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Registration No. 333-41778
Filed Pursuant to Rule 424(b)(4)
(CCA/Corrections Corporation of America Logo)
CORRECTIONS CORPORATION OF AMERICA
10 BURTON HILLS BOULEVARD
NASHVILLE, TENNESSEE 37215
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON TUESDAY, SEPTEMBER 12, 2000
To Our Shareholders:
Notice is hereby given that a special meeting of the shareholders of
Corrections Corporation of America, a Tennessee corporation ("CCA"), will be
held at 12:00 noon, local time, on Tuesday, September 12, 2000, at the Union
Station Hotel, 1001 Broadway, Nashville, Tennessee, for the following purposes:
1. To consider and vote upon a proposal to approve an Agreement and Plan
of Merger dated as of June 30, 2000 by and among CCA and Prison Realty
Trust, Inc., a Maryland corporation ("Prison Realty"), and a wholly
owned subsidiary of Prison Realty, pursuant to which CCA will combine
with Prison Realty through the merger of CCA with and into Prison
Realty's wholly owned subsidiary. As part of the merger, each share of
CCA common stock outstanding at the time of the merger (other than
shares owned by Prison Realty) will be converted into the right to
receive a certain number of shares of Prison Realty common stock, as
described in the Agreement and Plan of Merger. Immediately prior to the
merger, the shares of CCA common stock held by the Baron Asset Fund
will be purchased by Prison Realty for non-cash consideration
consisting of shares of Prison Realty common stock. Prison Realty may
also purchase shares of CCA common stock held by Sodexho Alliance, S.A.
for non-cash consideration consisting of shares of Prison Realty common
stock immediately prior to the merger. In addition, Prison Realty will
issue warrants to purchase shares of its common stock to Baron as
consideration for its consent to the merger. Prison Realty will also
purchase shares of CCA common stock held by former executive officers
of Prison Realty for cash pursuant to the terms of certain severance
agreements with such officers; and
2. To transact such other business as may properly come before the special
meeting and any adjournments or postponements thereof.
CCA has fixed the close of business on Friday, July 28, 2000, as the record
date for the determination of shareholders entitled to notice of and to vote at
the special meeting and at any adjournments or postponements thereof.
The board of directors of CCA recommends that you vote "FOR" the merger
agreement and related transactions.
Your vote is important. Approval of the merger agreement and related
transactions requires the affirmative vote of 80% of the outstanding shares of
CCA common stock (class A common stock and class B common stock voting together
as a single class). If you fail to return a properly executed proxy or to vote
in person at the special meeting, or if you abstain, the effect will be a vote
against the merger agreement and related transactions. In addition, pursuant to
the terms of an agreement between CCA and Baron, the merger agreement and
related transactions must be approved separately by Baron. Baron will consent to
the merger of CCA with Prison Realty and will vote the shares of CCA common
stock held by it in favor of the merger agreement and related transactions.
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Your attention is directed to the joint proxy statement/prospectus
accompanying this notice of special meeting for more complete information
regarding the matters to be presented and acted upon at the special meeting.
Shareholders who comply with Chapter 23 of the Tennessee Business
Corporation Act (the "TBCA") will have the right to dissent from the merger and
to obtain payment of the fair value of their shares of CCA common stock. A copy
of Chapter 23 of the TBCA is attached as Appendix C to the accompanying joint
proxy statement/prospectus. Please see the section entitled "Proposal to Approve
the Merger and Related Transactions -- Rights of dissenting shareholders of CCA"
in the joint proxy statement/prospectus for a discussion of the procedures to be
followed in asserting these dissenters' rights.
By Order of the Board of Directors of
Corrections Corporation of America,
/s/ Darrell K. Massengale
Darrell K. Massengale
Secretary
Nashville, Tennessee
August 3, 2000
TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE SPECIAL MEETING, PLEASE
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE
POSTAGE-PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING.
YOU MAY REVOKE YOUR PROXY AT ANY TIME BEFORE IT IS VOTED.
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JOINT PROXY STATEMENT/PROSPECTUS
PRISON REALTY TRUST, INC.
CORRECTIONS CORPORATION OF AMERICA
PROPOSED MERGER AND RELATED TRANSACTIONS
The board of directors of Corrections Corporation of America, a Tennessee
corporation ("CCA"), has approved a merger and series of related transactions
pursuant to which CCA will combine with Prison Realty Trust, Inc., a Maryland
corporation ("Prison Realty"), with CCA merging with and into a wholly owned
subsidiary of Prison Realty. Following the combination, the restructured company
will be renamed Corrections Corporation of America and intends to operate as a
taxable subchapter C corporation, rather than as a real estate investment trust,
or REIT, commencing with its 2000 taxable year.
As consideration for the merger, management and employee shareholders of
CCA will obtain the right to receive shares of Prison Realty common stock valued
at approximately $10.6 million in exchange for shares of CCA common stock that
they own at the time of the merger. Immediately prior to the merger, Prison
Realty will purchase the shares of CCA common stock held by the Baron Asset
Fund, the holder of 16.9% of CCA's outstanding capital stock, for non-cash
consideration consisting of shares of Prison Realty common stock valued at
approximately $8.0 million. In addition, Baron will receive warrants to purchase
$3.0 million in shares of Prison Realty common stock as consideration for its
consent to the merger. Prison Realty is currently negotiating with Sodexho
Alliance, S.A., the holder of 16.9% of CCA's outstanding capital stock, with
respect to the purchase of the shares of CCA common stock held by it. Prison
Realty will also purchase shares of CCA common stock held by former executive
officers of Prison Realty for $800,000 cash pursuant to the terms of certain
severance agreements with such officers. Shares of CCA held by Prison Realty
will be canceled in the merger.
CCA is seeking the votes of its shareholders in connection with the merger
and related transactions. The merger and related transactions cannot be
completed unless you and the other shareholders approve them.
In connection with the matters discussed in this joint proxy
statement/prospectus, Prison Realty is separately seeking the votes of its
stockholders at a special meeting to approve a restructuring of Prison Realty,
pursuant to which Prison Realty will amend its charter so as to permit it to
complete the restructuring transactions, including the merger and related
transactions described in this joint proxy statement/prospectus, and to elect
not to be taxed as a REIT for federal income tax purposes commencing with its
2000 taxable year.
This joint proxy statement/prospectus provides additional information about
the merger and related transactions, as well as information concerning the
restructuring being considered by the stockholders of Prison Realty.
THE RISKS ASSOCIATED WITH THE MERGER AND RELATED TRANSACTIONS AND WITH THE
OWNERSHIP OF PRISON REALTY COMMON STOCK ARE DISCUSSED UNDER THE HEADING "RISK
FACTORS" BEGINNING ON PAGE 30 OF THIS JOINT PROXY STATEMENT/PROSPECTUS.
This joint proxy statement/prospectus is also the prospectus of Prison
Realty regarding shares of Prison Realty common stock to be issued to
shareholders of CCA in connection with the merger and related transactions,
valued at a maximum of $29.6 million (and warrants to purchase $3,000,000 in
value of such shares), and the prospectus for the resale by a shareholder of CCA
of shares of Prison Realty common stock constituting $11.0 million in value of
such shares. The shares of Prison Realty common stock are currently listed on
the NYSE under the symbol "PZN" and the shares of Prison Realty common stock to
be issued in connection with the merger and related transactions will be listed,
subject to official notice of issuance, on the NYSE.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR
DISAPPROVED THE PRISON REALTY COMMON STOCK TO BE ISSUED UNDER THIS JOINT PROXY
STATEMENT/PROSPECTUS OR DETERMINED IF THIS JOINT PROXY/STATEMENT PROSPECTUS IS
ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this joint proxy statement/prospectus is August 3, 2000, and it
is first being mailed or delivered to shareholders of CCA on or about August 4,
2000.
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TABLE OF CONTENTS
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QUESTIONS AND ANSWERS ABOUT THE MERGER AND
RELATED TRANSACTIONS AND PRISON REALTY
RESTRUCTURING........................... 1
WHO CAN HELP ANSWER YOUR QUESTIONS........ 7
NOTE CONCERNING FORWARD-LOOKING
STATEMENTS.............................. 8
SUMMARY OF THE JOINT PROXY
STATEMENT/PROSPECTUS.................... 9
The companies........................... 9
The transactions........................ 12
Selected unaudited pro forma combined
financial information................. 21
Selected historical consolidated
financial information of Prison
Realty................................ 24
Selected historical consolidated
financial information of CCA.......... 26
Selected comparative per share data..... 27
Comparative per share market price and
distribution/dividend information..... 28
RISK FACTORS.............................. 30
You cannot be assured that the merger
and related transactions will be
completed............................. 30
Prison Realty currently has, and will
have after completion of the merger
and related transactions and the
Prison Realty restructuring, a
significant amount of debt............ 30
Prison Realty will no longer be paying
95% of its taxable income as
dividends............................. 31
Prison Realty will pay higher federal
income taxes after the merger and
related transactions and the Prison
Realty restructuring.................. 32
Some employees, directors and
shareholders of the companies will
receive benefits different from and in
addition to other shareholders in the
merger and related transactions and
the Prison Realty restructuring,
creating potential conflicts of
interest.............................. 32
You may not know the number of shares of
Prison Realty common stock to be
issued to shareholders of CCA until as
late as the day of the merger......... 33
Shares of Prison Realty common stock
issued to certain shareholders of CCA
in the merger cannot be sold or
transferred for a period of time...... 34
Prison Realty's business and operations
will be adversely affected if it
cannot attract and retain key
personnel............................. 34
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After the merger and related
transactions Prison will be more
directly exposed to risks inherent in
the management and operation of
correctional and detention
facilities............................ 34
Although Prison Realty is entitled to
receive 95% of PMSI's and JJFMSI's net
income, as defined, in the form of
dividends, the declaration and payment
of such dividends is in the discretion
of the boards of directors of each
company............................... 35
Prison Realty and CCA are currently
subject to certain litigation, and the
outcome of such litigation could have
a material adverse effect on Prison
Realty................................ 35
THE SPECIAL MEETING....................... 37
Date, time and place.................... 37
Matters to be considered at the
meeting............................... 37
Record date and outstanding shares...... 37
Quorum.................................. 37
Voting method and proxies............... 37
Revocability of proxy................... 38
Required vote........................... 38
Solicitation of proxies................. 38
Cross conditionality of proposals....... 39
Abstentions............................. 39
Dissenters' rights...................... 39
INFORMATION ABOUT PRISON REALTY........... 40
General................................. 40
Business and operations................. 40
Share ownership......................... 41
Recent developments..................... 42
Litigation.............................. 56
Business of Prison Realty following the
completion of the merger and related
transactions and the Prison Realty
restructuring......................... 59
Qualification of Prison Realty as a REIT
for 1999.............................. 67
INFORMATION ABOUT CCA..................... 81
General................................. 81
Business and operations................. 81
Competition............................. 81
Employees and labor matters............. 81
Legal proceedings....................... 82
Ownership of CCA capital stock.......... 82
Distribution policy..................... 83
Management's discussion and analysis of
financial condition and results of
operations............................ 84
Quantitative and qualitative disclosures
about market risk..................... 96
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THE MERGER AND RELATED TRANSACTIONS AND
THE PRISON REALTY RESTRUCTURING......... 97
General................................. 97
Background of the proposed Prison Realty
restructuring transactions............ 97
Prison Realty's reasons for the proposed
restructuring transactions;
Recommendation of the Prison Realty
board of directors.................... 114
CCA's reasons for the merger;
Recommendation of CCA's board of
directors............................. 117
Interests of certain persons in the
merger and related transactions and
the Prison Realty restructuring....... 119
Ownership of Prison Realty common
stock................................. 124
Regulatory filings and approvals
required for the merger and related
transactions and the Prison Realty
restructuring......................... 127
Description of the restructuring of
Prison Realty......................... 127
Distribution policies................... 132
PROPOSAL TO APPROVE THE MERGER AND RELATED
TRANSACTIONS............................ 133
General................................. 133
Effective time.......................... 133
Terms of the merger..................... 133
The agreement and plan of merger........ 133
Rights of dissenting shareholders of
CCA................................... 144
Stock exchange listing of Prison Realty
common stock.......................... 146
Federal securities law consequences;
Resale restrictions................... 146
Accounting treatment of the merger...... 147
Prison Realty capital stock............. 147
Comparison of the rights of shareholders
of Prison Realty after the merger and
related transactions and the Prison
Realty restructuring and the rights of
shareholders of CCA before the merger
and related transactions and the
Prison Realty restructuring........... 148
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Material federal income tax consequences
of the merger......................... 164
Purchase of CCA common stock from Baron
and Sodexho........................... 165
Recommendation of the CCA board......... 166
ADDITIONAL INFORMATION REGARDING PRISON
REALTY.................................. 167
Management's discussion and analysis of
financial condition and results of
operations............................ 167
Quantitative and qualitative disclosures
about market risk..................... 195
Business objectives and strategies...... 197
Leases and other contractual
relationships with CCA................ 198
Government regulation................... 200
Insurance............................... 201
Employees and labor matters............. 202
Competition............................. 202
Properties.............................. 202
Directors and executive officers........ 207
Compensation of Prison Realty's
directors............................. 209
Executive compensation.................. 211
Certain relationships and related
transactions.......................... 217
OTHER MATTERS............................. 219
LEGAL MATTERS............................. 219
EXPERTS................................... 220
WHERE YOU CAN FIND MORE INFORMATION....... 220
SELLING STOCKHOLDER....................... 221
INDEX TO FINANCIAL STATEMENTS............. F-1
APPENDICES
Agreement and Plan of Merger Appendix A
Form of Articles of Amendment and Restatement
(Amended and Restated Charter) of Prison
Realty Appendix B
Tennessee Dissenters' Rights Statute Appendix C
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QUESTIONS AND ANSWERS ABOUT THE
MERGER AND RELATED TRANSACTIONS AND
PRISON REALTY RESTRUCTURING
Q: WHY ARE CCA AND PRISON REALTY PROPOSING TO COMBINE?
A: As part of a comprehensive restructuring of Prison Realty Trust, Inc.
("Prison Realty") and Corrections Corporation of America ("CCA"), the
companies are proposing to combine in order to simplify their corporate
structure and address each company's liquidity and capital constraints
through the newly combined company's operation as a subchapter C
corporation. The companies believe that the combination is an essential
step to the continued viability of the companies and the successful
resolution of the companies' financial situation. The combination of Prison
Realty with CCA is also a requirement of Prison Realty's recently amended
bank indebtedness.
Q: WHAT ARE THE TERMS OF CCA'S MERGER WITH PRISON REALTY?
A: CCA will be merged with and into a wholly owned subsidiary of Prison
Realty, with the subsidiary being the surviving corporation. Shareholders
of CCA at the time of the merger other than Prison Realty will receive
shares of Prison Realty's common stock valued at approximately $10.6
million as consideration in the merger. The number of shares of Prison
Realty common stock to be received by these shareholders is based on a
formula in the merger agreement using the average closing price of Prison
Realty's common stock on the New York Stock Exchange for the five trading
day period ending two days prior to the completion of the merger. Because
the market value of Prison Realty common stock will fluctuate before the
closing of the merger, the exact number of shares of Prison Realty common
stock to be issued in the merger cannot be predicted at this time.
EXAMPLE:
If the average closing price for the five trading day period ending two
days prior to completion of the merger was $3.50, a CCA shareholder would
receive 0.55 share of Prison Realty common stock for each share exchanged
in the merger. If, however, the average closing price for the five trading
day period ending two days prior to completion of the merger was $2.00, a
CCA shareholder would receive 0.97 share of Prison Realty common stock for
each share exchanged in the merger.
Immediately prior to the merger, Prison Realty will purchase the shares of
CCA common stock held by the Baron Asset Fund, the holder of 16.9% of CCA's
outstanding capital stock, for non-cash consideration consisting of shares
of Prison Realty common stock valued at $8.0 million. In consideration for
Baron's consent to the merger (as necessary in order to effectuate the
merger), Baron has required that Prison Realty also issue Baron warrants to
purchase an aggregate of $3.0 million of shares of Prison Realty common
stock. Prison Realty is currently negotiating with Sodexho Alliance, S.A.,
the holder of 16.9% of CCA's outstanding capital stock, with respect to the
purchase of the shares of CCA common stock held by it. Prison Realty has
conditioned its proposed purchase of the shares of CCA common stock from
Sodexho on the elimination of Sodexho's existing contractual right to have
a representative on Prison Realty's board of directors. Prison Realty
indicated to Sodexho that it was willing to satisfy its previous agreement
to purchase the CCA shares in the form of Prison Realty common stock valued
at $8.0 million, rather than in cash, as required by Prison Realty's
amended bank credit facility. Sodexho has informed Prison Realty that
Sodexho believes it should
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receive the same aggregate consideration as Prison Realty agreed to pay
Baron. The merger agreement provides that Sodexho would receive fewer
shares of Prison Realty common stock in the merger pursuant to the exchange
ratio in the merger agreement. Prison Realty intends to continue
negotiations with Sodexho regarding its purchase of the CCA common stock
held by Sodexho for non-cash consideration of up to $8.0 million
conditioned on the elimination of Sodexho's right to a representative on
the Prison Realty board. If Prison Realty does not acquire Sodexho's shares
prior to the merger, there can be no assurance that Sodexho will vote the
shares of CCA common stock held by it in favor of the merger and related
transactions described herein or the Prison Realty common stock held by it
in favor of the charter amendments and the merger and related transactions
being considered by the stockholders of Prison Realty. If no agreement is
reached with Sodexho, Sodexho will maintain its existing contractual right
to have a representative on the Prison Realty board.
Prison Realty will also purchase shares of CCA common stock held by former
executive officers of Prison Realty for $800,000 in cash pursuant to the
terms of certain severance agreements with such officers.
In the event Prison Realty purchases all of the shares of CCA common stock
held by both Baron and Sodexho prior to the merger, Prison Realty will
issue shares of its common stock valued at up to approximately $26.6
million as consideration for the merger (including up to $16.0 million in
shares issued to Baron and Sodexho immediately prior to the merger and
$10.6 million in shares issued to employee and management shareholders in
the merger), in addition to warrants to purchase $3.0 in shares of Prison
Realty common stock issued to Baron. In the event Prison Realty purchases
only the shares of CCA common stock held by Baron prior to the merger,
Prison Realty will issue shares of its common stock valued at approximately
$21.8 million as consideration for the merger (including $8.0 million in
shares issued to Baron prior to the merger and $13.8 million in shares
issued to employee and management shareholders and Sodexho in the merger),
in addition to warrants to purchase $3.0 million in shares of Prison Realty
common stock issued to Baron.
The shares of Prison Realty common stock issued to CCA shareholders in the
merger who are wardens of the facilities operated by CCA will be subject to
forfeiture under a restricted stock plan, and shares issued to CCA
shareholders who are management of CCA or Prison Realty will be subject to
certain contractual resale prohibitions. Shares of Prison Realty common
stock issued to Baron and/or Sodexho as consideration for the purchase of
CCA common stock held by them prior to the merger or to Sodexho in the
merger, as well as shares issued to executive officers of CCA, will also be
subject to certain resale prohibitions under the federal securities laws.
As a result of the merger, Prison Realty will also assume all of CCA's
outstanding indebtedness at the time of the merger, and certain agreements
between the parties providing for payments between the parties will be
canceled or otherwise be of no further force and effect.
Q: WHAT IS THE PROPOSED STRUCTURE OF PRISON REALTY AFTER THE MERGER?
A: Upon completion of Prison Realty's merger with CCA and the restructuring of
Prison Realty, Prison Realty will hold 100% of the issued and outstanding
capital stock of CCA Acquisition Sub, Inc., the successor by merger to CCA.
As a result, Prison Realty, through itself and this subsidiary, will own
and operate correctional and detention facilities, including operating
those facilities currently operated by CCA.
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The terms of Prison Realty's recently announced amended bank credit
facility permit Prison Realty to combine with the two service companies,
Prison Management Services, Inc. and Juvenile and Jail Facility Management
Services, Inc., which currently manage certain government-owned prison and
jail facilities for non-cash merger consideration not to exceed $12.6
million. A maximum of $10.6 million in non-cash consideration may be paid
to outside, non-warden shareholders of the service companies. Prison Realty
has initiated discussions with representatives of the service companies
regarding a merger of the companies into wholly-owned subsidiaries of
Prison Realty; however, it is not expected that any agreement will be
reached with respect to such combination.
If the service companies are not combined with Prison Realty, Prison Realty
will maintain its ownership of 100% of the non-voting common stock of the
two service companies which entitles Prison Realty to receive 95% of each
service company's net income, as defined, in the form of cash dividends.
Prison Realty and its subsidiaries will also provide administrative
services for the service companies for a cash fee and will license the use
of the CCA name to the service companies under the terms of CCA's existing
agreements with the service companies.
Q: WHAT HAPPENS IF THE MERGER AND RELATED TRANSACTIONS ARE NOT COMPLETED?
A: The failure to complete the merger of CCA and Prison Realty will require
the continuation of the existing structure, which requires Prison Realty to
rely on CCA as its primary tenant to fund Prison Realty's operations,
notwithstanding CCA's existing financial condition. The failure to complete
the merger will also constitute an event of default under the terms of
Prison Realty's recently amended bank credit facility, and, as a result,
will cause a default under the terms of Prison Realty's other indebtedness
and under CCA's indebtedness. In the event the merger and related
transactions are not completed, both Prison Realty and CCA would be
required to renegotiate the terms of their respective bank and other
indebtedness on potentially significantly less favorable terms. In the
alternative, Prison Realty and/or CCA may be required to seek protection
under the federal bankruptcy laws.
Q: WHAT ARE THE RESTRUCTURING TRANSACTIONS PROPOSED BY PRISON REALTY?
A: Prison Realty is proposing a comprehensive restructuring designed to
address its current liquidity and capital constraints, simplify its
corporate structure, create a new management team and satisfy certain
conditions of its recently amended bank indebtedness. The restructuring
includes combining Prison Realty and CCA into a simplified corporate
structure that will not be taxed as a real estate investment trust, or
REIT, commencing with its 2000 taxable year, as well as:
- amending Prison Realty's charter to accommodate these transactions by
increasing the amount of Prison Realty's authorized capital stock,
removing provisions requiring Prison Realty to operate and qualify as a
REIT and changing the name of the company to "Corrections Corporation of
America;" and
- selecting a new senior management team, including a new chief executive
officer and chief financial officer.
Q: WHAT ARE THE ADVANTAGES OF COMPLETING THE MERGER AND RELATED TRANSACTIONS
AND THE PRISON REALTY RESTRUCTURING?
A: Throughout the process of considering all of the strategic alternatives
available to the companies, including the equity proposal previously
announced by Prison Realty, the
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companies' boards of directors have maintained that a combination of Prison
Realty and CCA provides a simplified and more stable corporate and
financial structure and creates the most value for each company's
shareholders by allowing the surviving entity to retain earnings and use
capital for growth opportunities and by eliminating potential conflicts of
interest which have harmed Prison Realty's and CCA's credibility in the
capital markets. The merger of Prison Realty and CCA allows for the
combined cash flows from operations to service the immediate financial and
liquidity needs of Prison Realty and CCA, versus the restrictions on the
uses of cash on a separate company basis.
In addition, the restructuring satisfies the requirement contained in
Prison Realty's recently obtained waiver of events of default under, and
amendments to, its senior bank indebtedness, as well as with respect to
waivers of events of default obtained by CCA under the terms of its bank
indebtedness and enhances management through the addition of a new chief
executive officer and chief financial officer of the surviving company.
Q: WHAT ARE THE DISADVANTAGES OF COMPLETING THE MERGER AND RELATED
TRANSACTIONS AND THE PRISON REALTY RESTRUCTURING?
A: The existing holders of CCA common stock will hold only approximately
5.7% of Prison Realty's common stock upon completion of the merger and
related transactions (assuming the purchase by Prison Realty of shares of
CCA common stock held by Baron and Sodexho immediately prior to the merger
and excluding shares of Prison Realty common stock already owned by such
shareholders and not received in connection with the merger). As a result,
existing holders of CCA common stock will have limited influence over the
management and operations of Prison Realty following the completion of the
merger and related transactions.
Q: HOW WILL THE NEWLY RESTRUCTURED PRISON REALTY DIFFER FROM THE EXISTING
PRISON REALTY?
A: Upon the completion of the merger and related transactions and the
restructuring of Prison Realty, in addition to the ownership, acquisition
and development of correctional and detention facilities, Prison Realty's
business will also include the operation and management of correctional and
detention facilities for government entities. As a taxable subchapter C
corporation commencing with its 2000 taxable year, Prison Realty will no
longer be required to pay 95% of its taxable income to its shareholders as
dividends but instead will be able to retain its earnings and reinvest them
in its business. Prison Realty will, however, elect to be taxed as a REIT
for the 1999 taxable year and, in satisfaction of its distribution
requirements, will distribute to all of its common shareholders
approximately $150.0 million of series B convertible preferred stock. The
record date for determination of common shareholders entitled to receive
the preferred stock distribution in satisfaction of Prison Realty's
remaining 1999 REIT distribution requirements is expected to be during the
third quarter of 2000, but in any event after the date of the special
meeting, with the distribution to be made prior to December 31, 2000.
Prison Realty does not intend to pay any cash dividends on its common stock
in the foreseeable future, including any cash dividends in order to
maintain its status as a REIT for 1999.
In addition, Prison Realty is currently conducting a search for a new chief
executive officer and will begin a search for a new chief financial
officer. Doctor R. Crants has been terminated as the chief executive
officer of Prison Realty, as well as the chief executive officer of CCA.
Mr. Crants has informed Prison Realty
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that he intends to remain a director of each of the service companies.
Thomas W. Beasley, the chairman of the board of directors of Prison Realty
and a founder of Prison Realty's predecessor company, is serving as interim
chief executive officer of Prison Realty while Prison Realty completes the
search for a permanent chief executive officer. Several candidates have
been identified for the position, and interviews have begun. The selection
process will be completed as expeditiously as possible. The search for a
new chief financial officer will be undertaken after the selection of a new
chief executive officer.
Prison Realty's board of directors currently consists of six members,
including three independent directors, two of whom serve on the Independent
Committee of Prison Realty's board of directors. Upon completion of the
merger and related transactions and the Prison Realty restructuring, Prison
Realty's board of directors will be restructured by increasing the size of
the existing board of directors and appointing one or more additional
directors to the newly created vacancies. In addition, certain existing
directors are expected to resign, allowing the appointment of one or more
new directors to the vacancies created by the resignations. Under Maryland
law, each of these new directors must stand for election at the next annual
meeting of shareholders following their appointment. It is expected that
the Prison Realty 2000 annual meeting will be held in November or December
2000.
Q: DOES PRISON REALTY INTEND TO ELECT TO BE TAXED AS A REIT FOR ITS 1999
TAXABLE YEAR?
A: Yes. In accordance with the provisions of Prison Realty's charter,
Prison Realty will elect to qualify and to be taxed as a REIT with respect
to its 1999 taxable year. Because the requirements applicable to REITs are
complex, however, no assurance can be given that Prison Realty will in fact
qualify as a REIT for 1999. In order to satisfy its remaining 1999 REIT
distribution requirements, Prison Realty will distribute to all of its
common stockholders shares of its series B convertible preferred stock
having a value of approximately $150.0 million. The series B convertible
preferred stock will provide for dividends payable in additional shares of
series B convertible preferred stock at a rate of 12% per year for the
first three years following the shares' issuance and cash dividends at a
rate of 12% per year thereafter, payable quarterly in arrears. Shares of
the series B convertible preferred stock will be callable at the stated
amount of $25 per share plus accrued dividends by Prison Realty at any time
after six months following a date which is the later of (i) three years
from the issuance of the series B convertible preferred stock or (ii) the
91st day following the redemption of Prison Realty's $100.0 million 12%
senior notes, due 2006. The shares of series B convertible preferred stock
will be convertible into shares of Prison Realty common stock during two
separate conversion periods (the first consisting of a 10 business day
period commencing on the sixth business day following issuance and the
second consisting of a 10 business day period ending 90 calendar days
following issuance), at a conversion price based on average closing prices
of Prison Realty's common stock on the NYSE during the 10 trading days
ending one day prior to conversion.
Prison Realty believes that the distribution of the series B convertible
preferred stock will satisfy its remaining REIT distribution requirements
for 1999. There can be no assurance, however, that such distribution will
ultimately satisfy the REIT requirements, or that additional distributions
will not be required at a later time. In the event Prison Realty does not
satisfy its distribution requirements through the issuance of the series B
convertible preferred stock or another security, Prison Realty will be
required to make its required REIT distribution in cash. Prison Realty does
not
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have the resources to pay such distribution in cash, and, under the terms
of its existing senior bank credit facility, such cash dividend payments
are explicitly prohibited. Even if the distribution of the series B
preferred stock satisfies Prison Realty's remaining distribution
requirements, there can be no assurance that Prison Realty will in fact
qualify as a REIT with respect to its 1999 taxable year. If Prison Realty
is unable to qualify as a REIT with respect to its 1999 taxable year for
any reason, Prison Realty will be required to pay federal income tax on its
earnings at ordinary corporate rates, which tax could exceed $83.5 million.
Q: WHY IS THE BOARD OF DIRECTORS OF CCA RECOMMENDING THE MERGER AND RELATED
TRANSACTIONS AND THE PRISON REALTY RESTRUCTURING?
A: The board of directors of CCA is recommending the merger and related
transactions because it believes they represent the best alternative
available to address the financial and liquidity constraints of Prison
Realty and CCA. The board believes the combination is an essential step to
the continued viability of CCA and the successful resolution of CCA's
financial situation. The board further believes the failure to address
these needs would significantly impair the business of CCA.
Q: DO CCA SHAREHOLDERS HAVE ANY DISSENTERS' RIGHTS?
A: Yes. CCA shareholders have dissenters' rights in connection with the
merger.
Q: WHEN DO YOU EXPECT THE MERGER AND RELATED TRANSACTIONS AND THE PRISON
REALTY RESTRUCTURING TO BE COMPLETED?
A: It is expected that the merger and related transactions and the Prison
Realty restructuring, if approved, will be completed on or before
September 15, 2000.
Q: WHAT DO I NEED TO DO NOW?
A: After making a decision about the merger and related transactions, you
should mark on your proxy card how you want to vote, and sign and mail the
proxy card in the enclosed return envelope as soon as possible so your
shares may be represented at the shareholders' meeting.
Q: WHAT IF I DO NOT VOTE?
A: If you sign and send in your proxy, but do not mark how you want to vote,
your proxy will be counted as a vote in favor of the proposal relating to
the merger and related transactions. If you do not vote or if you abstain,
the effect will be a vote against such proposal.
Q: CAN I CHANGE OR REVOKE MY PROXY?
A: You may attend the shareholders' meeting and vote your shares in person,
rather than signing and mailing your proxy card. In addition, you may
revoke your proxy up to and including the day of such meeting by following
the directions on page 38 of this joint proxy statement/prospectus, and you
may either change your vote or attend the meeting and vote in person.
Q: SHOULD SHAREHOLDERS SEND IN STOCK CERTIFICATES NOW?
A: No, after the merger and related transactions are completed, Prison Realty
will send CCA shareholders written instructions for exchanging their stock
certificates.
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WHO CAN HELP ANSWER YOUR QUESTIONS?
If you have more questions about the merger and related transactions and
the related Prison Realty restructuring, or if you would like additional copies
of this joint proxy statement/prospectus, you should contact CCA at:
10 Burton Hills Boulevard
Nashville, Tennessee 37215
Attention: Darrell K. Massengale, Chief Financial Officer and Secretary
Telephone Number: (615) 263-3000
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NOTE CONCERNING FORWARD-LOOKING STATEMENTS
This joint proxy statement/prospectus contains 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 statements
include statements with respect to Prison Realty's and CCA's financial
condition, results of operations and business and the expected impact of the
transactions descried in this joint proxy statement/prospectus on Prison
Realty's and CCA's financial performance. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates" and similar
expressions identify forward-looking statements.
These forward-looking statements are not guarantees of future performance
and are subject to risks and uncertainties that could cause actual results to
differ materially from the results contemplated by the forward-looking
statements. These risks and uncertainties include:
- the possibility that the merger and related transactions and the
restructuring of Prison Realty will not be completed;
- the possibility that the anticipated benefits from the merger and
related transactions and the restructuring of Prison Realty will not be
fully realized; and
- other risk factors as may be detailed from time to time in Prison
Realty's public announcements and filings with the SEC.
In evaluating the merger and related transactions and the restructuring of
Prison Realty, you should carefully consider the discussion of these and other
factors in the section entitled "Risk Factors" on page 30.
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SUMMARY OF THE JOINT PROXY STATEMENT/PROSPECTUS
This summary highlights selected information from this joint proxy
statement/prospectus and may not contain all of the information that is
important to you. To understand the merger and related transactions and the
Prison Realty restructuring fully and for a more complete description of the
legal terms of the transactions, you should read carefully this entire document
and the documents included herewith. We have included page references to direct
you to a more complete description of the topics presented in this summary.
THE COMPANIES
PRISON REALTY TRUST, INC.
10 Burton Hills Boulevard
Nashville, Tennessee 37215
615-263-0200
www.prisonreit.com
BUSINESS AND OPERATIONS
Prison Realty's existing business is the ownership of correctional and
detention facilities. The company currently finances, designs, constructs and
renovates new and existing jails and prisons that it leases to both private
prison managers and government agencies.
At July 24, 2000, Prison Realty owned, or was in the process of developing,
50 correctional and detention facilities, of which 45 facilities were operating,
two were under construction and three were in the planning stages. At July 24,
2000, Corrections Corporation of America, or CCA, the company's primary tenant,
leased 36 of Prison Realty's facilities, government agencies leased six of
Prison Realty's facilities, and other private operators leased three of Prison
Realty's facilities. In addition, at July 24, 2000, Prison Realty owned two
corporate office buildings, one of which is leased to CCA and one of which is
leased to TransCor America, LLC, a wholly owned subsidiary of CCA.
Prison Realty has entered into lease agreements with CCA with respect to
the correctional and detention facilities owned by Prison Realty and operated by
CCA, as well as a series of additional agreements relating to the payment of
certain fees by Prison Realty to CCA. As described in more detail herein under
the heading "Information About Prison Realty -- Recent developments," as the
result of the companies' financial condition and in order to address the
liquidity needs of each of the companies prior to the completion of the
restructuring transactions described in this joint proxy statement/prospectus,
Prison Realty and CCA have amended the terms of the lease agreements to defer,
with interest, a substantial portion of the rental payments due to Prison Realty
thereunder and amended the terms of the other agreements to defer payments due
to CCA thereunder. Additionally, as required by the terms of a subordination
agreement between Prison Realty, CCA and their respective bank lenders, CCA has
deferred the payment of interest due to Prison Realty under the terms of a
$137.0 million promissory note payable to Prison Realty. Prison Realty also owns
9.5% of the capital stock, consisting of non-voting common stock, of CCA. In
addition, Prison Realty owns 100% of the non-voting common stock of Prison
Management Services, Inc., or PMSI, and Juvenile and Jail Facility Management
Services, Inc., or JJFMSI, both of which are privately-held service companies
which manage certain government-owned prison and jail facilities under the
"Corrections Corporation of America" name. As the owner of the non-voting common
stock of the service companies, Prison Realty is entitled to receive 95% of each
company's net income, as defined, as cash dividends.
If the merger and related transactions and the Prison Realty restructuring
described in this joint proxy statement/prospectus are completed, Prison Realty,
by itself and through its subsidiaries, will be in the business of owning and
operating correctional and detention facilities,
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including operating those facilities currently operated by CCA. As permitted by
the terms of Prison Realty's recently amended credit facility, Prison Realty has
initiated discussions with PMSI and JJFMSI regarding the combination of such
companies with and into wholly owned subsidiaries of Prison Realty. It is not
expected, however, that any agreement will be reached with respect to such
combination. If PMSI and JJFMSI are not merged into Prison Realty, PMSI and
JJFMSI will continue to operate those facilities currently operated by them, and
Prison Realty will continue to be entitled to receive 95% of each service
company's net income, as defined, as cash dividends on the shares owned by them,
notwithstanding the completion of the merger and related transactions and the
Prison Realty restructuring.
Pursuant to the requirements of its charter, Prison Realty will elect and
qualify to be taxed as a REIT for its taxable year ended December 31, 1999. In
satisfaction of its remaining REIT distribution requirements for 1999, Prison
Realty will distribute to all of its common stockholders shares of its series B
convertible preferred stock having a value of approximately $150.0 million. The
terms of the series B preferred stock provide for:
- for the first three years after issuance, quarterly dividends payable in
additional shares of series B convertible preferred stock at a rate of
12% per year;
- following the first three years after issuance, cash dividends payable
quarterly at a rate of 12% per year;
- "callable" by Prison Realty (or allowing Prison Realty to repurchase
such shares) at the stated amount of $25 per share, plus accrued
dividends, at any time commencing six months following a date which is
the later of (i) three years from the issuance of the series B
convertible preferred stock and (ii) the 91st day following the
redemption of Prison Realty's 12% senior notes, due 2006; and
- convertible at the option of the holder into shares of Prison Realty's
common stock during two separate conversion periods (the first
consisting of a 10 business day period commencing on the sixth business
day following issuance and the second consisting of a 10 business day
period ending 90 calendar days following issuance), at a conversion
price based on average closing prices of Prison Realty's common stock on
the NYSE during the 10 trading days ending one day prior to conversion.
Prison Realty believes that the distribution of the series B preferred
stock will satisfy its remaining REIT distribution requirements. There can be no
assurance, however, that such distribution will ultimately satisfy the REIT
requirements, or that Prison Realty will otherwise qualify as a REIT with
respect to its 1999 taxable year.
Prison Realty's election and qualification to be taxed as a REIT with
respect to its 1999 taxable year and the terms of the series B convertible
preferred stock to be issued in connection therewith are more fully discussed in
the section entitled "Information About Prison Realty -- Qualification of Prison
Realty as a REIT for 1999" on page 67.
ADDITIONAL INFORMATION
For additional information concerning Prison Realty, see the section
entitled "Information About Prison Realty" on page 40 and "Additional
Information Regarding Prison Realty" on page 167. This includes important
information concerning recent developments, including information on
transactions between Prison Realty and CCA, efforts to secure waivers of, and
amendments to, the provisions of Prison Realty's outstanding indebtedness and
certain litigation.
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MARKET PRICE INFORMATION
Shares of Prison Realty common stock are listed on the NYSE. On Thursday,
June 29, 2000, the last full trading day prior to the public announcement of the
proposed merger and related transactions and Prison Realty restructuring, Prison
Realty's common stock closed at $3.13 per share. On Wednesday, August 2, 2000,
the closing price per share of Prison Realty common stock was $2.75. We urge you
to obtain current market quotations. The common stock of CCA is not publicly
traded.
For a more complete description of market price information, see the
section entitled "Comparative per Share Market Price and Distribution/Dividend
Information" on page 28.
CORRECTIONS CORPORATION OF AMERICA
10 Burton Hills Boulevard
Nashville, Tennessee 37215
615-263-3000
www.correctionscorp.com
BUSINESS AND OPERATIONS
CCA provides correctional and detention facility management services to
government agencies. At July 24, 2000, CCA had contracts to manage 42
correctional and detention facilities with a total design capacity of 44,880
beds, of which 40 facilities with a total design capacity of 39,910 beds were in
operation. At July 24, 2000, CCA's system-wide occupancy level was approximately
73%. CCA operates and manages the substantial majority of the facilities owned
by Prison Realty and leases these facilities from Prison Realty under certain
lease agreements described herein. At July 24, 2000, CCA leased 36 of the
facilities owned by Prison Realty. CCA also provides certain business and
facility development services for Prison Realty, as well as certain
administrative services to each of PMSI and JJFMSI. The services provided by CCA
to government agencies include the comprehensive operation and management of new
and existing correctional and detention facilities.
In addition to providing the fundamental residential services relating to
inmates, CCA's facilities offer a large variety of rehabilitation and education
programs including basic education, life skills and employment training and
substance abuse treatment. CCA also provides health care (including medical,
dental and psychiatric services), institutional food services, transportation
requirements and work and recreational programs. CCA provides transportation
services through its wholly owned subsidiary, TransCor America, LLC.
ADDITIONAL INFORMATION
For additional information concerning CCA, see the section entitled
"Information About CCA" on page 81; and the section entitled "Information About
Prison Realty -- Recent developments" on page 42.
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THE TRANSACTIONS
THE MERGER AND RELATED TRANSACTIONS
GENERAL
Pursuant to the terms of an agreement and plan of merger, CCA will be
merged with and into a newly formed, wholly owned subsidiary of Prison Realty,
with the Prison Realty subsidiary being the surviving corporation in the merger.
Shareholders of CCA at the time of the merger other than Prison Realty will
receive shares of Prison Realty common stock as the merger consideration,
pursuant to the exchange ratio described in the merger agreement. Shares held by
Prison Realty at the time of the merger will be canceled in the merger.
As described in the merger agreement, the exchange ratio for the merger
depends on a formula using the average closing price of one share of Prison
Realty common stock on the NYSE for the five trading day period ending two days
prior to the closing date of the merger. Therefore, the exchange ratio will not
be known at the time of the special meeting. No fractional shares of Prison
Realty common stock will be issued as a result of the merger, but shareholders
otherwise entitled to receive a fractional share will receive a cash payment in
lieu thereof.
The merger will be tax-free for the shareholders of CCA to the extent the
shareholders of CCA receive Prison Realty common stock in the merger, but a
shareholder will recognize taxable gain to the extent it receives cash in lieu
of a fractional share of Prison Realty common stock. The merger is expected to
be accounted for as a "purchase" for financial accounting purposes, in
accordance with generally accepted accounting principles.
Shareholders of CCA who comply with the provisions of the Tennessee
Business Corporation Act will have the right to dissent from the merger and to
obtain payment of the fair market value of their shares, as more fully discussed
in the section of this joint proxy statement/prospectus entitled "Proposal to
Approve the Merger and Related Transactions -- Rights of dissenting shareholders
of CCA" on page 144.
CONSIDERATION TO BE PAID IN CONNECTION WITH THE MERGER
Management and employee shareholders of CCA will receive shares of Prison
Realty common stock with an aggregate value of approximately $10.6 million (or
approximately 2.0% of Prison Realty's common stock on a fully-diluted basis) as
the merger consideration, pursuant to the exchange ratio described in the merger
agreement.
Immediately prior to the merger, Prison Realty will purchase the shares of
CCA common stock held by the Baron Asset Fund, the holder of 16.9% of CCA's
outstanding capital stock, for non-cash consideration consisting of shares of
Prison Realty common stock valued at $8.0 million (or approximately 2.3 million
shares assuming a Prison Realty common stock price of $3.44 per share). As
consideration for Baron's consent to the merger (as necessary in order to
effectuate the merger) Baron has required that Prison Realty issue Baron
warrants to purchase an aggregate of $3.0 million of shares of Prison Realty
common stock (or approximately 857,000 shares assuming a Prison Realty common
stock price of $3.50 per share with respect to two-thirds of the warrants and a
Prison Realty common stock price of $3.44 per share with respect to one-third of
the warrants). Prison Realty is currently negotiating with Sodexho Alliance,
S.A., the holder of 16.9% of CCA's outstanding capital stock, with respect to
the purchase of the shares of CCA common stock held by it. Prison Realty has
conditioned its proposed purchase of the shares of CCA common stock from Sodexho
on the elimination of Sodexho's existing contractual right to have a
representative on Prison Realty's board of directors. Prison Realty indicated to
Sodexho that it was willing to satisfy its previous contractual obliga-
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tion to purchase the CCA shares in the form of Prison Realty common stock
valued at $8.0 million rather than in cash, as required by Prison Realty's
amended bank indebtedness. Sodexho informed Prison Realty that it believed that
it should receive the same aggregate consideration as Prison Realty agreed to
pay Baron. The merger agreement provides that Sodexho would receive fewer shares
of Prison Realty common stock in the merger pursuant to the exchange ratio
described above. Prison Realty intends to continue negotiations with Sodexho
regarding its purchase of the CCA common stock held by Sodexho for non-cash
consideration of up to $8.0 million conditioned on the elimination of Sodexho's
right to a representative on the Prison Realty board. If Prison Realty does not
acquire Sodexho's shares prior to the merger, there can be no assurance that
Sodexho will vote the CCA common stock held by it in favor of the merger and
related transactions or the Prison Realty common stock held by it in favor of
the charter amendments and the merger and related transactions being considered
by the stockholders of Prison Realty. If no agreement is reached with Sodexho,
Sodexho will maintain its existing contractual right to have a representative on
the Prison Realty board. The shares of Prison Realty common stock issued to
Baron and/or Sodexho as consideration for the purchase of CCA common stock held
by them prior to the merger will not be subject to any contractual restrictions
on transfer, but will be subject to certain resale prohibitions under the
federal securities laws.
Prison Realty will also purchase shares of CCA common stock held by former
executive officers of Prison Realty for $800,000 in cash pursuant to the terms
of certain severance agreements with such officers.
In the event Prison Realty purchases all of the shares of CCA common stock
held by Baron and Sodexho prior to the merger, Prison Realty will issue shares
of its common stock valued at approximately $26.6 million as consideration for
the merger (including $16.0 million in shares issued to Baron and Sodexho prior
to the merger and $10.6 million in shares issued to employee and management
shareholders in the merger), or approximately 7.7 million shares, equal to
approximately 5.2% of Prison Realty's common stock, on a fully diluted basis,
assuming a Prison Realty common stock price of $3.50 per share at the time of
the merger, in addition to warrants to purchase an aggregate of $3.0 million of
shares of Prison Realty common stock issued to Baron. In the event Prison Realty
purchases only the shares of CCA common stock held by Baron prior to the merger,
Prison Realty will issue shares of its common stock valued at approximately
$21.8 million as consideration for the merger (including $8.0 million in shares
issued to Baron prior to the merger and $13.8 million in shares issued to
employee and management shareholders and Sodexho in the merger), or
approximately 6.3 million shares, equal to approximately 4.2% of Prison Realty's
common stock, on a fully-diluted basis assuming a Prison Realty common stock
price of $3.50 per share at the time of the merger, in addition to warrants to
purchase an aggregate of $3.0 million of shares of Prison Realty common stock
issued to Baron.
RESTRICTIONS ON SHARES ISSUED AS MERGER CONSIDERATION
Shares of Prison Realty common stock owned by wardens of the correctional
facilities operated by CCA and received in the merger will be subject to vesting
and forfeiture provisions under a restricted stock plan. Shares of Prison Realty
common stock owned by CCA shareholders who are management of CCA and/or Prison
Realty and received in the merger will be subject to restrictions on transfer
that prohibit any transfers for 180 days after the merger is completed.
