, the Company intends to
complete a comprehensive restructuring under the terms of an agreement with
Pacific Life providing for, among other things: (i) the combination of the
Company with each of CCA, PMSI and JJFMSI; (ii) a $200.0 million equity
investment in the Company; and (iii) a restructuring of the Company's existing
board of directors and management. In connection with the execution of the
agreement with Pacific Life, the Company terminated its agreement with
Fortress/Blackstone. The Fortress/Blackstone securities purchase agreement
provided for, as a result of its termination and the execution of the agreement
with Pacific Life, the payment by the Company to Fortress/Blackstone of a
termination fee of $7.5 million, as well as a $15.2 million commitment fee and
certain expenses incurred by Fortress/Blackstone in connection with the proposed
transaction. To date, the Company has not paid these fees.
There can be no assurance that the conditions to the completion of the Pacific
Life Restructuring will be met or that, if any of such conditions are not met,
Pacific Life will waive such conditions. In the event any such conditions are
not met and are not waived by Pacific Life, the Pacific Life Restructuring will
not be completed, and the Company's Board of Directors will be required to
determine the best alternative for the Company and its shareholders. The
Company's Board of Directors expects that if the Pacific Life Restructuring is
not completed, the Company will complete the merger with CCA provided (i) each
of the Company and CCA obtain the requisite shareholder approval, (ii) the
Company is able to restructure the terms of its indebtedness in a satisfactory
manner, and (iii) the Board of Directors of each of the companies determines
that a combination without additional equity is more favorable to such company
and its respective shareholders than seeking protection under the federal
bankruptcy laws.
YEAR 2000 COMPLIANCE.
In 1999, the Company completed an assessment of its key information technology
systems, including its client server and minicomputer hardware and 76 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.
53
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PRISON REALTY TRUST, INC. AND SUBSIDIARIES
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
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
March 31, 2000, and the Company does not expect to incur any significant costs
in connection with the Year 2000 subsequent to March 31, 2000.
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
March 31, 2000, CCA spent approximately $6.4 million which included $3.4 million
related to the replacement 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 March 31, 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
months ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
FUNDS FROM OPERATIONS:
Net loss available to common shareholders $(25,950) $(24,755)
Plus: real estate depreciation 12,924 9,917
Add back: provision for change in tax status -- 83,200
-------- --------
$(13,026) $ 68,362
======== ========
</TABLE>
54
<PAGE> 56
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
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.
55
<PAGE> 57
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
ITEM 3. -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's primary market risk exposure is to changes in U.S. interest rates.
The Company is exposed to market risk related to its Amended Credit Facility and
certain other indebtedness as discussed in "Management's Discussion and Analysis
of Financial Condition and Results of Operation -- Liquidity and Capital
Resources". The interest on the Amended Credit Facility and such other
indebtedness is subject to fluctuations in the market. If the interest rate for
the Credit Facility debt was 100 basis points higher or lower during the three
months ended March 31, 2000, the Company's interest expense net of amounts
capitalized would have been increased or decreased by approximately $2.9
million.
As of March 31, 2000, the Company had outstanding $100.0 million of its Senior
Notes with a fixed interest rate of 12.0%, $40.0 million of convertible notes
with a fixed interest rate of 9.5%, $30.0 million of convertible notes with a
fixed interest rate of 7.5% and $107.5 million of preferred stock with a fixed
dividend rate of 8%. Similarly, as of March 31, 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 Amended 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.
The Company does not have a material exposure to risks associated with foreign
currency fluctuations related to its operations. The Company does not use
derivative financial instruments in its operations or investment portfolio.
56
<PAGE> 58
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On December 29, 1999, a purported class action lawsuit was filed on behalf of
the shareholders 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
the investor under the Fortress/Blackstone Restructuring (as defined in Note
15). The lawsuit alleges that the directors breached their fiduciary duties to
the Company's shareholders by "effectively selling control" of the Company for
inadequate consideration and without having adequately considered or explored
all other alternatives to the Fortress/Blackstone Restructuring or having taken
steps to maximize stockholder value. The plaintiffs seek an injunction
preventing the completion of 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 the investors.
These three actions were consolidated on February 18, 2000. See Items 1. and 2.
of Part I herein with respect to the Company's agreement to complete the Pacific
Life Restructuring and its termination of the agreement providing for the
Fortress/Blackstone Restructuring.