Transfers may be made according to the following percentages:
- Up to 25% after 180 days;
- Up to 50% after December 31, 2001;
- Up to 75% after December 31, 2002; and
- Up to 100% after December 31, 2003.
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Shares received by executive officers and significant shareholders of CCA,
including Baron and Sodexho, will also be subject to certain resale prohibitions
under the federal securities laws. See "Proposal to Approve the Merger and
Related Transactions -- Federal securities law consequences; resale
restrictions" on page 146.
TAX CONSEQUENCES OF THE MERGER
Prison Realty has structured the merger so that CCA and its shareholders
will not recognize gain or loss for federal income tax purposes as a result of
the merger to the extent such shareholders receive shares of Prison Realty
common stock in the merger. Prison Realty will be taxable as a subchapter C
corporation after the merger, commencing with its 2000 taxable year, and will no
longer be subject to the distribution requirements for a REIT. For a detailed
description of the tax consequences of the merger and related transactions and
Prison Realty restructuring, see the section entitled "Proposal to Approve the
Merger and Related Transactions, and the Prison Realty Restructuring -- Material
federal income tax consequences of the merger" on page 164.
ADDITIONAL TERMS OF THE MERGER AGREEMENT
The completion of the merger is subject to various conditions, including:
- receipt of approval by the shareholders of CCA, including the separate
consent of Baron;
- receipt of stockholder approval of Prison Realty's election not to be taxed
as a REIT commencing with its 2000 taxable year, but instead electing to be
taxed as a subchapter C corporation;
- receiving legal opinions on the tax-free nature of the mergers;
- Prison Realty's having purchased the shares of CCA common stock held by
Baron;
- obtaining certain required government and third-party consents; and
- the required waiting period under the antitrust laws expiring or being
terminated.
The merger agreement may be terminated:
- by the written consent of Prison Realty and CCA;
- by Prison Realty or CCA if a final injunction or other order or decree has
been issued by a court or government agency preventing completion of the
merger transactions;
- by Prison Realty or CCA if the merger has not been completed on or before
October 31, 2000;
- by Prison Realty or CCA if Prison Realty's stockholders do not approve Prison
Realty's election not to be taxed as a REIT commencing with its 2000 taxable
year;
- by Prison Realty if CCA breaches, and does not cure such breach of, any
material provision of the merger agreement which is a condition to the
completion of the merger transactions;
- by Prison Realty if the shareholders or board of directors (or any committee
thereof) of CCA do not approve the merger and related transactions;
- by CCA if Prison Realty's board of directors (or any committee thereof) does
not approve, or withdraws its approval of, the merger and related
transactions; or
- by CCA if Prison Realty breaches, and does not cure such breach of, any
material provision of the merger agreement which is a condition to the
completion of the merger transactions.
For a detailed description of the conditions to the closing and the manner
in which the merger agreement may be terminated, see the sections entitled "The
Merger and Related Transactions and the Prison Realty Restructuring" on page 97
and "Proposal to Approve the Merger and Related Transactions -- The agreement
and plan of merger" on page 133.
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The merger agreement is attached to this joint proxy statement/prospectus
as Appendix A. We encourage you to read it carefully. The merger and related
transactions are more fully discussed in the section entitled "Proposal to
Approve the Merger and Related Transactions" on page 133.
RESTRUCTURING OF PRISON REALTY
GENERAL
Prison Realty is proposing a comprehensive restructuring designed to
address its current liquidity and capital constraints, simplify its corporate
structure, create a new management team and satisfy certain conditions of its
recently amended senior bank indebtedness. The restructuring includes combining
Prison Realty and CCA into a simplified corporate structure that will not be
taxed as a real estate investment trust, or REIT, commencing with its 2000
taxable year, as well as:
- amending Prison Realty's charter to accommodate these transactions by
increasing the amount of Prison Realty's authorized capital stock, removing
provisions requiring Prison Realty to operate and qualify as a REIT and
changing the name of the company to "Corrections Corporation of America;" and
- selecting a new senior management team through the appointment of a new chief
executive officer and chief financial officer.
THE AMENDMENTS TO PRISON REALTY'S CHARTER
The Prison Realty restructuring cannot be completed unless Prison Realty
effects the amendments to its charter as described below and in the section of
this joint proxy statement/ prospectus entitled "The Merger and Related
Transactions and the Prison Realty Restructuring -- Description of the
restructuring of Prison Realty." In connection with the restructuring, Prison
Realty will amend its charter to make the following changes, among others:
- remove ownership limitations and other provisions relating to Prison Realty's
REIT status;
- change Prison Realty's name to "Corrections Corporation of America;" and
- increase the authorized capital stock of Prison Realty.
The merger cannot be completed unless Prison Realty effects the amendments
to its charter as described above.
RELATIONSHIP WITH THE SERVICE COMPANIES
The terms of Prison Realty's recently amended bank credit facility permit
Prison Realty to combine with PMSI and JJFMSI for non-cash consideration not to
exceed $12.6 million. A maximum of $10.6 million in non-cash consideration may
be paid to outside, non-warden stockholders of the service companies. Prison
Realty has initiated discussions with representatives of PMSI and JJFMSI
regarding a merger of the two companies with and into wholly owned subsidiaries
of Prison Realty in accordance with the terms of Prison Realty's bank
indebtedness. The terms of such mergers, like the merger with CCA, would provide
for the exchange of shares of each service company's common stock for shares of
Prison Realty common stock in the merger at an exchange ratio determined by a
formula using the average closing price of Prison Realty common stock over a
period of time immediately prior to such merger. It is not expected, however,
that any agreement will be reached as to the service company mergers.
If PMSI and JJFMSI are not merged with Prison Realty upon completion of the
restructuring, Prison Realty will maintain its existing ownership of 100% of the
non-voting common stock of PMSI and JJFMSI, which will entitle Prison Realty to
continue to receive 95% of each company's net income, as defined, as cash
dividends on such shares. In addition, Prison Realty and its subsidiaries will
provide administrative services for the service companies for a cash fee under
the terms of an existing administrative services agreement between CCA and the
service companies. Prison Realty will also license the use of the CCA name to
the service companies for a cash fee under the terms of an
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existing service mark and trade name use agreement between CCA and the service
companies.
DIRECTORS AND EXECUTIVE OFFICERS OF PRISON REALTY FOLLOWING THE MERGER AND
RELATED TRANSACTIONS AND THE PRISON REALTY RESTRUCTURING
Prison Realty's board of directors currently consists of six members,
including three independent directors, two of which serve on the independent
committee of the board of directors. Upon completion of the merger and related
transactions and the Prison Realty restructuring, Prison Realty's board of
directors will be restructured by increasing the size of the existing board of
directors and appointing one or more additional directors to the newly created
vacancies. In addition, certain existing directors are expected to resign,
allowing the appointment of one or more directors to the vacancies created by
the resignations. Under Maryland law, each of these new directors must stand for
election at Prison Realty's next annual meeting of shareholders following their
appointment. It is expected that the Prison Realty 2000 annual meeting will be
held in November or December 2000.
Prison Realty is currently conducting a search for a new chief executive
officer and will begin a search for a new chief financial officer. Doctor R.
Crants has been terminated as the chief executive officer of Prison Realty, as
well as the chief executive officer of CCA. Mr. Crants has informed Prison
Realty that he intends to remain a director of each of the service companies.
Thomas W. Beasley, the chairman of the board of directors of Prison Realty, is
serving as interim chief executive officer of Prison Realty while Prison Realty
completes the search for a permanent chief executive officer. Several candidates
have been identified for the position, and interviews have begun. The selection
process will be completed as expeditiously as possible. The search for a new
chief financial officer will be undertaken after the selection of a new chief
executive officer.
For a more complete description of the changes in the management of Prison
Realty, see the section entitled "The Merger and Related Transactions and the
Prison Realty Restructuring -- Description of the restructuring of Prison
Realty" on page 127.
PRISON REALTY'S REASONS FOR THE RESTRUCTURING; RECOMMENDATION OF THE PRISON
REALTY BOARD OF DIRECTORS
The Prison Realty board believes that the restructuring:
- provides a simplified and more stable corporate and financial structure that
will create the most value for Prison Realty stockholders by allowing Prison
Realty to retain earnings and use capital for growth opportunities and by
eliminating potential conflicts of interest which have harmed Prison Realty's
credibility in the capital markets;
- allows for combined cash flows from operations to service the immediate
financial and liquidity needs of Prison Realty and CCA, on which Prison
Realty's financial health depends, versus the restrictions on the use of cash
on a separate company basis;
- represents the only available alternative to Prison Realty which satisfies
the requirements contained in Prison Realty's recently obtained waiver and
amendment with respect to its senior bank indebtedness;
- enhances management; and
- provides a more attractive alternative for Prison Realty than seeking relief
under the federal bankruptcy laws.
For a more detailed description of these reasons, see the section entitled
"The Merger and Related Transactions and the Prison Realty
Restructuring -- Prison Realty's reasons for the proposed restructuring
transactions" on page 114.
16
<PAGE> 22
CCA'S REASONS FOR THE MERGER AND RELATED TRANSACTIONS AND PRISON REALTY
RESTRUCTURING; RECOMMENDATION OF THE CCA BOARD OF DIRECTORS
The CCA board believes the merger and related transactions and related
Prison Realty restructuring:
- represent the only available alternative to CCA to address its immediate
financial and liquidity needs;
- provide a simplified and more stable corporate and financial structure that
will create the most value for CCA shareholders;
- allow for combined cash flows from operations to service the immediate
financial and liquidity needs of CCA and Prison Realty, versus the
restrictions on the use of cash on a separate company basis;
- represent the only available alternative to Prison Realty which satisfies the
requirements contained in Prison Realty's recently obtained waiver and
amendment with respect to its senior bank indebtedness;
- enhance management; and
- provide a more attractive alternative for both CCA or Prison Realty than
seeking relief under the federal bankruptcy laws.
For a more detailed description of these reasons, see the sections entitled
"The Merger and Related Transactions and the Prison Realty
Restructuring -- CCA's reasons for the CCA merger; recommendation of CCA's board
of directors" on page 117.
RISKS OR DISADVANTAGES OF THE MERGER AND RELATED TRANSACTIONS AND THE PRISON
REALTY RESTRUCTURING
The merger and related transactions and the Prison Realty restructuring may
have negative consequences to CCA and its shareholders, including the
consequence that the existing holders of CCA common stock will hold only
approximately 5.7% of Prison Realty's common stock upon completion of the merger
and related transactions (assuming the purchase of shares of CCA common stock
held by Baron and Sodexho immediately prior to the merger and excluding shares
of Prison Realty common stock already owned by such shareholders and not
received in connection with the mergers). As a result, existing holders of CCA
common stock will have limited influence over the management and operations of
Prison Realty following the completion of the merger and related transactions.
For a more complete description of the risks of completing the merger and
related transactions and Prison Realty restructuring, see the section entitled
"Risk Factors" on page 30 and the section entitled "The Merger and Related
Transactions and the Prison Realty Restructuring" on page 97.
17
<PAGE> 23
RISKS OR DISADVANTAGES OF NOT COMPLETING THE MERGER AND RELATED TRANSACTIONS AND
PRISON REALTY RESTRUCTURING
If the merger and related transactions and Prison Realty restructuring are
not completed, CCA and its shareholders will be subject to negative
consequences, including:
- the continuation of the existing structure which would require CCA to make
payments to Prison Realty for which CCA has insufficient liquidity, given its
current financial condition;
- a default under the terms of Prison Realty's and CCA's bank indebtedness
which would require Prison Realty and CCA to attempt to renegotiate the terms
of their existing bank indebtedness on possibly significantly less favorable
terms, and there is no assurance that such renegotiations could be
accomplished or that such renegotiations would be a better alternative for
Prison Realty and/or CCA than seeking protection under the federal bankruptcy
laws; and
- a debt restructuring on less favorable terms or a decision to seek protection
under the federal bankruptcy laws which could have a material adverse impact
on the business of Prison Realty and CCA.
For a more complete description of these risks or disadvantages, see the
section entitled "Risk Factors" on page 30 and the section entitled "The Merger
and Related Transactions and the Prison Realty Restructuring" on page 97.
INTERESTS OF DIRECTORS, OFFICERS AND AFFILIATES IN THE MERGER AND RELATED
TRANSACTIONS AND PRISON REALTY RESTRUCTURING
When considering the recommendations of the board of directors of CCA you
should be aware that some of the directors, officers and affiliates of Prison
Realty and CCA have interests in the merger and related transactions and the
Prison Realty restructuring that are different from, or in addition to, your
interests. These interests include:
- Prison Realty's proposed issuance of shares of Prison Realty common stock
valued at approximately $8.0 million immediately prior to the completion of
the merger as consideration for the purchase of shares of CCA common stock
held by Baron, as well as the issuance of warrants, to purchase an aggregate
of $3.0 million of shares of Prison Realty common stock to Baron as
consideration for its consent to the merger. A representative of Baron
currently serves as a member of the board of directors of CCA;
- Prison Realty's proposed issuance of shares of Prison Realty common stock
valued at up to approximately $8.0 million to Sodexho immediately prior to
the completion of the merger as consideration for the purchase of shares of
CCA stock held by Sodexho. A representative of Sodexho currently serves as a
director of Prison Realty and CCA and will continue to serve as a director of
the combined company unless the parties agree otherwise;
- Prison Realty will issue restricted shares of its common stock in the merger
to certain members of Prison Realty's management, including J. Michael
Quinlan and Vida H. Carroll, who hold shares of CCA common stock;
- Executives including D. Robert Crants, III, former president of Prison
Realty, and Michael W. Devlin, former chief operating officer of Prison
Realty, received severance benefits in connection with their resignation. D.
Robert Crants, III and Michael W. Devlin received payments of approximately
18
<PAGE> 24
$533,750 each for the purchase of a portion of their CCA common stock and to
satisfy amounts owed to them under the terms of their respective employment
contracts, which payment has been applied to reduce principal outstanding under
$1.0 million loans from Prison Realty to each of Mr. Crants, III and Mr.
Devlin. Under the original terms of these severance arrangements, CCA was to
purchase the initial portion of the shares of CCA common stock by Messrs.
Crants, III and Devlin. Because of certain restrictions on CCA's ability to
repurchase these shares, these obligations were assigned to and assumed by
Doctor R. Crants, who purchased the shares from Messrs. Crants, III and
Devlin for $600,000 cash with the proceeds of a loan from PMSI. Prison Realty
expects to pay $100,000 each to Mr. Crants, III and Mr. Devlin to purchase
the remaining portion of their CCA common stock prior to the merger, which
payment will be applied to further reduce the outstanding loan balance.
Prison Realty also expects to pay $600,000 to Doctor R. Crants for the CCA
shares acquired by him from Messrs. Crants, III and Devlin. It is expected
that Doctor R. Crants will repay the loan from PMSI on the due date of such
loan; and
- Other current or former executives of Prison Realty and/or CCA, including
Doctor R. Crants, Vida H. Carroll and Darrell K. Massengale, are anticipated
to receive certain benefits in connection with their employment with the
companies, or the termination thereof.
For a more complete description of the interests of related persons in the
merger and related transactions and in the Prison Realty restructuring, see the
section entitled "The Merger and Related Transactions and the Prison Realty
Restructuring -- Interests of certain persons in the merger and related
transactions" on page 119.
RECOMMENDATION OF THE CCA BOARD
The board of directors of CCA believes that the merger and related
transactions are in the shareholders' best interest and recommends that you vote
for approval of the merger and related transactions described in this joint
proxy statement/prospectus.
THE REQUIRED VOTE
You are entitled to vote at the CCA special meeting if you owned shares of
CCA common stock (class A common stock or class B common stock) on July 28,
2000. You will have one vote for each share of CCA common stock that you owned
on July 28, 2000. Under Tennessee law, CCA must obtain the vote of the holders
of a majority of the outstanding shares of Class A common stock to approve the
merger. In addition, under its charter, CCA must obtain the vote of the holders
of 80% of the outstanding shares of CCA capital stock to approve the merger
agreement, and the consent of Baron, a holder of approximately 16.9% of CCA's
outstanding common stock, pursuant to the terms of a contractual agreement. In
consideration of the issuance of the warrants to Baron, Baron will consent to
the merger of CCA with Prison Realty and will vote the shares of CCA common
stock held by it for the merger.
If you are entitled to vote at the CCA special meeting, you may take
certain steps to dissent from the merger and obtain payment for the fair value
of your shares of CCA common stock. For a detailed description of the
requirements you must meet to exercise your dissenters' rights, see the section
entitled "Proposal to Approve the Merger and Related Transactions -- Rights of
dissenting shareholders of CCA" on page 144.
As of July 28, 2000, directors and executive officers of CCA and their
affiliates, including Baron and Sodexho and excluding Doctor R. Crants, held
approximately 67% of the shares of CCA's class A common stock. Prison Realty
holds 100% of CCA's class B common stock. The directors and executive
19
<PAGE> 25
officers other than Jean-Pierre Cuny have indicated that they will vote all of
their shares in favor of the merger agreement and the related transactions, and
it is expected that Baron will agree to vote all of its shares in favor of the
merger agreement and related transactions. Prison Realty will also vote the
shares held by it in favor of the merger agreement and the related transactions.
The vote of shares held by directors and executive officers and their
affiliates, other than Sodexho, in favor of the merger agreement and the related
transactions together with the affirmative vote of the shares of CCA common
stock held by Prison Realty, will result in the affirmative vote of
approximately 54% of the shares of CCA voting common stock entitled to vote at
the CCA special meeting.
RESALES
This joint proxy statement/prospectus may also be used as a prospectus for
the reoffer and resale by Baron, of up to $11.0 million in shares of our common
stock issued hereunder.
THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU.
YOU SHOULD CAREFULLY READ THIS ENTIRE JOINT PROXY STATEMENT/PROSPECTUS CAREFULLY
FOR A MORE COMPLETE UNDERSTANDING OF THE MERGER AND RELATED TRANSACTIONS AND THE
PRISON REALTY RESTRUCTURING. IN PARTICULAR, YOU SHOULD READ THE DOCUMENTS
ATTACHED TO THIS JOINT PROXY STATEMENT/PROSPECTUS, INCLUDING THE MERGER
AGREEMENT WHICH IS ATTACHED AS APPENDIX A.
20
<PAGE> 26
PRISON REALTY TRUST, INC.
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following table sets forth certain selected unaudited pro forma
combined financial information as of and for the three months ended March 31,
2000 and for the year ended December 31, 1999.
The selected unaudited pro forma combined financial information as of and
for the three months ended March 31, 2000 and for the year ended December 31,
1999 presents the pro forma effects of the merger of Prison Realty and CCA
(assuming Sodexho receives $8.0 million in shares of Prison Realty common
stock), as well as certain effects of the waiver and amendment to Prison
Realty's bank credit facility and other financing transactions (as discussed
below) related to Prison Realty's outstanding $40 million, 9.5% and $30 million,
7.5% convertible notes.
The merger transactions will be accounted for as the purchase of CCA by
Prison Realty. As such, Prison Realty will be treated as the acquiring company
for financial reporting purposes. The general provisions of the purchase method
of accounting prescribe that: (1) CCA assets and liabilities be recorded at fair
market value, as required by Accounting Principles Board Opinion No. 16; and (2)
Prison Realty's assets and liabilities be carried forward at historical cost.
The purchase method of accounting prescribes that the assets and
liabilities owned by CCA be adjusted to estimated fair market value with any
excess of cost over fair value being recorded as goodwill and other intangible
assets to be amortized over the respective life of the intangibles. The fair
market values of the assets and liabilities of CCA have been determined based
upon preliminary estimates and are subject to change as additional information
is obtained. Management does not anticipate that the preliminary allocation of
purchase costs based upon the estimated fair market value of the assets and
liabilities will materially change; however, the allocation of purchase costs
reflected in the following selected unaudited pro forma combined financial
information is subject to final determination and may differ from the amounts
ultimately determined.
In connection with the proposed merger, Prison Realty has negotiated a
waiver and amendment to its bank credit facility that, among other terms and
requirements discussed herein, removes the existing additional 2% default rate
of interest applied to the outstanding balance of Prison Realty's bank credit
facility and applies the original interest rates to the bank credit facility
subsequent to completion of the merger transactions. In addition, Prison Realty
has initiated other financing transactions whereby Prison Realty has negotiated
separate waivers of default with holders of Prison Realty's $40 million, 9.5%
and $30 million, 7.5% convertible notes. In connection with the waivers obtained
by Prison Realty associated with the 9.5% and 7.5% convertible notes, Prison
Realty will not be subject to a significant default rate of interest under the
$40 million, 9.5% convertible notes, but Prison Realty will have to pay an
additional 0.5% interest rate to the holders of each of the 9.5% and 7.5%
convertible notes subsequent to the completion of the merger transactions.
Prison Realty incurred approximately $10.4 million in additional loan costs to
obtain the waiver and amendment and to complete the other financing
transactions. Due to the expected significant effects of the waiver and
amendment and other financing transactions to Prison Realty's financial
statements subsequent to the merger, Prison Realty has elected to present the
pro forma effects of the waiver and amendment and other financing transactions
as if the bank credit facility, the $40 million, 9.5% convertible notes and the
$30 million, 7.5% convertible notes had been refinanced.
The selected unaudited pro forma combined operating data is presented as if
the merger transactions and effects of the waiver and amendment and other
financing transactions had occurred as of the beginning of the period indicated
and therefore incorporates certain assumptions that are included in the Notes to
Pro Forma Combined Statements of Operations included elsewhere herein.
21
<PAGE> 27
PRISON REALTY TRUST, INC.
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
(CONTINUED)
The selected unaudited pro forma combined balance sheet data is presented as if
the merger transactions, the effects of the waiver and amendment and other
financing transactions had occurred on March 31, 2000 and therefore incorporates
certain assumptions that are included in the Notes to Pro Forma Combined Balance
Sheet included elsewhere herein. The pro forma information does not purport to
represent what Prison Realty's financial position or results of operations
actually would have been had the merger transactions, the waiver and amendment
or other financing transactions, in fact, occurred on such date or at the
beginning of the period indicated, or to project Prison Realty's financial
position or results of operations at any future date or for any future period.
22
<PAGE> 28
PRISON REALTY TRUST, INC.
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
(CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1999 2000
------------ ------------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
OPERATING DATA:
Revenues:
Management and other...................................... $ 491,230 $ 137,952
Rental.................................................... 9,580 2,460
--------- ----------
500,810 140,412
--------- ----------
Expenses:
Operating................................................. 382,358 105,485
Lease..................................................... 2,473 977
General and administrative................................ 39,303 8,702
Impairment loss........................................... 76,433 --
Depreciation and amortization............................. 56,550 15,909
--------- ----------
557,117 131,073
--------- ----------
Operating income (loss)..................................... (56,307) 9,339
Equity earnings in subsidiaries and amortization of
deferred gain.......................................... (22,886) (6,113)
Interest expense, net..................................... 52,234 26,566
Write-off of loan costs................................... 14,567 --
Loss on disposal of assets................................ 1,995 --
--------- ----------
Loss before income taxes.................................... (102,217) (11,114)
Provision (benefit) for income taxes........................ (36,465) (3,146)
--------- ----------
Net loss.................................................... (65,752) (7,968)
Dividends to preferred shareholders -- A.................... 8,600 2,150
Dividends to preferred shareholders -- B.................... 17,413 4,462
--------- ----------
Net loss available to common shareholders................... $ (91,765) $ (14,780)
========= ==========
Net loss per common share:
Basic..................................................... $ (0.73) $ (0.12)
Diluted................................................... $ (0.73) $ (0.12)
Weighted average common shares outstanding, basic........... 124,853 128,151
Weighted average common shares outstanding, diluted......... 124,853 128,151
BALANCE SHEET DATA (AT PERIOD END):
Total current assets........................................ $ 149,901
Total assets................................................ 2,765,640
Current portion of long-term debt........................... 12,267
Long-term debt, net of current portion...................... 991,384
Senior notes................................................ 100,000
Total liabilities........................................... 1,507,816
Stockholders' equity........................................ 1,257,824
</TABLE>
23
<PAGE> 29
PRISON REALTY TRUST, INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth (i) selected consolidated historical
financial data of Prison Realty (formerly Prison Realty Corporation) as of
December 31, 1995, 1996 and 1997 and for each year in the two-year period ending
December 31, 1996, before giving effect to the merger transactions, the waiver
and amendment and other financing transactions, which has been derived from the
audited consolidated financial statements of Prison Realty as of December 31,
1995, 1996 and 1997, and for each year in the two-year period ended December 31,
1996, not included herein, (ii) selected consolidated historical financial data
as of December 31, 1998 and 1999, and for each year in the three-year period
ended December 31, 1999, before giving effect to the merger transactions, the
waiver and amendment and other financing transactions, which has been derived
from the audited consolidated financial statements of Prison Realty as of
December 31, 1998 and 1999, and for each year in the three year period ending
December 31, 1999, included elsewhere herein and (iii) selected consolidated
historical financial data as of and for the three months ended March 31, 2000,
before giving effect to the merger transactions, the waiver and amendment and
other financing transactions, which has been derived from Prison Realty's
unaudited condensed consolidated financial statements as of and for the three
months ended March 31, 2000, included elsewhere herein. Due to the requirements
of reverse acquisition accounting applied to the 1999 merger, the historical
operating results of Prison Realty for all periods prior to January 1, 1999
reflect the operating results of old Corrections Corporation of America.
All information contained in the following table should be read in
conjunction with Prison Realty's consolidated financial statements (including
the notes thereto), Prison Realty's Unaudited Condensed Financial Statements,
Prison Realty's "Management's discussion and analysis of financial condition and
results of operations," and Prison Realty's Unaudited Pro Forma Combined
Financial Statements included elsewhere herein.
24
<PAGE> 30
PRISON REALTY TRUST, INC.
SELECTED HISTORICAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED
---------------------------------------------------- MARCH 31,
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues:
Management and Other............................... $207,241 $292,513 $462,249 $662,059 $ -- $ --
Rental............................................. -- -- -- -- 270,134 11,460
Licensing fees..................................... -- -- -- -- 8,699 2,576
Interest........................................... -- -- -- -- 6,885 3,312
-------- -------- -------- -------- -------- --------
207,241 292,513 462,249 662,059 285,718 17,348
Expenses:
Operating.......................................... 153,692 211,208 330,470 496,522 -- --
Lease.............................................. 5,904 2,786 18,684 58,018 -- --
General and administrative......................... 13,506 12,607 16,025 28,628 24,125 2,543
Impairment loss.................................... -- -- -- -- 76,433 --
CCA compensation charge............................ -- -- -- 22,850 -- --
Depreciation and amortization...................... 6,524 11,339 14,093 15,973 44,062 12,924
Write-off of amounts under lease arrangements...... -- -- -- -- 65,677 4,000
-------- -------- -------- -------- -------- --------
179,626 237,940 379,272 621,991 210,297 19,467
-------- -------- -------- -------- -------- --------
Operating income (loss).............................. 27,615 54,573 82,977 40,068 75,421 (2,119)
Equity earnings in subsidiaries and amortization of
deferred gain.................................... -- -- -- -- (22,886) (6,113)
Interest (income) expense.......................... 3,952 4,224 (4,119) (4,380) 51,921 31,794
Write-off of loan costs............................ -- -- -- 2,043 14,567 --
Loss on disposal of assets......................... -- -- -- -- 1,995 --
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes.................... 23,663 50,349 87,096 42,405 29,824 (27,800)
Provision for income taxes........................... 9,330 19,469 33,141 15,424 83,200 --
-------- -------- -------- -------- -------- --------
Net income (loss) before cumulative effect of
accounting change.................................. 14,333 30,880 53,955 26,981 (53,376) (27,800)
Cumulative effect of accounting change, net of tax... -- -- -- 16,145 -- --
-------- -------- -------- -------- -------- --------
Net income (loss).................................... 14,333 30,880 53,955 10,836 (53,376) (27,800)
Dividends available to preferred shareholders........ -- -- -- -- 8,600 2,150
-------- -------- -------- -------- -------- --------
Net income (loss) available to common shareholders... $ 14,333 $ 30,880 $ 53,955 $ 10,836 $(61,976) $(29,950)
======== ======== ======== ======== ======== ========
Net income (loss) per common share: Basic net income
(loss) per common share:
Before cumulative effect of accounting change...... $ 0.26 $ 0.49 $ 0.80 $ 0.38 $ (0.54) $ (0.25)
Cumulative effect of accounting change............. -- -- -- (0.23) -- --
-------- -------- -------- -------- -------- --------
$ 0.26 $ 0.49 $ 0.80 $ 0.15 $ (0.54) $ (0.25)
======== ======== ======== ======== ======== ========
Diluted net income (loss) per common share:
Before cumulative effect of accounting change...... $ 0.21 $ 0.42 $ 0.69 $ 0.34 $ (0.54) $ (0.25)
Cumulative effect of accounting change............. -- -- -- (0.20) -- --
-------- -------- -------- -------- -------- --------
$ 0.21 $ 0.42 $ 0.69 $ 0.14 $ (0.54) $ (0.25)
======== ======== ======== ======== ======== ========
Weighted average number of shares outstanding,
basic.............................................. 54,475 62,793 67,568 71,380 115,097 118,395
Weighted average number of shares outstanding,
diluted............................................ 71,396 76,160 78,959 78,939 115,097 118,395
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
-------------------------------------------------------- MARCH 31,
1995 1996 1997 1998 1999 2000
-------- -------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets......................................... $213,478 $468,888 $697,940 $1,090,437 $2,735,922 $2,698,611
Current portion of long-term debt.................... 11,020 8,281 5,847 9,576 998,991 997,471
Senior notes......................................... -- -- -- -- 100,000 100,000
Long-term debt, net of current portion............... 74,865 117,535 127,075 290,257 -- --
Total liabilities, excluding deferred gains.......... 116,774 187,136 214,112 395,999 1,209,528 1,204,745
Total shareholders' equity........................... 96,704 281,752 348,076 451,986 1,420,349 1,390,490
</TABLE>
25
<PAGE> 31
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF CCA
The following table sets forth selected consolidated historical financial
data of CCA as of and for the three months ended March 31, 2000, before giving
effect to the merger transactions, the waiver and amendment and other financing
transactions, which has been derived from CCA's unaudited financial information
as of and for the three months ended March 31, 2000, which is included elsewhere
herein. The following table also sets forth selected consolidated historical
financial data of CCA as of and for the year ended December 31, 1999, before
giving effect to the merger transactions, the waiver and amendment and other
financing transactions, which has been derived from CCA's audited consolidated
financial statements as of and for the year ended December 31, 1999 which are
also included elsewhere herein.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1999 2000
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
OPERATING DATA:
Revenues.................................................... $ 499,292 $137,952
Expenses:
Operating................................................. 376,724 105,485
Lease..................................................... 261,546 79,314
General and administrative................................ 26,166 6,159
Depreciation and amortization............................. 8,601 2,170
Trade name use............................................ 8,699 2,576
--------- --------
681,736 195,704
--------- --------
Operating loss.............................................. (182,444) (57,752)
Interest expense............................................ 20,474 4,888
--------- --------
Loss before income taxes.................................... (202,918) (62,640)
Provision for income taxes.................................. -- --
--------- --------
Net loss available to common shareholders.............. $(202,918) $(62,640)
========= ========
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, MARCH 31,
1999 2000
------------ ---------
<S> <C> <C>
BALANCE SHEET DATA:
Total current assets........................................ $ 88,647 $ 82,208
Total assets................................................ 184,701 175,918
Current portion of long-term debt........................... 153,214 143,180
Total liabilities........................................... 365,491 419,153
Stockholders' equity........................................ (180,790) (243,235)
</TABLE>
26
<PAGE> 32
SELECTED COMPARATIVE PER SHARE DATA
The following table sets forth the historical per share data and the
unaudited pro forma combined per share data giving effect to the merger and
related transactions and the Prison Realty restructuring transactions. The pro
forma combined data are not necessarily indicative of actual financial positions
or future operating results or that which would have occurred or will occur upon
completion of the restructuring transactions.
The information shown below should be read in conjunction with (1) the
consolidated financial statements and accompanying notes of Prison Realty,
included in this joint proxy statement/ prospectus, and (2) the unaudited pro
forma financial statements of Prison Realty, included in this joint proxy
statement/prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, 2000 DECEMBER 31, 1999
------------------------ ------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
---------- ----------- ---------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Income (loss) per common share:
Basic....................................... $ (.25) $(.12) $ (.54) $(.73)
Diluted..................................... $ (.25) $(.12) $ (.54) $(.73)
Cash dividends declared per common share...... $ -- $ -- $ 1.80 $1.65
Book value per common share, at period end.... $10.84 $8.98 $11.09 N/A
</TABLE>
27
<PAGE> 33
COMPARATIVE PER SHARE MARKET PRICE AND
DISTRIBUTION/DIVIDEND INFORMATION
Shares of Prison Realty common stock have been traded on the NYSE under the
symbol "PZN" since January 4, 1999, the first trading day following the date of
completion of the merger of CCA Prison Realty Trust, a Maryland real estate
investment trust ("Old Prison Realty"), and the old Corrections Corporation of
America, a Tennessee corporation ("Old CCA") with and into Prison Realty (the
"1999 Merger"). The common stock of CCA has no established public trading market
and therefore has no public market price.
Prior to the 1999 Merger, Old Prison Realty's common shares and Old CCA's
common stock were traded on the NYSE under the symbols "PZN" and "CCA,"
respectively. The following table sets forth, for the fiscal quarters indicated,
(i) the range of high and low sale prices of shares of the Prison Realty common
stock, the Old Prison Realty common shares and the Old CCA common stock on the
NYSE, and (ii) the amount of cash distributions paid per share:
PRISON REALTY
<TABLE>
<CAPTION>
PRISON REALTY
SALES PRICES PER SHARE CASH
--------------- DISTRIBUTION PAID OR
HIGH LOW EXPECTED TO BE PAID
------ ------ --------------------
<S> <C> <C> <C>
FISCAL YEAR 1999:
First Quarter.......................................... $24.38 $16.63 $ 0.60
Second Quarter......................................... 22.38 9.25 0.60
Third Quarter.......................................... 14.19 9.00 0.60
Fourth Quarter......................................... 11.75 4.50 0.00
FISCAL YEAR 2000:
First Quarter.......................................... 6.00 4.00 0.00
Second Quarter......................................... 4.00 2.00 0.00
Third Quarter (through July 24, 2000).................. 3.25 2.38 0.00 (expected)
</TABLE>
OLD PRISON REALTY
<TABLE>
<CAPTION>
OLD PRISON
REALTY
SALES PRICES
--------------- PER SHARE CASH
HIGH LOW DIVIDEND PAID
------ ------ --------------
<S> <C> <C> <C>
FISCAL YEAR 1998:
First Quarter.............................................. $44.50 $38.50 $0.425
Second Quarter............................................. 41.94 26.38 0.425
Third Quarter.............................................. 30.69 17.50 0.480
Fourth Quarter............................................. 26.75 15.50 0.480
</TABLE>
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OLD CCA
<TABLE>
<CAPTION>
OLD CCA
SALES PRICES
--------------- PER SHARE CASH
HIGH LOW DIVIDEND PAID
------ ------ --------------
<S> <C> <C> <C>
FISCAL YEAR 1998:
First Quarter.............................................. $41.50 $32.00 $0.00
Second Quarter............................................. 35.50 20.25 0.00
Third Quarter.............................................. 24.88 13.13 0.00
Fourth Quarter............................................. 22.38 10.50 0.00
</TABLE>
On June 29, 2000, the last trading day preceding public announcement of the
execution of the agreement and plan of merger by and between Prison Realty and
CCA relating to the merger and related transactions and the Prison Realty
restructuring, the closing price per share of Prison Realty common stock was
$3.13. On August 2, 2000, the last full trading day for which closing prices
were available at the time of printing of this joint proxy statement/prospectus,
the closing price per share of Prison Realty common stock was $2.75.
Shareholders of CCA are advised to obtain current market quotations for Prison
Realty common stock. No assurance can be given as to the market price of Prison
Realty common stock at any time before the completion of the merger or as to the
market price of Prison Realty common stock after the merger. The number of
shares of Prison Realty common stock received by shareholders of CCA in the
merger will vary depending upon the average closing price of Prison Realty
common stock for the five trading day period ending two days prior to the
closing of the merger. See "Proposal to Approve the Merger and Related
Transactions -- The agreement and plan of merger" for further discussion
regarding the consideration to be issued by Prison Realty to CCA shareholders.
Subject to the approval of Prison Realty's shareholders, Prison Realty will
cease to qualify as a REIT for federal income tax purposes commencing with its
2000 taxable year. In accordance with the provisions of its charter, Prison
Realty will elect to be taxed and to qualify as a REIT with respect to its 1999
taxable year. In order to satisfy its remaining 1999 REIT distribution
requirements, Prison Realty will distribute to its common shareholders shares of
its series B convertible preferred stock having a value of approximately $150.0
million. Prison Realty believes that the distribution of the series B
convertible preferred stock will satisfy its remaining REIT distribution
requirements for 1999. There can be no assurance, however, that such
distribution will ultimately satisfy the REIT requirements, or that additional
distributions will not be required at a later time. In the event Prison Realty
does not satisfy its distribution requirements through the issuance of the
series B convertible preferred stock or another security, Prison Realty will be
required to make its required REIT distribution in cash. Prison Realty does not
have the resources to pay such distribution in cash, and, under the terms of its
existing senior bank credit facility, such cash dividend payments are explicitly
prohibited. Moreover, if Prison Realty is otherwise unable to qualify as a REIT
with respect to its 1999 taxable year, Prison Realty will be required to pay
federal income tax on its earnings at ordinary corporate rates, which is
currently estimated to be as much as $100.0 million. See "Information About
Prison Realty -- Qualification of Prison Realty as a REIT for 1999." Following
completion of the merger and related transactions and the Prison Realty
restructuring, Prison Realty does not intend to pay any cash dividends on its
common stock in the foreseeable future.
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RISK FACTORS
In addition to the other information contained or incorporated by reference
in this joint proxy statement/prospectus, you should carefully consider the
following risk factors before you decide whether you wish to approve the merger
and related transactions described herein.
YOU CANNOT BE ASSURED THAT THE MERGER AND RELATED TRANSACTIONS WILL BE COMPLETED
The obligation of the companies to complete the merger and related
transactions is subject to the satisfaction of certain conditions, as more fully
described in "Proposal to Approve the Merger and Related Transactions -- The
agreement and plan of merger." These conditions include the following:
- approval by Prison Realty's shareholders of Prison Realty's charter
amendments to permit Prison Realty to elect not to be taxed as a REIT
for federal income tax purposes commencing with Prison Realty's 2000
taxable year;
- approval of the merger and related transactions by the shareholders of
CCA;
- the completion of the purchase of shares of common stock of CCA held by
Baron; and
- antitrust clearance.
As a result of these and other conditions, you cannot be assured that the
merger and related transactions will be successfully completed.
PRISON REALTY CURRENTLY HAS, AND WILL HAVE AFTER COMPLETION OF THE MERGER AND
RELATED TRANSACTIONS AND THE PRISON REALTY RESTRUCTURING, A SIGNIFICANT AMOUNT
OF DEBT
Prison Realty currently has, and will continue to have upon completion of
the merger and related transactions and the Prison Realty restructuring, a
significant amount of debt. Prison Realty currently has a $1.0 billion bank
credit facility, consisting of a $400.0 million revolving credit facility, a
$250.0 million term loan facility and a $350.0 million term loan facility.
Prison Realty has approximately $372.5 million currently outstanding under its
revolving credit facility and approximately $593 million currently outstanding
under its term loan facilities. In addition, as permitted by the waiver of
existing events of default under, and amendments to, Prison Realty's bank credit
facility, more fully described in "Information About Prison Realty Recent
Developments," Prison Realty may borrow up to $30.0 million under the bank
credit facility at various times, in addition to the $25.0 million Prison Realty
borrowed upon execution of the waiver and amendment. Prison Realty also has
outstanding an aggregate principal amount of $100.0 million of its 12% senior
unsecured notes, due June 2006, as well as a total of $70.0 million in
convertible, subordinated notes.
As more fully described in "Information About Prison Realty -- Recent
developments," Prison Realty recently obtained a waiver of existing events of
default under, and amendments to, the provisions of its senior bank credit
facility. In addition, Prison Realty recently obtained waivers of existing
events of default under, and amendments to, its convertible, subordinated notes.
Although the terms of Prison Realty's existing indebtedness, including the terms
of its indebtedness which have been recently amended, permit Prison Realty to
effect the merger and related transactions, the terms of this indebtedness
require Prison Realty to meet various financial and operational covenants. The
financial covenants require Prison Realty to achieve and maintain certain
financial ratios. If actual results do not meet these covenants, Prison Realty
would be in default under the applicable terms of its indebtedness. The
operational covenants contained in Prison Realty's indebtedness restrict Prison
Realty's ability to incur additional indebtedness, make certain capital
expenditures or repurchase or redeem, or pay dividends upon, its debt or equity
securities. Any violation of these operational
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<PAGE> 36
covenants by Prison Realty would result in an event of default under the
applicable provisions of Prison Realty's indebtedness. If Prison Realty were
unable to obtain a waiver of any event of default under its indebtedness, the
holders of such indebtedness would be able to accelerate all the indebtedness
Prison Realty owed them, making it immediately due and payable. In addition,
such an acceleration would trigger events of default under other indebtedness of
Prison Realty allowing the holders thereof to accelerate that indebtedness,
making it immediately due and payable.
In addition, as more fully described in "Information About Prison
Realty -- Recent developments," CCA also obtained a waiver of events of default
under, and amendments to, its bank credit facility. Although the terms of the
waiver and amendment waive any events of default arising in connection with
CCA's execution of the merger agreement with Prison Realty, the terms of the
waiver and amendment provide that the waiver and amendment will terminate upon
the earlier of: (i) the completion of the merger; (ii) September 30, 2000; (iii)
the date CCA makes any lease payments to Prison Realty other than as set forth
in the amended lease agreements; and (iv) the date Prison Realty's bank lenders
exercise any rights with respect to any defaults under Prison Realty's credit
facility. The terms of Prison Realty's bank credit facility provide that, upon
completion of the merger, CCA's bank credit facility, or a reasonably
satisfactory replacement facility, may continue in effect and continue to be
secured by certain management contracts and accounts receivable. CCA is
currently engaged in discussions with the agent of its bank credit facility with
respect to additional amendments to the bank credit facility which would provide
for the continued effectiveness of this facility following the merger and
related transactions.
Prison Realty's level of indebtedness could have important consequences.
You cannot be assured that Prison Realty will be able to satisfy its debt
service obligations or its obligations to pay dividends upon its equity
securities, including its series A preferred stock, or its series B convertible
preferred stock to be issued in satisfaction of Prison Realty's 1999 REIT
distribution requirements. In addition, Prison Realty's bank credit facility
currently restricts the payment of dividends on Prison Realty's series A
preferred stock. Prison Realty's ability to make payments on or refinance its
indebtedness will depend on its future financial and operating performance. This
will be subject to prevailing economic and competitive conditions and to
financial, business and other factors which are beyond Prison Realty's control.
These factors could include operating difficulties, increased operating costs
and delays in implementing Prison Realty's strategic plans.
PRISON REALTY WILL NO LONGER BE PAYING 95% OF ITS TAXABLE INCOME AS DIVIDENDS
Following completion of the restructuring, Prison Realty will not qualify
as a REIT for federal income tax purposes commencing with its taxable year
ending December 31, 2000. As a taxable subchapter C corporation commencing with
its 2000 taxable year, Prison Realty will no longer be required to pay 95% (90%
for years beginning after December 31, 2000) of its taxable income to its
stockholders as dividends. Prison Realty will, however, elect to be taxed as a
REIT for the 1999 taxable year and, in satisfaction of its distribution
requirements, will distribute to all of its common stockholders approximately
$150.0 million of series B convertible preferred stock, as more fully described
in "Information About Prison Realty -- Qualification of Prison Realty as a REIT
for 1999." Following completion of the restructuring, Prison Realty does not
intend to pay any cash dividends on its common stock in the foreseeable future.
See "The Merger and Related Transactions and the Prison Realty
Restructuring -- Description of the restructuring of Prison Realty."
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<PAGE> 37
PRISON REALTY WILL PAY HIGHER FEDERAL INCOME TAXES AFTER THE MERGER AND RELATED
TRANSACTIONS AND THE PRISON REALTY RESTRUCTURING
Following completion of the restructuring, Prison Realty will be taxed as a
subchapter C corporation commencing with its taxable year ending December 31,
2000. As a taxable subchapter C corporation, Prison Realty will be subject to
federal income tax at regular corporate rates and will be required to pay its
federal income tax when due.
SOME EMPLOYEES, DIRECTORS AND SHAREHOLDERS OF THE COMPANIES WILL RECEIVE
BENEFITS DIFFERENT FROM AND IN ADDITION TO OTHER SHAREHOLDERS IN THE MERGER AND
RELATED TRANSACTIONS AND THE PRISON REALTY RESTRUCTURING, CREATING POTENTIAL
CONFLICTS OF INTEREST
You should be aware that several employees, directors or shareholders of
CCA have interests in, and will receive benefits as a consequence of, the merger
and related transactions and the Prison Realty restructuring that are separate
from the interests of, and benefits to, shareholders of CCA generally. These
benefits are summarized below and are more fully described in "The Merger and
Related Transactions and the Prison Realty Restructuring -- Interests of certain
persons in the merger and related transactions and the Prison Realty
restructuring."
Immediately prior to the merger, Prison Realty will purchase from Baron all
of the voting common stock of CCA owned by Baron (approximately 16.9% of the
outstanding capital stock of CCA) in exchange for non-cash consideration,
consisting of shares of Prison Realty common stock, valued at $8.0 million (or
approximately 2.3 million shares assuming a Prison Realty common stock price of
$3.44 per share). In addition, as consideration for Baron's consent to the
merger, Prison Realty will issue warrants to purchase an aggregate of $3.0
million of Prison Realty common stock. It is expected that Baron will vote in
favor of the merger at the special meeting. Baron will have one vote per share
of common stock owned on the applicable record date, even though it will not own
these shares at the time of the CCA merger. Mitch Rubin, a representative of
Baron, is a director of CCA. Mr. Rubin abstained from the vote of the CCA board
approving the merger transactions.
Prison Realty is currently negotiating with Sodexho with respect to the
purchase of the shares of CCA common stock held by it. Prison Realty indicated
to Sodexho that it was willing to satisfy its previous agreement to purchase the
CCA shares in the form of Prison Realty common stock valued at $8.0 million,
rather than in cash, as required by Prison Realty's amended bank credit
facility. Prison Realty intends to continue negotiation with Sodexho regarding
its purchase of the CCA common stock held by Sodexho and it expects, if it can
reach an agreement with Sodexho, to pay Sodexho non-cash consideration
consisting of shares of Prison Realty common stock valued at up to $8.0 million
(or approximately 2.3 million shares assuming a Prison Realty common stock price
of $3.44 per share) for its shares of CCA common stock, under the same terms as
described above with respect to the purchase of shares of CCA common stock held
by Baron. Prison Realty has conditioned and will condition its proposed purchase
on the elimination of Sodexho's existing contractual right to have a
representative on Prison Realty's board of directors. Jean-Pierre Cuny, a
representative of Sodexho, is a director of Prison Realty and of CCA and, unless
the parties agree otherwise, will continue to serve as a director of the
restructured company. Mr. Cuny abstained from the vote of the Prison Realty
board approving the restructuring.
Certain members of the board of directors and management of Prison Realty
also are members of the board of directors and management of CCA. Thomas W.
Beasley, the chairman of the board of directors of Prison Realty, is currently
serving as the interim chief executive officer of each of Prison Realty and CCA,
pending the appointment of a permanent chief executive officer. Doctor R. Crants
was terminated as the chief executive officer of these companies on July 28,
2000. Mr. Crants resigned as a director of Prison Realty and as its
vice-chairman on July 5, 2000, and as a member of
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<PAGE> 38
CCA's board of directors on July 27, 2000. J. Michael Quinlan, president and
chief operating officer of CCA and a member of its board of directors, is also
the president of Prison Realty. Jean-Pierre Cuny is also a member of the board
of directors of CCA.
Prison Realty also has made, or will make, severance payments to certain
current and former executive officers of Prison Realty and CCA. Prison Realty is
obligated to provide severance payments and benefits to Doctor R. Crants in
connection with his resignation and termination from his positions with Prison
Realty as a result of Mr. Crants' employment agreement with Prison Realty. In
addition, Prison Realty's board of directors approved certain additional
modifications to the original terms of Mr. Crants' employment agreement in
connection with Mr. Crants' resignation and termination. Vida H. Carroll, Prison
Realty's chief financial officer, secretary and treasurer, also has received a
severance payment from Prison Realty in connection with her resignation and will
receive an additional severance payment in consideration for the extension of
her employment through the completion of the merger and related transactions and
the Prison Realty restructuring. Prison Realty also has made, and will make,
certain severance payments to D. Robert Crants, III, the former president of
Prison Realty, and Michael W. Devlin, the former chief operating officer of
Prison Realty, in connection with their resignation from their positions with
Prison Realty, including cash payments for the purchase of shares of CCA common
stock held by each of them, the proceeds to be applied to the reduction of $1.0
million loan from Prison Realty to each of them. CCA also is obligated to make
certain payments to, and vest any deferred or restricted shares or other equity
incentive awards previously granted to, Darrell K. Massengale, the chief
financial officer and secretary of CCA, in the event Mr. Massengale is not
employed by Prison Realty after the completion of the merger and related
transactions and the Prison Realty restructuring. CCA also has agreed to pay Mr.
Massengale a retention bonus in consideration for the extension of his
employment through the completion of the merger and related transactions and the
Prison Realty restructuring.
Prison Realty will issue restricted shares of its common stock to certain
members of Prison Realty's and CCA's management who hold shares of CCA common
stock, including Vida H. Carroll and J. Michael Quinlan, in the merger
transactions. Certain executive officers, including Mr. Quinlan, also are
expected to receive new employment contracts with Prison Realty following the
completion of the merger transactions.
YOU MAY NOT KNOW THE NUMBER OF SHARES OF PRISON REALTY COMMON STOCK TO BE ISSUED
TO SHAREHOLDERS OF CCA UNTIL AS LATE AS THE DAY OF THE MERGER
The number of shares of Prison Realty common stock to be issued to
shareholders of CCA other than Prison Realty in the merger is subject to
adjustment based on changes in the market price of Prison Realty common stock
prior to the special meeting. Specifically, the number of shares of Prison
Realty common stock to be issued in consideration for each share of CCA voting
common stock shall be determined by a formula based on the average closing price
of Prison Realty common stock for the five trading day period ending two trading
days prior to the date of the closing of the merger. The share price of Prison
Realty common stock is subject to price fluctuations in the market for publicly
traded equity securities and has experienced significant volatility. Prison
Realty cannot predict the market prices for Prison Realty common stock, and,
therefore, the number of shares of Prison Realty common stock to be issued in
the merger, at any time before completion of the merger. See "Proposal to
Approve the Merger and Related Transactions -- The agreement and plan of merger"
for a complete description of the formula for the number of shares of Prison
Realty common stock which will be issued in the merger.
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<PAGE> 39
SHARES OF PRISON REALTY COMMON STOCK ISSUED TO CERTAIN SHAREHOLDERS OF CCA IN
THE MERGER CANNOT BE SOLD OR TRANSFERRED FOR A PERIOD OF TIME
If the merger and related transactions are approved, shareholders of CCA
who receive shares of Prison Realty common stock in the merger will be required
to hold such shares for a period of time following the merger as a result of
contractual restrictions. In addition, certain shareholders of CCA may be deemed
to be an "affiliate" of CCA under the federal securities laws and, as such, may
be subject to resale limitations following the mergers. See "Proposal to Approve
the Merger and Related Transactions -- Federal securities law consequences;
Resale restrictions" for a description of the resale restrictions applicable to
such shareholders. As a result, such shareholders will be subject to market
risks and other risks inherent in holding Prison Realty common stock, including
the risk that the market price of Prison Realty common stock may decline.
PRISON REALTY'S BUSINESS AND OPERATIONS WILL BE ADVERSELY AFFECTED IF IT CANNOT
ATTRACT AND RETAIN KEY PERSONNEL
Following the merger and related transactions and the Prison Realty
restructuring, Prison Realty's future operating results will substantially
depend on the ability of its officers and key employees to manage the business
and operations of the combined company. Prison Realty is currently conducting a
search for a new chief executive officer and will begin a search for a new chief
financial officer. Doctor R. Crants has been terminated as the chief executive
officer of Prison Realty, as well as the chief executive officer of CCA. Thomas
W. Beasley, the chairman of the board of directors of Prison Realty, is serving
as interim chief executive officer of Prison Realty while Prison Realty
completes the search for a permanent chief executive officer. Vida H. Carroll
has delivered her resignation as Prison Realty's chief financial officer. The
search for the new chief financial officer will be undertaken after the
selection of a new chief executive officer. Prison Realty's failure to select
and retain qualified individuals to permanently fill these positions could
adversely affect its business and operations.
AFTER THE MERGER AND RELATED TRANSACTIONS, PRISON REALTY WILL BE MORE DIRECTLY
EXPOSED TO RISKS INHERENT IN THE MANAGEMENT AND OPERATION OF CORRECTIONAL AND
DETENTION FACILITIES
Following the merger and related restructuring, Prison Realty will, through
its wholly owned subsidiary, operate and manage correctional and detention
facilities formerly operated by CCA. In addition, Prison Realty will continue to
own 100% of the non-voting common stock of each of PMSI and JJFMSI, companies
whose business is the operation and management of correctional and detention
facilities. Accordingly, Prison Realty will become more directly exposed to the
risks inherent in the private corrections and detention industry. These risks
include:
- Cash flow and revenues generated from private prison management are
dependent upon facility management contracts with government entities,
which can be canceled on short notice without significant penalty.
- The failure of one or more government entities to renew these management
contracts or to send inmates to Prison Realty's facilities, or the
failure of one or more government entities to receive sufficient
appropriations to cover its contractual obligations, could have an
adverse effect on Prison Realty's business.
- Private prison managers are increasingly subject to public scrutiny
regarding proposed facilities, opposition from organized labor and
federal and state regulation and political conditions, which could make
it more difficult for Prison Realty to maintain or expand its business.
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- Legislation has been proposed or enacted in several states, and has
previously been proposed in the United States House of Representatives,
restricting the ability of private prison managers to house certain
types of inmates.
- Prison Realty could be subject to potential claims or litigation by
third parties or prisoners relating to personal injury or other damages
resulting from a prisoner's escape from, or a disturbance or riot at, a
facility owned by Prison Realty.
- Nine of the facilities either owned or under development by Prison
Realty are subject to an option to purchase by certain government
agencies. If one or more of those facilities are repurchased by a
government agency, Prison Realty may not be able to recoup its full
investment from such facility or be able to invest the proceeds from the
sale of the facility in one or more properties that yield as much
revenue as the repurchased property.
ALTHOUGH PRISON REALTY IS ENTITLED TO RECEIVE 95% OF PMSI'S AND JJFMSI'S NET
INCOME, AS DEFINED, IN THE FORM OF DIVIDENDS, THE DECLARATION AND PAYMENT OF
SUCH DIVIDENDS IS IN THE DISCRETION OF THE BOARDS OF DIRECTORS OF EACH COMPANY
Following completion of the merger and related transactions and the Prison
Realty restructuring, Prison Realty will continue to own 100% of the non-voting
common stock of PMSI and JJFMSI. As the owner of the non-voting common stock of
PMSI and JJFMSI, Prison Realty is entitled, pursuant to the charter of each
company, to receive 95% of each company's net income, as defined, as cash
dividends on such shares. PMSI and JJFMSI paid approximately $11.6 million and
approximately $10.7 million, respectively, as cash dividends to Prison Realty
with respect to the 1999 fiscal year. As of June 30, 2000, PMSI and JJFMSI have
paid approximately $3.8 million and approximately $2.2 million, respectively, as
cash dividends to Prison Realty with respect to the first fiscal quarter of
2000.
The charter of each of PMSI and JJFMSI provides that dividends shall be
paid as and if declared by the board of directors of each company and that
dividends payable to Prison Realty not declared and paid on a quarterly basis
will accrue and shall be cumulative. As a result, each of PMSI and JJFMSI may
not pay dividends to other shareholders without first paying, in cash, all
accrued but unpaid dividends to Prison Realty. However, Prison Realty cannot be
assured that the board of directors of each of PMSI and JJFMSI will declare and
pay dividends to Prison Realty or to any other shareholder. The failure of PMSI
and JJFMSI to pay regular quarterly cash dividends to Prison Realty following
completion of the merger and related transactions and the Prison Realty
restructuring would have a material adverse effect on Prison Realty's liquidity
and financial condition. In addition, Prison Realty's ownership of 100% of the
non-voting common stock of each of PMSI and JJFMSI does not enable Prison Realty
to vote in the election of directors of each company. Doctor R. Crants has
informed Prison Realty that he intends to remain a director of PMSI and of
JJFMSI.
PRISON REALTY AND CCA ARE CURRENTLY SUBJECT TO CERTAIN LITIGATION, AND THE
OUTCOME OF SUCH LITIGATION COULD HAVE A MATERIAL ADVERSE EFFECT ON PRISON REALTY
As more fully described in "Information About Prison Realty -- Litigation,"
Prison Realty is currently subject to a series of purported class actions in
federal and state court brought by current and former shareholders of Prison
Realty. These actions, which generally arise out of Prison Realty's increase of
fees payable to CCA in May of 1999 and Prison Realty's proposed transactions
with both Fortress/Blackstone and Pacific Life, claim violations of federal
and/or state laws, including violations of federal and state securities laws.
The plaintiffs in these actions seek both monetary and equitable relief, and at
least one action seeks injunctive relief to prevent the completion of the merger
and related transactions and the Prison Realty restructuring. In addition, a
complaint was recently filed in federal court by the Fortress/Blackstone
investor group to recover $23.2 million in fees allegedly
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<PAGE> 41
owed them as a result of Prison Realty's, CCA's, PMSI's and JJFMSI's termination
of the Fortress/ Blackstone securities purchase agreement. Prison Realty is also
subject to certain additional claims arising from Old Prison Realty's
acquisition of and merger with U.S. Corrections in 1998 and claims inherited
from Old CCA which seek monetary damages, each as discussed herein under the
section entitled "Information About Prison Realty -- Litigation." Moreover, upon
the completion of the merger and related transactions and the Prison Realty
restructuring, Prison Realty will assume the liabilities arising from the
litigation described herein under "Information About CCA -- Legal proceedings."
Management of Prison Realty does not believe that it is feasible to predict
the final outcome or resolution of these proceedings or to estimate the amount
or potential range of loss with respect to the resolution of these proceedings.
In addition, the timing of the final resolution of these proceedings is
uncertain. The possible outcomes or resolutions of these proceedings could
include judgments against Prison Realty or settlements and could require
substantial cash payments by Prison Realty that exceed its insurance coverage or
the issuance of common or preferred equity securities. Prison Realty's
management believes that adverse outcomes in the proceedings or any other
resolutions, including any settlements, could have a material impact on Prison
Realty's financial condition, results of operations or cash flows and could
depress the market price of Prison Realty's securities and cause significant
dilution to Prison Realty's existing stockholders.
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THE SPECIAL MEETING
DATE, TIME AND PLACE
The special meeting will be held on Tuesday, September 12, 2000 at the
Union Station Hotel, 1001 Broadway, Nashville, Tennessee, at 12:00 noon, local
time.
MATTERS TO BE CONSIDERED AT THE MEETING
At the special meeting, the shareholders of CCA will be asked, in
accordance with the Tennessee Business Corporation Act, to consider and vote on
the merger agreement and to consider and act upon such other business as may
properly come before the special meeting or any adjournments or postponements
thereof. The CCA board is not currently aware of any business to be acted upon
at the special meeting other than as described in this joint proxy
statement/prospectus. If, however, other matters are properly brought before the
special meeting, the persons appointed as proxies will have discretion to vote
those matters according to their judgment.
Representatives of CCA's independent auditors, Arthur Andersen LLP, will be
present at the special meeting to respond to appropriate questions regarding the
accounting and related effects of the proposal to be considered.
RECORD DATE AND OUTSTANDING SHARES
The board of directors of CCA has fixed the close of business on Friday,
July 28, 2000 as the record date for determining the shareholders entitled to
notice of, and to vote at, the meeting. As of the record date, there were issued
and outstanding 10,330,454 shares of CCA common stock (class A and class B)
entitled to vote at the special meeting.
QUORUM
The presence, either in person or by proxy, of the holders of shares
representing a majority of the voting power of the outstanding shares of capital
stock entitled to vote at the meeting will constitute a quorum for the
transaction of business at the meeting. In the absence of a quorum, the holders
of shares representing a majority of the voting power of the shares represented
at the meeting have the power to adjourn the meeting without further notice,
other than by announcement at the meeting of the time of its adjournment. At any
adjourned meeting at which a quorum exists, the shareholders entitled to vote
may transact any business that might have been transacted at the original
meeting. If and when a quorum exists at the meeting or any adjourned meeting,
the shareholders present and represented at the meeting may continue to transact
business until adjournment, notwithstanding the withdrawal from the meeting of
shareholders counted in determining the existence of a quorum.
VOTING METHOD AND PROXIES
You can vote on the matters to come before the meeting in two ways:
- by attending the meeting and casting your vote there; or
- by signing and returning the enclosed proxy card.
All shares represented by properly executed proxies received prior to or at
the shareholders' special meeting and not revoked will be voted in accordance
with the instructions indicated on those proxies or, if no instructions are
given, in favor of the merger and related transactions described in the proposal
and in accordance with this joint proxy statement/prospectus. We urge you to
mark the box
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on the proxy card to indicate how you want your shares of CCA common stock to be
voted. If matters other than those described in this joint proxy
statement/prospectus are properly presented at the special meeting, the persons
named as the proxies will vote in accordance with their own judgment with
respect to those matters.
REVOCABILITY OF PROXY
Even if you submit a vote by proxy on the applicable enclosed form, you may
still vote in person at the special meeting. A shareholder may revoke a proxy at
any time prior to the time it is voted by either:
- submitting a signed written revocation to the Secretary of CCA, at 10
Burton Hills Boulevard, Nashville, Tennessee 37215;
- submitting a signed proxy bearing a later date; or
- appearing at the meeting and voting in person.
No special form of revocation is required if you intend to vote in person at any
of the special meetings. However, attendance at a special meeting will not, in
and of itself, constitute revocation of a proxy.
REQUIRED VOTE
Holders of shares of CCA class A and class B common stock as of the record
date are entitled to one vote per share on the proposal to approve the merger
and related transactions set forth herein and other matters to be considered at
the special meeting. Approval of the proposal to approve the merger and the
related transactions at the special meeting will require, under Tennessee law,
the affirmative vote of the holders of a majority of CCA's outstanding class A
common stock, and, under CCA's charter, the affirmative vote of the holders of
80% of all outstanding shares of CCA class A and class B stock, voting as one
class (plus the separate approval of Baron pursuant to a contract between Baron
and CCA).
As of the record date, directors and executive officers of CCA and their
affiliates, including Baron and Sodexho and excluding Doctor R. Crants,
beneficially owned and were entitled to vote approximately 6,299,064 shares of
CCA's class A common stock, which represented 67% of the shares of CCA's class A
common stock outstanding and entitled to vote on the CCA record date (4,549,532
shares, or 48.3%, excluding Sodexho). On the record date, Prison Realty
beneficially owned and was entitled to vote approximately 981,393 shares of
CCA's class B common stock, which represented 100% of the shares of CCA's class
B common stock outstanding and entitled to vote on the record date. Each
director and executive officer, other than Jean-Pierre Cuny has indicated his
present intention to vote, or cause to be voted, the shares of CCA voting common
stock so owned by him for approval of the merger agreement and related
transactions. The vote of shares held by directors and executive officers and
their affiliates, other than Sodexho, together with shares of CCA common stock
held by Prison Realty, in favor of the transactions will result in the
affirmative vote of approximately 54% of the shares of CCA capital stock
entitled to vote at the CCA special meeting.
SOLICITATION OF PROXIES
CCA will pay the costs of soliciting proxies from its shareholders,
including the costs of preparing, filing, printing and distributing this joint
proxy statement/prospectus and any other solicitation materials that are used.
In addition to solicitation by mail, the directors, officers and
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employees of CCA may solicit proxies from the company's shareholders by
telephone or telegram or by other means of communication. Such directors,
officers and employees will not be additionally compensated but may be
reimbursed for their reasonable out-of-pocket expenses in connection with such
solicitation.
Any questions or requests regarding proxies or related materials may be
directed to Darrell K. Massengale at CCA at 10 Burton Hills Boulevard,
Nashville, Tennessee 37215, telephone number: (615) 263-3000.
CROSS CONDITIONALITY OF PROPOSALS
In order for the restructuring transactions to be completed by Prison
Realty, (i) the proposal herein regarding the merger and related transactions
must receive the required approval from the shareholders of CCA as described
above in "-- Required vote" and (ii) the shareholders of Prison Realty must
approve the amendments to Prison Realty's charter enabling Prison Realty to
elect not to be taxed as a real estate investment trust commencing with its 2000
taxable year, as more fully described in "The Merger and Related Transactions
and the Prison Realty Restructuring -- The restructuring of Prison Realty."
ABSTENTIONS
Abstentions will be included in determining the number of shares of CCA
common stock present and voting at the special meeting and will have the same
effect as votes against the merger and related transactions.
DISSENTERS' RIGHTS
Shareholders of CCA who comply with Chapter 23 of the TBCA will have the
right to dissent from the merger and to obtain payment of the fair value of
their shares. A copy of Chapter 23 of the TBCA is attached as Appendix C to this
joint proxy statement/prospectus. Please see the section entitled "Proposal to
Approve the Merger and Related Transactions -- Rights of dissenting shareholders
of CCA" in this joint proxy statement/prospectus for a discussion of the
procedures to be followed in asserting these dissenters' rights.
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INFORMATION ABOUT PRISON REALTY
GENERAL
Prison Realty, formerly Prison Realty Corporation, was formed in September
1998 and commenced operations on January 1, 1999, following the merger of the
former Corrections Corporation of America, a Tennessee corporation ("Old CCA"),
and CCA Prison Realty Trust, a Maryland real estate investment trust ("Old
Prison Realty") with and into Prison Realty (the "1999 Merger"). Prison Realty
currently finances, designs, constructs and renovates new and existing jails and
prisons and leases them to both private prison managers and government agencies.
At July 24, 2000, Prison Realty owned, or was in the process of developing 50
correctional and detention facilities in 17 states, the District of Columbia and
the United Kingdom, of which 45 facilities were operating, two were under
construction and three were in the planning stages. At July 24, 2000, Prison
Realty leased 36 of its facilities to CCA, its primary tenant, six facilities to
government agencies and three facilities to private operators. In addition, at
July 24, 2000, Prison Realty owned two corporate office buildings, one of which
is leased by CCA and one of which is leased by TransCor America, LLC, a wholly
owned subsidiary of CCA.
BUSINESS AND OPERATIONS
Prison Realty was formed to continue the success of its predecessors in
capitalizing on the opportunities for privatization in the corrections and
detention industry. The principal business strategy of Prison Realty has been to
own, design, build and finance new correctional and detention facilities that
meet Prison Realty's investment criteria, to acquire existing facilities meeting
such criteria from both private prison managers and government entities, to
expand the design capacity of its existing facilities, and to lease all such
facilities under long-term "triple-net" leases to government entities and
qualified third-party private prison managers.
In connection with the 1999 Merger, Prison Realty entered into lease
agreements with CCA with respect to the correctional and detention facilities
owned by Prison Realty and operated by CCA. The terms of the CCA lease
agreements are 12 years, which may be extended at fair market rates for three
additional five-year periods upon the mutual agreement of Prison Realty and CCA.
The total amount of lease payments required to be paid by CCA to Prison Realty
during 1999 was approximately $263.5 million, all of which amount has been paid.
In addition to the leases for correctional and detention facilities, Prison
Realty and CCA have entered into a series of contractual arrangements whereby,
among other things, CCA performs certain services for Prison Realty relating to
the identification of new business and the development and construction of
Prison Realty's new facilities in exchange for cash fees under the terms of a
business development agreement and amended and restated services agreement,
respectively. The total amount of fees required to be paid by Prison Realty to
CCA pursuant to the business development agreement and the amended and restated
services agreement during 1999 were approximately $15.0 million and $41.2
million, respectively, all of which amounts have been paid. Prison Realty also
is required to pay CCA certain tenant incentive fees for opening new beds at
Prison Realty-owned facilities under the terms of an amended and restated tenant
incentive agreement. The total amount of fees required to be paid by Prison
Realty to CCA pursuant to the amended and restated tenant incentive agreement
during 1999 was approximately $68.6 million, all of which amount has been paid.
CCA is required to pay Prison Realty a licensing fee for the use of the name
"Corrections Corporation of America" pursuant to the terms of a service mark and
trade name use agreement. The total amount of payments required to be paid
pursuant to the service mark and trade name use agreement during 1999 was
approximately $8.7 million, all of which has been paid. CCA is also required to
make interest payments to Prison Realty under the terms of a promissory note, in
the aggregate principal amount of $137.0 million, payable to
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Prison Realty by CCA. As more fully described in "-- Recent developments," CCA
did not make the first scheduled payment of interest on the CCA promissory note.
A significant portion of Prison Realty's income is derived from its leases
with CCA. To address CCA's liquidity needs, Prison Realty and CCA amended the
terms of these leases to, among other things, defer payments due from CCA to
Prison Realty. As a result, pursuant to the terms of the amended lease
agreements, as of July 24, 2000, CCA has paid Prison Realty $18.0 million in
lease payments for the year 2000. In addition, Prison Realty has amended the
terms of the agreements pursuant to which Prison Realty makes payments to CCA to
defer these payments. As a result of these amendments, as of July 24, 2000,
Prison Realty has paid no fees to CCA under the business development agreement,
the amended and restated services agreement, and the amended and restated tenant
incentive agreement for the year 2000. As of July 24, 2000, Prison Realty has
deferred the payment of $13.9 million in fees, not including interest, to CCA
pursuant to these amendments. A discussion of the terms of these amendments can
be found under the heading "-- Recent developments." Under the terms of the
service mark and trade name use agreement, CCA is required to pay Prison Realty
approximately $2.6 million with respect to the first quarter of 2000. As of July
24, 2000, CCA has not made this payment. Upon the completion of the merger, if
approved by the shareholders of the respective companies, these and the other
agreements between Prison Realty and CCA will be terminated.
Prison Realty owns 9.5% of the capital stock of CCA, consisting of
non-voting common stock. In 1999, CCA paid no dividends on the shares of its
capital stock. Prison Realty also owns 100% of the non-voting common stock of
PMSI and JJFMSI. As the owner of the non-voting common stock of PMSI and JJFMSI,
Prison Realty is entitled to receive 95% of each company's net income, as
defined, as cash dividends on such shares. During 1999, the amount of dividends
paid to Prison Realty by PMSI and JJFMSI was approximately $11.0 million and
$10.6 million, respectively, which does not include dividends of approximately
$580,000 and $120,000, respectively, paid in the first quarter of 2000 with
respect to the fourth quarter of 1999. As of July 24, 2000, PMSI and JJFMSI have
paid Prison Realty approximately $3.8 million and approximately $2.2 million in
dividends, respectively, with respect to the first quarter of 2000.
Certain information relating to Prison Realty and its business is included
elsewhere in this joint proxy statement/prospectus, including under "Additional
Information Regarding Prison Realty."
If the merger and related transactions and Prison Realty restructuring
described in this joint proxy statement/prospectus is completed, Prison Realty,
by itself and through its subsidiaries, will be in the business of owning and
operating correctional and detention facilities, including operating those
facilities currently operated by CCA.
SHARE OWNERSHIP
Information concerning the existing beneficial ownership of Prison Realty's
common stock, as well as the expected beneficial ownership of Prison Realty's
common stock following the completion of the merger and related transactions and
the Prison Realty restructuring can be found herein under "The Merger and
Related Transactions and the Prison Realty Restructuring -- Ownership of Prison
Realty common stock."
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RECENT DEVELOPMENTS
TERMINATION OF RESTRUCTURINGS LED BY AFFILIATES OF FORTRESS AND BLACKSTONE AND
PACIFIC LIFE
FORTRESS/BLACKSTONE. In order to address the capital and liquidity
constraints facing Prison Realty and CCA, as well as concerns regarding the
corporate structure and management of Prison Realty, Prison Realty, CCA, PMSI
and JJFMSI previously entered into a series of agreements concerning a proposed
restructuring led by a group of institutional investors consisting of an
affiliate of Fortress Investment Group LLC and affiliates of The Blackstone
Group, together with an affiliate of Bank of America Corporation. Under the
terms of the Fortress/Blackstone restructuring, Prison Realty proposed to:
- complete the combination of the companies and operate as a taxable C
corporation commencing with Prison Realty's 1999 taxable year;
- raise up to $350.0 million by selling shares of convertible preferred
stock and warrants to purchase shares of Prison Realty's common stock to
the Fortress/Blackstone investors in a private placement and to Prison
Realty's existing common stockholders in a $75.0 million rights
offering;
- obtain a new $1.2 billion credit facility;
- restructure existing management through a newly constituted board of
directors and executive management team; and
- amend Prison Realty's existing charter and bylaws to accommodate the
Fortress/Blackstone restructuring.
After publicly announcing the proposed Fortress/Blackstone restructuring,
Prison Realty received an unsolicited proposal from Pacific Life Insurance
Company ("Pacific Life") with respect to a series of restructuring transactions
intended to serve as an alternative to the restructuring proposed by
Fortress/Blackstone. After reviewing the terms of the Pacific Life proposal with
its advisors and reviewing the companies' ability to satisfy certain conditions
contained in the Fortress/Blackstone securities purchase agreement, the boards
of directors of Prison Realty, CCA, PMSI and JJFMSI terminated the companies'
agreement with Fortress/Blackstone and entered into a securities purchase
agreement with Pacific Life. Fortress/Blackstone has commenced litigation
against the companies claiming it is owed a transaction termination fee of $7.5
million, as well as a $15.7 million commitment fee, under the terms of the
securities purchase agreement. To date, the companies have paid none of these
fees. In addition, the payment of these fees is subject to certain claims in the
stockholder litigation described herein under "-- Litigation."
PACIFIC LIFE. The companies' agreement with Pacific Life also contemplated
a restructuring of the companies. Under the terms of the Pacific Life
restructuring, Prison Realty proposed to:
- complete the combination of the companies on substantially identical
terms as proposed by Fortress/Blackstone, with Prison Realty electing to
be taxed as a REIT with respect to its 1999 taxable year and operating
as a taxable subchapter C corporation commencing with its 2000 taxable
year;
- raise up to $200.0 million in a common stock rights offering to existing
stockholders, backstopped 100% by Pacific Life, which would purchase
shares of Prison Realty series B convertible preferred stock in
satisfaction of this commitment;
- issue shares of convertible preferred stock in satisfaction of its
remaining 1999 REIT distribution requirements;
- refinance or renew $1.0 billion of Prison Realty's senior secured debt;
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- restructure existing management through a newly constituted board of
directors and executive management team; and
- amend Prison Realty's existing charter and bylaws to accommodate the
Pacific Life restructuring.
Following the execution of the Pacific Life securities purchase agreement,
Prison Realty began taking steps necessary to fulfill the conditions to Pacific
Life's obligations under the agreement, including the refinancing or renewal of
Prison Realty's $1.0 billion senior secured bank credit facility. As part of
this process, Prison Realty consulted with Pacific Life as to the terms for the
renewal of the bank credit facility that would be satisfactory to Pacific Life.
During these discussions, Pacific Life advised Prison Realty that, based on the
draft of the waiver of events of default under, and amendments to, Prison
Realty's bank credit facility it had reviewed, it would need more information
before it could reach a definitive conclusion, but at least one material term in
such draft was not satisfactory to Pacific Life. After Prison Realty obtained
the waiver and amendment in connection with the bank credit facility as
described below, upon a preliminary review of it, Pacific Life advised Prison
Realty that it required certain information before it could reach a definitive
conclusion, but based on the preliminary review, it had significant concerns
with respect to a number of terms. As a result of Pacific Life's statements, it
was unclear to Prison Realty whether the waiver and amendment to the bank credit
facility would satisfy the condition contained in the securities purchase
agreement that the renewal of the senior credit facility would be in a form
reasonably acceptable to Pacific Life. Also, given the requirements of the
waiver and amendment that a proxy statement be filed by Prison Realty with the
SEC by July 1, 2000 with respect to a restructuring, the boards of directors of
Prison Realty, CCA, PMSI and JJFMSI approved the execution of an agreement with
Pacific Life mutually terminating the securities purchase agreement with Pacific
Life. The boards of Prison Realty and CCA subsequently approved the
restructuring of Prison Realty described in this joint proxy
statement/prospectus, including the execution of the merger agreement described
herein. Under the terms of the Pacific Life securities purchase agreement and
the mutual termination, the companies are not liable for any fees or material
expenses as the result of the termination of the Pacific Life securities
purchase agreement and the completion of the restructuring proposed herein.
SOLICITATION OF WAIVERS OF EXISTING EVENTS OF DEFAULT UNDER, AND AMENDMENTS TO,
PRISON REALTY'S AND CCA'S OUTSTANDING INDEBTEDNESS
FINANCIAL CONDITION OF CCA. CCA, which is Prison Realty's primary lessee
and Prison Realty's major source of income, incurred a net loss of $62.6 million
for the three months ended March 31, 2000, and currently has a net working
capital deficiency and a net capital deficiency. As previously described herein,
in connection with the 1999 Merger, Prison Realty entered into the lease
agreements with CCA with respect to the correctional and detention facilities
owned by Prison Realty and operated by CCA, as well as a series of additional
agreements relating to the payment of certain fees by Prison Realty to CCA. Due
to CCA's liquidity position, CCA has been unable to make timely rental payments
to Prison Realty under the original terms of the lease agreements. As more fully
described hereinafter, the lease agreements have been amended to defer, with
interest, until September 30, 2000, a substantial portion of rental payments due
from CCA to Prison Realty in 2000 under the original terms of the lease
agreements.
Also 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 Prison
Realty. Pursuant to the terms of the CCA promissory 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 Prison Realty
and the
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agent of CCA's bank credit facility, CCA is prohibited from making scheduled
interest payments on the CCA promissory note when CCA is not in compliance with
certain financial covenants set forth in CCA's bank credit facility. As of
December 31, 1999, CCA was not, and, notwithstanding the waiver of certain
events of default under CCA's bank credit facility discussed herein, CCA
currently is not, in compliance with these financial covenants. Consequently,
CCA is prohibited from making the scheduled interest payment to Prison Realty.
Pursuant to the terms of the subordination agreement, Prison Realty is
prohibited from accelerating payment of the principal amount of the CCA
promissory note or taking any other action to enforce its rights under the
provisions of the CCA promissory note for so long as CCA's bank credit facility
remains outstanding.
1999 FINANCIAL STATEMENTS AND GOING CONCERN MATTERS. Due to CCA's
liquidity position and its inability to make required payments to Prison Realty
under the original terms of the CCA lease agreements and the CCA promissory
note, CCA's independent auditor included an explanatory paragraph in its report
as to CCA's consolidated financial statements for the year ended December 31,
1999 that expresses substantial doubt as to CCA's ability to continue as a going
concern. Accordingly, as the result of Prison Realty's financial dependence on
CCA and Prison Realty's resulting liquidity position, as well as concerns with
respect to Prison Realty's noncompliance with, and then-existing defaults under,
certain provisions and covenants contained in its indebtedness and potential
liability arising as the result of stockholder and other litigation commenced
against Prison Realty, Prison Realty's independent auditor included an
explanatory paragraph in its report as to Prison Realty's consolidated financial
statements for the year ended December 31, 1999 that expresses substantial doubt
as to Prison Realty's ability to continue as a going concern. Notwithstanding
the receipt of waivers of events of default relating to these explanatory
paragraphs under the terms of Prison Realty's and CCA's existing indebtedness
described herein, the existence of these explanatory paragraphs may have a
material adverse effect on Prison Realty's and CCA's relationships with its
creditors and could have a material adverse effect on Prison Realty's business,
financial condition, results of operation and liquidity.
EXECUTION OF WAIVER OF EXISTING EVENTS OF DEFAULT UNDER, AND AMENDMENTS TO,
PRISON REALTY'S BANK CREDIT FACILITY. As a result of the financial condition of
Prison Realty and CCA, certain existing or potential events of default arose
under the provisions of Prison Realty's bank credit facility. In addition,
certain of the proposed restructuring transactions involving Prison Realty were
not permitted under the terms of the bank credit facility. As a result, in order
to obtain additional borrowings under the bank credit facility and in order to
avoid certain events of default under the terms of Prison Realty's 12% senior
notes and convertible, subordinated debt, Prison Realty, through Lehman
Commercial Paper Inc., the administrative agent of Prison Realty's bank credit
facility ("Lehman"), solicited the consent of the requisite percentage of the
senior lenders under the bank credit facility for a waiver of the existing
events of default under the bank credit facility and amendments to the terms of
the bank credit facility to permit a restructuring of Prison Realty.
WAIVERS OF EVENTS OF DEFAULT. Following the approval of the requisite
senior lenders, Prison Realty, certain of its wholly owned subsidiaries, various
lenders and Lehman, as administrative agent, executed a waiver and amendment,
dated as of June 9, 2000, to the provisions of the bank credit facility, which
waived all of the events of default under the provisions of Prison Realty's bank
credit facility, specifically including:
- Prison Realty's failure to comply with certain of the financial
covenants contained in the bank credit facility for the fiscal quarters
ended December 31, 1999, March 31, 2000 and June 30, 2000.
- Prison Realty'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.
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- The failure of Prison Realty to deliver annual financial statements of
Prison Realty and CCA unqualified as to the ability of each of Prison
Realty and CCA to continue as a going concern.
- Prison Realty's appointment of a new chairman of the board of directors
and president, the elimination of the position of chief development
officer and the execution and performance of certain conditions
contained in the securities purchase agreement with Pacific Life, each
of which constituted a "change of control" of Prison Realty under the
terms of the bank credit facility upon the expiration of an applicable
period.
TRANSACTIONS CONTEMPLATED BY THE WAIVER AND AMENDMENT. In connection with
obtaining the waiver and amendment, Prison Realty agreed to complete certain
transactions which were incorporated as covenants in the waiver and amendment.
Specifically, the waiver and amendment provides that Prison Realty must:
- Complete the CCA merger on or before the earlier of: (i) September 15,
2000; or (ii) five business days after the date upon which all required
consents and authorizations necessary to complete the CCA merger have
been obtained, upon the terms and conditions specified in the waiver and
amendment, including the payment of non-cash consideration to all
holders of equity securities of CCA, including Baron and Sodexho.
- In connection with the CCA merger: (i) pending requisite stockholder
approval, elect not to be taxed as a REIT for federal income tax
purposes, commencing with the fiscal year ending December 31, 2000; and
(ii) terminate all existing agreements between Prison Realty and CCA at
the time of completion of the CCA merger.
- Use commercially reasonable efforts to complete, prior to December 31,
2000, an offering of its common stock, through the distribution of
rights to purchase shares of common stock to Prison Realty's
then-current common stockholders, yielding net cash proceeds to Prison
Realty of at least $50.0 million, with 40% of such proceeds to be
applied to the repayment of Prison Realty's existing indebtedness under
the bank credit facility.
- Select a new chief executive officer and chief financial officer,
reasonably satisfactory to the requisite percentage of senior lenders
under the bank credit facility, on or before November 15, 2000, and,
prior to such time, continue to retain a management consultant reporting
to Prison Realty's board of directors reasonably satisfactory to Lehman.
- Pay a dividend, in the form of Prison Realty's preferred stock,
sufficient to satisfy Prison Realty's remaining REIT distribution
requirements for the fiscal year ending December 31, 1999.
- Effect an offering of securities by a subsidiary of Prison Realty,
backed by lease payments from the U.K. government relating to the HMP
Forrest Bank facility located in Salford, England, yielding net cash
proceeds to Prison Realty of at least L45.0 million (or the equivalent
in U.S. dollars) on or before February 28, 2001.
Prison Realty's failure to meet these requirements will result in an event
of default under the terms of the bank credit facility. Generally, upon the
occurrence of an event of default under the bank credit facility, the lenders
under the bank credit facility, may, upon the expiration of any applicable cure
period, accelerate the maturity of the aggregate principal amount of Prison
Realty's borrowings under the bank credit facility. The waiver and amendment
provides, however, that an event of default under the bank credit facility
relating to Prison Realty's failure to complete the
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securitization of lease payments relating to the HMP Forrest Bank facility will
not give rise to a right of the lenders to accelerate the maturity of Prison
Realty's borrowings under the bank credit facility.
The waiver and amendment also provides that Prison Realty may, but is not
required to, complete certain transactions and amends the terms of the bank
credit facility to permit such transactions. Specifically, the waiver and
amendment provides that Prison Realty is permitted to:
- Enter into an agreement with CCA deferring a substantial portion of
CCA's rental payments to Prison Realty due and payable under the
original terms of CCA's lease agreements with Prison Realty.
- Sell Prison Realty's headquarters for cash proceeds of at least $12.0
million, and subsequently lease such headquarters from the purchaser
thereof, on terms and conditions reasonably satisfactory to the
requisite percentage of senior lenders under the bank credit facility.
- Complete the merger of each of PMSI and JJFMSI with and into wholly
owned subsidiaries of Prison Realty, upon the terms and conditions
specified in the waiver and amendment, including the payment of
aggregate non-cash consideration not to exceed $12.6 million to all
holders of equity securities of PMSI and JJFMSI and the termination of
all agreements between PMSI, JJFMSI and either Prison Realty or CCA.
In addition, the terms of the waiver and amendment do not prohibit Prison
Realty from making required interest payments under the terms of its currently
outstanding 12% senior notes.
EVENTS OF DEFAULT RELATED TO PRISON REALTY'S CONVERTIBLE, SUBORDINATED
NOTES. As more fully described hereinafter, at the time of the effectiveness of
the waiver and amendment Prison Realty was in default under the provisions of
the agreements relating to Prison Realty's $40.0 million convertible,
subordinated notes and its $30.0 million convertible, subordinated notes. Under
the provisions of Prison Realty's bank credit facility, these defaults under the
terms of the convertible, subordinated notes resulted in an event of default
under Prison Realty's bank credit facility. In addition, as more fully described
herein, certain other actions of Prison Realty in connection with the proposed
restructuring of Prison Realty potentially would have resulted in additional
events of default under the provisions of the agreements governing the
convertible, subordinated notes. These potential defaults under the terms of the
notes would also have resulted in an event of default under Prison Realty's bank
credit facility.
The waiver and amendment addressed each existing or potential event of
default under Prison Realty's bank credit facility with respect to Prison
Realty's convertible, subordinated notes described above. The waiver and
amendment provides that, so long as a holder of any of the convertible,
subordinated notes does not take any action adverse to Prison Realty or to the
senior lenders under the bank credit facility, the existence of any of these
events of default will not (i) prevent Prison Realty from making additional
borrowings otherwise permitted under the bank credit facility, or (ii) permit
Lehman or the senior lenders under the bank credit facility to exercise any
remedies against Prison Realty which normally would be available upon an event
of default under the bank credit facility. The waiver and amendment, however,
provides that the senior lenders are not waiving these events of default and
that the senior lenders expressly are not consenting to the repurchase of all or
any portion of the convertible, subordinated notes or the payment or repayment
of all or any portion of any amounts owing under the notes. Moreover, even if
the aggregate principal amount of such convertible subordinated notes were
accelerated, the repayment of such amounts is subordinate to the rights of the
senior bank lenders.
Prior to the effectiveness of the waiver and amendment, Prison Realty was
required to pay a default rate of interest equal to 2% above the otherwise
applicable rate of interest under the bank
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credit facility as a result of existing events of default under the bank credit
facility, including the occurrence of events of default under Prison Realty's
convertible, subordinated notes. Following the effectiveness of the waiver and
amendment, Prison Realty was no longer required to pay such default rate of
interest despite the continued existence of events of default under Prison
Realty's convertible, subordinated notes. However, as described below, the
waiver and amendment provides that the existence of any events of default
relating to the convertible, subordinated notes will give rise to the right of
the senior lenders to require Prison Realty to pay any applicable default rate
of interest under the bank credit facility.
As more fully described herein, Prison Realty has obtained waivers of all
existing events of default under its convertible, subordinated notes. These
waivers involve an amendment to the economic terms of such notes, including an
increase in the applicable interest rate with respect to such notes. The waiver
and amendment provides that, subject to certain limited exceptions, the interest
rate applicable to all outstanding amounts under the bank credit facility will
be increased by 2.0% above the otherwise applicable interest rate for any period
during which Prison Realty pays an interest rate in excess of the stated coupon
rate of the convertible, subordinated notes, except to the extent that such
interest rate is increased in a manner satisfactory to the requisite percentage
of the senior lenders under the bank credit facility in connection with a
written waiver of existing or potential events of default under the convertible,
subordinated notes. Prison Realty has submitted these waivers to the
administrative agent of the lenders for their approval, but there can be no
assurance that such approval will be obtained.
ADDITIONAL AMENDMENTS TO BANK CREDIT FACILITY. In addition to the
amendments to the provisions of the bank credit facility required to facilitate
the transactions discussion above, the waiver and amendment contains certain
other amendments to the provisions of the bank credit facility. These amendments
allowed Prison Realty to borrow $25.0 million at the time of the execution of
the waiver and amendment and up to an additional $30.0 million under the bank
credit facility at various times during the 2000 calendar year.
In addition to the waiver of Prison Realty's compliance with the previously
existing financial covenants contained in the bank credit facility described
above, the waiver and amendment provides that, prior to the completion of the
merger, Prison Realty shall be required to maintain certain monthly minimum
liquidity thresholds. The waiver and amendment also provides that, following
completion of the merger, the previously existing financial covenants contained
in the bank credit facility will be replaced by the following financial
covenants, each as defined in the waiver and amendment, designed to reflect
Prison Realty's status as a subchapter C corporation rather than as a REIT: (i)
total leverage ratio; (ii) interest coverage ratio; (iii) fixed charge coverage
ratio; (iv) ratio of total indebtedness to total capitalization; (v) minimum
EBITDA; and (vi) minimum occupancy percentage.
The waiver and amendment provides that, in addition to quarterly
consolidated financial statements, Prison Realty is required to provide monthly
consolidated financial statements to Lehman. The waiver and amendment further
provides that, prior to completion of the merger, Prison Realty is required to
provide weekly statements of cash receipts and disbursements to Lehman. The
waiver and amendment also requires that Prison Realty submit a business plan to
Lehman setting forth Prison Realty's financial projections, planned capital
expenditures and business strategy.
The waiver and amendment provides that, generally, Prison Realty will be
required to use the net cash proceeds received by Prison Realty from certain
transactions, including the following, to repay outstanding indebtedness under
the bank credit facility: (i) any disposition of real estate assets; (ii) the
securitization of lease payments with respect to Prison Realty's HMP Forrest
Bank facility; and (iii) the sale-leaseback of Prison Realty's headquarters.
Under the terms of the waiver and
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amendment, Prison Realty will also be required to apply a designated portion of
its "excess cash flow," as such term is defined in the waiver and amendment, to
the prepayment of outstanding indebtedness under the bank credit facility. In
addition, Prison Realty is, and after the merger CCA will be, required by the
waiver and amendment to transfer certain depository and other non-disbursement
accounts to an account at a bank that is a senior lender under the bank credit
facility and to grant perfected liens in such accounts in favor of Lehman for
the benefit of the senior lenders under the bank credit facility.
Under the terms of Prison Realty's amended bank credit facility, all of
Prison Realty's subsidiaries, unless otherwise exempt, must guarantee and pledge
substantially all of their assets to secure Prison Realty's bank credit
facility. As such, substantially all of the assets formerly owned by CCA must be
pledged to secure Prison Realty's obligations under the bank credit facility
upon completion of the merger. However, the waiver and amendment provides that
the accounts receivable and certain other assets of CCA need not be pledged to
secure outstanding indebtedness under Prison Realty's bank credit facility if
such assets are pledged to secure a new revolving bank credit facility or a
refinancing or renewal of CCA's existing bank credit facility obtained by the
surviving entity in the merger. Any such new bank credit facility or refinancing
or renewal of CCA's existing bank credit facility must be on terms and
conditions reasonably satisfactory to the requisite percentage of senior lenders
under Prison Realty's bank credit facility.
ADDITIONAL EVENTS OF DEFAULT. As previously described, the waiver and
amendment provides that Prison Realty's failure to complete the transactions
required by the waiver and amendment will result in an event of default under
the bank credit facility. The waiver and amendment also provides that, in
addition to the existing events of default under the original terms of the bank
credit facility, it shall be an event of default under the terms of the bank
credit facility if:
- Prison Realty settles its currently outstanding stockholder litigation
for cash amounts not otherwise fully covered by Prison Realty's existing
directors' and officers' liability insurance policies.
- Prison Realty declares and pays dividends with respect to Prison
Realty's currently outstanding series A preferred stock prior to the
receipt of net cash proceeds of at least $100.0 million from the
issuance of additional shares of common or preferred stock.
- CCA shall amend or refinance its bank credit facility on terms and
conditions less favorable than the existing terms of CCA's bank credit
facility.