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 not elect to be taxed as a REIT beginning
with its 1999 taxable year and, therefore, certain statements made by them prior
to that time were false and misleading. The plaintiffs seek an unspecified
amount of monetary damages 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 complaint was filed
in the same court on behalf of one plaintiff. The lawsuit, captioned Brody, et
al. v. Prison Realty Trust, Inc. et al., names as defendants the Company, Doctor
R. Crants, D. Robert Crants, III and Darrell K. Massengale. These three actions
were consolidated on March 13, 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 securities laws based on claims substantially identical to those
enumerated above. See Items 1. and 2. of Part I herein with respect to the
Company's expectation that it will elect to be taxed and qualify as a REIT for
its 1999 taxable year, and with respect to the Company's satisfaction of its
remaining 1999 REIT distribution requirements.
The Company is also currently subject to two separate 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 1999 Merger. 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 1999
57
<PAGE> 59
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
Merger 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 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 sixteen 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 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 in the 1999 Merger.
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 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, F-53 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.
The Company is defending vigorously its actions in each of the various
shareholder or class action lawsuits. It is possible additional lawsuits will be
filed, or that the existing complaints filed in connection with the
Fortress/Blackstone Restructuring will be amended, in connection with Pacific
Life Restructuring. It is also possible that the Company's liability in regard
to the shareholder or class action 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.
With the exception of the foregoing matters, the Company is not presently
subject to any material litigation nor, to the Company's knowledge, is any
litigation threatened against the Company, 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
58
<PAGE> 60
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
The Company is currently in default under certain provisions of the agreements
governing a portion of its indebtedness. For a description of the Company's
non-compliance with the terms and covenants of its indebtedness and events of
default thereunder, as well as the Company's actions with respect to obtaining
waivers of these matters, see Items 1. and 2. of Part I herein.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
3.1 Second Amended and Restated Bylaws of the Company (previously
filed as Exhibit 3.3 to the Company's Annual Report on Form
10-K for the year ended December 31, 1999 filed with the
Commission on March 30, 2000 and incorporated herein by this
reference).
10.1 First Amendment to Securities Purchase Agreement, dated as of
February 28, 2000, by and among the Company, Corrections
Corporation of America, a Tennessee corporation, Prison
Management Services, Inc., a Tennessee corporation, and
Juvenile and Jail Facility Management Services, Inc., a
Tennessee corporation, on the one hand (collectively, the
"Companies"), and Prison Acquisition Company, L.L.C., a
Delaware limited liability company, 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 March 1, 2000
and incorporated herein by this reference).
10.2 Securities Purchase Agreement as executed by the Companies 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).
99.1 Letter to the Board of Directors of the Company, dated
February 22, 2000, from Pacific Life Insurance Company
(previously filed as Exhibit 99.1 to the Company's Current
59
<PAGE> 61
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
Report on Form 8-K filed with the Commission on March 1, 2000
and incorporated herein by this reference).
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 March 1, 2000 (File no. 0-25245), relating to the Company's receipt
of the Pacific Life proposal and the amendment to the
Fortress/Blackstone Securities Purchase Agreement.
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 Insurance Company
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 Pacific Life Securities Purchase Agreement and the
Company's termination of the Fortress/Blackstone Securities Purchase
Agreement.
60
<PAGE> 62
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PRISON REALTY TRUST, INC.
Date: May 15, 2000
/s/ Vida H. Carroll
--------------------------------
Vida H. Carroll
Chief Financial Officer/
Chief Accounting Officer
61
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PRISON REALTY FOR THE THREE MONTHS ENDED MARCH 31, 2000
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 37,475
<SECURITIES> 0
<RECEIVABLES> 176,984
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 85,740
<PP&E> 2,216,662
<DEPRECIATION> (62,709)
<TOTAL-ASSETS> 2,698,611
<CURRENT-LIABILITIES> 88,036
<BONDS> 1,097,471
0
107,500
<COMMON> 1,184
<OTHER-SE> 1,285,806
<TOTAL-LIABILITY-AND-EQUITY> 2,698,611
<SALES> 11,460
<TOTAL-REVENUES> 17,348
<CGS> 12,924
<TOTAL-COSTS> 47,261
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,794
<INCOME-PRETAX> 25,950
<INCOME-TAX> 0
<INCOME-CONTINUING> 25,950
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,950
<EPS-BASIC> (0.22)
<EPS-DILUTED> (0.22)
</TABLE>