- Prison Realty fails to distribute a proxy statement with respect to the
restructuring to Prison Realty's stockholders on or before August 1,
2000.
- A "repurchase right event" or a "termination event" shall occur under
the terms of the note purchase agreement governing Prison Realty's $40.0
million convertible, subordinated notes.
Generally, upon the occurrence of an event of default under the bank credit
facility, the senior lenders under the bank credit facility, may, upon the
expiration of any applicable cure period, accelerate the maturity of the
aggregate principal amount of Prison Realty's borrowings under the bank credit
facility.
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CONDITIONS TO THE CONTINUED EFFECTIVENESS OF WAIVER AND AMENDMENT. The
terms of the waiver and amendment provide that the continued effectiveness of
the waiver and amendment is conditioned upon, among other things:
- The existence of no default or events of default under Prison Realty's
bank credit facility (other than the defaults with respect to Prison
Realty's convertible, subordinated notes described above).
- The effectiveness of a waiver of all events of default under CCA's bank
credit facility.
- Prison Realty's continued engagement of a management consultant,
reporting to Prison Realty's board of directors, reasonably satisfactory
to Lehman.
- As more fully described hereinafter, in connection with CCA's deferral
of a substantial portion of its rental payments to Prison Realty, the
deferral of certain payments due from Prison Realty payable to CCA until
completion of the CCA merger.
INCREASED INTEREST RATE AND ADDITIONAL FEES. In connection with the
execution of the waiver and amendment, Prison Realty was required to pay an
amendment fee equal to 0.75% of the bank credit facility. Also as a result of
the waiver and amendment, the interest rate applicable to all outstanding
amounts under the bank credit facility was increased by 0.5% above the otherwise
applicable rate through and including September 15, 2000, subject to extension
by the requisite percentage of lenders under the credit facility for successive
three-month periods thereafter. Prior to the effectiveness of the waiver and
amendment, Prison Realty was required to pay a default rate of interest with
respect to all outstanding amounts under the bank credit facility, which was
equal to 2% above the otherwise applicable rate. In addition, the waiver and
amendment provides that if the merger has not been consummated on or before
September 15, 2000, or such later date as may be consented to by the requisite
percentage of lenders under the bank credit facility, Prison Realty will be
required to pay an additional fee equal to 0.375% of the bank credit facility.
AMENDMENTS TO AGREEMENTS BETWEEN PRISON REALTY AND CCA. As previously
described, the terms of the waiver and amendment provide that Prison Realty and
CCA may defer a substantial portion of the rental payments due to Prison Realty
under the CCA lease agreements in order to address CCA's liquidity needs.
Accordingly, Prison Realty and CCA entered into the second master amendment to
lease agreements, dated as of June 9, 2000, pursuant to which Prison Realty and
CCA agreed: (i) to defer, with the exception of certain scheduled payments,
rental payments under the original terms of the CCA lease agreements until
September 30, 2000, provided, that if Prison Realty pays to CCA, and CCA
accepts, any payments of certain fees due to CCA from Prison Realty which have
also been deferred, a portion of the rental payments which otherwise would have
been due and payable had the CCA lease agreements not been amended shall become
immediately due and payable; and (ii) that CCA shall pay interest, at an annual
rate equal to the current non-default rate of interest applicable to its
existing bank credit facility, subject to adjustment, on all rental payments
which would have been payable to Prison Realty had the CCA lease agreements not
been amended, from the date each such payment would have been payable until the
date such payment is actually made.
In connection with the amendments to the CCA lease agreements deferring a
substantial portion of the rental payments due to Prison Realty thereunder, the
terms of the waiver and amendment condition the effectiveness of the waiver and
amendment upon the deferral of Prison Realty's payment of fees to CCA which
would otherwise be payable pursuant to the terms of the amended and restated
tenant incentive agreement, the business development agreement and the amended
and restated services agreement. Accordingly, Prison Realty and CCA entered
into: (i) amendment number one to amended and restated tenant incentive
agreement, dated as of June 9, 2000;
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(ii) amendment number one to business development agreement, dated as of June 9,
2000; and (iii) amendment number one to amended and restated services agreement,
dated as of June 9, 2000.
The terms of each of these amendments provide: (i) that no payments shall
be made by Prison Realty to CCA, under the original terms of the respective
agreement being amended, until the termination of such agreement at the time of
the merger, provided, with respect to amounts which otherwise would have been
payable under such agreement, interest shall accrue, at the applicable
non-default rate of interest under the terms of Prison Realty's bank credit
facility, as amended by the waiver and amendment, and shall be payable by Prison
Realty to CCA upon completion of the merger; (ii) during the period from January
1, 2000 to September 30, 2000, in the event that CCA pays to Prison Realty, and
Prison Realty accepts, any rental payments in excess of the scheduled amounts
set forth in the second master amendment to lease agreements, a similar portion
of the amounts which otherwise would have been payable by Prison Realty to CCA
under the original terms of the respective agreement being amended shall become
immediately due and payable; and (iii) in the event that all rental payments
originally due and payable by CCA under the original terms of the CCA lease
agreements become immediately due and payable as a result of an event of default
under the second master amendment to lease agreements, all fees which would have
been payable by Prison Realty under the original terms of the respective
agreement being amended shall become immediately due and payable.
The terms of the indenture governing Prison Realty's 12% senior notes
(described below) restrict amendments to the CCA lease agreements, the amended
and restated tenant incentive agreement, the business development agreement and
the amended and restated services agreement without the delivery of an opinion
as to the fairness, from a financial point of view, to Prison Realty of such
amendments, issued by an accounting, appraisal, consulting or investment banking
firm of national standing, to the trustee under the indenture of the 12% senior
notes. In connection with this requirement, the effectiveness of the second
master amendment to lease agreements, amendment number one to amended and
restated tenant incentive agreement, amendment number one to business
development agreement, and amendment number one to amended and restated services
agreement was expressly conditioned upon the delivery of such fairness opinion.
Prison Realty has, in accordance with the terms of the indenture, delivered to
the trustee under the indenture a fairness opinion meeting the requirements of
the indenture.
12% SENIOR NOTES. Prison Realty believes that it currently is not in
default under the terms of the indenture governing its $100.0 million 12% senior
notes. The indenture governing the 12% senior notes, however, contains a
provision which allows the holders thereof to accelerate the outstanding
principal amount of the 12% senior notes and to seek additional remedies if
Prison Realty has a payment default under Prison Realty's bank credit facility
or if Prison Realty's obligations under the bank credit facility have been
accelerated. However, the amounts outstanding under the 12% senior notes are
effectively subordinated to Prison Realty's obligations under the bank credit
facility to the extent of the value of the assets securing the bank credit
facility. In the event of acceleration of outstanding principal amounts under
both the 12% senior notes and the bank credit facility, the lenders under the
bank credit facility will be entitled to proceed against the collateral that
secures Prison Realty's obligations under the bank credit facility, and such
collateral will not be available to satisfy any amounts owed under the 12%
senior notes.
$40.0 MILLION CONVERTIBLE, SUBORDINATED NOTES. The original provisions of
the note purchase agreement relating to the $40.0 million convertible,
subordinated notes issued by Prison Realty to MDP Ventures IV LLC and affiliated
purchasers (which are subordinated by their terms to the bank credit facility)
provide that the execution of the securities purchase agreement by and between
Prison Realty and Pacific Life constituted a "change of control" of Prison
Realty. This "change of control" gave rise to a right of the holders of such
notes to require Prison Realty to repurchase the notes at a
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price of 105% of the aggregate principal amount of such notes within 45 days
after the provision of written notice by such holders to Prison Realty, although
the holders of the notes have not so required. In addition, as of February 5,
2000, Prison Realty was no longer in compliance with a financial covenant
contained in the note purchase agreement. As a result of the violation of this
covenant, Prison Realty was in default under the provisions of the note purchase
agreement governing the notes, and the holders of such notes were permitted, at
their option, to accelerate all or a portion of the outstanding principal amount
of this indebtedness. Moreover, during any period in which Prison Realty is in
default under the provisions of the note purchase agreement, the holders of the
notes may require Prison Realty to pay an applicable default rate of interest of
20%. In addition to the default rate of interest, as a result of the default,
Prison Realty was obligated, under the original terms of the note purchase
agreement, 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 Prison Realty's common stock under the terms of the note purchase
agreement. Any such contingent interest is retroactive to the date of issuance
of the notes.
As previously described herein, the bank credit facility waiver and
amendment provides that the lenders under Prison Realty's bank credit facility
did not consent to the repurchase of all or any portion of the $40.0 million
convertible, subordinated notes or the payment or repayment of all or any
portion of any amounts owing under the notes. In addition, as previously
described herein, the bank credit facility waiver and amendment also provides
that the existence of any events of default under Prison Realty's bank credit
facility as a result of an event of default under the terms of the $40.0 million
convertible, subordinated notes will give rise to the right of the lenders under
the bank credit facility to require Prison Realty to pay any applicable default
rate of interest under the bank credit facility. Moreover, the bank credit
facility waiver and amendment provides that, subject to certain limited
exceptions, the interest rate applicable to all outstanding amounts under the
bank credit facility will be increased by 2.0% above the otherwise applicable
interest rate for any period during which Prison Realty pays an interest rate in
excess of 9.5% with respect to the $40.0 million convertible, subordinated
notes, except to the extent that such interest rate is increased in a manner
satisfactory to the requisite percentage of the lenders under the bank credit
facility in connection with a written waiver of existing defaults under the
notes.
On June 30, 2000, Prison Realty obtained a waiver of events of default
under, and amendments to, the provisions of the note purchase agreement relating
to these convertible, subordinated notes. The effectiveness of the waiver and
amendment was subject to the fulfillment of certain conditions by Prison Realty,
all of which have been met, including the payment of a waiver fee of $250,000.
The waiver and amendment to the note purchase agreement provides for a
waiver of the following events of default: (i) Prison Realty's failure to
provide a "repurchase right notice" (as defined in the note purchase agreement)
as a result of the occurrence of a change of control of Prison Realty under the
terms of the note purchase agreement; (ii) Prison Realty's non-compliance with a
financial covenant contained in the note purchase agreement; (iii) any failure
of Prison Realty to fully enforce its rights under its lease agreements with
CCA, including with respect to CCA's deferral of a substantial portion of its
rental payments in 2000; (iv) termination of Prison Realty's status as a REIT
for federal income tax purposes, commencing with its taxable year ending
December 31, 2000; (v) Prison Realty's operation of correctional and detention
facilities following completion of the merger; and (vi) certain defaults arising
from Prison Realty's non-compliance with the provisions of its $30.0 million
convertible, subordinated notes. The waiver and amendment to the note purchase
agreement further provides that the completion of, or the failure to complete,
certain transactions, including the merger, Prison Realty's election, pending
shareholder approval, not to be taxed as a REIT, commencing with its taxable
year ending December 31, 2000, and the rights offering required
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by the bank credit facility waiver and amendment, will not constitute an event
of default or a "termination event" (as defined in the note purchase agreement)
under the terms of the note purchase agreement.
The waiver and amendment to the note purchase agreement also amends the
economic terms of the notes to provide, subject to the approval of the requisite
percentage of lenders under Prison Realty's bank credit facility, for an
increase in the applicable interest rate of the notes by 0.5% per annum, which
would require cash interest payments by Prison Realty equal to an interest rate
of 10.0% per annum. The waiver and amendment provides that if such approval is
not obtained, Prison Realty will be required to issue, in lieu of such
additional cash interest payments, additional convertible, subordinated "paid in
kind" notes on a pro rata basis to all holders. In addition, the waiver and
amendment further requires Prison Realty to issue, following the execution of
this waiver and amendment, additional convertible, subordinated "paid in kind"
notes, in the aggregate principal amount of approximately $1.1 million on a pro
rata basis to all holders, representing all interest on the convertible,
subordinated notes which has accrued at an applicable default rate of interest
as a result of the previously existing events of default under the note purchase
agreement. Any "paid in kind" notes will be on substantially similar terms as
the $40.0 million convertible, subordinated notes, although these notes do not
provide for the payment of contingent interest, as such term is defined in the
note purchase agreement.
Also as a result of the waiver and amendment to the note purchase
agreement, the conversion price of the notes will be adjusted to an initial
conversion price equal to 125% of the average closing price of Prison Realty's
common stock on the NYSE for a period of 30 days immediately preceding the
earlier of (i) October 31, 2000 or (ii) the closing date of the merger. This
conversion price will be subject to adjustment upon the occurrence of certain
events. The waiver and amendment to the note purchase agreement further provides
for the deletion of an existing financial covenant and the addition of certain
post-merger financial covenants relating to Prison Realty's: (i) ratio of total
indebtedness to total capitalization; (ii) interest coverage ratio; and (iii)
fixed charge coverage ratio. The waiver and amendment to the note purchase
agreement further adjusts the determination of when Prison Realty will be
required to make payments of contingent interest with respect to the notes and
provides for an increase in the applicable contingent interest rate with respect
to the notes.
The continued effectiveness of the waiver and amendment is subject to there
being no occurrence of an event of default or termination event under the terms
of the note purchase agreement, as amended by the waiver and amendment. There
can be no assurance that Prison Realty will be able to maintain the
effectiveness of this waiver and amendment to the note purchase agreement. If
Prison Realty is unable to do so, and if the holders of these notes do not
consent to an additional proposed waiver of events of default under, and
amendments to, the note purchase agreement, Prison Realty may be required to
repurchase or redeem the outstanding principal amount of the notes. If the
aggregate principal amount of such convertible, subordinated notes were
accelerated, however, the repayment of such amounts would be subordinate to the
rights of the senior lenders under Prison Realty's bank credit facility. Any
requirement to repurchase or redeem the outstanding principal amount of this
indebtedness prior to its stated maturity would also trigger an event of default
under the provisions of Prison Realty's other indebtedness, including the
provisions of Prison Realty's bank credit facility.
$30.0 MILLION CONVERTIBLE, SUBORDINATED NOTES. The original provisions of
the note purchase agreement relating to the $30.0 million convertible,
subordinated notes issued to PMI Mezzanine Fund, L.P. contain certain financial
covenants. As of March 31, 2000, Prison Realty was not in compliance with these
financial covenants. However, Prison Realty has not been in default under the
provisions of this note purchase agreement because the holder of the $30.0
million convertible,
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subordinated notes has not provided Prison Realty with written notice declaring
such an event of default.
As previously described herein, the bank credit facility waiver and
amendment provides that the lenders under Prison Realty's bank credit facility
did not consent to the repurchase of all or any portion of the $30.0 million
convertible, subordinated notes or the payment or repayment of all or any
portion of any amounts owing under the notes. In addition, as previously
described herein, the bank credit facility waiver and amendment also provides
that the existence of any events of default under Prison Realty's bank credit
facility as a result of an event of default under the terms of the $30.0 million
convertible, subordinated notes will give rise to the right of the lenders under
the bank credit facility to require Prison Realty to pay any applicable default
rate of interest under the bank credit facility. Moreover, the bank credit
facility waiver and amendment provides that, subject to certain limited
exceptions, the interest rate applicable to all outstanding amounts under the
bank credit facility will be increased by 2.0% above the otherwise applicable
interest rate for any period during which Prison Realty pays an interest rate in
excess of 7.5% with respect to the $30.0 million convertible, subordinated
notes, except to the extent that such interest rate is increased in a manner
satisfactory to the requisite percentage of the lenders under the bank credit
facility in connection with a written waiver of existing defaults under the
notes.
On June 30, 2000, Prison Realty obtained a waiver of events of default
under, and amendments to, the provisions of the note purchase agreement relating
to these convertible, subordinated notes. The effectiveness of the waiver and
amendment to the note purchase agreement was subject to the fulfillment of
certain conditions by Prison Realty, all of which have been met, including the
payment of a waiver fee of $75,000.
The waiver and amendment to the note purchase agreement provides for a
waiver of the following events of default: (i) Prison Realty's non-compliance
with certain financial covenants contained in the note purchase agreement prior
to the execution of the waiver and amendment to the note purchase agreement, as
well as Prison Realty's noncompliance with certain financial covenants prior to
completion of the merger; and (ii) certain defaults arising from Prison Realty's
non-compliance with the provisions of its $40.0 million convertible,
subordinated notes. The waiver and amendment further provides that, generally,
the completion of, or the failure to complete, certain transactions, including:
(i) the merger; (ii) Prison Realty's election, pending shareholder approval, not
to be taxed as a REIT, commencing with its taxable year ending December 31,
2000; and (iii) the rights offering required by the bank credit facility waiver
and amendment, will not constitute an event of default under the terms of the
note purchase agreement. Specifically, the waiver and amendment to the note
purchase agreement amends the provisions of the note purchase agreement to
provide that Prison Realty may, following the merger, engage in the operation
and management of correctional and detention facilities.
The waiver and amendment to the note purchase agreement also amends the
economic terms of the notes, through the issuance of a replacement note in the
aggregate principal amount of $30.0 million, to provide, subject to the approval
of the requisite percentage of lenders under Prison Realty's bank credit
facility, for an increase in the applicable interest rate of the notes by 0.5%
per annum, which would require cash interest payments by Prison Realty equal to
an interest rate of 8.0% per annum. The amended terms of the notes provide that
if such approval is not obtained, Prison Realty will be required to issue, in
lieu of such additional cash interest payments, additional convertible,
subordinated "paid in kind" notes on a pro rata basis to all holders. Any "paid
in kind" notes will be on substantially similar terms as the $30.0 million
convertible, subordinated notes.
Also as a result of the waiver and amendment to the note purchase
agreement, the conversion price of the notes will be adjusted to an initial
conversion price equal to 125% of the average closing
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price of Prison Realty's common stock on the NYSE for a period of 30 days
immediately preceding the earlier of (i) October 31, 2000 or (ii) the closing
date of the merger. This conversion price will be subject to adjustment upon the
occurrence of certain events. The waiver and amendment to the note purchase
agreement further provides for the deletion of the existing financial covenants
in the note purchase agreement upon completion of the merger and the addition of
certain post-merger financial covenants relating to Prison Realty's: (i) maximum
total leverage ratio; (ii) interest coverage ratio; and (iii) fixed charge
coverage ratio.
The continued effectiveness of the waiver and amendment is subject to there
being no occurrence of an event of default or termination event under the terms
of the note purchase agreement, as amended by the waiver and amendment. There
can be no assurance that Prison Realty will be able to maintain the
effectiveness of the waiver and amendment to the note purchase agreement. If
Prison Realty is unable to do so, and if the holders of these notes do not
consent to any additional proposed waiver of events of default under, and
amendments to, the note purchase agreement, Prison Realty may be required to
repurchase or redeem the outstanding principal amount of the notes. If the
aggregate principal amount of such convertible subordinated notes were
accelerated, however, the repayment of such amounts would be subordinate to the
rights of the senior lenders under the bank credit facility. Any requirement to
repurchase or redeem the outstanding principal amount of this indebtedness prior
to its stated maturity would also trigger an event of default under the
provisions of Prison Realty's other indebtedness, including the provisions of
Prison Realty's bank credit facility.
CCA'S BANK CREDIT FACILITY. On April 27, 2000, CCA obtained the consent of
the requisite percentage of the senior lenders under its bank credit facility
for a waiver of its bank credit facility's restrictions relating to:
- Prison Realty's and CCA's amendments of the original terms of the CCA
lease agreements, the amended and restated tenant incentive agreement,
the business development agreement and the amended and restated services
agreement;
- CCA's violation of a net worth covenant contained in its bank credit
facility; and
- CCA's execution of an agreement and plan of merger with respect to a
merger of each of CCA, PMSI and JJFMSl with and into wholly owned
subsidiaries of Prison Realty, in connection with the proposed
Fortress/Blackstone restructuring.
As consideration for the initial waiver, the CCA senior lenders required
and were paid a fee equal to $2.0 million in cash. The terms of the initial
waiver provided that the waiver would remain in effect until the earlier of (i)
July 31, 2000; (ii) the date the Pacific Life securities purchase agreement is
terminated; (iii) the date CCA makes any payments to Prison Realty other than as
set forth in the amendments to CCA's agreements with Prison Realty; or (iv) the
date the lenders under Prison Realty's bank credit facility exercise any rights
with respect to any default or event of default under Prison Realty's bank
credit facility.
Because the termination of the Pacific Life securities purchase agreement
resulted in a termination of the initial waiver and because CCA's proposed
execution of the merger agreement was not addressed in the initial waiver, CCA
requested that its senior lenders amend the waiver to provide for its
continuation, notwithstanding the termination of the Pacific Life securities
purchase agreement, and to permit CCA's execution of the merger agreement. CCA's
senior lenders refused to agree to such amendments unless CCA paid an additional
waiver fee of $1.0 million to CCA's senior lending group. Because of the
ramifications of the existence of a default under the CCA bank credit facility,
and the fact that such a default would cause an event of default under Prison
Realty's recently amended bank credit facility, on June 30, 2000, CCA committed
to pay its lenders the $1.0 million
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fee and obtained the consent of the requisite percentage of the senior lenders
under its bank credit facility to extend the term of the initial waiver to
September 30, 2000 and to permit: (i) the termination of the merger agreement
relating to the proposed combination of Prison Realty; (ii) the execution by CCA
of the merger agreement; and (iii) the termination of the Pacific Life
securities purchase agreement.
EFFECT OF FAILURE OF PRISON REALTY TO OBTAIN AND MAINTAIN REQUESTED
WAIVERS. With the exception of the events of default relating to Prison
Realty's convertible, subordinated notes existing at the time of the Prison
Realty bank credit facility waiver and amendment, as previously described, the
Prison Realty bank credit facility waiver and amendment waived all known events
of default under the bank credit facility. Prison Realty has subsequently
obtained waivers of the defaults under the convertible, subordinated notes as
also previously described. As a result of the foregoing, Prison Realty is
currently not in default under the terms of any of its indebtedness, including
under its credit facility, its 12% senior notes, and its convertible,
subordinated notes, and is not aware that any potential events of default exist
under the terms of its indebtedness.
The effectiveness of the Prison Realty bank credit facility waiver and
amendment is subject to conditions previously described herein. In the event
Prison Realty is unable to maintain the Prison Realty bank credit facility
waiver and amendment, or if Prison Realty is unable to obtain or maintain
waivers of events of default under the terms of any of its other indebtedness,
and such indebtedness is accelerated, the senior lenders under Prison Realty's
bank credit facility are entitled, at their discretion, to exercise certain
remedies, including acceleration of the outstanding borrowings under the bank
credit facility. In such event, Prison Realty may be forced to seek protection
under the federal bankruptcy code.
Prison Realty's 12% senior notes and convertible, subordinated notes
contain provisions which allow the holders of such indebtedness to accelerate
the outstanding principal amount of such indebtedness and seek remedies if
Prison Realty has a payment default under its bank credit facility or if the
obligations under Prison Realty's bank credit facility have been accelerated. If
the senior lenders under Prison Realty's bank credit facility elect to exercise
their rights to accelerate Prison Realty's obligations under the bank credit
facility, such action could result in the acceleration of all or a portion of
the outstanding principal amount of Prison Realty's 12% senior notes or its
convertible, subordinated notes, which would have a material adverse effect on
Prison Realty's liquidity and financial position. Prison Realty does not have
sufficient working capital to satisfy its debt obligations in the event of an
acceleration of all of Prison Realty's outstanding indebtedness.
Effect of failure of CCA to maintain waivers of events of default under the
provisions of its bank credit facility. As previously discussed, CCA has
obtained waivers of certain events of default under the provisions of its bank
credit facility. However, these waivers expire on July 31, 2000 and are subject
to termination upon the occurrence of certain events, as previously described
herein. 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 the CCA bank credit facility are entitled, at
their discretion, to exercise certain remedies, including acceleration of the
outstanding borrowings under the bank credit facility. If the senior lenders
elect to exercise their rights to accelerate CCA's obligations under CCA's bank
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 indebtedness under CCA's bank credit
facility.
In addition, as described above, the terms of the Prison Realty bank credit
facility waiver and amendment provide that a condition to the continued
effectiveness of the Prison Realty bank credit facility waiver and amendment is
the continued effectiveness of a waiver of all existing events of default under
CCA's bank credit facility. Prison Realty's bank credit facility, as modified by
the
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Prison Realty bank credit facility waiver and amendment, also provides that
either of the following will result in an event of default under Prison Realty's
bank credit facility: (i) the occurrence of an event of default under CCA's bank
credit facility; or (ii) the amendment or refinancing of CCA's bank credit
facility on terms and conditions less favorable than its existing terms. As a
result of such an event of default, the senior lenders under Prison Realty's
bank credit facility would be entitled, at their discretion, to exercise certain
remedies, including acceleration of the outstanding borrowings under the bank
credit facility. In such event, Prison Realty may be forced to seek protection
under the federal bankruptcy code.
CCA MANAGEMENT CONTRACTS WITH GOVERNMENT ENTITIES
FEDERAL BUREAU OF PRISONS. On June 9, 2000, CCA received a notice of award
with respect to two contracts with the Federal Bureau of Prisons ("FBOP") to
house 3,316 federal detainees at Prison Realty's California City Correctional
Facility located in California City, California and Prison Realty's Cibola
County Corrections Center located in Milan, New Mexico. The contracts, which are
expected to be dated as of mid-September, will have an initial term of three
years with seven one-year renewal options. The terms of the contracts provide
for a 95% guaranteed occupancy rate, and revenues for the contracts are expected
to be received early in the fourth quarter of 2000.
STATE OF NORTH CAROLINA. CCA has commenced negotiations with the North
Carolina Department of Correction with respect to the termination of CCA's
management contracts for the Mountain View Correctional Institution located in
Spruce Pine, North Carolina and the Pamlico Correctional Institution located in
Bayboro, North Carolina. The 528-bed, medium security institutions are owned by
Prison Realty and leased to the state of North Carolina pursuant to leases
expiring in the fourth quarter of 2008, subject to extension for an additional
10 years upon the agreement of the parties. The facilities house adult male
inmates for the state pursuant to contracts obtained by Old CCA as part of its
acquisition of certain management contracts from U.S. Corrections Corporation in
1998. Prison Realty expects to continue leasing the facilities to the North
Carolina Department of Correction.
POTENTIAL LIABILITY WITH REGARD TO BOND ISSUE
The Internal Revenue Service is conducting an audit of $72.7 million in tax
exempt bonds issued by Hardeman County (Tennessee) Correctional Facilities
Corporation ("HCCFC") in 1997, the proceeds of which were used to construct a
correctional facility in Hardeman County, Tennessee, owned by HCCFC. At the time
the bonds were issued, Old CCA entered into a management agreement with respect
to the correctional facility. By separate agreement, Old CCA agreed to pay any
debt service deficits on the bonds. Subsequent to the issuance of the bonds,
HCCFC paid Old CCA a discretionary bonus of approximately $4.1 million. The
tax-exempt nature of the bonds is under review by the IRS. Because of the
contractual relationship between Old CCA and the correctional facility, in the
event the IRS determines that the bonds are taxable, there exists the risk that
Prison Realty as the successor to Old CCA may be required to remit all or a
portion of the bonus received, or, in the alternative, repurchase the principal
amount of the bonds, plus accrued interest. Prison Realty intends to contest
this matter vigorously.
LITIGATION
STOCKHOLDER LITIGATION
On December 29, 1999, a purported class action lawsuit was filed on behalf
of the stockholders of Prison Realty in the Chancery Court for Davidson County,
Tennessee. The lawsuit, captioned Bernstein v. Prison Realty Trust, et al.,
names as defendants Prison Realty and its directors, as well
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<PAGE> 62
as certain affiliates of Fortress, Blackstone and Bank of America. The lawsuit
alleges that the directors of Prison Realty breached their fiduciary duties to
Prison Realty's stockholders by effectively selling control of Prison Realty for
inadequate consideration and without having adequately considered or explored
all other alternatives to the proposed Fortress/Blackstone restructuring or
having taken steps to maximize stockholder value. The plaintiffs seek an
injunction preventing the completion of the Fortress/Blackstone restructuring,
declaratory relief, and costs and fees. On each of January 4, 2000 and January
12, 2000, nearly identical purported class action lawsuits were filed in the
same court on behalf of different purported class representatives. The lawsuits,
captioned Hardee v. Prison Realty Trust, et al. and Holle v. Prison Realty
Trust, et al., name as defendants Prison Realty and its directors, as well as
each of Fortress, Blackstone and Bank of America. These three actions were
consolidated on February 18, 2000.
On December 30, 1999, a purported class action lawsuit was filed in federal
court in the United States District Court for the Middle District of Tennessee,
on behalf of the stockholders of Prison Realty. The lawsuit, captioned Neiger v.
Doctor Crants, et al., names as defendants Prison Realty, 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
Prison Realty 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 Prison Realty had entered into an agreement with respect to the
Fortress/Blackstone restructuring and would not elect to be taxed as a REIT
beginning with its 1999 taxable year, and therefore, certain statements made by
the defendants prior to that time were false and misleading. The plaintiffs seek
an unspecified amount of monetary damages, equitable and/or injunctive relief
and costs and fees. On February 4, 2000, a nearly identical purported class
action lawsuit was filed in the same court on behalf of different purported
class representatives. The lawsuit, captioned Anderson v. Doctor Crants, et al.,
names as defendants Prison Realty, Doctor R. Crants and D. Robert Crants, III.
On February 24, 2000, a nearly identical purported class action lawsuit was
filed in the same court on behalf of a different purported class representative.
The lawsuit, captioned Brody v. Prison Realty Trust, Inc. et al., names as
defendants Prison Realty, Doctor R. Crants, and D. Robert Crants, III. These
three actions were consolidated on March 13, 2000. The plaintiffs filed a
consolidated complaint on May 30, 2000. Additionally, on March 3, 2000, a
similar lawsuit was filed on behalf of two plaintiffs in the Chancery Court for
the State of Tennessee, Twentieth Judicial District. The lawsuit, captioned
Buchanan v. Prison Realty Trust, Inc., et al., names as defendants Prison
Realty, Doctor R. Crants, D. Robert Crants, III and Darrell K. Massengale and
alleges violations of state common and securities laws based on claims
substantially identical to those enumerated above.
Prison Realty is also currently subject to two separate purported class
actions filed in federal court in the United States District Court for the
Middle District of Tennessee, alleging securities fraud in connection with the
agreements entered into by Prison Realty and CCA in May 1999 to increase
payments made by Prison Realty 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 Prison Realty as the result of
the merger of Old CCA with and into Prison Realty. The plaintiffs' class in In
re Prison Realty Securities Litigation consists of former shareholders of Old
Prison Realty who acquired shares of Prison Realty as the result of the merger
of Old Prison Realty with and into Prison Realty and all persons who acquired
shares of Prison Realty in the open market prior to May 17, 1999. Each of these
actions alleges violations of federal securities laws based, among other things,
on the allegations that Prison Realty 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 Prison Realty 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
57
<PAGE> 63
class action nearly identical to In re Prison Realty Securities Litigation was
filed in the United States District Court for the Middle District of Tennessee.
It is anticipated that the lawsuit, captioned Mikovits v. Prison Realty Trust,
et. al., will be coordinated and/or consolidated with In re Prison Realty
Securities Litigation. In addition, a purported stockholders' derivative
complaint has been filed in the Chancery Court for Davidson County, Tennessee in
Nashville, captioned Wanstrath v. Crants, et al., against Prison Realty, CCA and
persons who were directors at the time Prison Realty entered into the agreements
regarding the increased payments to CCA. The derivative action alleges, among
other things, that the directors of Prison Realty 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.
Prison Realty also is subject to a complaint filed in August 1998 in the
Chancery Court for Davidson County, Tennessee, inherited from Old CCA as a
result of Old CCA's merger with and into Prison Realty. 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.
Prison Realty is defending vigorously its actions in each of the
shareholder lawsuits described herein. There exists the risk that additional
lawsuits will be filed, or that the existing complaints filed in connection with
the Fortress/Blackstone restructuring and/or the Pacific Life restructuring will
be amended in connection with the proposed restructuring transactions. It is
possible that Prison Realty's liability in regard to the shareholder lawsuits
will exceed Prison Realty's insurance coverage limits and will have a material
adverse impact on Prison Realty's consolidated financial position, results of
operations and cash flows. It is also possible that any settlement of the
shareholder lawsuits will include the issuance by Prison Realty of a significant
amount of equity securities which issuance would cause dilution to Prison
Realty's existing stockholders. In addition, as previously described, the terms
of the waiver and amendment provide that it shall be an event of default under
Prison Realty's bank credit facility if Prison Realty settles its currently
outstanding shareholder litigation for cash amounts not otherwise fully covered
by Prison Realty's existing directors' and officers' liability insurance
policies.
OTHER LITIGATION
In addition to the stockholder litigation previously described and the
matters described below, Prison Realty is, and will be upon completion of the
merger and related transactions and the Prison Realty restructuring, also
subject to certain other litigation, including routine litigation arising in the
ordinary course of Prison Realty's business. All or a portion of any liabilities
resulting from this litigation are expected to be covered by liability
insurance, and all of such litigation collectively is not expected to have a
material adverse effect on the financial condition of Prison Realty.
Prison Realty 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 Prison
Realty, CCA, JJFMSI
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<PAGE> 64
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.
At December 31, 1998, Old CCA was a party to two inmate lawsuits at the
Northeast Ohio Correctional Center for wrongful deaths. These lawsuits were
assumed by Prison Realty in the 1999 Merger. While the outcome of these lawsuits
is not determinable, Prison Realty does not believe that such litigation, if
resolved against Prison Realty, would have a material adverse effect upon its
business or financial position.
As previously described herein under "-- Recent developments," on June 9,
2000, a complaint was filed in federal court in the United States District Court
for the Southern District of New York by Fortress/Blackstone to recover $23.2
million in fees allegedly owed them as the result of the companies' termination
of the Fortress/Blackstone securities purchase agreement. The payment of these
fees is also subject to certain claims in the shareholder litigation previously
described herein.
On September 14, 1998, a complaint captioned Thomas Horn, Ferman Heaton,
Ricky Estes, and Charles Combs, individually and on behalf of the U.S.
Corrections Corporations Employee Stock Ownership Plan and its participants v.
Robert B. McQueen, Milton Thompson, the U.S. Corrections Corporation Employee
Stock Ownership Plan, U.S. Corrections Corporation, and Corrections Corporation
of America was filed in the U.S. District Court for the Western District of
Kentucky alleging numerous violations of the Employees Retirement Income
Security Act ("ERISA"), including but not limited to failure to manage the
assets of the ESOP in the sole interest of the participants, purchasing assets
without undertaking adequate investigation of the investment, overpayment for
employer securities, failure to resolve conflicts of interest, lending money
between the ESOP and employer, allowing the ESOP to borrow money other than for
the acquisition of employer securities, failure to make adequate, independent,
and reasoned investigation into the prudence and advisability of certain
transaction, and otherwise. The plaintiffs are seeking damages in excess of
$30,000,000 plus prejudgment interest and attorneys' fees. It is expected that
all or a portion of any liability resulting from this claim will be covered by
insurance. While the outcome of this lawsuit is not determinable, in the event
any resulting liability is not covered by insurance proceeds, such liability
would have a material adverse effect upon the business or financial position of
Prison Realty.
On October 15, 1998, a complaint captioned Fredrick & May Construction Co.
v. U.S. Corrections Corporation was filed in the Circuit Court for Lee County,
Kentucky alleging a breach of contract regarding the construction of
improvements to two correctional facilities acquired when Old CCA purchased and
merged with U.S. Corrections Corporation ("USCC"). Frederick & May Construction
Co. ("Fredrick & May") alleged that it had valid contracts for the completion of
the improvements and that the contracts were wrongfully terminated. The issue of
damages in this matter was tried to a jury in June 2000, subsequent to the court
granting summary judgment in favor of Frederick & May on the issue of the
existence of a contract. The jury returned a verdict against USCC in an amount
of approximately $753,000. The plaintiff's motion to assess and determine the
amount of prejudgment interest, if any, is presently pending before the court.
Prison Realty has vigorously defended this action to date and is in the process
of appealing the judgment.
BUSINESS OF PRISON REALTY FOLLOWING THE COMPLETION OF THE MERGER AND RELATED
TRANSACTIONS AND THE PRISON REALTY RESTRUCTURING
Following the completion of the merger and related transactions and the
Prison Realty restructuring, Prison Realty will be a full-service provider of
correctional and detention services and
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<PAGE> 65
will continue to provide all of the services previously offered to customers of
Prison Realty and CCA under the "Corrections Corporation of America" name. In
addition, Prison Realty will no longer operate so as to qualify as a REIT and
will instead conduct its business as a taxable subchapter C corporation,
effective January 1, 2000.
OPERATIONS AND BUSINESS STRATEGY
After the completion of the merger and related transactions and Prison
Realty restructuring, if approved by the shareholder of each of CCA and Prison
Realty, as may be required, Prison Realty intends to increase revenues and its
position as the largest owner, developer and manager of privatized correctional
and detention facilities worldwide through the following business strategies.
EFFICIENT DEVELOPMENT AND MANAGEMENT OF FACILITIES. The newly combined
company will continue to provide high quality, cost-efficient management of its
facilities. Prison Realty believes that the combined company's quality of
personnel, efficient application of financial resources and adherence to proven
policies and procedures will enable it to design, develop and manage
correctional and detention facilities at costs lower than those of government
agencies that are responsible for performing such services. Prison Realty
believes that the reputations of its predecessors as innovative and effective
owners and managers of facilities will enhance its ability to market its
services and capitalize on a larger scope of opportunities with a variety of
government agencies.
Prison Realty also recognizes the importance of the facility administrator
and the facility's management team in the successful financial performance of
each facility. Prison Realty believes that CCA's reputation will enable it to
attract highly-qualified facility administrators. Each CCA facility management
team operates each facility in accordance with a company-wide policy and
procedure regimen derived from industry standards and designed to ensure the
delivery of consistent, high quality services in each of its facilities. The
combined company will seek to minimize operating expenses by designing its
facilities to optimize correctional officer staffing consistent with facility
security requirements. The combined company will further control operating
expenses through the continued use of electronic surveillance systems and other
technologies.
DEVELOPMENT OF DOMESTIC BUSINESS OPPORTUNITIES. As a result of the growth
in the demand for privatized correctional and detention facilities, the combined
company will be selective in the projects it pursues. The combined company will
continue to pursue projects based on probability of success, geographic
location, size, potential profitability and political and community
acceptability. Management believes this approach will allow the combined company
to enhance its market share and optimize resource allocation, profitability and
financial return. The combined company intends to continue its focus on
institutions with an emphasis on medium to maximum security that are 500 to
1,000 beds or larger. Management believes that the experience and reputation of
the newly combined company in managing large secure facilities will enable it to
maintain its industry position and to capitalize on the trend of governments to
privatize larger facilities.
EXPANSION INTO INTERNATIONAL MARKETS. Prison Realty believes that the
majority of its new business will come from within the United States. While
management will not detract from its domestic business to pursue international
activities, Prison Realty will continue to participate in selected international
projects it finds attractive. The combined company also believes that in order
to compete effectively in international markets it must enter into alliances
with strategic local partners in the international marketplace with access to
local opportunities and familiarity with local business practices.
COST REDUCTION PROGRAMS. An important component of CCA's current strategy
is to position itself as a low cost, high quality provider of prison management
services in all of its markets. The
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<PAGE> 66
newly combined company will continue this strategy. As cost containment
pressures increase, the combined company will continue to focus on improving
operating performance and efficiency through the following key operating
initiatives: (i) standardization of supply and service purchasing practices and
usage; (ii) improvement of inmate management, resource consumption and reporting
procedures; and (iii) improvement in salary and wage expenses by reducing
overtime, monitoring staff levels and developing productivity standards. Prison
Realty intends to continue to apply these operating cost initiatives throughout
its existing facilities and in new facilities.
FACILITIES TO BE OWNED AND/OR OPERATED BY PRISON REALTY UPON COMPLETION OF THE
MERGER AND RELATED TRANSACTIONS AND PRISON REALTY RESTRUCTURING
Information regarding each facility to be owned and/or operated by Prison
Realty and/or its subsidiaries upon completion of the merger and related
transactions and Prison Realty restructuring, including those facilities
currently under construction or development, is set forth below, grouped by
state:
<TABLE>
<CAPTION>
NO. OF
CONTRACTING FACILITY
LOCATION CITY/COUNTY FACILITY PARTIES EXPIRATION BEDS
-------- --------------- ----------------------- --------------------------- --------------------- --------
<S> <C> <C> <C> <C> <C>
DOMESTIC
Arizona Eloy Eloy Detention Center U.S. Department of February 28, 2002 1,500
Justice/FBOP
Florence Central Arizona U.S. Marshals Service November 3, 2000 2,304
Detention Center ("USMS")
Pinal County, Arizona January 5, 2014
State of Alaska June 30, 2001
State of Hawaii June 30, 2001
Gila River Police Dept. of (1)
Arizona
Pascua Yaqui Tribe of (1)
Arizona
Florence Florence Correctional State of Hawaii June 30, 2001 1,600
Facility
Pascua Hagui Tribe of (1)
Arizona
California California City California City California City, California October 31, 2024 2,304
Correctional Facility
USMS November 15, 2000
FBOP November 9, 2003
Live Oak Leo Chesney Cornell Corrections(2) February 28, 2002 240
Correctional Facility
Mendota Mendota Correctional (3) (3) 1,024
Facility
San Diego San Diego Correctional Immigration and December 31, 2000 1,200
Facility Naturalization Service
("INS")
Colorado Burlington Kit Carson Correctional Colorado Department of June 30, 2001 768
Facility Corrections ("DOC")
City of Burlington October 31, 2003
USMS (5)
Las Animas Bent County Bent County, Colorado August 17, 2018 700
Correctional Facility
Colorado DOC
<CAPTION>
OWNED,
MANAGED
LOCATION AND/OR LEASED
-------- -------------
<S> <C>
DOMESTIC
Arizona Owned and
managed
Owned and
managed
Owned and
managed
California Owned and
managed
Owned and
leased
Owned and
managed
Owned,
managed and
leased(4)
Colorado Owned and
managed
Owned and
managed
</TABLE>
61
<PAGE> 67
<TABLE>
<CAPTION>
NO. OF
CONTRACTING FACILITY
LOCATION CITY/COUNTY FACILITY PARTIES EXPIRATION BEDS
-------- --------------- ----------------------- --------------------------- --------------------- --------
<S> <C> <C> <C> <C> <C>
Walsenburg Huerfano County Huerfano County October 31, 2122 752
Correctional Center Correctional Facilities
Authority
Colorado DOC
Georgia Alamo Wheeler Correctional Georgia DOC June 30, 2001 1,524
Facility
McRae McRae Correctional (3) (3) 1,524
Facility
Millen Millen Correctional (3) (3) 1,524
Facility
Nicholls Coffee Correctional Georgia DOC June 30, 2001 1,524
Facility
Stewart County Stewart County (3) (3) 1,524
Correctional Facility
Indiana Warsaw Northeast Indiana Youth (3) (3) 146
Village
Kansas Leavenworth Leavenworth Detention USMS December 31, 2000 483
Center
Kentucky Beatyville Lee Adjustment Center Commonwealth of Kentucky December 11, 2001 756
Louisville River City Correctional Jefferson County, Kentucky June 30, 2000 363
Center
St. Mary Marion Adjustment Commonwealth of Kentucky December 7, 2001 856
Center
Wheelwright Otter Creek Commonwealth of Kentucky December 7, 2001 656
Correctional Center
Minnesota Appleton Prairie Correctional Appleton Prison Corp. July 31, 2009 1,338
Facility
Minnesota DOC June 30, 2001
Nebraska (USMS) (5)
USMS September 20, 2000
State of Hawaii June 30, 2001
North Dakota DOC July 31, 2000
Wisconsin DOC December 22, 2000
Mississippi Tallahatchie Tallahatchie County Tallahatchie County May 23, 2003 1,104
Correctional Center Correctional Authority
Wisconsin DOC December 22, 2000
Montana Shelby Crossroads Correctional Montana DOC August 31, 2003 512
Center
Montana DOC June 30, 2002
Nevada Las Vegas Southern Nevada State of Nevada, Nevada June 30, 2015 500
Women's Correctional Dept. of Prisons
Facility
New Mexico Estancia Torrance County Torrance County, New Mexico October 31, 2010 910
Detention Facility (management services)
Torrance County, New Mexico October 31, 2010
Lincoln County, New Mexico (1)
Valencia County, New Mexico (1)
USMS (5)
Grants New Mexico Women's New Mexico DOC June 30, 2001 596
Correctional Facility
<CAPTION>
OWNED,
MANAGED
LOCATION AND/OR LEASED
-------- -------------
<S> <C>
Owned and
managed
Georgia Owned and
managed
Owned and
managed
Owned and
managed
Owned and
managed
Owned and
managed
Indiana Owned and
managed
Kansas Owned and
managed
Kentucky Owned and
managed
Owned and
managed
Owned and
managed
Owned and
managed
Minnesota Owned and
managed
Mississippi Owned and
managed
Montana Owned and
managed
Nevada Owned,
managed
and
leased(6)
New Mexico Owned and
managed
Owned and
managed
</TABLE>
62
<PAGE> 68
<TABLE>
<CAPTION>
NO. OF
CONTRACTING FACILITY
LOCATION CITY/COUNTY FACILITY PARTIES EXPIRATION BEDS
-------- --------------- ----------------------- --------------------------- --------------------- --------
<S> <C> <C> <C> <C> <C>
Milan Cibola County Cibola County, New Mexico April 16, 2001 1,072
Corrections Center
State of Idaho July 15, 2000
State of Alaska June 30, 2001
FBOP November 9, 2003
North Carolina Bayboro Pamlico Correctional North Carolina DOC September 1, 2003(7) 528
Institution
Spruce Pine Mountainview State of North Carolina November 30, 2003(7) 528
Correctional
Institution
Ohio Cincinnati Queensgate Correctional Hamilton County, Ohio(2) March 1, 2000 850
Facility
Youngstown Northeast Ohio Government of District of September 8, 2000 2,016
Correction Center Columbia
Oklahoma Cushing Cimarron Correctional Oklahoma DOC June 30, 2001 960
Facility
Holdenville Davis Correctional Oklahoma DOC June 30, 2001 960
Facility
Sayre North Fork Correctional Wisconsin DOC December 22, 2000 1,440
Center
State of Hawaii June 30, 2001
Sayre Industrial Authority April 30, 2018
Watonga Diamondback Watonga Economic July 31, 2018 1,440
Correctional Facility Development Authority
State of Hawaii June 30, 2001
Indiana DOC January 31, 2003
Oklahoma DOC June 30, 2001
Tennessee Mason West Tennessee City of Mason July 29, 2010 600
Detention Center
USMS August 4, 2000
State of Hawaii June 30, 2001
Wisconsin DOC December 22, 2000
Memphis Shelby Training Center Juvenile Court of Memphis April 14, 2015 200
and Shelby County,
Tennessee
U.S. Department of Justice December 31, 2000
Delaware Dept. of Services June 30, 2001
for Children, Youth and
their Families
Nevada Dept. of Human June 30, 2001
Resources Division of Child
and Family Services
Idaho Dept. of Juvenile November 30, 2000
Corrections
Whiteville Whiteville Correctional Wisconsin DOC December 22, 2000 1,536
Facility
Texas Bridgeport Bridgeport Pre-Parole Texas Dept. of Criminal August 31, 2000 200
Transfer Facility Justice
Dallas Community Education Community Education August 14, 2008 --
Partners -- Dallas Partners(2)
<CAPTION>
OWNED,
MANAGED
LOCATION AND/OR LEASED
-------- -------------
<S> <C>
Owned and
managed
North Carolina Owned,
managed and
leased(6)
Owned,
managed and
leased(6)
Ohio Owned and
leased(6)
Owned and
managed
Oklahoma Owned and
managed
Owned and
managed
Owned and
managed
Owned and
managed
Tennessee Owned and
managed
Owned and
managed
Owned and
managed
Texas Owned and
managed
Owned and
Leased
</TABLE>
63
<PAGE> 69
<TABLE>
<CAPTION>
NO. OF
CONTRACTING FACILITY
LOCATION CITY/COUNTY FACILITY PARTIES EXPIRATION BEDS
-------- --------------- ----------------------- --------------------------- --------------------- --------
<S> <C> <C> <C> <C> <C>
Eden Eden Detention Center City of Eden April 13, 2011 1,225
FBOP (5)
Houston Community Education Community Education June 30, 2008 --
Partners -- Houston Partners(2)
Houston Houston Processing INS September 30, 2000 411
Center
Laredo Laredo Processing INS September 30, 2000 258
Center
Laredo Webb County Detention Webb County October 1, 2018 480
Facility
USMS February 8, 2001
Mineral Wells Mineral Wells Pre- Texas Dept. of Criminal August 31, 2000 2,103
Parole Transfer Justice
Facility
Taylor T. Don Hutto Williamson County, Texas January 21, 2003 480
Correctional Center
TDCJ October 31, 2000
USMS (5)
District of Washington Correctional Treatment District of Columbia March 15, 2017 866
Columbia Facility
INTERNATIONAL
United Kingdom Salford HMP Forrest Bank HMP Secretary of State for January 25, 2025 800
the Home Department and
Agecroft Prison Management,
Ltd.
<CAPTION>
OWNED,
MANAGED
LOCATION AND/OR LEASED
-------- -------------
<S> <C>
Owned and
managed
Owned and
Leased
Owned and
managed
Owned and
managed
Owned and
managed
Owned and
managed
Owned and
managed
District of Owned,
Columbia managed and
leased(6)
INTERNATIONAL
United Kingdom Owned,
managed and
leased(6)
</TABLE>
-------------------------
(1) Contract continues until either party provides the other with 30 days
written notice of termination.
(2) Indicates leasing party.
(3) Facility currently under development or construction.
(4) Prison Realty is lessee under a ground lease with City of San Diego for the
real property.
(5) Contract expires when funding is no longer allocated by U.S. Congress.
(6) Facility is leased to the appropriate state or local government agency (or
the District of Columbia).
(7) CCA is currently in discussion with the NCDOC with respect to the mutual
termination of the contract.
RELATIONSHIP WITH THE SERVICE COMPANIES
Upon completion of the merger and related transactions and the Prison
Realty restructuring, Prison Realty will maintain its existing ownership of 100%
of the non-voting common stock of PMSI and JJFMSI, which will entitle it to
continue to receive 95% of each company's net income, as defined, in the form of
cash dividends on such shares. In addition, Prison Realty and its subsidiaries
will provide administrative services for the service companies for a cash fee
under the terms of an existing administrative services agreement between CCA and
the service companies. Prison Realty will also license the use of the CCA name
to the service companies for a cash fee under the terms of an existing service
mark and trade name use agreement between CCA and the service companies.
The terms of Prison Realty's recently amended bank credit facility permit
Prison Realty to combine with PMSI and JJFMSI for non-cash consideration not to
exceed $12.6 million. A maximum of $10.6 million in non-cash consideration may
be paid to outside, non-warden
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<PAGE> 70
stockholders of the service companies. Prison Realty has initiated discussions
with representatives of PMSI and JJFMSI regarding a merger of each of the two
companies with and into subsidiaries of Prison Realty in accordance with the
terms of Prison Realty's bank indebtedness. The terms of such merger would, like
the merger with CCA, provide for the exchange of shares of each service
companies' common stock for shares of Prison Realty common stock in the merger
at an exchange ratio determined by a formula using the average closing price of
Prison Realty common stock over a period of time immediately prior to such
merger. It is not expected however, that any agreement will be reached as to the
service company mergers.
Prison Realty previously entered into agreements to purchase 85% of the
voting common stock of each of PMSI and JJFMSI, which is held by outside, or
non-employee, shareholders of each company in connection with the transactions
contemplated by the Fortress/Blackstone restructuring and the Pacific Life
restructuring. Due to the termination of the restructuring transactions with
Fortress/Blackstone and Pacific Life, Prison Realty believes it has no remaining
obligations under these agreements.
Information regarding each facility to be operated by PMSI and JJFMSI upon
completion of the merger and related transactions and the Prison Realty
restructuring, is set forth below, grouped by state:
PMSI
<TABLE>
<CAPTION>
OWNED
NO. OF MANAGED
CONTRACTING FACILITY AND/OR
LOCATION CITY FACILITY PARTIES EXPIRATION BEDS LEASED
-------- ------------- --------------------- --------------------------- ------------------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
Florida Gadsden Gadsden Correctional State of Florida July 1, 2001 896 Managed
Institution Correctional Privatization
Commission
Panama City Bay Correctional State of Florida August 28, 2000 750 Managed
Facility Correctional Privatization
Commission
Idaho Boise Idaho Correctional State of Idaho, Department June 30, 2003 1,250 Managed
Facility of Administration
Louisiana Winnfield Winn Correctional Department of Public Safety March 18, 2003 1,538 Managed
Center and Corrections
Mississippi Greenwood Delta Correctional Delta Correctional October 25, 2001 1,016 Managed
Facility Authority
Woodville Wilkinson County Wilkinson County Industrial January 5, 2003 900 Managed
Correctional Center Development Authority
Puerto Rico Guayama Guayama Correctional Administration of December 17, 2000 1,000 Managed
Center Corrections of the
Commonwealth of Puerto
Rico, Puerto Rico Public
Buildings Authority
Ponce Ponce Adult Administration of February 6, 2002 1,000 Managed
Correctional Facility Corrections of the
Commonwealth of Puerto
Rico, Puerto Rico Public
Buildings Authority
Tennessee Clifton South Central Tennessee DOC February 28, 2002 1,506 Managed
Correctional Facility
Whiteville Hardeman County Hardeman County November 14, 2001 2,016 Managed
Correctional Center Correctional Facilities
Corp.
Virginia Lawrenceville Lawrenceville Virginia DOC March 22, 2003 1,500 Managed
Correctional Center
</TABLE>
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<PAGE> 71
JJFMSI
<TABLE>
<CAPTION>
OWNED
NO. OF MANAGED
CONTRACTING FACILITY AND/OR
LOCATION CITY FACILITY PARTIES EXPIRATION BEDS LEASED
-------- ------------- --------------------- --------------------------- ------------------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
DOMESTIC:
Florida Brooksville Hernando County Jail Hernando County, Florida October 1, 2010 302 Managed
USMS (1)
Lake City Lake City State of Florida June 30, 2001 350 Managed
Correctional Center Correctional Privatization
Commission
Lecanto Citrus County Citrus County, Florida September 30, 2000 400 Managed
Detention Facility
Polk County, Florida (2)
Panama City Bay County Jail Bay County, Florida September 30, 2000 276 Managed
Panama City Bay County Jail Annex Bay County, Florida September 30, 2000 401 Managed
Okeechobee Okeechobee Juvenile State of Florida Department December 3, 2002 96 Managed
Offender Correctional of Juvenile Justice
Center
Indiana Vincennes Southwest Indiana Children and Family June 30, 2002 170 Managed
Regional Youth Services Corporation
Village
State of Delaware June 30, 2001
Indianapolis Marion County Jail II Marion County, Indiana November 20, 2001 670 Managed
Madison County, Indiana (2)
New Jersey Elizabeth Elizabeth Detention INS January 2, 2001 300 Managed
Center
Oklahoma Tulsa David L. Moss Tulsa County Criminal August 22, 2002 1,440 Managed
Criminal Justice Justice Authority
Center
Puerto Rico Ponce Ponce Youthful Administration of February 6, 2002 500 Managed
Offender Correctional Corrections of the
Facility Commonwealth of Puerto
Rico, Puerto Rico Public
Buildings Authority
Tennessee Chattanooga Silverdale Facilities Hamilton County, Tennessee September 19, 2000 576 Managed
Memphis Tall Trees Tennessee Dept. of June 30, 2001 63 Managed
Children's Services (level
1)
Tennessee Dept. of June 30, 2001
Children's Services (level
2)
Nashville Metro-Davidson County Metropolitan Government of May 31, 2002 1,092 Managed
Detention Nashville and Davidson
Facility County, Tennessee
Texas Bartlett Bartlett State Jail Texas Dept. of Criminal August 31, 2001 962 Managed
Justice
Brownfield Brownfield Texas Dept. of Criminal August 31, 2000 200 Managed
Intermediate Sanction Justice
Facility
Liberty Liberty County Jail Liberty County, Texas November 25, 2001 380 Managed
Delaware Dept. of Services June 30, 2001
for Children, Youth and
their Families
</TABLE>
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<PAGE> 72
<TABLE>
<CAPTION>
OWNED
NO. OF MANAGED
CONTRACTING FACILITY AND/OR
LOCATION CITY FACILITY PARTIES EXPIRATION BEDS LEASED
-------- ------------- --------------------- --------------------------- ------------------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
Nevada Dept. of Human June 30, 2001
Resources Division of Child
and Family Services
USMS (1)
Short term contracts: (2)
Orange County
Hardin County
Polk/Trinity/San Jacinto
Counties
Jefferson County
Montgomery County
Nacogdoches County
Tyler County
Chambers County
Baytown
Pascua Yaqui Tribe of
Arizona
First Judicial District
Juvenile Probation
Dept.
Nevada Youth Training
Center
INS
BOP
Venus Venus Pre-Release Texas Dept. of Criminal August 31, 2001 1,000 Managed
Center Justice
INTERNATIONAL:
Australia Queensland Borallon Corrections Queensland Correctional September 30, 2000 492 Managed
Centre Services and CCAustralia
PTY, Ltd.
Melbourne Metropolitan Women's Department of Justice and August 21, 2001 171 Owned,
Correctional Centre Excor Investments PTY, Ltd. managed
and
leased(3)
Wooroloo Acacia Prison State of Western Australia 5 years from 750 Managed
and CCAustralia PTY, Ltd. opening date
(scheduled to be
November 1, 2000)
United Redditch HMP Blakenhurst HMP Secretary of State for May 25, 2001 850 Managed
Kingdom the Home Department and
UKDS Ltd.
</TABLE>
-------------------------
(1) Contract expires when funding is no longer allocated by U.S. Congress.
(2) Contract continues until either party provides the other with 30 days
written notice of termination.
(3) Facility is leased to appropriate government agency or authority.
QUALIFICATION OF PRISON REALTY AS A REIT FOR 1999
TAX STATUS OF PRISON REALTY
As required by the terms of Prison Realty's charter, Prison Realty will
elect to be taxed as a REIT for federal income tax purposes with respect to its
taxable year ended December 31, 1999. Following consummation of the merger and
related transactions and the Prison Realty restructuring, Prison Realty will no
longer operate as to qualify as a REIT. Therefore, commencing with its taxable
year ending December 31, 2000, Prison Realty will be taxable as a subchapter C
corporation. Because
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<PAGE> 73
the requirements relating to qualification as a REIT are highly technical and
complex, no assurance can be given that Prison Realty will in fact qualify as a
REIT for 1999.
In satisfaction of its remaining REIT distribution requirements for 1999,
Prison Realty will issue shares of its newly-issued series B convertible
preferred stock to the holders of its common stock. It is currently anticipated
that Prison Realty will distribute approximately $150.0 million in shares of
series B convertible preferred stock. This distribution of the series B
convertible preferred stock is intended to constitute a taxable dividend.
QUALIFICATION OF PRISON REALTY AS A REIT
Set forth below is a general discussion of the material U.S. federal income
tax considerations relating to the qualification of Prison Realty as a REIT with
respect to its 1999 taxable year. The discussion is based on the Code, current
and proposed Treasury Regulations promulgated thereunder, administrative rulings
and applicable judicial decisions, all of which are subject to change, possibly
with retroactive effect. The discussion does not purport to deal with all
aspects of federal income taxation that may be relevant to particular holders of
Prison Realty's capital stock in view of their personal circumstances and,
except as otherwise specifically indicated, is not addressed to certain types of
holders subject to special treatment under federal income tax law, such as
insurance companies, tax-exempt organizations, financial institutions,
broker-dealers, persons that hold capital stock that is a hedge or that is
hedged against currency risks or that is part of a "straddle" or "conversion"
transaction, and foreign persons.
EACH SHAREHOLDER IS URGED TO CONSULT ITS TAX ADVISOR REGARDING THE SPECIFIC
TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND SALE OF PRISON REALTY CAPITAL
STOCK AND OF PRISON REALTY'S ELECTION TO BE TAXED AS A REIT FOR 1999, INCLUDING
THE STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH ACQUISITION,
OWNERSHIP, SALE AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
The following discussion sets forth only the material aspects of the
federal income tax requirements applicable to REITs and their shareholders. This
summary is qualified in its entirety by the applicable Code provisions, rules
and Treasury Regulations promulgated thereunder, and administrative and judicial
interpretation thereof.
TAXATION AS A REIT. In general, a REIT is not subject to federal corporate
income taxes on that portion of its ordinary income or capital gain that is
distributed to its stockholders because the REIT provisions of the Code
generally allow a REIT to deduct dividends paid to its shareholders. This
deduction for dividends paid substantially eliminates the federal "double
taxation" on earnings (once at the corporate level and once again at the
shareholder level) that generally results from investment in a corporation.
However, a REIT may be subject to federal income tax in the following
circumstances. First, a REIT will be taxed at regular corporate rates on any
undistributed taxable income, including undistributed net capital gains. Second,
under certain circumstances, a REIT may be subject to the "alternative minimum
tax" on its items of tax preference, if any. Third, to the extent a REIT has (i)
net income from the sale or other disposition of "foreclosure property"
(generally, property acquired by reason of a default on a lease or an
indebtedness held by a REIT) that is held primarily for sale to customers in the
ordinary course of business, or (ii) other non-qualifying net income from
foreclosure property, it will be subject to tax at the highest corporate rate on
such income. Fourth, to the extent a REIT has net income from a "prohibited
transaction" (generally, a sale or other disposition of property held primarily
for sale to customers in the ordinary course of business, other than foreclosure
property), such income will be subject to a 100% tax. Fifth, to the extent a
REIT fails to satisfy the 75% income test or the 95% income test (as discussed
below) for any year, and has nonetheless maintained its qualification as a REIT
because certain other requirements have been met, it will be subject to a 100%
tax on the net income attributable to the
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<PAGE> 74
greater of the amount by which it fails the 75% income test or 95% income test,
multiplied by a fraction intended to reflect the REIT's profitability. Sixth, to
the extent a REIT fails to distribute with respect to any taxable year at least
the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its
REIT capital gain net income for such year, and (iii) any undistributed taxable
income from prior periods ("Minimum Distributions"), the REIT will be subject to
a 4% excise tax (the "Excise Tax") on the excess of such Minimum Distributions
over the amounts actually distributed. For purposes of the Excise Tax, any
income, including net capital gains, on which a REIT pays regular corporate
income tax is treated as having been distributed. Seventh, if a REIT has
acquired any asset from a subchapter C corporation (i.e., a corporation which is
generally subject to a full corporate-level tax) in a transaction in which the
basis of the asset in the REIT's hands is determined by reference to the basis
of the asset (or any other asset) in the hands of the subchapter C corporation
and the REIT recognizes gain on the disposition of the asset during the 10-year
period beginning on the date on which such asset was acquired by the REIT, then
to the extent of such asset's "built-in gain" (i.e., the excess of the fair
market value of such asset at the time of acquisition over the adjusted basis in
such asset as of such time), such gain will be subject to tax at the highest
regular corporate rate applicable. This result as to the recognition of
"built-in gain" assumes that the REIT makes an election pursuant to IRS Notice
88-19 or applicable future administrative rules or Treasury Regulations.
For Prison Realty to qualify as a REIT with respect to its 1999 taxable
year, it must make certain additional distributions to its stockholders in 2000.
Because Prison Realty failed to make the Minimum Distributions with respect to
its 1999 taxable year, it will also be subject to Excise Tax equal to 4% of the
excess of such Minimum Distributions over the amounts actually distributed.
Prison Realty estimates that the amount of this Excise Tax will be approximately
$5 million.
REQUIREMENTS FOR QUALIFICATION. The Code defines a REIT as a corporation,
trust or association: (i) that is managed by one or more trustees or directors;
(ii) the beneficial ownership of which is evidenced by transferable shares or by
transferable certificates of beneficial interest; (iii) which would be taxable
as a domestic corporation but for the REIT provisions of the Code; (iv) that is
neither a financial institution nor an insurance company subject to certain
provisions of the Code; (v) the beneficial ownership of which is held by 100 or
more persons; (vi) during the last half of each taxable year, not more than 50%
in value of the outstanding capital stock of which is owned, directly or
indirectly (through the application of certain attribution rules), by five or
fewer individuals (as defined in the Code to include certain entities); and
(vii) which meets certain other tests, described below, regarding the nature of
its income and assets.
The Code provides that conditions (i) through (iv), inclusive, must be met
during the entire taxable year and that condition (v) must be met during at
least 335 days of a taxable year of 12 months, or during a proportionate part of
a taxable year of less than 12 months. If a REIT complies with Treasury
Regulations that provide procedures for ascertaining the actual ownership of its
shares for such taxable year and the REIT did not know (and with the exercise of
reasonable diligence could not have known) that it failed to meet the
requirement of condition (vi) above for such taxable year, the REIT will be
treated as having met the requirement of condition (vi) for such year.
Prison Realty has satisfied the requirements set forth in (i) through (iv)
above with respect to its 1999 taxable year and has issued sufficient capital
stock with sufficient diversity of ownership to allow it also to satisfy
conditions (v) and (vi) above. The charter of Prison Realty includes certain
restrictions regarding transfers of its common stock and preferred stock that
are intended to assist Prison Realty in satisfying the stock ownership
requirements described in (v) and (vi) above. However, such restrictions may not
be adequate in all cases to prevent transfers of Prison Realty's capital stock
in violation of the ownership limitations.
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<PAGE> 75
In addition to the foregoing organizational requirements, a REIT must also
satisfy certain other tests (described below) regarding the nature of its income
and assets. In applying these tests, a corporation that is a "qualified REIT
subsidiary" (within the meaning of Section 856(i) of the Code) will not be
treated as a separate corporation. Instead, all of its assets, liabilities,
income, deductions and credits will be treated as owned, realized or incurred
(as the case may be) directly by the REIT. In general, a qualified REIT
subsidiary is a corporation all of the stock of which is owned by a REIT. Prison
Realty has a number of "qualified REIT subsidiaries." In applying the income and
asset tests described below to Prison Realty, the separate existence of these
subsidiaries will be ignored, and their assets, liabilities, income, deductions
and credits will be treated as assets, liabilities, income, deductions and
credits of Prison Realty.
INCOME TESTS. For Prison Realty to qualify as a REIT for 1999, it must
satisfy two gross income requirements. First, at least 75% of Prison Realty's
gross income (excluding gross income from prohibited transactions) for 1999 must
be derived directly or indirectly from investments relating to real property
(including rents from real property, lease commitment fees, certain mortgage
interest and dividends from qualified REITs) or from "qualified temporary
investment income" (generally, income attributable to the temporary investment
of new capital received by Prison Realty) (the "75% income test"). Second, at
least 95% of Prison Realty's gross income (excluding gross income from
prohibited transactions) for 1999 must be derived from the foregoing sources or
from dividends, interest and gain from the sale or disposition of stock or
securities (the "95% income test").
If Prison Realty fails to satisfy one or both of the 75% income test or the
95% income test, it may nevertheless qualify as a REIT if it is entitled to
relief under certain provisions of the Code. These relief provisions generally
will be available if (i) the failure to meet such tests was due to reasonable
cause and not due to willful neglect, (ii) a schedule of the sources of
qualifying income is attached to Prison Realty's federal income tax return for
such taxable year, and (iii) any incorrect information on the schedule was not
due to fraud with intent to evade tax. It is not possible to state whether
Prison Realty would be entitled to the benefit of these relief provisions if the
IRS were to determine that Prison Realty for any reason failed to satisfy either
the 75% income test or the 95% income test for its 1999 taxable year. Moreover,
even if these relief provisions were to apply, Prison Realty would still be
subject to a tax on the amount of the excess net income.
"Rents from real property" generally means the gross amount received for
the use of, or the right to use, a REIT's real property. For the rents received
by Prison Realty to qualify as "rents from real property," the leases under
which the rents were paid must be respected as true leases for federal income
tax purposes and must not treated as service contracts, joint ventures or some
other type of arrangement. The determination of whether a lease is a true lease
depends on surrounding facts and circumstances. In making such a determination,
courts have considered a variety of factors, including the following: (i) the
intent of the parties; (ii) the form of the agreement; (iii) the degree of
control over the property retained by the property owner (e.g., whether the
lessee has substantial control over the operation of the property or whether the
lessee is required to use its best efforts to perform its obligations under the
agreement); (iv) the extent to which the property owner retains the risk of loss
with respect to the operation of the property (e.g., whether the lessee bears
the risk of increases in operating expenses or the risk of damage with respect
to the property); and (v) the extent to which the property owner retains the
burdens and benefits of ownership of the property.
Under Code Section 7701(e), a contract that purports to be a service
contract (or a partnership agreement) will be treated instead as a lease of
property if the contract is properly treated as such, taking into account all
relevant factors, including whether or not: (i) the service recipient is in
physical possession of the property; (ii) the service recipient controls the
property; (iii) the service recipient has a significant economic or possessory
interest in the property (e.g., the property's use is likely to be dedicated to
the service recipient for a substantial portion of the useful life of the
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<PAGE> 76
property, the recipient shares the risk that the property will decline in value,
the recipient shares in any appreciation in the value of the property, the
recipient shares in savings in the property's operating costs, or the recipient
bears the risk of damage to or loss of the property); (iv) the service provider
does not bear any risk of substantially diminished receipts or substantially
increased expenditures if there is nonperformance under the contract; (v) the
service provider does not use the property concurrently to provide significant
services to entities unrelated to the service recipient; and (vi) the total
contract price does not substantially exceed the rental value of the property
for the contract period. Since the determination whether a service contract
should be treated as a lease is inherently factual, the presence or absence of
any single factor may not be dispositive in every case.
CCA was Prison Realty's primary lessee during 1999. The leases between
Prison Realty and CCA should qualify as true leases for federal income tax
purposes, based in part on the following facts: (i) the leases are styled as
leases (e.g., Prison Realty holds legal title to the facilities, and the leases
give CCA the right to possession of the facilities), and Prison Realty and CCA
have represented that they intend their relationship to be that of lessor and
lessee; (ii) Prison Realty has represented that the useful life of each of the
facilities extends for a significant period of time beyond expiration of the
leases; (iii) the facilities should have significant residual value after
expiration of the terms of the leases; (iv) the leases do not provide CCA with
the right to purchase the facilities at a bargain price; (v) Prison Realty is
entitled to receive significant rental income under the leases; and (vi) Prison
Realty and CCA have represented that at the time the leases were entered into,
the rents payable under the leases represented fair market rents.
There are, however, no controlling Treasury Regulations, published rulings
or judicial decisions involving leases with terms substantially the same as the
CCA leases that address whether such leases are true leases for federal income
tax purposes. If these leases are recharacterized as service contracts or
partnership agreements rather than true leases, then part or all of the payments
that Prison Realty received from CCA during 1999 would not be considered rent
and would not otherwise satisfy the various requirements for qualification as
"rents from real property." In that event, Prison Realty likely would not
satisfy either the 75% income test or the 95% income test and, as a result,
would not qualify as a REIT with respect to its 1999 taxable year.
Another requirement for the qualification of rents as "rents from real
property" is that Prison Realty, or an owner of 10% or more of Prison Realty,
must not own, directly or constructively (through the application of certain
stock attribution rules), 10% or more of the voting power or total number of
outstanding shares of a corporate tenant or 10% or more of the assets or net
profits of a non-corporate tenant (a "Related Party Tenant") at any time during
a taxable year. To enable Prison Realty to comply with these rules, Prison
Realty's charter provides that no person may own, directly or constructively
(through application of certain stock attribution rules), more than 9.8% of the
outstanding shares of Prison Realty's common stock or 9.8% of the outstanding
shares of Prison Realty's preferred stock. Assuming these ownership limitations
were complied with, no person should have owned (directly or constructively)
during 1999 10% or more of both Prison Realty and any tenant of Prison Realty.
The stock attribution rules, however, are highly complex and difficult to apply,
and Prison Realty may have inadvertently entered into leases with tenants who,
through application of such rules, constituted Related Party Tenants. In such
event, rent paid by the Related Party Tenant will not qualify as "rents from
real property," which may jeopardize Prison Realty's ability to qualify as a
REIT with respect to its 1999 taxable year.
Prison Realty owns directly all of the non-voting common stock of CCA. The
total number of shares of the CCA non-voting common stock equals approximately
9.5% of the shares of CCA capital stock outstanding, and such shares represent
approximately a 9.5% economic interest in CCA. Therefore, Prison Realty's
ownership of these shares was not a violation of the Related Party Tenant rules.
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<PAGE> 77
Prison Realty also holds a promissory note from CCA in the original
principal amount of $137.0 million. If this note is treated for federal income
tax purposes as equity rather than debt, Prison Realty could be deemed to own in
excess of 10% of the total outstanding CCA capital stock in violation of the
Related Party Tenant rules. Classification of an instrument as debt or equity is
generally determined based on all facts and circumstances as they existed at the
time the instrument was executed. Among the relevant criteria are the following:
(i) the intent of the parties, (ii) the extent of participation in management by
the holder of the instrument, (iii) the ability of the corporation to obtain
funds from outside sources, (iv) the "thinness" of the capital structure in
relation to debt (based on fair market value of the debtor's assets, including
intangible assets), (v) the risk involved, (vi) the formal indicia of the
arrangement, (vii) the relative position of the creditor in question versus
other creditors regarding payment of interest and principal, (viii) the voting
power of the holder of the instrument, (ix) the provision of a fixed rate of
interest, (x) the contingency of the obligation to repay, (xi) the source of
repayment, (xii) the presence or absence of a fixed maturity date, and (xiii)
whether the note is guaranteed or otherwise secured.
The CCA note should be treated as debt for federal income tax purposes
based, in part, on various facts and circumstances, including that the note (i)
is clearly denominated as debt, (ii) has a fixed maturity of 10 years, (iii)
provides for a fixed rate of interest, (iv) requires that interest be paid
annually during the first four years of the term of the note and that principal
be amortized over years five through 10 of such term, (v) requires that certain
excess cash flow be used to prepay the note and (vi) is partially guaranteed by
Doctor R. Crants. There are, however, no controlling Treasury Regulations,
published rulings or judicial decisions involving indebtedness with terms
substantially the same as the CCA note that address whether such indebtedness is
to be treated as debt for federal income tax purposes. If the CCA note is
recharacterized as equity, part or all of the payments that Prison Realty
received from CCA in 1999 likely would not qualify as "rents from real
property." In that event, based upon the expected amount of rent to be paid to
Prison Realty by CCA under the CCA leases, Prison Realty likely would not
satisfy either the 75% income test or the 95% income test and, as a result,
would lose its REIT status.
In addition to the foregoing requirements, the amount of rent, to qualify
as "rents from real property," must not be based in whole or in part on the
income or profits of any person. However, rents received or accrued generally
will not be disqualified as "rents from real property" solely by reason of being
based on a fixed percentage or percentages of receipts or sales. Also, if rent
attributable to personal property leased in connection with a lease of real
property is greater than 15% of the total rent received under the lease, then
the portion of rent attributable to such personal property will not qualify as
"rents from real property." Finally, rents received by Prison Realty for 1999,
subject to certain exceptions, will not qualify as "rents from real property" if
Prison Realty operated or managed the property or furnished or rendered services
to the tenants of such property, other than through an independent contractor
who was adequately compensated and from whom Prison Realty derived no income.
All rents received by Prison Realty during 1999 should satisfy these
requirements.
All interest (other than interest based on the net income of any person) is
qualifying income for purposes of the 95% income test. However, only interest on
obligations secured by mortgages on real property or on interests in real
property is qualifying income for purposes of the 75% income test. If the loan
value of real property (determined as of the time the commitment to make or
purchase the loan becomes binding) equals or exceeds the amount of the loan, all
interest on the loan will be allocated to the real property and will thus
qualify as mortgage interest. If the loan value is less than the amount of the
loan, interest will be allocated to the real property in the same proportion as
the loan value bears to the amount of the loan. Interest received under an
installment contract for the
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<PAGE> 78
sale of real property should be treated as mortgage interest to the extent of
the value of the underlying real property.
Prison Realty acquired in the 1999 Merger certain leases to government
entities. Under each of these leases, either (i) the government entity, as
lessee, has an option to purchase the leased facility for a specified,
below-market amount, which typically declines over the term of the lease, or
(ii) the facility automatically reverts to the government entity at the
conclusion of the lease. Primarily because of these features, it is likely that
the leases will be treated as financing arrangements for federal income tax
purposes rather than as true leases. Therefore, a portion of each lease payment
will be treated as interest income, and a portion will be treated as a return of
principal. The interest should be treated as mortgage interest to the extent of
the value of the underlying facility and therefore as qualifying income for
purposes of both the 75% income test and the 95% income test. If, however, the
amount financed exceeds the value of the underlying real property, interest will
be allocated to the underlying property (and thus treated as mortgage interest)
in the same proportion as the loan value of the property bears to the amount of
the loan.
In addition to real property rents and mortgage interest, Prison Realty
received in 1999 income from a variety of other sources. These included (i)
interest income under the CCA note, (ii) license fees under the trade name use
agreement relating to the use of the CCA name, and (iii) dividend income on its
non-voting common stock in PMSI and JJFMSI. The interest income under the CCA
note and the dividends from PMSI and JJFMSI should be qualifying income for
purposes of the 95% income test but not for purposes of the 75% income test. The
license fees under the trade name use agreement are nonqualifying for purposes
of both the 95% income test and the 75% income test. Taking into account these
other sources of income, Prison Realty still satisfied the 75% income test and
the 95% income test with respect to its 1999 taxable year.
The IRS has the authority under a number of Code sections to reallocate
income and deductions between Prison Realty and CCA. For example, the IRS may
assert that the rents payable by CCA are excessive and treat the excess as
attributable to the trade name use agreement, the management contracts acquired
with the CCA note or some other source. Such a reallocation could cause Prison
Realty to fail one or both of the 75% income test and the 95% income test, which
in turn could cause Prison Realty to lose its status as a REIT. To ensure that
the amounts charged as rent under the CCA leases are fair market rents, Prison
Realty obtained independent appraisals of the facilities and an independent
analysis of the appropriate lease rates for the facilities. This appraisal and
analysis will not be binding on the IRS, however, and the IRS may attempt to
reallocate the payments from CCA as described above. If the IRS were to be
successful, Prison Realty may not qualify as a REIT for 1999.
ASSET TESTS. For Prison Realty to qualify as a REIT, at the close of each
quarter of its taxable year it must also satisfy three tests relating to the
nature of its assets. First, at least 75% of the value of Prison Realty's total
assets must be represented by real estate assets (which for this purpose
includes real estate assets held by a "qualified REIT subsidiary" of Prison
Realty) and cash, cash items and government securities. Second, no more than 25%
of Prison Realty's total assets may be represented by securities other than
those in the 75% asset class. Third, of the investments included in the 25%
asset class, the value of any one issuer's securities owned by Prison Realty may
not exceed 5% of the value of Prison Realty's total assets, and Prison Realty
may not own more than 10% of any one issuer's outstanding voting securities
(excluding securities of a "qualified REIT subsidiary" or another REIT).
Total assets for purposes of these tests include only those assets that
appear on Prison Realty's balance sheet prepared in accordance with generally
accepted accounting principles. In applying the 5% and 10% tests, the term
"issuer" has the same meaning as when used in the Investment Company
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Act of 1940, as amended (the "ICA"). Under the ICA, such term means generally
"every person who issues or proposes to issue any security, or has outstanding
any security which it has issued." Under this definition and various
administrative rulings interpreting this definition, each of CCA, PMSI and
JJFMSI should be treated as a separate issuer.
Subject to certain exceptions, the asset tests are applied as of the close
of each calendar quarter. Shares in other REITs generally are valued at the
higher of market value or asset value. Securities (other than REIT shares) for
which market quotations are readily available must be valued at market value.
The value of all other REIT assets must be determined in good faith by the
Prison Realty board of directors. After initially meeting the asset tests at the
close of any quarter, a REIT will not lose its status as such for failure to
satisfy the asset tests at the end of a later quarter solely by reason of
changes in asset values. If the failure to satisfy the asset tests results from
an acquisition of securities or other property during a quarter, the failure can
be cured by disposition of sufficient non-qualifying assets within 30 days after
the close of that quarter.
In an effort to ensure compliance with the 75% and 5% asset tests, Prison
Realty obtained appraisals of the facilities. Based in part on these appraisals,
Prison Realty should satisfy the 75% and 5% asset tests as of the close of each
calendar quarter during 1999. In addition, Prison Realty did not at any time
during 1999 own 10% or more of the voting securities of any issuer.
Although Prison Realty has maintained adequate records of the value of its
assets to document compliance with the asset tests, there can be no assurance
that Prison Realty has taken all action necessary to satisfy the tests.
Furthermore, the appraisals obtained by Prison Realty are not binding on the
IRS, and the IRS may challenge the values determined by Prison Realty using
these appraisals. The IRS could also attempt to treat one or more of CCA, PMSI
and JJFMSI as a single issuer rather than as separate issuers. If the IRS is
successful with any of these arguments, Prison Realty might lose its ability to
qualify as a REIT.
DISTRIBUTION REQUIREMENTS. To be taxed as a REIT for 1999, Prison Realty
is required to meet certain distribution requirements. First, Prison Realty must
have distributed prior to the end of 1999 dividends to its stockholders in an
amount equal to all of the earnings and profits inherited from Old CCA in the
1999 Merger. Second, Prison Realty must distribute dividends (other than capital
gain dividends) to its stockholders in an amount at least equal to (1) the sum
of (a) 95% of Prison Realty's "REIT taxable income" (computed without regard to
the dividends paid deduction and Prison Realty's net capital gain) and (b) 95%
of the net income, if any, from foreclosure property in excess of the special
tax on income from foreclosure property, minus (2) the sum of certain items of
non-cash income. Prison Realty was required generally to pay these dividends in
1999, but may pay them in 2000 if, among other things, it declares the dividends
before it timely files its 1999 tax return and pays the dividends on or before
the date it pays any dividends for its 2000 taxable year.
To the extent that Prison Realty does not distribute all of its net capital
gain or distributes at least 95% (but less than 100%) of its REIT taxable
income, as adjusted, it is subject to tax on the undistributed portion, at
regular capital gains and ordinary corporate tax rates. Furthermore, to the
extent Prison Realty failed to distribute in 1999 at least the sum of (a) 85% of
its REIT ordinary income for such year, (b) 95% of its REIT capital gain net
income for such year, and (c) any undistributed ordinary income and capital gain
net income from prior periods ("Minimum Distributions"), it is subject to a 4%
excise tax (the "Excise Tax") on the excess of such required distribution over
the amounts actually distributed.
In 1999, Prison Realty paid dividends on its common and preferred stock of
approximately $217.7 million. It succeeded to earnings and profits from Old CCA
of approximately $152 million. Under applicable ordering rules, distributions
made by Prison Realty during 1999 were treated as
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having been made first from Old CCA's earnings and profits, and then from Prison
Realty's current earnings and profits. Thus, Prison Realty has satisfied its
earnings and profits distribution requirement. To satisfy its remaining REIT
distribution requirements, Prison Realty anticipates that will distribute
approximately $150.0 million of its newly issued series B convertible preferred
stock to its common stockholders. Although the distribution is intended to
enable Prison Realty to satisfy its distribution requirements for 1999, it will
be taxable to Prison Realty's common stockholders in 2000. Because Prison Realty
failed to make the Minimum Distributions with respect to its 1999 taxable year,
it will be subject to Excise Tax equal to 4% of the excess of such Minimum
Distributions over the amounts actually distributed. Prison Realty estimates
that the amount of this Excise Tax will be approximately $5 million.
The IRS may in the future make adjustments increasing the amount of Old
CCA's earnings and profits or the amount of Prison Realty's 1999 taxable income.
These adjustments, if sufficiently large, may cause Prison Realty to fail to
satisfy the foregoing distribution requirements. Under certain circumstances,
however, Prison Realty may be able to rectify such a failure by paying
"deficiency dividends" or by making "qualified designated distributions" to
stockholders within a specified period of time following the date of the
adjustment. Prison Realty thus may be able to avoid disqualification as a REIT.
In such circumstances, however, Prison Realty will be required to pay interest
based on that part of the adjustment that Prison Realty distributes as a
deficiency dividend or as a qualified designated distribution.
FAILURE TO QUALIFY. If Prison Realty fails to qualify for taxation as a
REIT with respect to its 1999 taxable year, and certain relief provisions do not
apply, Prison Realty would be subject to tax (including any applicable
alternative minimum tax) on its income at regular corporate rates, which could
exceed $83.5 million. Additionally, distributions paid by Prison Realty to its
shareholders in 1999 will not be deductible by Prison Realty and will be taxable
to shareholders as ordinary income to the extent of current or accumulated
earnings and profits, although corporate distributees may be eligible for the
dividends received deduction.
OTHER TAX CONSEQUENCES. Prison Realty and its stockholders may be subject
to state or local taxation in various state or local jurisdictions, including
those in which it or they transact business or reside. The state and local tax
treatment of Prison Realty and its stockholders may not conform to the federal
income tax consequences discussed above. Consequently, shareholders should
consult their own tax advisors regarding the effect of state and local tax laws
on an investment in Prison Realty.
DESCRIPTION OF THE SERIES B CONVERTIBLE PREFERRED STOCK
The following summarizes material terms of the shares of series B
convertible preferred stock to be issued to Prison Realty stockholders in
satisfaction of Prison Realty's remaining 1999 REIT distribution requirements.
RANK AND PREFERENCE. The series B articles supplementary will classify 8.0
million shares of Prison Realty's preferred stock as series B convertible
preferred stock with a fixed stated amount of $25.00 per share. The shares of
series B convertible preferred stock will rank senior as to dividends and
liquidation preference to all classes of Prison Realty's common stock and,
unless the issuance is approved by the holders of the shares of series B
convertible preferred stock, to any future Prison Realty preferred stock ranking
senior to the series B convertible preferred stock. The series B convertible
preferred stock will rank, as to dividends and liquidation preference, on a
parity with all capital stock of Prison Realty the terms of which specifically
provide that such capital stock ranks on a parity with the series B convertible
preferred stock.
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DIVIDENDS. For the first three years following the date of issuance of the
series B convertible preferred stock, Prison Realty will pay cumulative
preferential dividends payable in additional shares of series B preferred stock,
payable quarterly, on shares of the series B convertible preferred stock at a
rate of 12% per annum of the stated amount. Following the third anniversary of
the issuance of the shares of series B convertible preferred stock, Prison
Realty will pay cumulative preferential cash dividends, payable quarterly, on
shares of the series B convertible preferred stock at a rate of 12% per annum of
the stated amount. Dividends on the shares of series B convertible preferred
stock will accrue whether or not such dividends are declared by Prison Realty
and whether or not funds are legally available for payment of such dividends.
Any dividend payment made on shares of series B convertible preferred stock
shall first be credited against the current dividend and then against the
earliest accrued but unpaid dividend.
For so long as any shares of series B convertible preferred stock are
outstanding, all dividends declared and paid by Prison Realty upon shares of the
series B convertible preferred stock or upon any shares of capital stock of
Prison Realty ranking on a parity with the shares of series B convertible
preferred stock shall be declared pro rata based upon the amount of unpaid and
accrued dividends outstanding upon the shares of series B convertible preferred
stock and upon such parity stock, if any. In addition, for so long as any shares
of series B convertible preferred stock are outstanding, and until all accrued
dividends on the shares of series B convertible preferred stock are declared and
paid in full (or a sum sufficient for payment is set apart for payment):
- Prison Realty may not declare or pay, or set apart for payment,
dividends on any shares of capital stock of Prison Realty ranking junior
to the shares of series B convertible preferred stock (other than (i)
dividends payable in shares of such junior stock and (ii) distribution
of rights to purchase shares of common stock or preferred stock to
common shareholders); and
- Prison Realty may not make any payment on account of, or set apart for
payment, money for a sinking or similar fund for the purposes of the
purchase, redemption or retirement of any shares of capital stock of
Prison Realty ranking on a parity with, or junior to, the shares of
series B convertible preferred stock, or of warrants, rights, calls or
options exercisable or convertible into such shares of Prison Realty's
capital stock (or cause any entity directly or indirectly controlled by
Prison Realty to effect such repurchase, redemption or retirement).
CONVERSION INTO COMMON STOCK AT THE OPTION OF THE HOLDER. Each share of
series B convertible preferred stock may, at the option of its holder, be
converted into shares of Prison Realty common stock during either: (i) the
period of 10 business days commencing on the sixth business day after the date
of issuance of the series B convertible preferred stock; or (ii) the period of
10 business days ending 90 calendar days after the date of issuance of the
series B convertible preferred stock (or the first business day thereafter). For
each share of series B convertible preferred stock converted into shares of
Prison Realty's common stock, the holder will receive that number of shares of
Prison Realty's common stock equal to the stated amount ($25.00) per share,
divided by the conversion price of the shares of series B convertible preferred
stock. The conversion price of the series B convertible preferred stock shall be
fixed at a price equal to the average of the closing prices of Prison Realty's
common stock on the NYSE for the 10 consecutive trading days ending one day
prior to the applicable date of conversion.
During: (i) any period in which shares of series B convertible preferred
stock may be converted into Prison Realty common stock; or (ii) any period
during which the conversion price of shares of series B convertible preferred
stock is being determined, Prison Realty may not declare a dividend or make a
distribution on the outstanding shares of Prison Realty's common stock, in
either case, in shares of Prison Realty's common stock, or effect a subdivision,
combination, consolidation or
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reclassification of the outstanding shares of Prison Realty's common stock into
a greater or lesser number of shares of common stock.
REDEMPTION AT THE OPTION OF PRISON REALTY. At any time or from time to
time commencing six months following the date which is the later of: (i) the
third anniversary of the issuance of the series B preferred stock; or (ii) the
date which is the 91st day following the repayment in full of Prison Realty's
12% senior notes, due June 2006, Prison Realty shall have the right, at its sole
option and election, to redeem, out of funds legally available therefor, all, or
a portion, of the outstanding shares of series B convertible preferred stock.
Prison Realty may redeem the shares of series B convertible preferred stock at a
cash price per share equal to the stated amount ($25.00) per share, plus any
accrued but unpaid dividends. If less than all shares of series B convertible
preferred stock outstanding at the time are to be repurchased by Prison Realty,
the shares of series B convertible preferred stock to be repurchased shall be
selected pro rata; provided, however, that in the event that less than 10% of
the number of shares of series B convertible preferred stock originally issued
are then outstanding, Prison Realty shall be required to repurchase all of such
outstanding shares if it elects to repurchase any shares.
VOTING RIGHTS. Holders of the series B convertible preferred stock will
not have any voting rights, except as set forth below or as required by law.
Whenever dividends on any shares of series B convertible preferred stock
shall be in arrears for four quarterly periods, such holders of such shares of
series B convertible preferred stock (voting separately as a class with all
other series of preferred stock ranking on a parity with the series B
convertible preferred stock as to dividends or on liquidation upon which like
voting rights have been conferred and are exercisable) will be entitled to vote
for the election of a total of one additional director of Prison Realty at a
special meeting called by the holders of record of at least 20% of the
outstanding shares of series B convertible preferred stock or the holders of
shares of any other series of preferred stock ranking on a parity with the
series B convertible preferred stock so in arrears or at the next annual meeting
of stockholders, and at each subsequent annual meeting until all dividends
accumulated on such shares of series B convertible preferred stock for the past
dividend periods and the dividend for the then current dividend period shall
have been fully paid or authorized and a sum sufficient for the payment thereof
is set aside for payment in full.
The above voting provisions will not apply if all outstanding shares of
series B convertible preferred stock shall have been redeemed or called for
redemption upon proper notice and sufficient funds shall have been irrevocably
deposited or set aside to effect such redemption.
EFFECT OF CONSOLIDATION OR MERGER UPON CONVERSION OF SERIES B CONVERTIBLE
PREFERRED STOCK. In the event of: (i) any capital reorganization or
reclassification of Prison Realty common stock; (ii) any consolidation, share
exchange or merger of Prison Realty with or into another entity; or (iii) any
sale or conveyance to another entity of all or substantially all of the property
of Prison Realty, each share of series B convertible preferred stock will
thereafter not be convertible into shares of Prison Realty's common stock
issuable immediately prior to the completion of such transaction. Instead, each
share of series B convertible preferred stock will be convertible into the kind
and amount of shares of stock and other securities and property receivable in
the transaction by a holder of that number of shares of Prison Realty's common
stock into which one share of series B convertible preferred stock was
convertible immediately prior to the transaction.
ABILITY TO RECEIVE PREFERENTIAL CASH PAYMENT UPON LIQUIDATION. Upon the
occurrence of an event of liquidation or dissolution of Prison Realty (which
shall not include a merger, consolidation or other business combination
involving Prison Realty), the holders of the shares of series B convertible
preferred stock will be entitled to receive, on a parity with holders of Prison
Realty's preferred stock
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ranking on a parity with the series B convertible preferred stock, a liquidating
distribution per share, out of assets legally available for distribution to
stockholders, equal to the stated amount ($25.00) per share, plus any accrued
but unpaid dividends.
After payment of the full amount of the greater of the amounts above, the
holders of shares of series B convertible preferred stock will not be entitled
to any further participation in any distribution of assets of Prison Realty. If,
upon any liquidation, dissolution or winding up of Prison Realty, the available
assets of Prison Realty are insufficient to pay the amount of the liquidating
distributions on all outstanding shares of series B convertible preferred stock
and upon all outstanding shares of Prison Realty's capital stock ranking on a
parity with the shares of series B convertible preferred stock, then the holders
of shares of the series B convertible preferred stock and such parity stock will
share equally and ratably in any distribution of assets of Prison Realty.
TAX CONSEQUENCES
The following is a general discussion of material federal income tax
consequences to holders of Prison Realty common stock who receive a distribution
of the series B convertible preferred stock. There can be no assurance that the
IRS will not successfully challenge one or more of the tax consequences
described herein, and Prison Realty has not obtained, nor does it intend to
obtain, a ruling from the IRS with respect to the U.S. federal income tax
consequences of acquiring, holding or disposing of the Prison Realty common
stock and series B convertible preferred stock.
This discussion does not deal with all aspects of U.S. federal income
taxation that may be important to holders of the Prison Realty common stock and
series B convertible preferred stock and does not deal with tax consequences
arising under the laws of any foreign, state or local jurisdiction. This
discussion is for general information only, and does not purport to address all
tax consequences that may be important to a particular holder in light of its
personal circumstances (such as holders subject to the alternative minimum tax
provisions of the Code), or to certain types of holders (such as certain
financial institutions, insurance companies, tax-exempt entities, dealers in
securities, persons who hold the common stock in connection with a straddle or
hedge, a conversion transaction or other integrated transactions or persons
whose "functional currency" is not the U.S. dollar) that may be subject to
special rules.
SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE
FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE DISTRIBUTION OF THE
SERIES B CONVERTIBLE PREFERRED STOCK AND THE EFFECT THAT THEIR PARTICULAR
CIRCUMSTANCES MAY HAVE ON SUCH TAX CONSEQUENCES.
DISTRIBUTION OF SERIES B CONVERTIBLE PREFERRED STOCK. The distribution of
the series B convertible preferred stock will generally be treated as a dividend
to the extent paid or deemed paid out of Prison Realty's current and accumulated
earnings and profits. Accordingly, each stockholder generally will be required
to include in gross income (as ordinary income) the fair market value of the
series B convertible preferred stock as of the time of distribution. To the
extent the fair market value of the series B convertible preferred stock exceeds
the amount of Prison Realty's current and accumulated earnings and profits, the
distribution will be treated as a return of capital, which will reduce (but not
below zero) each stockholder's basis in its shares of Prison Realty common
stock. Thereafter, the distribution will be treated as gain from the sale or
exchange of Prison Realty common stock. Such gain will be capital gain, assuming
the stock is held as a capital asset at the time of the distribution, and will
be long-term if the shareholder's holding period for the stock exceeds one year.
If the shareholder is an individual, any long term capital gain will generally
be taxed at a maximum federal income tax rate of 20%. Each stockholder's basis
in the series B preferred stock will equal its fair market value on the date of
distribution.
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To the extent the dividend is deemed to be paid from earnings and profits
generated by Prison Realty in 1999 or in earlier years, the dividend generally
will not be eligible for the dividends received deduction. To the extent the
dividend is deemed to be paid from earnings and profits generated by Prison
Realty after 1999, the dividend generally will be eligible for the dividends
received deduction.
DIVIDENDS ON SERIES B CONVERTIBLE PREFERRED STOCK. Distributions with
respect to the series B convertible preferred stock will generally be treated as
dividends to the extent paid or deemed paid out of Prison Realty's current or
accumulated earnings and profits. Accordingly, each stockholder generally will
be required to include in gross income (as ordinary income) the amount of cash
and the fair market value of the additional shares of series B convertible
preferred stock as of the time of distribution. To the extent the amount of
dividends exceeds the amount of Prison Realty's current and accumulated earnings
and profits, the distribution will be treated as a return of capital, which will
reduce (but not below zero) each stockholder's basis in its shares of the series
B convertible preferred stock. Thereafter, the distribution will be treated as
gain from the sale or exchange of the series B convertible preferred stock. Such
gain will be capital gain, assuming the stock is held as a capital asset at the
time of the distribution, and will be long-term if the stockholder's holding
period for the stock exceeds one year. If the stockholder is an individual, any
long term capital gain will generally be taxed at a maximum federal income tax
rate of 20%. The amount of any dividend generally will be eligible for the
dividends received deduction.
SALE OR EXCHANGE OF SHARES OF SERIES B CONVERTIBLE PREFERRED STOCK. If a
stockholder sells or exchanges its series B convertible preferred stock, it will
generally recognize gain or loss equal to the difference between the amount
realized and its basis in the shares. Such gain or loss will be capital gain or
loss, assuming the stock is held as a capital asset at the time of the sale or
exchange, and will be long term if the stockholder's holding period for the
stock exceeds one year. If the stockholder is an individual, any long term
capital gain will generally be taxed at a maximum federal income tax rate of
20%. The deductibility of capital losses is subject to certain limitations.
REDEMPTION OF SHARES. If Prison Realty redeems shares of series B
convertible preferred stock solely for cash, such redemption will be treated as
a sale or exchange of the shares if the redemption (i) results in a "complete
termination" of the holder's stock interest under Code Section 302(b)(3), (ii)
is "substantially disproportionate" with respect to the holder under Code
Section 302(b)(2), (iii) is "not essentially equivalent to a dividend" with
respect to the holder under Code Section 302(b)(1), or (iv) is from a
non-corporate holder in partial liquidation under Code Section 302(b)(4). In
applying these tests, shares actually owned and shares deemed to be owned by a
stockholder by reason of the constructive ownership rules of Code Section 318
(pursuant to which a stockholder will be deemed to own shares owned by certain
related individuals and entities and shares subject to an option) must generally
be taken into account. If a redemption of shares solely for cash satisfies any
of the foregoing tests, the stockholder will recognize gain or loss based on the
difference between the amount of cash received and its tax basis in the redeemed
shares in the same manner as if the shareholder had sold the shares. If a
redemption does not satisfy any of the foregoing tests, the gross proceeds will
be treated as a dividend to the extent of Prison Realty's current and
accumulated earnings and profits, and any excess will be treated first as a
return of capital and then as gain upon a sale or exchange of the shares. In
such event, the stockholder's basis in its shares (reduced for any amounts
treated as a non-taxed portion of extraordinary dividends or a return of
capital) will be transferred to any stock interest retained in Prison Realty.
CONVERSION. In general, no gain or loss will be recognized for federal
income tax purposes upon conversion of shares of series B convertible preferred
stock into shares of Prison Realty common stock. A stockholder's basis in the
shares of Prison Realty common stock received upon conversion will be equal to
the stockholder's adjusted basis in the shares so converted, and, provided that
the shares of series B convertible preferred stock were held as a capital asset,
the holding period for the
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shares of Prison Realty common stock received will include the holding period
for the shares converted. A stockholder will, however, generally recognize gain
or loss on the receipt of cash in lieu of fractional shares of Prison Realty
common stock in an amount equal to the difference between the amount of cash
received and the stockholder's adjusted basis in the shares for which cash was
received.
INFORMATION REPORTING AND BACKUP WITHHOLDING. Under the backup withholding
rules of the Code, a stockholder may be subject to 31% backup withholding with
respect to any reportable payments made to the stockholder pursuant to the REIT
distribution or upon any sale of Prison Realty stock or series B convertible
preferred stock. A stockholder will not be subject to backup withholding if it:
- Is a corporation or falls within certain other exempt categories and,
when required, demonstrates that fact; or
- Provides a correct taxpayer identification number and certifies under
penalties of perjury that its taxpayer identification number is correct
and that it is not subject to backup withholding because it previously
failed to report all dividends and interest income.
Any amount withheld under these rules will be credited against the
shareholder's federal income tax liability, provided that the required
information is given to the IRS. Prison Realty may require a stockholder to
establish its exemption from backup withholding or make other arrangements with
respect to the payment of backup withholding.
WITHHOLDING REQUIREMENTS WITH RESPECT TO SODEXHO. Sodexho currently owns
approximately 8.8% of the total number of outstanding shares of Prison Realty
common stock (and after the completion of the merger and related transactions
and the Prison Realty restructuring will own approximately 10.1% of the total
number of outstanding shares of Prison Realty common stock, assuming Prison
Realty purchases the shares of CCA common stock held by Sodexho immediately
prior to the merger for non-cash consideration consisting of $8.0 million in
shares of Prison Realty common stock) and thus will receive in the distribution
series B convertible preferred stock valued at approximately $15.2 million.
Because Sodexho is a foreign corporation, this distribution will be subject to a
30% withholding requirement. Accordingly, Prison Realty will be required to
withhold 30% from the amount distributed to Sodexho and to remit approximately
$4.6 million in cash to the IRS on Sodexho's behalf.
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INFORMATION ABOUT CCA
GENERAL
CCA, formerly Correctional Management Services Corporation, was formed in
September 1998 and commenced operations on January 1, 1999, in connection with
the 1999 Merger. CCA was formed to manage and operate certain facilities
operated and managed by Old CCA and owned by Old Prison Realty prior to the 1999
Merger. At July 24, 2000, CCA had contracts to manage or plans to develop 42
correctional and detention facilities with a total design capacity of 44,880
beds, of which 40 facilities with a total design capacity of 39,910 beds were in
operation. At July 24, 2000, CCA's system-wide occupancy level was approximately
73%. CCA operates and manages the substantial majority of the facilities owned
by Prison Realty and leases these facilities from Prison Realty under the CCA
lease agreements as described herein. At July 24, 2000, CCA leased 36 of the
facilities owned by Prison Realty. CCA also provides certain business and
facility development services for Prison Realty for fees. See "Information About
Prison Realty -- Recent developments."
BUSINESS AND OPERATIONS
CCA provides correctional and detention facility management services to
government agencies under management contracts with federal, state and local
government agencies and authorities which generally may be canceled by such
agencies and authorities on short notice and without significant penalty.
Accordingly, the relationship of such agencies and authorities with CCA, and
their confidence in CCA, is crucial to its business. The services provided by
CCA to government agencies include the comprehensive operation and management of
new and existing correctional and detention facilities. In addition to providing
the fundamental residential services relating to inmates, CCA's facilities offer
a large variety of rehabilitation and education programs including basic
education, life skills and employment training and substance abuse treatment.
CCA also provides health care (including medical, dental and psychiatric
services), institutional food services, transportation requirements and work and
recreational programs. CCA provides inmate transportation services through its
wholly owned subsidiary, TransCor America, LLC.
COMPETITION
The correctional and detention facilities managed by CCA are, and any
additional correctional and detention facilities managed by CCA or its successor
in the future will be, subject to competition for inmates from other private
prison managers. The number of inmates in a particular area could have a
material adverse effect on the operating revenues generated by CCA-managed
facilities. In addition, revenues of these facilities may be affected by a
number of factors, including the demand for inmate beds and general economic
conditions.
EMPLOYEES AND LABOR MATTERS
At July 24, 2000, CCA employed 8,243 full-time employees and 125 part-time
employees. Of such full-time employees, 182 were employed at CCA's corporate
offices and 8,061 were employed at CCA's facilities and in its inmate
transportation business. CCA employed personnel in the following areas: clerical
and administrative, including facility administrators/wardens, security, food
service, medical, transportation and scheduling, maintenance, teachers,
counselors and other support services.
As of the date of this joint proxy statement/prospectus, CCA, and prior to
the 1999 Merger, Old CCA, has never experienced a strike or work stoppage at any
of its facilities. CCA is subject to an agreement with a union to represent 38
non-security personnel and an agreement with a union to represent approximately
60 correctional officers at its Shelby Training Center. In addition, CCA is
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subject to an agreement to represent approximately 120 correctional officers and
other support services staff at the D.C. Correctional Treatment Facility. In the
opinion of CCA management, overall employee relations are considered good.
LEGAL PROCEEDINGS
In February 2000, a complaint was filed in federal court in the United
States District Court for the Western District of Texas against TransCor, inmate
transportation subsidiary. The lawsuit, captioned Cheryl Schoenfeld v. TransCor
America, Inc., et. al., names as defendants TransCor and its directors. The
lawsuit alleges that two drivers sexually assaulted and raped the plaintiff
during her transportation to a facility in Texas. While the case is in the very
early stages of discovery, the plaintiff recently submitted a $21.0 million
settlement demand. CCA and TransCor intend to defend the action vigorously. It
is expected that a portion of any liabilities resulting from this litigation
will be covered by liability insurance.
CCA and/or its officers and directors are also subject to certain
litigation described in this joint proxy statement/prospectus under "Information
About Prison Realty -- Litigation," which, if resolved against CCA, could result
in a material adverse effect upon its business or financial position.
In addition to the litigation described above, CCA, as an owner and
operator of privatized correctional and detention facilities is subject to a
variety of legal proceedings arising in the ordinary course of operating such
facilities, including proceedings relating to personal injury and property
damage. Such proceedings are generally brought against the operator of a
correctional facility. Accordingly, CCA expects that, in connection with the
operation of correctional and detention facilities, it will be a party to such
proceedings. CCA does not believe that litigation arising out of its operation
of correctional and detention facilities, if resolved against it, would have a
material adverse effect upon its business or financial position.
OWNERSHIP OF CCA CAPITAL STOCK
The following table sets forth certain information concerning the
beneficial ownership of CCA's common stock as of July 24, 2000 for the
following: (i) each person or entity known to CCA to beneficially own at least
5.0% of the outstanding shares of CCA's common stock; (ii) each of CCA's current
directors and chief executive officer and other most highly compensated officers
for its 1999 fiscal year (the "Named Executive Officers"); and (iii) all
executive officers and directors as a group. Percentage of ownership is based on
approximately 9,349,061 shares of CCA class A common stock outstanding as of
July 24, 2000 and 981,393 shares of CCA class B common stock outstanding on July
24, 2000.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF CCA
COMMON STOCK BENEFICIALLY
OWNED AS OF JULY 24, 2000
-------------------------- PERCENTAGE
NAME OF BENEFICIAL OWNER CLASS A CLASS B OF CLASS(1)
------------------------ ---------- ---------- -----------
<S> <C> <C> <C>
Prison Realty Trust, Inc......................... 1,038,793(2) 100.0%
10 Burton Hills Boulevard
Nashville, Tennessee 37215
Baron Capital Group.............................. 1,749,532 -- 18.7
767 Fifth Avenue, 49th Floor
New York, New York 10153
</TABLE>
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<TABLE>
<CAPTION>
NUMBER OF SHARES OF CCA
COMMON STOCK BENEFICIALLY
OWNED AS OF JULY 24, 2000
-------------------------- PERCENTAGE
NAME OF BENEFICIAL OWNER CLASS A CLASS B OF CLASS(1)
------------------------ ---------- ---------- -----------
<S> <C> <C> <C>
Sodexho Alliance, S.A............................ 1,749,532 -- 18.7%
31 Rue Cardinet
75017, Paris, France
CFE, Inc. (GECC) and Bank of America, N.A........ 546,729(3) -- 5.5
Lucius E. Burch, III (director).................. 0 -- 0
J. Michael Quinlan (director).................... 200,000 -- 2.1
Jean-Pierre Cuny (director)...................... 1,749,532(4) -- 18.7
Mitch Rubin (director)........................... 1,749,532(5) -- 18.7
R. Clayton McWhorter (director).................. 0 -- 0
Doctor R. Crants(6).............................. 300,000(7) -- 3.2
Thomas W. Beasley (chief executive officer)...... -- -- 0
Darrell K. Massengale............................ 200,000 -- 2.1
Todd Mullenger................................... 200,000 -- 2.1
David L. Myers................................... 200,000 -- 2.1
W. Brent Turner.................................. 200,000 -- 2.1
Gay E. Vick, III................................. 200,000 -- 2.1
All directors and executives as a group (14
persons)....................................... 6,599,064 -- 70.1%
</TABLE>
-------------------------
(1) Based on 9,349,061 shares of class A common stock or 981,393 shares of class
B common stock, as applicable.
(2) Consists of 981,393 shares of class B common stock and includes a warrant to
purchase 57,400 shares of CCA class B common stock
(3) Includes a warrant to purchase 546,729 shares of CCA class A common stock
(4) Includes shares of class A common stock held by Sodexho, of which he is an
officer and the designee to the CCA board
(5) Includes shares of class A common stock held by Baron, of which he is an
officer and the designee to the CCA board
(6) Doctor R. Crants resigned as a member of the board of directors of CCA on
July 27, 2000 and was terminated as CCA's chief executive officer on July
28, 2000.
(7) Comprised of shares of class A common stock purchased from D. Robert Crants,
III and Michael W. Devlin
DISTRIBUTION POLICY
For a discussion of CCA's distribution policy, see the section of this
joint proxy statement/ prospectus entitled "The Merger and Related Transactions
and the Prison Realty Restructuring-Distribution policies."
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain historical and pro forma financial information regarding CCA is
included elsewhere in this joint proxy statement/prospectus. The following
discussion and analysis should be read in conjunction with that financial
information.
OVERVIEW
CCA was initially formed as Correctional Management Services Corporation, a
Tennessee corporation, on September 11, 1998 and changed its name to Corrections
Corporation of America on May 14, 1999. CCA was formed in anticipation of the
1999 Merger between Old CCA, Old Prison Realty and Prison Realty. On September
22, 1998, CCA issued 5.0 million shares of class A voting common stock to
certain founding shareholders at par value. Additionally, on September 22, 1998,
CCA issued 0.8 million restricted shares of Class A voting common stock to
certain wardens of Old CCA's facilities at the implied fair market value of $3.9
million. Immediately prior to CCA's acquisition of management contracts from Old
CCA on December 31, 1998, CCA issued 3.5 million shares of class A voting common
stock to outside investors in consideration of cash proceeds totaling $16.0
million.
CCA operates and manages prisons and other correctional and detention
facilities and provide prisoner transportation services for federal, state and
local governmental agencies. At July 24, 2000, CCA had contracts to manage 42
correctional and detention facilities with an aggregate design capacity of
44,880 beds, of which 40 facilities with a total design capacity of 39,910 beds
were in operation.
On December 31, 1998, immediately prior to the 1999 Merger, CCA acquired
all of the issued and outstanding capital stock of certain wholly owned
corporate subsidiaries of Old CCA, certain management contracts and certain
other related assets and liabilities of Old CCA. In exchange, CCA issued to Old
CCA an installment promissory note in the principal amount of $137.0 million and
100% of CCA's class B non-voting common stock, which represents 9.5% of CCA's
outstanding capital stock. The class B non-voting common stock was valued at the
implied fair market value of $4.75 million. Prison Realty succeeded to the note
and the class B common stock as a result of the 1999 Merger.
On December 31, 1998, immediately prior to the 1999 Merger and in
connection with the transactions described above, CCA entered into a trade name
use agreement with Old CCA. Under the trade name use agreement, which has a term
of 10 years, CCA obtained the right to use the name "Corrections Corporation of
America" and derivatives thereof, in return for a quarterly fee based on the
revenues of Prison Realty.
In connection with the 1999 Merger, on January 1, 1999, CCA entered into a
master lease agreement and leases with respect to the substantial majority of
the properties owned by Prison Realty. The initial terms of the CCA leases are
12 years and may be extended at fair market rates for three additional five-year
periods upon the mutual agreement of CCA and Prison Realty. As more fully
described in "Information About Prison Realty -- Recent developments," the CCA
leases have been amended, and in connection with the merger and related
transactions and the Prison Realty restructuring, it is anticipated that the CCA
leases will be canceled.
CCA began operations on January 1, 1999. Accordingly, CCA has a limited
operating history upon which its business can be evaluated. As a result,
period-to-period comparisons of CCA's operating results do not exist with
respect to periods before CCA began operations. In addition, management of CCA
believes that period-to-period comparisons of CCA's operating results, to the
extent such comparisons exist, may not be a good indication of CCA's operating
performance.
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FINANCIAL CONDITION OF CCA AND PRISON REALTY
A substantial majority of the correctional and detention facilities
operated and managed by CCA are owned by Prison Realty. Accordingly, if CCA's
leases with Prison Realty were no longer in effect and CCA was not permitted to
operate such facilities, CCA would lose a substantial majority of its revenues
derived from operating and managing correctional and detention facilities. In
addition, as a result of the 1999 Merger and certain contractual relationships
existing between CCA and Prison Realty, CCA is entitled to receive payments from
Prison Realty for services rendered to Prison Realty, in the development of its
correctional and detention facilities. See "Information About Prison
Realty -- Recent developments" for a complete description of the contractual
relationships between Prison Realty and CCA and recent amendments to these
contractual relationships.
CCA incurred a net loss of $202.9 million for the year ended December 31,
1999 and incurred a net loss of $62.6 million for the three months ended March
31, 2000, and currently has a net working capital deficiency and a net capital
deficiency. As more fully described in "Information About Prison
Realty -- Recent developments," due to CCA's liquidity position, CCA has been
unable to make timely rental payments to Prison Realty under the original terms
of the CCA leases and has been required to defer the first scheduled payment of
accrued interest on the $137.0 million promissory note payable by CCA to Prison
Realty.
As of December 31, 1999, CCA was in default under the provisions of its
bank credit facility, although such events of default were waived subsequent to
December 31, 2000, as more fully described in "Information About Prison
Realty -- Recent developments." The waiver and amendment, which was originally
obtained on April 27, 2000 and which was amended on June 30, 2000, will remain
in effect until the earlier of: (i) the completion of the merger of CCA with and
into a wholly owned subsidiary of Prison Realty; (ii) September 30, 2000; (iii)
the date CCA makes any lease payment to Prison Realty other than as set forth in
the amended CCA leases (as described herein); or (iv) the date the lenders under
Prison Realty's bank credit facility exercise any rights with respect to any
default or event of default under Prison Realty's bank credit facility.
As a result of CCA's financial and liquidity condition, the independent
public accountants of CCA have indicated in their opinion on CCA's 1999
consolidated financial statements that there is substantial doubt about CCA's
ability to continue as a going concern.
As discussed in "Information About Prison Realty -- Recent developments,"
Prison Realty and CCA have amended the original terms of the CCA leases to
defer, with interest, rental payments originally due to Prison Realty during the
period from January 2000 to June 2000 until September 30, 2000, with the
exception of certain scheduled payments. Pursuant to the terms of this
amendment, CCA shall pay interest on such deferred rental payments, at an annual
rate equal to the current non-default rate of interest applicable to CCA's
credit facility (subject to adjustment if and to the extent that such rate of
interest under such existing bank credit is adjusted) from the date each such
payment would have been payable under the original terms of the CCA leases until
the date such payment is actually paid. CCA's obligation to make payments under
the CCA leases is not secured by any of the assets of CCA, although the
obligations under the CCA leases are cross-defaulted so that Prison Realty could
terminate all of the CCA leases if CCA fails to make required lease payments. In
addition, as described in "Information About Prison Realty -- Recent
Developments," Prison Realty and CCA have deferred, with interest, Prison
Realty's payment of fees to CCA pursuant to the terms of the amended and
restated services agreement, the amended and restated tenant incentive agreement
and the business development agreement.
Continued operating losses by CCA; declarations of events of default and
acceleration actions by CCA's creditors; the continued inability of CCA to make
contractual payments to Prison Realty; and
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CCA's limited resources currently available to meet its operating, capital
expenditure and debt service requirements will have a material adverse impact on
CCA's consolidated financial position, results of operations and cash flows. In
addition, these matters raise substantial doubt about CCA'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 CCA be unable to continue as a
going concern.
CCA has limited resources currently available to meet its operating,
capital and debt service requirements. As a result, CCA currently is, and will
continue to be, dependent on its ability to borrow funds under the terms of its
credit facility to meet these requirements. Due to CCA's financial condition,
the availability of borrowings under its bank credit facility is uncertain,
notwithstanding the recently obtained waiver and amendment to its credit
facility. The terms of the waiver and amendment to CCA's bank credit facility
provide that the waiver and amendment will remain in effect only until the
earlier of: (i) the completion of the merger of CCA with and into a wholly owned
subsidiary of Prison Realty; (ii) September 30, 2000; (iii) the date CCA makes
any lease payment to Prison Realty other than as set forth in the amendments to
the CCA leases (as described herein); or (iv) the date the lenders under Prison
Realty's bank credit facility exercise any rights with respect to any default or
event of default under Prison Realty's bank credit facility. Accordingly, there
can be no assurance that CCA will be able to meet its operating, capital
expenditure and debt service requirements in the future.
LENDER CONSENTS
As a result of the financial condition of CCA, certain existing events of
default arose under the provisions of CCA's credit facility. In addition,
certain of the proposed restructuring transactions involving Prison Realty were
not permitted under the terms of CCA's indebtedness. As more fully described in
"Information About Prison Realty -- Recent Developments" and in "-- Liquidity
and Capital Resources" CCA has obtained a waiver of previously existing events
of default under the provisions of its credit facility. CCA also has obtained an
amendment to the provisions of its credit facility to permit the restructuring
transactions and the amendments to the CCA leases and the other contractual
arrangements between Prison Realty and CCA. As of July 24, 2000, the waiver and
amendment remained in effect, and, as a result, CCA was not in default under the
terms of its credit facility. See "Information About Prison Realty -- Recent
developments."
AMENDMENTS TO CCA LEASES AND OTHER AGREEMENTS
On December 31, 1999, Prison Realty and CCA amended the terms of the CCA
leases to change the annual base rent escalation formula with respect to each
facility leased to CCA. Previously, each facility's annual base rent was subject
to increase each year in an amount equal to a percentage of the total rental
payments with respect to each facility, such percentage being the greater of:
(i) 4%; or (ii) 25% of the percentage increase of gross management revenue
derived from such facility. As a result of this amendment, each facility's
annual base rent is subject to increase each year in an amount equal to the
lesser of: (i) 4% of the annualized yearly rental payments with respect to such
facility; or (ii) 10% of the excess of CCA's aggregate gross management revenues
for the prior year over a base amount of $325.0 million.
In an effort to address the liquidity needs of CCA prior to the completion
of the restructuring, and as permitted by the terms of the waiver and amendment
to Prison Realty's bank credit facility, Prison Realty and CCA have amended the
terms of the CCA leases. As previously described in "Information About Prison
Realty -- Recent developments" and in "-- Liquidity and capital resources,"
lease payments under the CCA leases will be due and payable on June 30 and
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December 31 of each year, instead of monthly. In addition, Prison Realty and CCA
have agreed to defer, with interest, and with the exception of certain scheduled
payments, the first semi-annual rental payment under the revised terms of the
CCA lease agreements, due June 30, 2000, until September 30, 2000. Pursuant to
the terms of this amendment, CCA shall pay interest on such deferred rental
payments, at an annual rate equal to the current non-default rate of interest
applicable to CCA's credit facility (subject to adjustment if and to the extent
that such rate of interest under such existing bank credit is adjusted) from the
date each such payment would have been payable under the original terms of the
CCA leases until the date such payment is actually paid.
As described in "Information About Prison Realty -- Recent developments,"
in connection with the amendments to the CCA leases deferring a substantial
portion of the rental payments due to Prison Realty thereunder, the terms of the
waiver and amendment to Prison Realty's bank credit facility condition the
effectiveness of the waiver and amendment upon the deferral of Prison Realty's
payment of fees to CCA which would otherwise be payable pursuant to the terms of
the amended and restated tenant incentive agreement, the business development
agreement and the amended and restated services agreement. Also as described in
"Information About Prison Realty -- Recent developments," Prison Realty and CCA
have deferred, with interest, the payment of such amounts. The terms of CCA's
recently amended waiver and amendment to the provisions of its bank credit
facility permit the deferral of these payments.
RESULTS OF OPERATIONS
Revenues for operation of correctional and detention facilities are
recognized as the services are provided, based on a rate per day per inmate
("per diem" rate). The per diem rates vary according to the type of facility and
the extent of services provided at the facility. Transportation revenues are
based on a per mile charge or a fixed fee per trip.
CCA recognizes revenue from its contractual relationships with PMSI and
JJFMSI. Pursuant to an administrative services agreement between CCA and each of
PMSI and JJMSI, CCA provides administrative services (including, but not limited
to, legal, finance, management information systems and government relations
services) to each of PMSI and JJFMSI for a management fee. In addition, CCA has
granted each of PMSI and JJFMSI the right to use the name "Corrections
Corporation of America."
CCA also recognizes certain revenue and reductions in lease and operating
expense as a result of its contractual relationships with Prison Realty. CCA
provides services to Prison Realty related to the development of new
correctional and detention facilities pursuant to the terms of an amended and
restated services agreement and a business development agreement.
Facility payroll and related taxes constitute the majority of facility
operating expenses. Substantially all other operating expenses consist of food,
clothing, medical services, utilities, supplies, maintenance, insurance and
other general operating expenses. As inmate populations increase following the
start-up of a facility, operating expenses generally decrease as a percentage of
related revenues.
Pursuant to the terms of a trade name use agreement, Prison Realty has
granted CCA the right to use the name "Corrections Corporation of America" in
exchange for a fee. The fee payable by CCA with respect to the trade name use
agreement is based upon gross revenues of CCA, subject to a limitation based on
the gross revenues of Prison Realty.
CCA's lease expense consists primarily of rents payable to Prison Realty
under the terms of the leases between CCA and Prison Realty. As previously
described, the CCA leases have been amended to defer, with interest, a
substantial portion of the rental payments due to Prison Realty under the
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original terms of the CCA leases. CCA continues to recognize in its statement of
operations the actual lease expenses as incurred.
General and administrative costs consist of salaries of officers and other
corporate headquarters personnel, legal, accounting and other professional fees,
travel expenses, and promotional and marketing expenses.
Operating income for each facility depends upon the relationship between
operating and lease costs, the rate at which CCA is compensated per manday, and
the occupancy rate. The rates of compensation are fixed by contract and
approximately two-thirds of all operating costs, including costs related to the
CCA lease expense, are fixed costs. Therefore, operating income will vary from
period to period as occupancy rates fluctuate. Operating income will be affected
adversely as CCA increases the number of newly-constructed or expanded
facilities under management and experiences initial low occupancy rates.
Three months ended March 31, 2000 as compared to the three months ended March
31, 1999
Primarily as a result of its obligations under the CCA leases, CCA incurred
an operating loss of $62.6 million and $39.8 million for the three months ended
March 31, 2000 and 1999, respectively, and currently has a net working capital
deficiency and net capital deficiency.
Continued operating losses by CCA; potential declarations of events of
default and potential acceleration actions by CCA's creditors in the event that
CCA is unable to maintain in effect existing waivers of events of default; the
continued inability of CCA to make contractual payments to Prison Realty under
their original terms and the resulting suspension of Prison Realty's contractual
payments to CCA under their original terms; and CCA's limited resources
currently available to meet its operating, capital expenditure and debt service
requirements will have a material adverse impact on CCA's consolidated financial
position, results of operations and cash flows.
Revenues. Revenues for the first quarter of 2000 increased 22.8% over the
comparable period of 1999. Management revenues increased $27.5 million or 26.0%,
transportation revenues increased $67,000 or 1.4% and development fees decreased
$2.0 million or 100% in the first three months of 2000 as compared to the same
period in 1999. The increase in management revenues was primarily due to a 22.8%
increase in compensated mandays. During the first quarter of 2000, CCA expanded
two facilities totaling 512 beds and also realized the full period effect of
7,624 beds brought on line over the course of 1999. Development fees decreased
as a result of the agreement between CCA and Prison Realty to defer these
payments until the merger is completed; provided, however, that all of such
deferred payments would be due and payable prior to completion of the merger if
CCA pays to Prison Realty, prior to the merger, any rental payments other than
the scheduled payments previously agreed to by Prison Realty and CCA.
Operating expenses. Operating expenses for the first quarter of 2000
increased 28.4% over the comparable quarter in 1999. This increase was due to
the increased compensated mandays and compensated mileage that CCA realized in
2000 as described above. As a percentage of revenues, operating expenses
increased to 76.6% for the first quarter of 2000 from 75.4% for the same period
in 1999. CCA expanded two facilities during the first quarter of 2000 and opened
two new facilities totaling 3,904 beds in the fourth quarter of 1999. The
increase in operating expenses as a percentage of revenues was due to costs
incurred in the ramp-up of these two facilities as staff were added and other
preparations were made in advance of receiving inmates.
Trade name use expense. Trade name use expense for the first quarter of
2000 increased 20.4% over the comparable period of 1999. This fee is based upon
gross revenues of CCA, subject to a limitation of 2.75% of the gross revenues of
Prison Realty.
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Lease. Lease expense for the first quarter of 2000 decreased $1.4 million,
or 1.8% over the comparable period of 1999. During the first three quarters of
1999, CCA recognized lease expense on a straight-line basis over the life of the
lease. As previously discussed, the CCA leases were amended in the fourth
quarter of 1999, and CCA currently records actual lease expense as incurred.
Lease expense disregarding straight-line rent accruals increased $17.6 million
for the first quarter of 2000 over the comparable period of 1999. This increase
was attributed to five new leases entered into, three expanded facilities and
scheduled rent increases.
General and administrative expense. General and administrative expenses
increased 6.7% for the first quarter of 2000 as compared to the first quarter of
1999. The increase was due to the expanded activity and staffing necessary to
administer the increased beds under management. Even though these costs
increased in amount, general and administrative expenses decreased as a
percentage of revenues to 4.5% in the first quarter of 2000 from 5.1% during the
comparable period of 1999.
Depreciation and amortization. Depreciation and amortization expense for
the first quarter of 2000 increased 5.2% as compared to the first quarter of
1999. This increase was due to the equipment purchased for the growth in beds.
Interest expense. Interest expense, net for the first quarter of 2000
decreased $1.7 million over the comparable period of 1999. This decrease was due
to the write-off of loan costs during the first quarter of 1999 in conjunction
with debt refinancing.
Income taxes. During the first quarter of 1999, CCA was recording income
tax benefits relating to its losses. During the third quarter of 1999, CCA made
the decision that the income tax benefits should be fully reserved after
considering CCA's ability to generate taxable income within the net operating
loss carryforward period. Thus, no income tax benefit was recorded in the first
quarter of 2000.
For the year ended December 31, 1999
CCA, which was incorporated on September 11, 1998, began operations on
January 1, 1999. Accordingly, CCA has a limited operating history upon which its
business can be evaluated. As a result, period-to-period comparisons of CCA's
operating results do not exist with respect to periods before CCA began
operations.
Revenues. Total revenues for 1999 were $499.3 million and were generated
primarily from the management of correctional and detention facilities and
transportation revenues. Transportation revenues were $18.7 million.
Operating expenses. Operating expenses totaled $376.7 million in 1999 with
$16.7 million related to costs of transporting inmates. Other components of
operating expenses included salaries and related benefits, inmate medical
services and supplies, food costs, utilities, repairs and maintenance, taxes and
insurance and operating supplies.
Trade name use agreement. The expense associated with the trade name use
agreement was $8.7 million in 1999. This expense was based on gross revenues of
CCA, subject to a limitation of 2.75% of the gross revenues of Prison Realty.
Lease. Lease expense totaled $261.5 million in 1999. At December 31, 1999,
CCA leased 34 operating properties from Prison Realty.
General and administrative expense. General and administrative expenses
totaled $26.2 million in 1999.
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Depreciation and amortization. Depreciation and amortization expenses
totaled $8.6 million in 1999.
Interest expense. Interest expense totaled $20.5 million in 1999,
primarily as a result of the $137.0 million note payable to Prison Realty that
bears interest at 12% and CCA's interest expense under its working capital
credit facility.
LIQUIDITY AND CAPITAL RESOURCES
CCA incurred a net loss of $202.9 million for the year ended December 31,
1999 and a net loss for the quarter ended March 31, 2000 of $62.6 million, had a
net working capital deficiency and a net capital deficiency at December 31, 1999
and as of March 31, 2000, and, prior to its execution of a waiver of existing
events of default under, and amendments to, its bank credit facility, was in
default under the provisions of its credit facility. CCA's default under its
revolving credit facility related to, among other things, a failure to comply
with certain financial covenants. In addition, notwithstanding the waiver and
amendment to CCA's credit facility, as of December 31, 1999, CCA was, and CCA
currently is, prohibited under the terms of the credit facility, and a related
subordination agreement, from making the first scheduled interest payment under
the terms of the CCA note, totaling approximately $16.4 million. Also as a
result of CCA's liquidity position, the independent public accountants of CCA
have indicated in their opinion on CCA's 1999 consolidated financial statements
that there is a substantial doubt about CCA's ability to continue as a going
concern.
CCA has also not made certain scheduled lease payments to Prison Realty
pursuant to the original terms of the CCA leases. As of March 31, 2000,
approximately $92.1 million of rents due from CCA to Prison Realty under the
original terms of the CCA leases were unpaid. Subsequent to March 31, 2000, CCA
paid $11.9 million of rents due to Prison Realty with respect to 1999. As
previously described in "Information About Prison Realty -- Recent
developments," the CCA leases have been amended to provide that lease payments
under the CCA leases will be due and payable on June 30 and December 31 of each
year, instead of monthly. In addition, as previously described, Prison Realty
and CCA have agreed to defer, with interest, and with the exception of certain
scheduled payments, CCA's first semi-annual rental payment under the revised
terms of the CCA leases until September 30, 2000. Subsequent to March 31, 2000
and through July 17, 2000, CCA has paid $18.0 million of lease payments related
to 2000 in accordance with the payment schedule previously agreed upon by Prison
Realty and CCA. At July 24, 2000, $143.8 million of lease payments were accrued
but unpaid under the original terms of the CCA leases.
In response to the significant losses experienced by Prison Realty and by
CCA during 1999 and in response to the then-existing defaults under Prison
Realty's and CCA's debt agreements, Prison Realty, CCA, PMSI and JJFMSI had
entered into an agreement with Pacific Life with respect to a comprehensive
restructuring of Prison Realty. As more fully described in "Information About
Prison Realty -- Recent developments," the companies entered into a mutual
termination of the Pacific Life securities purchase agreement, and Prison Realty
and CCA subsequently entered into an agreement and plan of merger contemplating
the merger of CCA with and into a wholly owned subsidiary of Prison Realty. The
recently obtained waivers and amendments relating to each of Prison Realty's and
CCA's indebtedness contemplated these transactions, and, as a result, the
termination of the Pacific Life securities purchase agreement and the execution
of the agreement and plan of merger did not result in an event of default under
the provisions of Prison Realty's and CCA's indebtedness.
Cash flow from operating, investing and financing activities
For the quarter ended March 31, 2000, as compared to the quarter ended
March 31, 1999. CCA's cash flow provided by operating activities was $2.2
million and cash flow used in operating
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activities was $5.6 million for the three months ended March 31, 2000 and 1999,
respectively. CCA's cash flow used in investing activities was $0.4 million and
$1.0 million for the three months ended March 31, 2000 and 1999, respectively.
CCA's cash flow used in financing activities was $10.0 million and $1.5 million
for the three months ended March 31, 2000 and 1999, respectively. These changes
are attributable, in part, to the fact that, during the three months ended March
31, 2000 CCA paid $12.9 million to Prison Realty pursuant to the CCA leases, CCA
paid $2.2 million to Prison Realty pursuant to the trade name use agreement, and
CCA received $1.4 million in fees from Prison Realty related to the amended and
restated services agreement, amended and restated tenant incentive agreement and
the business development agreement. By comparison, during the three months ended
March 31, 1999, CCA paid $38.2 million to Prison Realty pursuant to the CCA
leases, CCA paid $0 to Prison Realty pursuant to the trade name use agreement,
and CCA received $21.7 million in fees from Prison Realty related to a services
agreement and a tenant incentive agreement.
For the year ended December 31, 1999. CCA's cash flow used in operating
activities was $16.3 million for 1999. CCA's cash flow used in investing
activities was $2.1 million for 1999. CCA's cash flow provided by financing
activities was $10.1 million for 1999. During 1999 CCA paid $238.6 million to
Prison Realty pursuant to the CCA leases, CCA paid $6.5 million to Prison Realty
pursuant to the trade name use agreement and CCA received $123.0 million in fees
from Prison Realty related to the amended and restated services agreement,
amended and restated tenant incentive agreement and the business development
agreement.
To offset the cash requirements of its operating losses, CCA has utilized
cash from borrowings under its revolving credit facility and payments from
Prison Realty for tenant incentive arrangements and other services as well as
the deferral of lease and interest payments due to Prison Realty. CCA expects to
continue to use borrowings under its revolving credit facility and defer lease
and interest payments to Prison Realty to offset its anticipated losses from
operations. There can be no assurance that CCA will be able to meet its
operating, capital expenditure and debt service requirements in the future.
CCA credit facility. On March 1, 1999, CCA obtained a revolving credit
facility of up to $100.0 million pursuant to the terms of a credit agreement
with Foothill Capital Corporation. This facility replaced a $30.0 million
revolving credit facility previously obtained by CCA with General Electric
Capital Corporation ("GECC"). In connection with the credit facility obtained
from GECC, a warrant to purchase 546,729 shares of CCA was granted to an
affiliate of GECC.
CCA's existing credit facility is secured by substantially all of the
assets of CCA, including its trade accounts receivable. The credit facility
matures March 1, 2002 and bears interest at a floating rate of Prime plus 2.5%.
At July 13, 2000, this rate was 12%.
As more fully described in "Information About Prison Realty -- Recent
developments," CCA previously obtained on April 27, 2000 the consent of the
requisite percentage of the lenders under its bank credit facility for a waiver
of the bank credit facility's restrictions relating to CCA's violation of a
financial covenant and certain transactions effected or to be effected by Prison
Realty. However, the terms of this waiver provided that it would expire upon the
termination of the Pacific Life securities purchase agreement. Accordingly, as
more fully described in "Information About Prison Realty -- Recent
Developments," on June 30, 2000 CCA obtained an amendment to the waiver and
amendment to its bank credit facility which, among other things, continued to
waive the previously-waived events of default and permitted: (i) the termination
of the Pacific Life securities purchase agreement, and the related termination
of the merger agreement contemplated by such securities purchase agreement; and
(ii) CCA's execution of the agreement and plan of merger with Prison Realty.
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As of March 31, 2000, CCA had $6.2 million outstanding under the bank
credit facility, and as of July 17, 2000, CCA had $15.2 million outstanding
under the bank credit facility. CCA places significant reliance on the
availability of these borrowings to meet its day to day liquidity needs. CCA's
continued eligibility to borrow under its bank credit facility is material to
CCA's ability to offset a portion of its anticipated losses from operations.
There can be no assurance, however, that CCA will be able to comply with and
maintain the waiver and amendment to its bank credit facility. The waiver and
amendment, which was originally obtained on April 27, 2000 and which was amended
on June 30, 2000, will remain in effect until the earlier of: (i) the completion
of the merger of CCA with and into a wholly owned subsidiary of Prison Realty;
(ii) September 30, 2000; (iii) the date CCA makes any lease payment to Prison
Realty other than as set forth in the amended CCA leases (as described herein);
or (iv) the date the lenders under Prison Realty's bank credit facility exercise
any rights with respect to any default or event of default under Prison Realty's
bank credit facility. In the event CCA is unable to comply with and maintain the
waiver and amendment, the lenders under the CCA bank credit facility are
entitled, at their discretion, to exercise certain remedies, including
acceleration of the outstanding borrowings under the bank credit facility. If
the lenders elect to exercise their rights to accelerate CCA's obligations under
CCA's bank 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 indebtedness under CCA's bank credit
facility.
In addition, as described in "Information About Prison Realty -- Recent
developments," the terms of the Prison Realty bank credit facility waiver and
amendment provide that the continued effectiveness of the Prison Realty bank
credit facility waiver and amendment is conditioned upon the continued
effectiveness of a waiver of all existing events of default under CCA's bank
credit facility. Prison Realty's bank credit facility, as modified by the Prison
Realty bank credit facility waiver and amendment, also provides that the
occurrence of an event of default under CCA's bank credit facility will result
in an event of default under Prison Realty's bank credit facility. As a result
of such an event of default, the senior lenders under Prison Realty's bank
credit facility would be entitled, at their discretion, to exercise certain
remedies, including acceleration of the outstanding borrowings under the bank
credit facility.
Prospective restructuring transactions. In order to address the capital and
liquidity constraints facing CCA and Prison Realty, as well as concerns
regarding the corporate structure and management of Prison Realty, Prison Realty
entered into a securities purchase agreement with Pacific Life, pursuant to
which the companies were to complete a comprehensive restructuring, including,
among other things: (i) the combination of Prison Realty with each of CCA, PMSI
and JJFMSI; (ii) a $200.0 million equity investment in Prison Realty; and (iii)
a restructuring of Prison Realty's existing board of directors and management.
These transactions were intended to serve as an alternative to a series of
restructuring transactions provided for under an agreement entered into between
Prison Realty, CCA, PMSI, JJFMSI and the Fortress/Blackstone investor group.
As more fully discussed in "Information about Prison Realty -- Recent
developments," based on certain statements from Pacific Life, the boards of
directors of Prison Realty, CCA, PMSI and JJFMSI determined that it was unclear
whether the waiver and amendment to Prison Realty's bank credit facility would
satisfy the condition contained in the Pacific Life securities purchase
agreement that the renewal of Prison Realty's bank credit facility would be in a
form reasonably acceptable to Pacific Life. Also, given the requirements of the
Prison Realty bank credit facility waiver and amendment that a proxy statement
be filed by Prison Realty with the SEC by July 1, 2000 with respect to a
restructuring, the boards of directors of Prison Realty, CCA, PMSI and JJFMSI
approved the execution of an agreement with Pacific Life mutually terminating
the securities purchase agreement with Pacific Life. The boards of Prison Realty
and CCA subsequently approved
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the merger of the two companies and related transactions, including the
execution of the merger agreement described herein.
Equity capital. On December 28, 1998, CCA issued 1,749,532 shares of class
A voting common stock to each of Baron and Sodexho in a private placement. Each
of Baron and Sodexho purchased these shares of common stock for an aggregate
purchase price of $8.0 million. Proceeds from such sales were used for general
corporate purposes.
Cash flow related to Prison Realty
CCA note. In connection with the 1999 Merger, Old CCA received the $137.0
million CCA note. Prison Realty succeeded to the CCA note as a result of the
1999 Merger. Interest on the CCA note is payable annually at the rate of 12%.
Interest only is payable for the first four years of the CCA note. Principal is
due in six equal annual installments of approximately $22.8 million, beginning
December 31, 2003. In addition, notwithstanding the waiver and amendment to
CCA's credit facility, as of December 31, 1999, CCA was, and CCA currently is,
prohibited under the terms of the credit facility, and a related subordination
agreement, from making the first scheduled interest payment under the terms of
the CCA note, totaling approximately $16.4 million.
CCA leases. For the year ended December 31, 1999, CCA recognized gross
rental expense as a result of the CCA leases of $263.5 million. Based on the CCA
leases in effect at December 31, 1999, the future minimum lease payments
scheduled to be paid to Prison Realty by CCA under the original terms of the CCA
leases as of January 1, 2000 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Years Ending December 31:
2000...................................................... $ 310,651
2001...................................................... 310,651
2002...................................................... 310,651
2003...................................................... 310,651
2004...................................................... 310,651
Thereafter................................................ 1,890,193
----------
$3,443,448
==========
</TABLE>
As of March 31, 2000, approximately $92.1 million of rents due from CCA to
Prison Realty under the original terms of the CCA leases were unpaid. Subsequent
to March 31, 2000, CCA paid $11.9 million of rents with respect to 1999,
representing the remainder of rents to Prison Realty with respect to 1999. The
original terms of the CCA leases provide that such rental payments were due and
payable on December 25, 1999. Under the terms of the CCA leases, an event of
default occurs if CCA fails to pay all required lease payments owed to Prison
Realty under the CCA leases within 15 days of receiving a notice of nonpayment
from Prison Realty. No such notice of nonpayment was provided by Prison Realty.
As described in "Information About Prison Realty -- Recent developments," the
CCA leases have been amended to defer, with interest, rental payments originally
due during the period from January 2000 to June 2000, with the exception of
certain installment payments. Subsequent to March 31, 2000 and through July 17,
2000, CCA paid $18.0 million of lease payments related to 2000 in accordance
with the payment schedule previously agreed upon by Prison Realty and CCA. At
July 24, 2000, $143.8 million of lease payments were accrued but unpaid under
the original terms of the CCA leases.
In addition, CCA expects that, in connection with the merger and related
transactions and the Prison Realty restructuring, the CCA leases will be
canceled.
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Trade name use agreement. For the year ended December 31, 1999, CCA
recognized expense of $8.7 million under the terms of the trade name use
agreement. As of December 31, 1999, CCA had recorded a payable of $2.2 million
to Prison Realty for licensing fees due under the trade name use agreement. It
is anticipated that, in connection with the merger and related transactions and
the Prison Realty restructuring, this agreement will be canceled.
Amended and restated tenant incentive agreement. The incentive fees
received by CCA are being deferred and amortized as reductions in lease expense
over the terms of the respective leases. For the year ended December 1999, CCA
had received from Prison Realty tenant incentive fees of $68.6 million, with
$4.1 million of those fees amortized against rental expense. For the first
quarter of 2000, CCA had received from Prison Realty tenant incentive fees of
$0, with $1.1 million of total fees received amortized against rental expense.
During the fourth quarter of 1999, Prison Realty and CCA undertook a plan that
contemplates Prison Realty 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 Prison Realty during 2000. As described in "Information About Prison
Realty -- Recent Developments," CCA and Prison Realty amended this agreement to
defer, with interest, payments to CCA by Prison Realty pursuant to this
agreement. At July 24, 2000, $8.4 million of payments under the amended and
restated tenant incentive agreement were accrued but unpaid under the original
terms of this agreement. It is anticipated that, in connection with the merger
and related transactions and the Prison Realty restructuring, this agreement
will be canceled.
Amended and restated services agreement. CCA billed $41.6 million in fees
to Prison Realty under the amended and restated services agreement for the year
ended December 31, 1999, of which $39.4 million had been collected as of
December 31, 1999. During 1999, CCA recognized $8.1 million as revenues for
services provided in projects where CCA does not lease the facility from Prison
Realty, $5.6 million as a reduction in operating expenses, and deferred $27.9
million as deferred credits, of which $0.1 million was amortized as a reduction
in lease expense. As described in "Information About Prison Realty -- Recent
Developments," CCA and Prison Realty amended this agreement to defer, with
interest, payments to CCA by Prison Realty pursuant to this agreement. For the
three months ended March 31, 2000, CCA collected $2.2 million of amounts billed
in 1999, billed $3.0 million and recognized $0.3 million as a reduction of lease
expense. Due to the agreement to defer cash payments, as described above, for
the three months ended March 31, 2000, CCA recognized $0 as revenues and $0 as a
reduction in operating expense. At July 24, 2000, $0.6 million of payments under
the amended and restated services agreement were accrued but unpaid under the
original terms of this agreement. It is anticipated that, in connection with the
merger and related transactions and the Prison Realty restructuring, this
agreement will be canceled.
Business development agreement. The fees received by CCA from Prison Realty
pursuant to the business development agreement are being deferred and amortized
as reductions in lease expense over the terms of the respective leases. CCA
received $15.0 million in fees under the business development agreement for the
year ended December 31, 1999. CCA amortized $0.2 million as reductions in lease
expense, with $14.8 million remaining in deferred credits at December 31, 1999.
For the three months ended March 31, 2000, CCA amortized $0.1 million as a
reduction in lease expense, with $14.7 million remaining as deferred credits at
March 31, 2000. As described in "Information About Prison Realty -- Recent
developments," CCA and Prison Realty amended this agreement to defer, with
interest, payments to CCA by Prison Realty pursuant to this agreement. At July
24, 2000, $4.3 million of payments under the business development agreement were
accrued but unpaid under the original terms of this agreement. It is anticipated
that, in connection with the merger and related transactions and the Prison
Realty restructuring, this agreement will be canceled.
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Commitments and contingencies
Litigation. CCA is subject to a variety of legal proceedings, some of
which, if resolved against CCA, could have a material adverse effect upon the
business and financial position of Prison Realty. A complete description of the
material litigation currently commenced against CCA is set forth herein under
the headings "Information About Prison Realty -- Litigation" and "Information
About CCA -- Legal proceedings." CCA also is subject to certain other litigation
arising in the ordinary course of its business, all of which, taken together, is
not expected to have a material adverse effect on CCA's business and financial
position.
YEAR 2000 COMPLIANCE
In 1999, CCA completed an assessment of its key information technology
systems, including its client server and minicomputer hardware and operating
systems and critical financial and non-financial applications, in order to
ensure that these date sensitive critical information systems would properly
recognize the Year 2000 as a result of the century change on January 1, 2000.
Based on this assessment, CCA determined that these key information systems were
Year 2000 compliant. CCA also evaluated its non-critical information technology
systems for Year 2000 compliance and determined that such non-critical systems
were compliant. CCA's systems did not subsequently experience any significant
disruptions as a result of the century change on January 1, 2000. In 1999, CCA
also completed communications with third parties with whom it has important
financial or operational relationships to determine the extent to which they
were vulnerable to the Year 2000 issue. Based on responses from these
third-parties, CCA determined that there were no third party related Year 2000
noncompliance issues that would have a material adverse impact on CCA's
operations. These third parties 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 CCA's operations.
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.
INFLATION
Many of CCA's facility contracts provide periodic adjustments in the
compensation paid to CCA in accordance with changes in the consumer price index
during such period. Management of CCA does not believe that inflation has had a
material adverse effect on the revenues or expenses of CCA. CCA's leases with
Prison Realty include clauses enabling Prison Realty to pass through to CCA
certain operating costs, including real estate taxes, utilities and insurance,
thereby increasing CCA's exposure to increases in costs and operating expenses
resulting from inflation. Additionally, the CCA leases contain provisions which
would increase interest expense to CCA in the future. It is anticipated that, in
connection with the merger and related transactions and the Prison Realty
restructuring, the CCA leases will be canceled.
NEWLY ISSUED ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," effective, as
amended, for fiscal years beginning after
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June 15, 2000. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and hedging activities. SFAS No. 133 requires all
derivatives to be recognized in the statement of financial position and to be
measured at fair market value. CCA anticipates that it (or any successor as a
result of the merger) will adopt the provisions of SFAS No. 133 effective
January 1, 2001 and does not believe the adoption of SFAS No. 133 will have a
material impact on CCA's (or any successor's) consolidated financial position or
results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CCA's primary market risk exposure is to changes in U.S. interest rates.
CCA is exposed to market risk related to its bank credit facility as discussed
in "Management's discussion and analysis of financial condition and results of
operation -- Liquidity and capital resources." The interest on the CCA bank
credit facility is subject to fluctuations in the market. If the interest rate
for CCA's outstanding indebtedness under the bank credit facility was 100 basis
points higher or lower in 1999, CCA's interest expense, net of amounts
capitalized, would have been increased or decreased by approximately $76,000. If
the interest rate for the CCA bank credit facility debt was 100 basis points
higher or lower during the three months ended March 31, 2000, CCA's interest
expense net of amounts capitalized would have been increased or decreased by
approximately $49,000.
Additionally, CCA 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.
Although it is not currently anticipated that it will do so, CCA also could
use long-term and medium-term debt as a source of capital. These debt
instruments, if issued, would typically bear fixed interest rates. When these
debt instruments mature, CCA could 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, CCA could 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, CCA could enter into interest rate
protection agreements. CCA does not believe it has any other material exposure
to market risks associated with interest rates.
CCA does not have a material exposure to risks associated with foreign
currency fluctuations related to its operations. CCA does not use derivative
financial instruments in its operations or investment portfolio.
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THE MERGER AND RELATED TRANSACTIONS AND THE
PRISON REALTY RESTRUCTURING
GENERAL
The boards of directors of Prison Realty and CCA have approved the merger
and related transactions pursuant to which CCA will combine with Prison Realty,
with CCA merging with and into a wholly owned subsidiary of Prison Realty.
Following the combination, the restructured company will be renamed Corrections
Corporation of America and intends to operate as a taxable subchapter C
corporation, rather than as a real estate investment trust, or REIT, commencing
with its 2000 taxable year. In addition, Prison Realty will complete a series of
additional transactions, including a restructuring of Prison Realty's senior
management through the selection of a new chief executive officer and chief
financial officer and the raising of additional capital through the completion
of a common stock rights offering.
The merger and related transactions and the Prison Realty restructuring
described herein was adopted by the boards of directors as an alternative to a
previously disclosed restructuring of Prison Realty led by Fortress/Blackstone
and a previously disclosed restructuring led by Pacific Life. The
Fortress/Blackstone-led restructuring contemplated a $350.0 million equity
investment, including a $75.0 million rights offering, and the combination of
Prison Realty, CCA, PMSI and JJFMSI into a single entity operating as a taxable
subchapter C corporation for federal income tax purposes commencing with Prison
Realty's 1999 taxable year. The Prison Realty board of directors terminated its
agreement with Fortress/Blackstone in favor of the proposed Pacific Life
restructuring. The Pacific Life-led restructuring contemplated a $200.0 million
equity investment, including a $200.0 million common stock rights offering
backstopped 100% by Pacific Life and the combination of Prison Realty, CCA, PMSI
and JJFMSI into a single entity as a taxable subchapter C corporation for
federal income tax purposes commencing with Prison Realty's 2000 taxable year.
Due to the uncertainty as to whether the Pacific Life restructuring would be
consummated, the respective boards of the companies terminated the agreement
with Pacific Life and the boards of Prison Realty and CCA proposed the current
restructuring.
BACKGROUND OF THE PROPOSED PRISON REALTY RESTRUCTURING TRANSACTIONS
GENERAL
The combination of Prison Realty with CCA was considered by the board of
directors of each of Prison Realty and CCA in connection with its analysis of
various strategic alternatives designed to address the capital needs of Prison
Realty and the general financial health and well being of Prison Realty, and CCA
as its primary tenant. Moreover, as Prison Realty solicited proposals from
potential equity investors and financial partners, it became apparent that the
combination would be a condition to any equity investment by a third party or
the restructuring of Prison Realty's senior bank indebtedness. Accordingly, the
considerations and ultimate determinations of each of the Prison Realty board
and the CCA board centered around the combination of the companies in connection
with the equity investment in Prison Realty. The following description of the
background of Prison Realty's restructuring, which includes the merger of the
companies, sets forth the series of events that led to Prison Realty's
determination to combine with CCA.
Prison Realty, in its current form, is the result of the 1999 Merger. As
part of the 1999 Merger, CCA, PMSI and JJFMSI assumed the business of operating
correctional facilities, with CCA being the lessee of a substantial number of
Prison Realty's facilities. The agreements and contractual obligations entered
into by these parties in connection with these transactions are described in
detail under the headings "Information About Prison Realty" on page 40 of this
joint proxy statement/prospectus. The rates on the leases between CCA and Prison
Realty were set with the intention
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that the public stockholders of Prison Realty would receive as much of the
benefit as possible from owning and operating the correctional facilities, while
at the same time Prison Realty would be able to maintain its status as a REIT.
This status as a REIT would enable Prison Realty to pay no corporate income tax,
but would require it to pay out large amounts of dividends to the Prison Realty
stockholders. In fact, the lease rates were set so that CCA was projected to
lose money for the first several years of its existence. Both Prison Realty and
CCA believed that CCA would have access to adequate debt financing to fund this
deficit until CCA became profitable. After completion of the first quarter of
1999, the first quarter in which operations were conducted in this new
structure, the management of Prison Realty and the management of CCA discovered
that CCA had not performed as well as projected for several reasons: occupancy
rates at its facilities were lower than in 1998; operating expenses were higher
as a percentage of revenues than in 1998; and certain aspects of the lease
arrangements with Prison Realty, including the obligation of CCA to begin making
full lease payments even before a facility accepted inmates, adversely affected
CCA. As a result, in May 1999, Prison Realty and CCA amended certain of the
agreements between them to provide CCA with additional cash flow. The objective
of these changes was to allow CCA to be able to continue to make its full lease
payments, to allow Prison Realty to continue to make dividend payments to its
shareholders and to provide time for CCA to improve its operations so that it
might ultimately perform as projected and be able to make its full lease
payments. However, after these changes were announced, a chain of events
occurred which adversely affected both Prison Realty and CCA. Prison Realty's
stock price fell dramatically, resulting in the commencement of stockholder
litigation against Prison Realty and its directors. These events made it more
difficult for Prison Realty to raise capital. A lower stock price meant that
Prison Realty had more restricted access to equity capital, and the
uncertainties caused by the falling stock price, the stockholder litigation and
the results of operations at CCA made it much more difficult for Prison Realty
to obtain debt financing. In addition, the stock prices of REITs generally
suffered in the capital markets during this period as a result of both general
market and REIT-specific factors. During this time, Prison Realty was trying to
raise approximately $300.0 million of debt financing through an offering of
high-yield notes. Because of these events and the conditions of the capital
markets generally, Prison Realty was only able to raise $100.0 million in this
financing, and the notes bore interest at a much higher rate than was expected.
Raising capital was important to Prison Realty because as a REIT, it had to
pay out 95% of its taxable income as dividends. During the first three quarters
of 1999, Prison Realty paid out approximately $217.7 million in cash as
dividends. At the same time, Prison Realty's business strategy was to develop,
finance and own prison facilities. Prison Realty believes that providing this
construction financing for federal, state and local governments has been an
important factor in its success. Building prison facilities is very expensive;
the cost of the average prison facility built by Prison Realty over the last
three years has been approximately $43.5 million. In addition to the need for
capital to build prisons, it is very important that both Prison Realty and CCA
have adequate capital to fund their operations because the business of owning
and operating correctional facilities involves significant issues with respect
to public safety. It is essential that the government customers of Prison Realty
and CCA believe that Prison Realty and CCA have adequate capital resources to
conduct their business. Accordingly, if Prison Realty was required to pay out
large amounts of cash as dividends and could not raise debt or equity capital,
its business would suffer.
During the summer of 1999, Prison Realty was able to increase its line of
credit from $650.0 million to $1.0 billion. However, for the reasons described
above, this financing had higher interest rates and transaction costs and also
imposed other significant requirements on Prison Realty. One of the financing
requirements was that Prison Realty raise $100.0 million and CCA raise $25.0
million in new equity in order for Prison Realty to make the distributions that
would be necessary to enable Prison Realty to qualify as a REIT in cash;
provided, however, that such requirement did not prohibit Prison Realty from
making such required distributions in certain combinations of its securities. As
a
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result, management and the board of directors of Prison Realty decided that
Prison Realty needed to retain a financial advisor to assist it in raising this
capital. In addition, the Prison Realty board and the special committee
described below decided that it was important to attract not just financing but
also an investor with credibility and expertise in managing companies that were
facing challenges. What follows is a chronological description of the events
that took place over an eleven-month period leading up to the proposed
restructuring.
PRISON REALTY BOARD OF DIRECTORS
On Friday, August 27, 1999, the Prison Realty board of directors held a
special meeting for the purpose of considering and selecting a strategic
financial advisor for Prison Realty. At the meeting, presentations were made to
the board of directors and management of Prison Realty by representatives of two
investment banking firms, one of which was Merrill Lynch & Co. ("Merrill
Lynch"). Following the presentations, the members of the Prison Realty board
engaged in a discussion with management regarding the selection of a financial
advisor, including Prison Realty's existing and prospective relationships with
each of the firms. The Prison Realty board also deliberated without the presence
of management. Based on these deliberations, it was agreed that Merrill Lynch
would be engaged as Prison Realty's financial advisor due to, among other
things, its substantial resources, its ability to quickly and efficiently
analyze Prison Realty's current financial situation, and its relationship with
potential investors. Subsequent to this meeting and Prison Realty's engagement
of Merrill Lynch, the CCA board also determined to engage Merrill Lynch to act
as its financial advisor with respect to these transactions. The Prison Realty
board did not view Merrill Lynch's role as financial advisor to both Prison
Realty and CCA as creating a conflict because of the dependence of the two
companies on each other and because both companies needed to raise new equity
capital.
In connection with the foregoing, at the request of the independent
committee of the board of directors of Prison Realty, the boards of each of
Prison Realty, CCA, PMSI and JJFMSI approved the formation of a special
coordinating committee to monitor the financial situation of both Prison Realty
and CCA and to coordinate with the companies' advisors regarding the
consideration of strategic alternatives. The independent committee of the Prison
Realty board is composed of independent directors and, under the bylaws of
Prison Realty, the independent committee is required to review transactions
between Prison Realty and CCA. Certain existing members of the independent
committee of the Prison Realty board, together with Jean-Pierre Cuny, the
Sodexho designee to the Prison Realty board and the CCA board, Thomas W.
Beasley, chairman of the PMSI board, Lucius E. Burch, III, chairman of the CCA
board, and Samuel W. Bartholomew, Jr., chairman of the JJFMSI board, were
appointed to serve as members of the special committee, and Joseph V. Russell,
chairman of the independent committee of the Prison Realty board, was appointed
to serve as the special committee's chairman. Throughout the process, both the
special committee and the independent committee had numerous opportunities to
meet with Merrill Lynch and their other advisors and to deliberate without
management present.
On Tuesday, August 31, 1999, representatives of Merrill Lynch presented the
special committee with a preliminary analysis and overview of various strategic
alternatives to be considered by Prison Realty and CCA in light of the financial
condition of both companies and the current conditions in the capital markets.
In analyzing the strategic alternatives available to Prison Realty, Merrill
Lynch reviewed a number of potential alternatives including, among others: (i)
maintenance of the current operating structure while reducing the lease payments
made by CCA to Prison Realty; (ii) the creation of a "paper-clip" operating
structure whereby the stock of one or both of PMSI and JJFMSI held by Prison
Realty would be distributed to Prison Realty's stockholders, with one or both of
PMSI or JJFMSI then being merged with and into CCA; (iii) an investment by a
third-party investor in equity securities of Prison Realty, coupled with a
merger of CCA with and into an affiliate of the
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third-party investor; and (iv) the merger of CCA and each of PMSI and JJFMSI
with and into Prison Realty, either standing alone, together with a rights
offering to Prison Realty's existing shareholders, or in conjunction with an
investment by a third-party investor in equity securities of Prison Realty. The
members of the special committee and Merrill Lynch also discussed the range of
investment proposals which Prison Realty might receive, Merrill Lynch's strategy
with respect to certain investors, and the existing role of Prison Realty's
management.
Following the meeting and through the first three weeks of September 1999,
the representatives of Merrill Lynch worked with the management of each of
Prison Realty and CCA and the special committee to develop financial models and
analyses of the companies on a going-forward basis. Merrill Lynch and members of
the special committee engaged in intense review of these models during this
period, including the assumptions being used therein.
The Prison Realty board and the special committee and its advisors met on
Friday, September 24, 1999. At the meeting, Merrill Lynch presented its
preliminary conclusions with respect to the various strategic alternatives
available to Prison Realty. The representatives of Merrill Lynch discussed the
financial models of Prison Realty and CCA and analyzed the various strategic
alternatives in light of these models. Based on this analysis, Merrill Lynch
determined that the viable alternatives available to Prison Realty were: (i) a
combination of the companies into a single entity taxable as a subchapter C
corporation; (ii) a merger of the companies accompanied with a strategic equity
placement of up to $150.0 million; (iii) a merger of the companies accompanied
with a strategic equity placement of up to $500.0 million; (iv) a sale or merger
of Prison Realty to or with another entity; and (v) a "going private"
transaction. Merrill Lynch and the members of the board and special committee
then discussed potential financial partners that could assist Prison Realty in
completing one of these strategic alternatives. The representatives of Merrill
Lynch informed the board and special committee that virtually all the potential
financial partners that they had contacted that were interested in making an
investment of greater than $150.0 million in Prison Realty had indicated that
any such investment would need to be made in connection with a merger of the
companies into a subchapter C corporation, absent an outright purchase of Prison
Realty and/or CCA.
Beginning in the last week of September, Merrill Lynch contacted the
parties who may have had an interest in completing an equity investment and a
related restructuring with Prison Realty and CCA, including several private
equity firms in the business of investing in capital stock of other companies.
During the weeks of October 4 and October 11, Prison Realty entered into
confidentiality and standstill agreements with 12 of the private equity firms
contacted and distributed information to these parties concerning a possible
investment in Prison Realty. Prison Realty received preliminary inquiries from
an additional 18 parties, but none of these parties entered into a
confidentiality and standstill agreement, and, as a result, did not receive any
due diligence materials from Prison Realty.
During this period, the Prison Realty board and the CCA board instructed
management of the companies and Merrill Lynch to pursue discussions with the
firms or groups, including representatives of the Fortress/Blackstone investment
group, who had indicated an interest in investing in the companies, in an effort
to obtain the best offer available.
Because most of the strategic alternatives involved a transaction with CCA,
approval of the transaction by the independent committee was required by Prison
Realty's bylaws. Accordingly, the independent committee engaged its own special
counsel and Wasserstein Perella & Co., Inc. ("Wasserstein Perella") to serve as
financial advisor to the independent committee in its consideration of strategic
alternatives being considered by the special committee and the Prison Realty
board. Prison Realty's law firm continued in its capacity as counsel to Prison
Realty and the
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special committee with respect to the consideration of strategic alternatives.
In November 1999, the board of directors of CCA subsequently engaged counsel to
the CCA board.
During the last two weeks of October, Merrill Lynch engaged in discussions
with the various firms or companies who had received information from the
companies, including the Fortress/ Blackstone investment group. Merrill Lynch
received a total of four written proposals, one from the Fortress/Blackstone
investment group, one from a private equity investment firm and two alternative
proposals from a public company.
During the final week of October and during the first few days of November,
representatives of Merrill Lynch engaged in numerous discussions with the
members of the special committee and its advisors, as well as Prison Realty's
legal, tax and accounting advisors regarding the terms of the various proposals.
In addition, Merrill Lynch was specifically instructed by the special committee
to explore certain "standalone" alternatives in greater detail in an effort to
determine the capital requirements of Prison Realty and the liquidity needs of
CCA, as well as the viability of the companies and their ability to continue
operating without an equity investment.
The proposals received were based on varying assumptions as to Prison
Realty's dividend requirements. During this period, the Prison Realty board and
the special committee continued discussions with Merrill Lynch and Prison
Realty's legal, tax and accounting advisors as to the form of, and the timing
and amount of dividend payments required to be made by Prison Realty, including
the requirement to distribute the accumulated earnings and profits of Old CCA to
which Prison Realty succeeded in the 1999 Merger.
The special committee held a meeting on Thursday, November 4, 1999 to
review the proposals which Merrill Lynch had evaluated as offering the best
alternatives for Prison Realty. The representatives of Merrill Lynch distributed
materials to each person at the meeting summarizing Merrill Lynch's analysis of
the strategic alternatives available to Prison Realty and CCA, based on the
following objectives: (i) maximizing Prison Realty stockholder value; (ii)
improving financial stability; (iii) reducing the cost of capital; and (iv)
increasing the availability of capital. Merrill Lynch reviewed the four
proposals which had been received and presented its financial evaluation of each
proposal. Merrill Lynch also informed the special committee that it had
performed a financial evaluation of certain standalone alternatives in which
neither Prison Realty nor CCA would complete a transaction with a strategic
investor, and that based on its review, the standalone alternatives were not the
best options due to, among other things, the negative impact they would have on
Prison Realty's ability to restructure its existing debt, and accordingly,
Prison Realty and CCA should consider and choose among one of the four proposals
received from the potential strategic partners. At the time Wasserstein Perella
delivered its opinion to the independent committee, it concluded, based on
information provided to it, that the standalone alternatives were not feasible.
Following the November 4, 1999 meeting, the special committee engaged in
discussions with its legal, tax and accounting advisors and with the
representatives of Merrill Lynch in an effort to determine which of the four
proposals provided the best alternative for Prison Realty. The special committee
and the independent committee decided that the proposals submitted to Merrill
Lynch by the Fortress/Blackstone investment group and by an additional proposed
private equity investor provided better opportunities to Prison Realty and its
stockholders than the two alternative proposals presented by the public company.
In addition, when invited to make a presentation to the special committee
regarding its alternative proposals, the public company indicated that it had
decided to withdraw from the process and not make any definitive offer to Prison
Realty. Representatives of the Fortress/Blackstone investment group and the
other proposed private equity investor were subsequently invited to give
presentations to the special committee and the independent committee regarding
their respective proposals. The Fortress/Blackstone investment group and the
additional
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proposed investor accepted the invitation and on November 9 and 11, the special
committee and the independent committee and their advisors heard presentations
from the two prospective investor groups. During the presentations,
representatives from both investor groups addressed the special committee and
the independent committee regarding their respective proposals, investment
philosophy and perspective regarding Prison Realty's REIT status and dividend
requirements and each responded to various questions from the directors
regarding the same. At the Fortress/Blackstone presentation, representatives of
Fortress/Blackstone described their proposal as contemplating an investment of
$250.0 million through the purchase of convertible preferred stock at a
conversion price of $10.00 per share and the purchase of warrants to purchase
shares of Prison Realty's common stock at an exercise price of $12.00 per share.
Fortress/Blackstone's proposal also contemplated that Prison Realty maintain
REIT status through 1999. Having observed and discussed the presentations made
by the representatives of the proposed investor groups, the special committee
instructed Merrill Lynch to solicit final proposals from each.
The special committee and independent committee held a special joint
meeting, and the Prison Realty board held a meeting immediately following this
joint meeting, on Tuesday, November 16, 1999, at which the representatives of
Merrill Lynch reviewed the status of the most recent proposals submitted by the
two proposed investor groups. While the proposals were similar in many respects,
the Prison Realty board and the special and independent committees observed that
the proposal from the investor group other than Fortress/Blackstone contained a
continuous adjustment feature to the conversion rate, based on the trading price
of Prison Realty's common stock during a certain period following the closing of
the proposed transaction. Merrill Lynch then informed the special committee and
independent committee that the Fortress/Blackstone investment group had
conditioned their most recent proposal on the requirement that the companies
enter into an exclusivity agreement with Fortress/Blackstone. Representatives of
Merrill Lynch further indicated that it was their belief that
Fortress/Blackstone was significantly further along in the due diligence process
and were more likely to enter into a definitive agreement within the necessary
time constraints created by Prison Realty's distribution requirements. Based on
this development, and on Merrill Lynch's belief that the other potential
investor would remain interested in an investment in Prison Realty and would be
willing to proceed should the Fortress/Blackstone investment group fail to do
so, Merrill Lynch recommended that the companies enter into an exclusivity
agreement with Fortress/Blackstone. As a result, Prison Realty and CCA
subsequently entered into an exclusivity arrangement with Fortress/Blackstone
for a period ending on December 3, 1999.
During the exclusivity period, representatives of the companies, including
the special committee, along with their counsel and Merrill Lynch, negotiated
the draft purchase agreement with representatives of Fortress/Blackstone and
their counsel and financial advisors. On December 3, 1999, the exclusivity
agreement expired. Despite this expiration, the parties continued to negotiate
the draft purchase agreement. On December 4, 1999, Fortress/Blackstone advised
Prison Realty that for a variety of reasons, including the fact that the third
quarter earnings results for the companies on a combined basis were
significantly below the projected financial performance for the companies and
CCA's liquidity concerns were greater than originally estimated, they were not
prepared to proceed with the transaction as proposed. In order to move quickly
to complete a transaction, the special committee advised Merrill Lynch to
reestablish communications with the other proposed investors, including the
public company, in addition to continuing to pursue the proposal with Fortress/
Blackstone. During this period, the Prison Realty board received a revised
proposal from Fortress/ Blackstone which (i) increased the total amount of the
investment from $250.0 million to $350.0 million (as required by the proposed
lending group), (ii) decreased the conversion price of the convertible preferred
stock (from $10.00 to $8.00) and the exercise price of the warrants (from $12.00
to $10.00), (iii) increased the fees to be paid to Fortress/Blackstone in
connection with the transaction reflecting the increase in the proposed equity
investment, (iv) added an adjustment to the
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conversion price of the convertible preferred stock and warrants in the event
certain payments made by Prison Realty in connection with certain stockholder
litigation exceed $50.0 million, (v) limited the cash consideration to be paid
for CCA, PMSI and JJFMSI, and (vi) required that Prison Realty submit for
stockholder vote the election of subchapter C corporation status in lieu of REIT
status for calendar year 1999, which would result in Prison Realty's not paying
further dividends on its common stock and Prison Realty being required to pay
federal income taxes on its earnings for 1999. Moreover, in view of the
continuing liquidity needs of Prison Realty, Fortress/Blackstone's revised
proposal required that no further distributions be made. In response to this
proposal, the special committee and management of Prison Realty solicited a
revised proposal from the other potential investor. While the other potential
investor was willing to consider the transaction, and in fact orally proposed a
transaction which was on substantially similar economic terms to
Fortress/Blackstone's proposal, the other potential investor's proposal still
contained the continuous adjustment feature to the conversion rate of the
convertible preferred stock and required a period of additional due diligence
prior to the execution of a definitive agreement. On December 6, 1999, the
special committee decided to pursue Fortress/Blackstone's revised proposal
rather than the other group's revised proposal after concluding, (i) that the
companies should raise between $300.0 and $350.0 million in equity to address
their liquidity needs and meet the demands of the proposed lending group, (ii)
that the dividend rate on the convertible preferred stock proposed by
Fortress/Blackstone was lower than the dividend rate on the convertible
preferred stock proposed by the other investor, and (iii) the conversion price
on the convertible preferred stock proposed by Fortress/Blackstone was higher
than the conversion price of the convertible preferred stock proposed by the
other investor. In addition, after consultation with its advisors, the
independent committee concurred with this decision. However, as a condition to
their decision to pursue Fortress/Blackstone's proposal, the special committee
and the independent committee insisted that the shareholders of Prison Realty be
allowed to participate in the proposed investment through a rights offering in
which Prison Realty stockholders would be able to purchase up to $75.0 million
in convertible securities with the same economic terms as offered to
Fortress/Blackstone.
The Prison Realty board, together with the special and independent
committees, convened on Sunday, December 12, 1999, in order to receive a
presentation from Merrill Lynch regarding its opinion with respect to the
fairness of the proposed Fortress/Blackstone equity investment to Prison Realty
and its stockholders from a financial point of view. The representatives of
Merrill Lynch reviewed the latest terms of Fortress/Blackstone's proposal with
the members of the special committee and the Prison Realty board and also
discussed the reasoning and analysis utilized in reaching their conclusion that
maintaining REIT status was not in the best interests of Prison Realty and would
not maximize stockholder value. At this meeting, Prison Realty's counsel
provided the members of the committees and the board with a detailed summary of
the terms of the most recent drafts of the purchase agreement and other
documents prepared in connection with the transactions. Following this
discussion, representatives of Merrill Lynch reviewed with the Prison Realty
board and the special committee an analysis of the strategic alternatives
available to the companies. This discussion included an overview of the
companies' process in reviewing the strategic alternatives to date, as well as
an analysis of the potential advantages and disadvantages of
Fortress/Blackstone's proposal, the earlier proposal from the other investor
group and the standalone strategy. This meeting was adjourned to provide Merrill
Lynch with additional time to finalize the terms of the new credit facility to
be obtained in connection with this transaction and to analyze the companies'
ability to comply with certain financial covenants contained in the commitment
letter. In addition, representatives of Wasserstein Perella reviewed with the
independent committee its analysis of the feasibility of the standalone
alternatives and the proposed equity investment.
In assessing whether the companies would be able to meet certain earnings
requirements contained in the credit facility commitment letter, the companies
and Fortress/Blackstone determined
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that the fourth quarter earnings results of the combined companies would also be
significantly below the projected financial performance for the companies.
Fortress/Blackstone advised the special committee and the board that based on
the revised earnings estimates, they would be willing to proceed with their
proposed investment only if the conversion price of the convertible preferred
stock was reduced to $6.50, the warrant exercise price was reduced to $7.50 and
the companies agreed to attempt to settle certain existing stockholder
litigation matters prior to closing. In addition, Fortress/ Blackstone and the
special committee and the Prison Realty board discussed certain changes with
respect to Prison Realty's management and the operation of Prison Realty
following the completion of the transaction. Based on these discussions, Prison
Realty's board determined that it should make certain changes in its management,
including changes in management prior to the completion of any transaction and
the restructuring of Prison Realty's board of directors subsequent to the
closing of the transaction.
Because the proposal by Fortress/Blackstone required that Prison Realty not
elect REIT status for 1999, the tax advisors to Prison Realty began at this time
to focus on what additional distributions, if any, Prison Realty would have to
make in 1999 to retain the option of electing REIT status should the equity
investment and the related restructuring for any reason not be completed. To
elect REIT status for 1999, Prison Realty has to meet two distribution
requirements. First, it has to distribute all of the accumulated earnings and
profits of Old CCA, and second, it has to distribute 95% of its 1999 REIT
taxable income. Under certain ordering rules contained in the Code,
distributions by Prison Realty during 1999 were applied first to the earnings
and profits distribution requirement with the excess, if any, being applied to
the 95% distribution requirement.
Under certain relief provisions contained in the Code, Prison Realty's tax
advisors concluded that Prison Realty could meet the 95% distribution
requirement as late as December 31, 2000, so long as certain conditions were
satisfied. They also concluded, however, that these relief provisions were not
available with respect to the earnings and profits distribution requirement and
that Prison Realty would have to satisfy the earnings and profits distribution
requirement not later than January 31, 2000. Therefore, Prison Realty had to
determine whether its distributions in 1999 were sufficient to satisfy the
earnings and profits distribution requirement and, if not, the amount of
additional distributions it would have to make.
At that time, Prison Realty had made 1999 distributions of approximately
$217.7 million. Prison Realty estimated the accumulated earnings and profits of
Old CCA to be approximately $235.0 million. The accumulated earnings and profits
of Old CCA consisted generally of two components, the first being earnings and
profits as they then existed and the second being a "cushion" amount to allow
for possible adjustments to earnings and profits by the IRS. It was necessary to
include "cushion" amounts in the calculation of earnings and profits, since it
was not clear under the Code that Prison Realty could make remedial
distributions if the IRS were later to make adjustments increasing Old CCA's
earnings and profits. Given this estimate of the earnings and profits and the
amount of Prison Realty's distributions to date, the Prison Realty board
determined preliminarily to pay a fourth quarter dividend of approximately $20.0
million and began discussing the form and timing of the dividend and the concern
that Prison Realty did not have sufficient liquidity to pay such dividend in
cash.
On December 17, 1999, President Clinton signed into law the Work Incentive
Improvements Act of 1999 (the "WIIA"). The WIIA included provisions relating to
REITs and specifically contained relief provisions for REITs which inherit
subchapter C corporation earnings and profits. Under these relief provisions, if
a REIT inherits subchapter C corporation earnings and profits and the IRS later
makes adjustments to increase those earnings and profits, the REIT may at that
time make additional distributions to eliminate the amount of the increase. In
light of this legislation, and because Prison Realty had already distributed in
1999 amounts in excess of Old CCA's actual accumulated earnings
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and profits (excluding the "cushion" amounts), Prison Realty and
Fortress/Blackstone determined that no additional distributions were necessary
at that time for Prison Realty to maintain the option of electing REIT status
for 1999. Moreover, in view of the continuing liquidity needs of Prison Realty,
Fortress/Blackstone required that no further distributions be made.
Given these circumstances, Prison Realty determined that it would request
an automatic extension of time to file its 1999 tax return from March 15, 2000
to September 15, 2000 and thus defer its election to be taxed as a REIT for 1999
until September 2000, while paying no further dividends on its common stock in
the interim. Accordingly, by obtaining an extension, Prison Realty would retain
the ability to elect REIT status while awaiting the outcome of any required
stockholder vote on Prison Realty's determination not to elect REIT status. If
stockholder approval were not obtained, then Prison Realty could still take such
actions prior to or upon filing its 1999 tax return as may be necessary to elect
REIT status for 1999, including declaring sufficient dividends with respect to
its 1999 taxable year and filing an election to be taxed as a REIT for 1999.
Because of liquidity constraints, however, Prison Realty determined
preliminarily that in such event any dividends paid for 1999 would be paid in
whole or in part in the form of securities.
The Prison Realty board and the special and independent committees
reconvened on Wednesday, December 22, 1999, at which time representatives of
Merrill Lynch provided an update on certain revised terms of
Fortress/Blackstone's proposal and the status of the commitment for the new
credit facility and discussed the strategy to be employed by Prison Realty with
respect to certain pending stockholder litigation. The meeting was then
subsequently adjourned again until Sunday, December 26, 1999, to provide the
representatives of Merrill Lynch and the members of the special committee and
their counsel with sufficient time to negotiate the final terms of the proposed
transaction.
On Sunday, December 26, 1999, representatives of Merrill Lynch made their
final presentation to the special committee and the Prison Realty board and
delivered their oral opinion, which opinion was subsequently confirmed in a
written opinion, to the Prison Realty board that, based on the matters presented
to the Prison Realty board and as set forth in its opinion, as of the date of
the opinion, the equity investment contemplated by the Fortress/Blackstone
proposal was fair from a financial point of view to Prison Realty and its
stockholders. They also informed the Prison Realty board that they were
delivering an opinion to the CCA board in connection with the merger and related
transactions. Counsel to the Prison Realty board and the special committee then
summarized the terms of the draft securities purchase agreement relating to the
equity investment contemplated by the Fortress/Blackstone proposal, including
the revised conversion price of the preferred shares and the revised exercise
price of the warrants. Merrill Lynch also reconfirmed its conclusion that Prison
Realty's standalone alternatives did not represent the best options available to
Prison Realty at that time. After a full discussion, the members of the special
committee then approved the equity investment contemplated by the
Fortress/Blackstone proposal, the merger and the transactions contemplated
thereby, and recommended the same for the review of and approval by the
independent committee and the full Prison Realty board. Wasserstein Perella
delivered its oral opinion, which opinion was subsequently confirmed in a
written opinion, to the independent committee to the effect that, based on the
matters presented to the independent committee and as set forth in its opinion,
as of the date of the opinion, the equity investment contemplated by the
Fortress/Blackstone proposal was fair, from a financial point of view, to Prison
Realty and its stockholders. After a full discussion of that presentation and
the terms of the transactions, the members of the independent committee then
unanimously approved the equity investment contemplated by the
Fortress/Blackstone proposal and the related restructurings, and recommended the
same for approval by the Prison Realty board. After a full discussion, the
Prison Realty board, with Jean-Pierre Cuny and Michael W. Devlin abstaining,
approved the equity investment contemplated by the Fortress/Blackstone proposal,
the
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merger and the transactions contemplated thereby and resolved to recommend the
same for approval by the stockholders of Prison Realty.
A securities purchase agreement with Fortress/Blackstone and the merger
agreement were executed on Sunday, December 26, 1999. The equity investment and
the related restructurings contemplated by the Fortress/Blackstone proposal were
publicly announced on Monday, December 27, 1999.
Throughout the month of January 2000 and the first two weeks of February
2000, Prison Realty and Fortress/Blackstone worked together on the preparation
of preliminary proxy materials to be filed with the SEC with respect to a
special meeting of Prison Realty's stockholders to be held in the second quarter
of 2000 to approve the transactions contemplated by the Fortress/Blackstone
proposal. At the same time, Prison Realty was preparing a registration statement
to be filed with the SEC with respect to the registration of shares of Prison
Realty common stock to be issued to employee shareholders of CCA, PMSI and
JJFMSI in the merger transactions. On February 17, 2000, Prison Realty filed the
preliminary proxy materials with the SEC.
Subsequently, on Wednesday, February 23, 2000, the Prison Realty board of
directors received an unsolicited proposal from Pacific Life regarding a
transaction intended to serve as an alternative to the equity investment and
restructuring transactions led by Fortress/Blackstone. Pacific Life, the
beneficial owner of approximately 4.5 million shares of Prison Realty common
stock, an affiliate of a limited partner and an affiliate of the general partner
of the holder of the $30.0 million 7.5% convertible, subordinated notes,
proposed an equity investment in Prison Realty of $200.0 million and a
restructuring of Prison Realty in which CCA, PMSI and JJFMSI would combine with
Prison Realty under terms substantially similar to those proposed by
Fortress/Blackstone. Specifically, pursuant to the terms of the Pacific Life
proposal, Prison Realty would conduct a rights offering in which it would offer
its common stockholders the right to purchase up to $200.0 million in shares of
Prison Realty common stock at a purchase price of the lower of $4.00 per share
or 75% of the average market price for a specified number of trading days prior
to the commencement of the offering, with Pacific Life purchasing an amount of
newly-issued series of convertible preferred stock equal to the amount by which
the rights offering subscriptions were less than $200.0 million. The shares of
the convertible preferred stock would be convertible into shares of Prison
Realty common stock at a conversion price equal to the rights offering
subscription price and would pay a 6% cash dividend and a 4% paid-in-kind
dividend per year for the first three years and a 10% cash dividend per year
thereafter. In consideration of this commitment, Pacific Life would receive
warrants to purchase Prison Realty common stock, with such warrants being
exercisable for a period of 15 years at an exercise price equal to 125% of the
rights offering purchase price, or $5.00 per share. Also pursuant to the
proposal, Prison Realty would (i) elect to qualify as a REIT with respect to its
1999 taxable year, and would distribute an undetermined amount of convertible,
preferred securities in satisfaction of the REIT distribution requirements, and
(ii) combine with CCA, PMSI and JJFMSI on the same terms as proposed by
Fortress/Blackstone. On Thursday, February 24, 2000, pursuant to the terms of
the Fortress/Blackstone securities purchase agreement, Prison Realty notified
Fortress/ Blackstone of Prison Realty's receipt of the unsolicited proposal from
Pacific Life and the material terms of the transaction contemplated thereby.
On Friday, February 25, 2000, the Prison Realty board of directors,
together with the special committee and the independent committee, held a
special joint meeting for the purpose of reviewing the Pacific Life proposal and
to determine whether such proposal merited further consideration from the Prison
Realty board and its respective financial, legal, and accounting advisors. After
considerable discussion regarding the Pacific Life proposal, the Prison Realty
board and the special and independent committees determined that the Pacific
Life proposal appeared to have sufficient credibility to require that the board
and the committees, in the exercise of their fiduciary duties,
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request that their respective financial and legal advisors review the terms of
the Pacific Life proposal and report to the board and the committees on their
findings. Following this meeting, information regarding the Pacific Life
proposal was disseminated to the financial advisors of the board and the
committees, who were instructed to review the terms of the Pacific Life proposal
and compare such terms with those set forth in the Fortress/Blackstone
securities purchase agreement. On February 25, 2000, Pacific Life also publicly
announced its submission of the proposal to Prison Realty, as well as certain
terms of the proposal.
On Sunday, February 27, 2000, the Prison Realty board held another joint
meeting with the special and independent committees at which representatives of
each of Merrill Lynch and Wasserstein Perella were present. Representatives from
each of Merrill Lynch and Wasserstein Perella made a presentation outlining and
analyzing the economic terms of the Pacific Life proposal. Following the
presentations by Merrill Lynch and Wasserstein Perella, the members of the
Prison Realty board and the special and independent committees engaged in a
discussion with management and their respective advisors regarding the merits of
the Pacific Life proposal compared to the terms of the Fortress/Blackstone
securities purchase agreement and the fiduciary duties of the board with respect
to its consideration of the proposal. Based on these deliberations, the board
and the special and independent committees agreed that Prison Realty should
commence negotiations with Pacific Life in order to reach an agreement on more
favorable terms than those contemplated by the Fortress/Blackstone securities
purchase agreement. At the February 27 meeting, it was also determined that
Wasserstein Perella should be engaged by the full board as its financial advisor
along with Merrill Lynch for the purpose of negotiating with Pacific Life. Due
to the fact that the interests of the full board were aligned with the interests
of the independent committee, Wasserstein Perella's dual representation of the
full board and the independent committee was deemed acceptable.
Following this meeting, representatives of the Prison Realty board
contacted representatives of Pacific Life regarding the possibility of
completing a restructuring of Prison Realty combined with an equity investment
by Pacific Life. Negotiations regarding the terms of the proposed equity
investment ensued between representatives of Prison Realty and Pacific Life.
Following the board's decision to commence negotiations with Pacific Life,
Prison Realty and Fortress/Blackstone amended the terms of the
Fortress/Blackstone securities purchase agreement to clarify the provisions
governing Fortress/ Blackstone's right to match the terms of any superior
unsolicited proposals for an equity investment in and restructuring of Prison
Realty. At the same time, representatives of Prison Realty continued
negotiations with representatives of Pacific Life in an attempt to reach an
agreement for an equity investment and restructuring which would be more
favorable to Prison Realty and its shareholders than the transactions
contemplated by the Fortress/Blackstone securities purchase agreement. On
Tuesday, February 29, 2000, Prison Realty publicly announced its receipt of the
Pacific Life proposal and that, after reviewing the Pacific Life proposal with
its financial and legal advisors, its board of directors had determined that it
was appropriate to commence negotiations with Pacific Life regarding a potential
transaction. On Wednesday, March 1, 2000, Prison Realty filed a Current Report
on Form 8-K (File no. 0-25245) with the SEC containing the full text of the
Pacific Life proposal, as well as a copy of the amendment to the
Fortress/Blackstone securities purchase agreement.
On Wednesday, March 22, 2000, the Prison Realty board held a special joint
meeting with the special and independent committees, at which representatives of
Pacific Life were in attendance. The representatives of Pacific Life made a
presentation to the board and the committees regarding the status of its
proposal, its investment philosophy, its perspective regarding Prison Realty's
REIT status and the distribution requirements relating thereto and the prospects
of refinancing Prison Realty's existing credit facility, and they responded to
various questions from the members of the Prison Realty board and the committees
regarding the same. Having observed and discussed the presentations made by the
representatives of Pacific Life, the board, together with the special and
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independent committees, instructed their respective financial advisors to
solicit a final proposal from Pacific Life so that Prison Realty could make a
determination whether to enter into a definitive agreement with Pacific Life
which encompassed the terms of its proposal.
Also, on Wednesday, March 22, 2000, the Prison Realty board received an
unsolicited proposal from an investment banking firm, on behalf of a competitor
of the companies, outlining a proposed combination of Prison Realty, CCA, PMSI,
JJFMSI with the competitor. Under this proposal, the surviving company would be
managed by the existing management of the competitor.
In late March 2000, Prison Realty management conducted a preliminary review
of the companies' anticipated combined financial results for the first quarter
of 2000, and concluded that there was a substantial likelihood that the
companies would not satisfy certain financial covenants contained in the
Fortress/Blackstone securities purchase agreement and related bank commitment
letter related to the companies' consolidated combined first quarter EBITDA.
During this time, representatives of Fortress/Blackstone reviewed the status of
the companies' financial results for the fourth quarter of 1999, as well as the
status of the audits of the companies' year-end financial statements.
Fortress/Blackstone was informed at this time that fourth quarter results were
lower than expected and that it was anticipated that first quarter results would
also be lower than expected, and that as such, it was unlikely that the
companies would be able to satisfy the first quarter EBITDA covenants contained
in the Fortress/Blackstone securities purchase agreement and in the related CSFB
bank financing commitment letter issued in connection therewith. In light of the
actual and anticipated financial results, management of the companies asked
Fortress/Blackstone to confirm (i) whether Fortress/Blackstone intended to waive
any breach of such covenants and consummate the transactions contemplated by the
Fortress/Blackstone securities purchase agreement, and (ii) whether CSFB was
willing to waive any breach of the covenant set forth in its commitment letter.
The companies received no definitive response from Fortress/Blackstone or
representatives of CSFB to these inquiries. Accordingly, on March 31, 2000,
Prison Realty requested in writing that Fortress/Blackstone confirm to the
companies in writing (i) whether Fortress/Blackstone intended to waive the
breach of such covenants and consummate the transactions contemplated by the
Fortress/ Blackstone securities purchase agreement, and (ii) whether CSFB was
willing to waive the breach of the covenant set forth in its commitment letter.
On Monday, April 3, 2000, the Prison Realty board received the final terms
of the proposal from Pacific Life. Following the delivery of the final proposal
to Prison Realty, on Wednesday, April 5, 2000, Pacific Life delivered to the
Prison Realty board a securities purchase agreement, executed by representatives
of Pacific Life, which incorporated the terms of the final Pacific Life proposal
previously delivered. Additionally, on April 5, 2000, Prison Realty received a
written reply to its March 31, 2000 letter from Fortress/Blackstone in which
Fortress/Blackstone stated that due to its and CSFB's need to complete
additional due diligence on the companies' financial results and the reasons
behind any actual or anticipated earnings shortfalls, it was currently uncertain
as to whether it would proceed to close the transactions contemplated by the
Fortress/Blackstone securities purchase agreement and whether CSFB would provide
financing under the terms of its commitment letter in light of Prison Realty's
anticipated failure to meet the EBITDA covenants. Upon receiving the executed
securities purchase agreement from Pacific Life, Prison Realty and its financial
and legal advisors reviewed the terms of the agreement with Pacific Life and its
counsel and made certain revisions to the terms of the securities purchase
agreement. Pacific Life subsequently provided the companies with an executed
copy of the final revised agreement. Having received the final Pacific Life
proposal and a final executed securities purchase agreement, and following the
reply from Fortress/Blackstone, on Thursday, April 6, 2000, the Prison Realty
board held a special joint meeting with the special and independent committees,
together with their respective financial advisors, for the purpose of discussing
the alternatives available to Prison Realty and deciding which, if any, proposal
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to approve. After discussing the proposal submitted by Prison Realty's
competitor on March 22, 2000, the Prison Realty board and the special and
independent committees determined that the proposal was not in the best
interests of Prison Realty and its stockholders, as the proposal, among other
things, contained no provision to provide Prison Realty with the capital
required to address its liquidity concerns and to finance its business strategy.
Representatives of both Merrill Lynch and Wasserstein Perella then made
presentations regarding the transaction contemplated by the terms of the Pacific
Life proposal. The members of the board and the committees then engaged in
lengthy discussions with their financial advisors regarding the merits and
disadvantages of the Pacific Life proposal and the agreement with
Fortress/Blackstone, as well as the negotiating strategies which should be
pursued with respect to each of Pacific Life and Fortress/Blackstone. Following
such discussions, the Prison Realty board, together with the special and
independent committees, determined that the terms of the Pacific Life proposal
were superior to the terms set forth in the Fortress/Blackstone securities
purchase agreement, and the adoption of the Pacific Life proposal, as set forth
by the terms of the Pacific Life securities purchase agreement, was approved by
the special and independent committees, and such proposal was subsequently
submitted for the approval of, and approved and adopted by, the Prison Realty
board. The members of the Prison Realty board then authorized representatives of
Prison Realty (i) to contact Fortress/Blackstone and to notify their
representatives, pursuant to the terms of the Fortress Blackstone securities
purchase agreement, that the Prison Realty board had approved a superior
unsolicited proposal and that Fortress/Blackstone had a period of five business
days to match the terms of the Pacific Life proposal, and (ii) to execute the
securities purchase agreement with Pacific Life if Fortress/Blackstone failed to
match the terms of the Pacific Life proposal.
A copy of the Pacific Life securities purchase agreement was delivered to
representatives of Fortress/Blackstone on Friday, April 7, 2000. Pursuant to the
terms of the Fortress/Blackstone securities purchase agreement,
Fortress/Blackstone had until midnight on Friday, April 14, 2000, to match the
terms of the Pacific Life proposal. On Friday, April 14, 2000, representatives
of Fortress/ Blackstone confirmed to the Prison Realty board that
Fortress/Blackstone would not match the terms of the Pacific Life proposal.
On Sunday, April 16, 2000, the Prison Realty board, together with the
special and independent committees, held a special joint meeting, in which
representatives of Merrill Lynch and Wasserstein Perella participated, at which
the members of the board were informed that Fortress/Blackstone had elected not
to match the terms of the Pacific Life proposal. The representatives of Merrill
Lynch and Wasserstein Perella then delivered their respective final fairness
opinions with respect to the proposed equity investment by Pacific Life. The
Prison Realty board reconfirmed its previous decision to authorize the execution
of the Pacific Life securities purchase agreement based upon the fairness
opinions delivered by Merrill Lynch and Wasserstein Perella. Upon authorization
by the Prison Realty board, representatives of Prison Realty executed the
Pacific Life securities purchase agreement, and delivered a letter to
Fortress/Blackstone terminating the Fortress/Blackstone securities purchase
agreement.
During the final weeks of April and during the month of May, Prison Realty
worked with representatives of Lehman to secure the necessary waiver of existing
defaults under the bank credit facility so as to allow for additional borrowings
by Prison Realty. At the same time the parties worked together to make certain
amendments to the bank credit facility so as to provide for the comprehensive
restructuring of the companies as provided for by Prison Realty's agreement with
Pacific Life. During the course of these negotiations, Prison Realty contacted
representatives from Pacific Life in order to obtain their input on the terms of
the waivers and amendments. Specifically, in early May, Prison Realty presented
Pacific Life with the terms of the waiver and amendment as proposed by Lehman.
At that time, Pacific Life indicated to Prison Realty and Lehman that, among
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other things, the amendments to the credit facility should include a four-year
extension of the maturities of the loans outstanding under the facility. Pacific
Life was reminded by Lehman that such an amendment would require the approval of
100% of the lenders under the bank credit facility (as opposed to 66.6% which
was required for the amendments proposed by Prison Realty and Lehman) and that,
in Lehman's opinion, such approval could not likely be obtained. Prison Realty
and Lehman then continued to negotiate the term of the waiver and amendment and,
in late May, submitted those terms, including an extension of the maturities as
requested by Pacific Life, to the lenders under the bank credit facility for
their approval.
The requisite percentage of the lenders under the bank credit facility did
not approve the extension of maturities under the waiver and amendment as
proposed by Prison Realty, but subsequently approved the waiver and amendment
previously disclosed by Prison Realty and as described in this joint proxy
statement/prospectus. Accordingly, Prison Realty obtained the waiver and
amendment on June 9, 2000. Prison Realty publicly disclosed this event on June
12, 2000 and filed a Current Report on Form 8-K (File no. 0-25245) with the SEC
containing the full text of the waiver and amendment, at which time it also
submitted the waiver and amendment to Pacific Life in order to determine whether
the terms of the waiver and amendment were reasonably acceptable to Pacific Life
and therefore satisfied the condition contained in the securities purchase
agreement.
At the same time Prison Realty was negotiating with the lenders with
respect to the waiver and amendment, Prison Realty was involved in settlement
negotiations with representatives of the plaintiffs in the stockholder
litigation pending against Prison Realty. In early May, the parties participated
in a settlement conference. During the remainder of May and through the month of
June, Prison Realty continued settlement discussions with representatives of the
plaintiffs.
On Monday, June 12, 2000, Prison Realty forwarded a copy of the executed
waiver and amendment to Pacific Life for its review and asked Pacific Life
whether the terms of the waiver and amendment were acceptable to it and whether
Pacific Life believed the waiver and amendment satisfied the condition contained
in the Pacific Life securities purchase agreement that Prison Realty refinance
or renew its bank credit facility on terms reasonably acceptable to Pacific
Life. At the same time, Prison Realty, CCA, PMSI and JJFMSI contacted the
outside shareholders of CCA, PMSI and JJFMSI and commenced negotiations with
respect to the combination of the companies in accordance with the terms of the
waiver and amendment. On Friday, June 16, 2000, Pacific Life informed Prison
Realty in writing that it was unable to determine whether the terms of the
waiver and amendment were acceptable to it at that time. During the week of June
19, 2000, Prison Realty provided Pacific Life with additional information, but
was unable to obtain any assurances from Pacific Life that the terms of the
waiver and amendment were acceptable to it and that the condition to the
securities purchase agreement was satisfied. Also during the week of June 19,
2000, Prison Realty, CCA, PMSI and JJFMSI continued to negotiate with the
outside shareholders of CCA, PMSI and JJFMSI regarding the termination of the
existing merger agreement among the companies with respect to PMSI and JJFMSI in
the event the outside shareholders determined not to sell their shares to Prison
Realty and the combination of Prison Realty and CCA under the terms of the
waiver and amendment.
During the week of June 25, 2000, Prison Realty reached an agreement with
Baron regarding Prison Realty's purchase of the shares of CCA common stock held
by Baron for non-cash consideration consisting of shares of Prison Realty common
stock valued at $8.0 million. In consideration for Baron's consent to the merger
(as necessary in order to effectuate the merger), Baron required that Prison
Realty also issue Baron warrants to purchase $3.0 million in shares of Prison
Realty common stock. Also during the week of June 25, 2000, Prison Realty
indicated to Sodexho that it was willing to satisfy its previous contractual
obligation to purchase the CCA shares held by it in the form of Prison Realty
common stock valued at $8.0 million as required by Prison
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Realty's amended bank facility. In response to this offer, Sodexho informed
Prison Realty that it should receive the same aggregate consideration as Prison
Realty agreed to pay Baron. Prison Realty informed Sodexho that it was not
willing to do so.
On Wednesday, June 28, 2000, the Prison Realty board, together with its
special and independent committees, held a special joint meeting in which
representatives of Merrill Lynch and Wasserstein Perella participated. At that
meeting, the board and the committees engaged in a lengthy discussion of the
likelihood that the transactions contemplated by the Pacific Life securities
purchase agreement would be completed. The board and committee members were
informed that Pacific Life had indicated that the terms of the waiver and
amendment were currently not acceptable to it and that Pacific Life had provided
no assurance that it would waive the condition in the securities purchase
agreement. The board and the committee members also were informed that Pacific
Life had indicated to Prison Realty its belief that Prison Realty had
experienced a "material adverse change" under the terms of the Pacific Life
securities purchase agreement and that, as a result, a condition to Pacific
Life's obligation to complete the transactions contemplated by the securities
purchase agreement would not be satisfied. The board and the committee members
then discussed the fact that Pacific Life had provided no assurance that it
would waive such condition. After a review of the status of Prison Realty's
negotiations with representatives of the plaintiffs in certain outstanding
stockholder litigation against Prison Realty, the board and the committee
members discussed the fact that it was unlikely that the litigation would be
settled in a manner satisfactory to Pacific Life prior to completion of the
transactions contemplated by the Pacific Life securities purchase agreement. The
board and committee members were then informed that Pacific Life had given no
indication that it would waive the condition to its obligations under the
securities purchase agreement that such litigation be settled in a manner
satisfactory to it.
The board and the committees then engaged in lengthy conversations
regarding the restructuring transactions required under the waiver and amendment
and the requirement that Prison Realty file preliminary proxy materials with the
SEC on or before July 1, 2000. As a result of Pacific Life's unwillingness to
provide the companies with any assurances with respect to its willingness to
waive the conditions to its obligation to complete the transactions contemplated
by the Pacific Life securities purchase agreement described herein, and the
requirements of the waiver and amendment, on Wednesday, June 28, 2000, the
Prison Realty board concluded that the completion of the transactions
contemplated by the Pacific Life securities purchase agreement was unlikely and
determined to enter into negotiations with Pacific Life with respect to a mutual
termination of the Pacific Life securities purchase agreement. The Prison Realty
board also approved the execution of the merger agreement with CCA and the
filing of this joint proxy statement/prospectus pending termination of the
Pacific Life securities purchase agreement. On Wednesday, June 28, 2000 the CCA
board also determined to enter into negotiations with Pacific Life with respect
to a mutual termination of the Pacific Life securities purchase agreement and
approved the execution of the merger agreement with Prison Realty pending
termination of the Pacific Life securities purchase agreement. Representatives
of Prison Realty and CCA accordingly entered into negotiations with Pacific Life
with respect to a mutual termination, and, on Friday, June 30, 2000, the
companies and Pacific Life agreed to mutually terminate the Pacific Life
securities purchase agreement.
On Friday, June 30, 2000, Prison Realty and CCA executed the merger
agreement and Prison Realty filed preliminary proxy materials with the SEC.
CCA BOARD OF DIRECTORS
On Thursday, August 26, 1999, the CCA board met with members of CCA's
management to discuss, among other things, CCA's financial performance for the
second quarter of 1999. After
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reviewing CCA's revenues and net losses for the year-to-date, management of CCA
informed the board that they expected CCA to experience continued cash
shortfalls for the remainder of 1999 and 2000. The CCA board discussed the
factors resulting in the shortfalls, including the terms of the contractual
arrangements between CCA and Prison Realty. The CCA board also considered the
requirement under Prison Realty's credit facility that CCA raise $25.0 million
in additional equity or subordinated debt in order for Prison Realty to make
certain required distributions to its shareholders by the end of 1999.
Following the August 26 meeting, certain members of the CCA board met with
representatives of Merrill Lynch, who had been selected by Prison Realty as its
financial advisor to assist Prison Realty in satisfying the capital-raising
requirements set forth in Prison Realty's credit facility. Based on these
meetings, CCA selected Merrill Lynch as its financial advisor for the purpose of
assisting CCA in raising capital to alleviate its liquidity concerns. During the
first three weeks of September, representatives of Merrill Lynch worked with the
management of each of CCA and Prison Realty and their advisors to develop
financial models and analyses of the companies on a going-forward basis. Once
these financial models were developed, Merrill Lynch initiated communications
with various parties in an attempt to raise capital for CCA and Prison Realty.
Merrill Lynch's efforts continued throughout the month of October and into
November, a period during which representatives of Merrill Lynch received
various proposals for investments in CCA and Prison Realty, although the
substantial majority of the proposals received contemplated an investment in
Prison Realty and a combination of Prison Realty, CCA, PMSI and JJFMSI into a
single entity. After extensive discussions of these proposals with Prison Realty
and Merrill Lynch, the CCA board and the Prison Realty board reached an
agreement that the proposal submitted by the investors, which contemplated a
substantial equity investment in Prison Realty and the merger of CCA, PMSI and
JJFMSI with and into Prison Realty, presented the best alternative for the
companies.
The CCA board met on Friday, November 19, 1999, with representatives of
Merrill Lynch. The CCA board considered the investors' request for an
exclusivity agreement. Merrill Lynch informed the CCA board of its belief that
another investor group would remain interested on comparable economic terms if
the investors failed to complete the transaction or if the pending proposal was
ultimately deemed to be unacceptable. Representatives of Merrill Lynch further
indicated that it was their belief that the investors were significantly further
along in the performance of their due diligence review and were more likely to
close a transaction. Merrill Lynch recommended that CCA enter into the
exclusivity agreement with the investors for a period ending on December 3,
1999. The CCA board approved the execution of the exclusivity agreement with the
investors. At or about the same time, Prison Realty entered into the exclusivity
agreement.
The CCA board met again with representatives of Merrill Lynch on Wednesday,
December 1, 1999. The CCA board considered and discussed the terms of the
proposed merger agreement and the CCA merger. While there were material
financial details to be completed, the CCA board considered the general form and
nature of the proposed CCA merger. Of particular interest was the treatment to
be accorded to the shareholders of CCA in connection with the CCA merger. On a
preliminary basis, Merrill Lynch indicated that in their opinion the
consideration to be paid to the shareholders of CCA in the CCA merger was fair,
from a financial point of view, to the CCA shareholders. The CCA board received
a report from the Prison Realty board regarding the status of the negotiations
with the investors. Subject to receipt of additional financial and other
relevant material terms, the CCA board, with Jean-Pierre Cuny abstaining,
tentatively approved the general terms and structure of the CCA merger, as
proposed. This conditional approval was subject to review by the CCA board of
the additional financial terms and other information and the execution of all
the relevant documents by Prison Realty, the investors, and all other affected
parties. The CCA board then adjourned without closing the meeting in order to
meet more promptly in case financial terms were received to be
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considered. This meeting was reconvened on Friday, December 3, 1999, and
adjourned to Monday, December 6, 1999. The December 6 meeting was adjourned and
completed without further action.
Financial terms and other material information relevant to the CCA merger
and the investors' proposal were subsequently delivered to the CCA board as
received from Merrill Lynch and the investors. The CCA board reviewed and
considered such information. In addition, representatives of Merrill Lynch
communicated with the CCA board and on December 26, 1999 delivered their oral
opinion that, based upon the matters presented to the CCA board and as set forth
in its opinion, as of the date of the opinion, the CCA merger, taken as a whole,
was fair, from a financial point of view, to CCA and it shareholders. After
review and consideration, the CCA board, with Jean-Pierre Cuny abstaining,
approved of the merger agreement, the CCA merger and certain related
transactions.
On Wednesday, February 25, 2000, the Prison Realty board received an
unsolicited proposal from Pacific Life regarding a transaction intended to serve
as an alternative to the equity investment and restructuring transaction led by
Fortress/Blackstone, which proposal had been reviewed by the board and special
committee of Prison Realty. Early in April 2000, a copy of the proposed
securities purchase agreement was distributed to the CCA board.
On Friday, April 14, 2000, the CCA board met with representatives of CCA
management and with the Prison Realty board and representatives of Merrill
Lynch, to consider the Pacific Life proposal. In considering the proposed
transaction with Pacific Life, the CCA board noted, in particular, that the
Pacific Life proposal treated CCA shareholders in the same manner as the
Fortress/Blackstone proposal did since it adopted and incorporated the merger
agreement between CCA and Prison Realty previously approved by the CCA board at
its December 1, 1999, meeting. In the course of the meeting, the representatives
of Merrill Lynch expressed the same view, noting that the consideration to be
paid to the CCA shareholders, aside from Sodexho and Baron, would also be the
same as proposed by Fortress/Blackstone, adding that Merrill Lynch believed that
the transaction made sense for CCA equity holders. The CCA board then approved,
with Jean-Pierre Cuny abstaining, going forward with the Pacific Life proposal,
conditioned upon its subsequent acceptance by Prison Realty and, in connection
with that approval, reaffirmed CCA's representations and warranties made in
connection with the merger agreement at its December 1, 1999, meeting.
On Thursday, June 8, 2000, the CCA board met again to consider amendments
to certain of its master agreements with Prison Realty as required by the
lenders under Prison Realty's bank credit facility in order for Prison Realty to
be granted a waiver and amendment with regard to certain existing defaults by
Prison Realty under its credit facility. After a review by management and
counsel for the benefit of the board of the effect of the proposed amendments,
the board unanimously approved of the various amendments in order to allow
Prison Realty to obtain the waiver and amendment.
Prison Realty subsequently obtained the waiver and amendment but, on
Friday, June 16, 2000, was informed by Pacific Life that Pacific Life was unable
to conclude that the terms of the waiver and amendment were acceptable to it or
that the obtaining of the waiver and amendment, which was a condition precedent
to its securities purchase agreement, had been satisfied. During that same week,
Prison Realty management and CCA management continued negotiations with the
outside shareholders of CCA, among others, regarding the terms of the merger
agreement in light of Pacific Life proposal and the requirement of the waiver
and amendment that the merger of CCA into Prison Realty be effected solely for a
non-cash consideration. On the morning of Wednesday, June 28, 2000, the CCA
board met again for the purposes of receiving an update on the status of the
Pacific Life transaction and of a proposed reconsolidation of CCA with Prison
Realty. In that meeting, the board was advised that: (i) at that point it was
certain that the proposed investment by Pacific Life in Prison Realty would be
terminated, and (ii) as an alternative, it had been proposed that Prison
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Realty and CCA engage in a stand alone reconsolidation of their entities in
accordance with the terms of an amended merger agreement. Attention then focused
on the continuing requirement of Prison Realty's lenders that such a
reconsolidation be effected for non-cash consideration and, in particular, upon
the effect of this requirement upon Baron and Sodexho. After confirming that the
proposed amended merger agreement involved no non-cash consideration for any CCA
shareholder, and that the consideration be received by CCA shareholders remained
essentially the same as had been proposed under both the Fortress/Blackstone and
Pacific Life proposals, the board agreed to terminate the Pacific Life
securities purchase agreement originally approved by the board at it's April 14,
2000, meeting and the merger agreement originally approved by the board at its
December 1, 1999, meeting, each action conditioned upon Prison Realty taking the
same action at its meeting later that day. After taking those actions, the CCA
board then unanimously approved of the proposed amended merger agreement between
Prison Realty and CCA.
PRISON REALTY'S REASONS FOR THE PROPOSED RESTRUCTURING TRANSACTIONS;
RECOMMENDATION OF PRISON REALTY'S BOARD OF DIRECTORS
The Prison Realty board and its special and independent committees believe
that the restructuring is fair to and in the best interests of Prison Realty's
stockholders. The Prison Realty board and its special and independent committees
also believe that the transactions will create short-term shareholder value by
allowing for the combined cash flows from operations of Prison Realty and CCA to
service the immediate financial and liquidity needs of the companies and
avoiding a filing by Prison Realty and/or CCA under Chapter 11 of the Federal
Bankruptcy Code which could adversely impact Prison Realty's and CCA's
relationships with key government entities. Additionally, the Prison Realty
board and its special and independent committees believe that the transactions
will create long-term shareholder value by providing the combined company with a
more simplified and stable operating structure. Moreover, the Prison Realty
board believes the combination of the companies and the restructuring is an
essential step to the continued viability of each company and the successful
resolution of the companies' financial situation.
The Prison Realty board and its special and independent committees have
approved the restructuring and have recommended that stockholders of Prison
Realty vote for the transactions required to complete the restructuring,
including amendments to Prison Realty's charter and the merger and related
transactions. In reaching this decision, the Prison Realty board and its special
and independent committees consulted with members of management of each of
Prison Realty, CCA, PMSI and JJFMSI, as well as financial advisors, legal
counsel and accountants of the companies, and considered a number of factors.
In making their determination with respect to the restructuring, the Prison
Realty board, the special committee and the independent committee considered the
following factors:
- The Prison Realty board determined that combining Prison Realty and CCA
and operating as a subchapter C corporation is the structure which will
create the most value for Prison Realty stockholders.
- Prison Realty's lenders required the combination with CCA as a condition
to providing the waiver and amendment.
- Combining Prison Realty and CCA eliminates the potential conflicts of
interest which have previously existed and adversely affected Prison
Realty's credibility in the capital markets, including those conflicts
arising out of the landlord-tenant and debtor-creditor relationship
between Prison Realty and CCA.
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- Since the 1999 Merger, trading prices for shares of REITs have
suffered in the stock market, making it more difficult for REITs to
raise equity or debt capital.
- As a subchapter C corporation, the combined company will be able to
retain earnings to help fund future growth.
- As a result of additional borrowings made available to Prison Realty
under its bank credit facility pursuant to the waiver and amendment and
access to additional sources of liquidity and capital, the Prison Realty
board determined that the proposed restructuring without the equity
investment proposed by Pacific Life was a viable alternative for Prison
Realty and a better alternative than seeking relief under the federal
bankruptcy laws.
- The restructuring was the result of an exhaustive eleven-month long
process designed to produce a proposal which would provide the most
long-term value for Prison Realty and its stockholders. On behalf of
Prison Realty, Merrill Lynch contacted 47 potential investors and merger
partners. Prison Realty received a proposal from Fortress/Blackstone,
which at that time represented the best offer from the four proposals
received and represented the only offer which could be accomplished
quickly because Fortress/Blackstone had completed their due diligence
and had made arrangements for refinancing Prison Realty's existing
indebtedness. The Prison Realty board and the special committee and
independent committee believe Merrill Lynch's contact with the large
pool of potential investors and merger partners resulted in the best and
most relevant proposals available to Prison Realty. Prior to
consummating a transaction with Fortress/Blackstone, Prison Realty
received two unsolicited proposals and concluded that the proposal
received from Pacific Life was a superior proposal to the
Fortress/Blackstone proposal and all other proposals received,
especially since Fortress/Blackstone and its proposed bank lender could
not provide assurance to Prison Realty that they would waive certain
conditions to their obligations, which were not expected to be
satisfied. Further, Fortress/Blackstone elected not to exercise their
right to match the terms and conditions of the Pacific Life proposal as
provided in the Fortress/Blackstone securities purchase agreement and
that agreement was terminated. Subsequent to reaching an agreement with
Pacific Life, but prior to completion of the transactions with Pacific
Life, Prison Realty determined that it was unclear as to whether Pacific
Life would proceed with the completion of the transactions contemplated
under the companies' securities purchase agreement with Pacific Life.
Prison Realty's board and its special and independent committees reached
this determination based upon Pacific Life's failure to provide
assurances that it would waive certain conditions to its obligation to
complete the transactions contemplated by the Pacific Life securities
purchase agreement, including conditions relating to (i) the refinancing
or renewal of Prison Realty's bank credit facility, (ii) Pacific Life's
view that there had occurred a "material adverse change" in Prison
Realty, and (iii) the settlement of certain stockholder litigation on
terms satisfactory to Pacific Life. Accordingly, based on its
determination that the transactions contemplated by the Pacific Life
securities purchase agreement were unlikely to be completed and in order
to satisfy the conditions contained in the waiver and amendment relating
to the timing of the restructuring, Prison Realty determined to
terminate the Pacific Life securities purchase agreement and complete
the restructuring.
- No party has expressed a willingness to complete an investment in, or
pursue any other business combination transaction with Prison Realty, on
terms that are feasible.
- The proposed restructuring represents the only alternative available to
Prison Realty which satisfies the conditions of its bank credit facility
as a result of the waiver and amendment.
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- Action had to be taken to preserve the financial health of Prison Realty
and CCA. Since CCA is Prison Realty's primary tenant, its financial
problems are also borne by Prison Realty.
- CCA did not meet its operating projections. Occupancy rates at its
facilities were adversely affected by the opening of a substantial
number of new facilities; operating expenses were higher as a
percentage of revenues than in 1998, and there were significant
expenses associated with newly-opened facilities.
- During 1999 and the first quarter of 2000, the operating performance
of CCA continued to decline. The Prison Realty board believed that the
restructuring would give the company the opportunity to correct its
financial problems and to bring in a new management team to improve
the company's operating results.
- Prison Realty considered significantly lowering the lease payments owing
to Prison Realty by CCA and maintaining the current structure of the
companies. This alternative was rejected.
- Reducing the lease payments could be a default under the agreements
governing Prison Realty's indebtedness.
- Reducing the lease payments could cause Prison Realty to violate the
rules applicable to REITs, which would subject Prison Realty to
corporate income tax.
- Conflicts of interest would continue to exist.
- The Prison Realty board believes that the consideration being paid to
shareholders of CCA is the minimum amount that could be paid and still
accomplish the transactions without resulting in an event of default
under Prison Realty's bank credit facility as a result of the waiver and
amendment.
- Baron, an outside investor in CCA, stated that they would not accept
any amount of consideration less than the payment being made to them.
Baron has the contractual right to approve any merger of CCA.
- CCA possesses all the contracts with government agencies, the
employees and infrastructure necessary to operate Prison Realty's
properties. Any effort to force CCA's shareholders to accept less was
likely to result in significant disruption of relationships with
government agencies and substantial loss of value.
- The Prison Realty board noted that significant restrictions on the
transfer of the shares issued to members of management and key
employees would exist following the merger.
- The Prison Realty board also considered what would happen to the
companies and their stockholders if the transactions were not
approved.
- Because the companies' business involves public safety, the Prison
Realty board believes it would have a serious adverse impact upon its
business if the government entities for which the companies house
inmates viewed the companies as not having the financial resources to
carry out their public safety obligations.
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In making its determination with respect to the restructuring, the Prison
Realty board, the special committee and the independent committee also
considered the following potentially negative factors:
- Prison Realty cannot be assured that it will qualify as a REIT with
respect to its 1999 taxable year or that the distribution of series B
preferred stock or other securities will satisfy its 1999 remaining REIT
distribution requirements.
- The combined company's net income per share will be lower due to the
increase in the number of shares as a result of the issuance of the
shares of common stock to CCA shareholders in the merger.
- Completion of the restructuring will require the companies to incur
approximately $60.0 million of transaction costs (a substantial portion
of which has either been incurred or contractually committed), which
includes approximately $26.5 million in fees and expenses incurred in
connection with the previously announced restructuring transactions or
claimed by Fortress/Blackstone as described above, and will require a
substantial amount of management's time. These resources could have
otherwise been used by the companies to further their respective
business objectives.
- Completing the restructuring will place significant demands on the
combined company's liquidity as the result of the above described fees
and expenses as well as from the payment of federal income tax as a
subchapter C corporation commencing with its 2000 taxable year. The
combined company's ability to meet these liquidity requirements will
depend on its ability to borrow under its credit facility and to
generate sufficient cash from operations.
- Following the completion of the merger and related transactions, as the
result of the beneficial ownership of 8.5 million shares of Prison
Realty common stock, on a fully diluted basis, not including shares of
Prison Realty common stock owned by such parties and not received in
connection with the merger and related transactions, the existing
shareholders of CCA will hold approximately 6.7% of the voting power of
Prison Realty. The voting power held by the existing CCA shareholders
following the merger and related transactions will reduce the voting
power currently held by Prison Realty's existing stockholders.
In the Prison Realty board's opinion, the factors listed immediately above,
along with the other factors discussed in this joint proxy statement/prospectus,
represent the material potential risks and adverse consequences of the
restructuring. The Prison Realty board considered the impact of these risks and
consequences to the existing stockholders in evaluating the restructuring. In
the Prison Realty board's opinion, however, these potential risks and
consequences were outweighed by the potential positive factors and the risks of
not consummating the restructuring discussed above. Accordingly, the Prison
Realty board voted to approve the restructuring.
In view of the wide variety of factors considered by the Prison Realty
board, the Prison Realty board did not find it practicable to, and did not,
quantify or otherwise attempt to assign relative weights to the specific factors
considered in making the recommendations.
CCA'S REASONS FOR THE MERGER; RECOMMENDATION OF CCA'S BOARD OF DIRECTORS
In making its recommendation to approve the merger, the CCA board
considered the following factors, the order of which does not necessarily
reflect their relative significance:
The CCA board believes that the merger and related transactions are
fair to and in the best interests of CCA's shareholders. The CCA board
believes that the merger and related
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transactions will create short-term shareholder value by allowing CCA's
shareholders to acquire an interest in an entity which will be able to use
the combined cash flows from operations to service the immediate financial
and liquidity needs of the combined companies and by avoiding a debt
restructuring which could include more onerous terms and adversely impact
both CCA's and Prison Realty's relationships with key governmental
entities. Additionally, the CCA board believes that the merger and related
transactions will create long-term shareholder value by creating a
simplified corporate structure which will increase the combined company's
access to working and growth capital to fund its development strategy.
Moreover, the CCA board believes the combination is an essential step to
the continued viability of each company and the successful resolution of
the companies' financial situation.
THE CCA BOARD HAS APPROVED THE MERGER AND RELATED TRANSACTIONS AND
RECOMMENDS THAT THE SHAREHOLDERS OF CCA VOTE FOR THE PROPOSAL SET FORTH IN THIS
JOINT PROXY STATEMENT/PROSPECTUS. In reaching this decision, the CCA board
consulted with members of management of each of the combining companies, as well
as financial advisors, legal counsel and accountants of the companies, and
considered a number of factors.
In making its determination with respect to the merger and the related
transactions, the CCA board considered the following factors:
- The proposed merger and related transactions represent the best
alternative available to CCA.
- The merger proposal was the result of an exhaustive eleven-month long
process designed to produce a proposal which would alleviate CCA's
significant liquidity problems and would provide the most long-term
value to its shareholders. On behalf of CCA, Merrill Lynch contacted
many potential investors or merger partners. In the process of
soliciting proposals for investments in CCA and/or Prison Realty, it
became readily apparent to Merrill Lynch and the CCA board that the
parties contacted had no interest in making an investment directly in
CCA. As such, the merger proposal represented the best alternative to
alleviate CCA's liquidity crisis.
- If a more favorable transaction is proposed by a third party, the CCA
board has the right to consider and accept such proposal.
- The combination of CCA and Prison Realty is the structure which will
create the most value for CCA's shareholders.
- CCA has experienced significant liquidity problems. At the time the
lease rates were established for the facilities leased from Prison
Realty to CCA, CCA believed that it would be able to make those lease
payments despite the fact that it was expected during the early years
of the leases that CCA would experience operating deficits. However,
during 1999, CCA did not perform as well as projected for several
reasons: occupancy rates at its facilities were lower than in 1998;
operating expenses were higher as a percentage of revenues than in
1998; and certain aspects of the lease arrangements with Prison
Realty, including the obligation of CCA to begin making full lease
payments even before a facility had accepted inmates adversely
affected CCA. These operating problems significantly impaired CCA's
access to capital. Because it had been anticipated that CCA would
experience operating deficits in its first several years in any event,
the more restricted access to capital meant that CCA was having a
difficult time making all of the payments that it owed to Prison
Realty. Therefore, the CCA board concluded that it was not a viable
alternative for CCA to continue making payments to Prison Realty under
the arrangements as currently in effect.
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- CCA's inability to raise capital, combined with increased operating
expenses, has significantly impaired CCA's ability to remain current
in its payments to Prison Realty and various other parties. Because
CCA is the primary tenant for Prison Realty's facilities, CCA's
inability to make payments to Prison Realty would have a direct
negative impact on Prison Realty's financial condition, and it is
likely that Prison Realty would be forced to seek alternate lessees
for its facilities.
- The merger will create short-term shareholder value by allowing for
the combined cash flow from operations to service the immediate
financial and liquidity needs of Prison Realty and CCA, versus the
restrictions on the use of cash on a separate company basis.
Additionally, the transactions offer the best opportunity to create
long-term shareholder value by providing the combined company with
working and growth capital to fund the current business development
plans of Prison Realty and CCA.
- Combining the companies eliminates the potential conflicts of interest
which have previously existed and affected both CCA's and Prison
Realty's credibility in the capital markets, including those conflicts
arising out of the landlord-tenant and debtor creditor relationship
between Prison Realty and CCA.
- As a subchapter C corporation, the combined company will be able to
retain earnings to help fund future growth.
In making its determination with respect to the merger and the related
transactions, the CCA board also considered the following potentially negative
factors:
- Following the completion of the merger and related transactions, the
shareholders of CCA will own only a small interest in the combined
company, and as such will have limited control over the management and
operations of the combined company.
- The Prison Realty common stock to be issued to the CCA shareholders in
the merger will be subject to the terms of either a restricted stock
plan or a lock-up agreement, both of which will restrict the ability of
the shareholder to sell or otherwise transfer the shares of Prison
Realty common stock received in the merger.
In the opinion of the CCA board, the factors listed immediately above,
along with the other factors discussed in this joint proxy statement/prospectus,
represent the material potential risks and adverse consequences to CCA's
shareholders which could occur as part of the CCA merger and related
transactions. The CCA board considered the impact of these risks and
consequences to CCA's shareholders in evaluating the merger and related
transactions. In the CCA board's opinion, however, these potential risks and
consequences were outweighed by the potential positive factors discussed above.
Accordingly, the CCA board voted to approve the merger and related transactions.
In view of the wide variety of factors considered by the CCA board, it did
not find it practicable to, and did not, quantify or otherwise attempt to assign
relative weights to the specific factors considered in making the
recommendations.
INTERESTS OF CERTAIN PERSONS IN THE MERGER AND RELATED TRANSACTIONS AND THE
PRISON REALTY RESTRUCTURING
In considering the recommendations of the CCA board to approve the merger
and related transactions, shareholders of CCA should be aware that some of the
directors, executive officers and shareholders of Prison Realty and CCA have
interests in, and will receive benefits as a consequence, of the merger and
related transactions and the Prison Realty restructuring, that are separate from
the
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interests of, and benefits to the shareholders of CCA generally. The CCA board
was aware of these interests when it approved the merger and related
transactions.
PURCHASE OF CCA COMMON STOCK FROM BARON AND SODEXHO
BARON. Pursuant to the terms of a stock purchase agreement by and among
Prison Realty and Baron, immediately prior to the completion of the merger,
Prison Realty will purchase all of the shares of the voting common stock of CCA
which are owned by Baron for non-cash consideration consisting of shares of
Prison Realty common stock valued at $8.0 million (or approximately 2.3 million
shares assuming a Prison Realty common stock price of $3.44 per share). The
number of shares of Prison Realty common stock to be issued and delivered to
Baron as the purchase price under the agreement shall be determined by dividing
$8.0 million by the lesser of: (i) $3.4375, the closing price of shares of
Prison Realty common stock on the NYSE on Friday, June 23, 2000; (ii) the
average closing price of Prison Realty common stock on the NYSE over the five
trading days ending two trading days prior to the closing of the merger; (iii)
the conversion price of Prison Realty's secured or unsecured indebtedness
existing prior to the merger; and (iv) the exercise price of any equity
securities issued by Prison Realty prior to the merger in satisfaction of its
existing contractual obligations.
As consideration for Baron's consent to the merger (as necessary in order
to effectuate the merger), Baron has required that Prison Realty issue to Baron
warrants to purchase $3.0 million in shares of Prison Realty common stock (or
approximately 857,000 shares assuming a Prison Realty common stock price of
$3.50 per share with respect to two-thirds of the warrants and a Prison Realty
common stock price of $3.44 per share with respect to one-third of the
warrants). Specifically, Prison Realty will issue and deliver to Baron (i)
series A warrants to purchase shares of Prison Realty common stock having an
aggregate value of $2.0 million, as calculated below, with an exercise price
equal to $0.01 per share and (ii) series B warrants to purchase shares of Prison
Realty common stock having an aggregate value of $1.0 million, as calculated
below, at an exercise price equal to the lesser of: (a) $3.4375, the closing
price of shares of Prison Realty common stock on the NYSE on Friday, June 23,
2000; (b) the average closing price of Prison Realty common stock on the NYSE
over the five trading days ending two trading days prior to the closing of the
merger; (c) the conversion price of any of Prison Realty's secured or unsecured
indebtedness existing prior to the merger; and (d) the exercise price of any
equity securities issued prior to the merger in satisfaction of its existing
contractual obligations. The warrants shall be exercisable for a period of five
years commencing on the date of issuance of the warrants. The number of shares
of Prison Realty common stock Baron shall receive as the result of its exercise
of the series A warrants shall be determined by dividing $2.0 million by the
lesser of: (a) $3.4375, the closing price of the shares of Prison Realty common
stock on the NYSE on Friday, June 23, 2000; (b) average closing price of Prison
Realty common stock on the NYSE over the 5 trading days ending two trading days
prior to the closing of the merger; (c) the conversion price of Prison Realty's
existing secured or unsecured indebtedness existing prior to the merger; and (d)
the exercise price or conversion price of any equity securities issued by Prison
Realty in satisfaction of its existing contractual obligations. The number of
shares of Prison Realty common stock Baron shall receive as the result of its
exercise of the series B warrants shall be determined by dividing $1.0 million
by the lesser of: (a) $3.4375, the closing price of shares of Prison Realty
common stock on the NYSE on Friday, June 23, 2000; (b) the average closing price
of Prison Realty common stock on the NYSE over the five trading days ending two
trading days prior to the closing of the merger; (c) the conversion price of any
of Prison Realty's secured or unsecured indebtedness existing prior to the
merger; and (d) the exercise price of any equity securities issued by Prison
Realty prior to the merger in satisfaction of its existing contractual
obligations.
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<PAGE> 126
In addition, certain of the agreements entered into by Baron in connection
with its initial purchase of the shares from CCA will be canceled and will be of
no further force or effect. The completion of the transactions contemplated by
the Baron stock purchase as set forth in the Baron purchase agreement is subject
to (i) the voting by Baron of their shares of CCA common stock in favor of the
merger, and (ii) obtaining the necessary shareholder approval of the merger.
Baron has designated a representative serving on the CCA board.
SODEXHO. Prison Realty is currently negotiating with Sodexho with respect
to the purchase of the shares of CCA common stock held by it. Prison Realty
expects, if it can reach an agreement with Sodexho, to pay Sodexho non-cash
consideration consisting of shares of Prison Realty common stock valued at up to
$8.0 million (or approximately 2.3 million shares assuming a Prison Realty
common stock price of $3.44 per share) for its shares of CCA common stock, under
the same terms as described above with respect to the purchase of shares of CCA
common stock held by Baron. Prison Realty indicated to Sodexho that it was
willing to satisfy its previous agreement to purchase the CCA shares in the form
of Prison Realty common stock valued at $8.0 million as required by Prison
Realty's amended bank facility. Sodexho informed Prison Realty that it should
receive the same aggregate consideration as Prison Realty agreed to pay Baron.
The merger agreement provides that Sodexho would receive fewer shares of Prison
Realty common stock in the merger pursuant to the exchange ratio set forth in
the merger agreement. Prison Realty intends to continue negotiations with
Sodexho regarding its purchase of the CCA common stock held by Sodexho for
non-cash consideration of up to $8.0 million conditioned on the elimination of
Sodexho's existing contractual right to have a representative on Prison Realty's
board. In the event Prison Realty does not acquire such shares prior to the
merger, there can be no assurance that Sodexho will vote the CCA common stock
held by it in favor of the merger or the Prison Realty common stock held by it
in favor of the charter amendments and the merger and related transactions. If
no agreement is reached with Sodexho, Sodexho will maintain its existing
contractual right to have a representative on the Prison Realty board.
BOARD OF DIRECTORS AND SENIOR MANAGEMENT
Thomas W. Beasley, chairman of the board of directors and interim chief
executive officer of Prison Realty, currently serves as the interim chief
executive officer of CCA and is chairman of the board of directors of PMSI.
Doctor R. Crants has been terminated as the chief executive officer of
Prison Realty, as well as the chief executive officer of CCA. Mr. Crants has
also resigned as a member of the board of directors of CCA. Mr. Crants has
informed Prison Realty that he intends to remain a director of each of PMSI and
JJFMSI.
J. Michael Quinlan, president and chief operating officer of CCA and a
member of its board of directors is also the president of Prison Realty.
Jean-Pierre Cuny is a member of the board of directors of CCA and Prison
Realty.
SEVERANCE ARRANGEMENTS WITH CURRENT AND FORMER PRISON REALTY AND CCA EXECUTIVE
OFFICERS
On January 1, 1999, Prison Realty entered into an employment agreement with
Doctor R. Crants which provided for a term of three years with an additional
three-year renewal option. The agreement provided for annual compensation and
incentive compensation as determined by Prison Realty's compensation committee
of the board of directors and also provided for certain non-cash benefits such
as life and health insurance. Doctor R. Crants has since resigned from his
position as
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chairman of the Prison Realty board and has been terminated as the chief
executive officer of Prison Realty. In connection with Doctor R. Crants'
resignation from the board of directors and termination as chief executive
officer, the board of directors of Prison Realty has approved modifications to
certain agreements and arrangements between Prison Realty and Doctor R. Crants
relating to his employment and compensation. Specifically, the board approved:
(i) an amendment to his employment agreement with Prison Realty removing Prison
Realty's right to offset payments owed to Doctor R. Crants upon his termination
under the employment agreement (consisting of three years of salary) against
amounts earned by Mr. Crants through other employment; (ii) a modification to
the $1.0 million loan granted to Mr. Crants under the Prison Realty Executive
Equity Loan Plan whereby the outstanding principal amount of the loan did not
become immediately due and payable upon Mr. Crants' termination, but rather Mr.
Crants will make interest only payments on the loan for the first three years
following the modification at the rate of 250 basis points over the thirty-day
LIBOR rate in effect on such date and 33.3% of the principal amount of the loan,
and all accrued and unpaid interest thereon, shall be paid in three equal
amounts on the fourth, fifth and sixth anniversaries of the modification; and
(iii) the immediate vesting of 140,000 deferred shares of Prison Realty common
stock granted to Mr. Crants in November 1995 by Old CCA pursuant to a stock
bonus plan adopted by Prison Realty in the 1999 Merger which would either be
forfeited upon Mr. Crants' termination or would not vest until November 2005. As
a result of Mr. Crants' termination as chief executive officer of Prison Realty,
any stock option or similar rights which have not been exercised by Mr. Crants,
and any other awards of stock or equity interests in which Mr. Crants has not
become vested, have been terminated or forfeited to Prison Realty. The
provisions of Mr. Crants' employment agreement prohibit him from competing with
Prison Realty for a period of one year after termination of his employment.
In connection with Ms. Carroll's resignation from her position as chief
financial officer, secretary and treasurer of Prison Realty which was originally
to be effective June 30, 2000, the board of directors of Prison Realty granted
Ms. Carroll cash severance equal to six months salary. In consideration for the
extension of Ms. Carroll's employment through September 15, 2000, Prison Realty
has agreed to pay Ms. Carroll an additional cash severance payment of $78,750 on
or about the time of the completion of the restructuring and the merger. In the
event the restructuring and merger are not completed by September 15, 2000, Ms.
Carroll will remain employed by Prison Realty at her current salary until the
earlier of the completion of the restructuring and merger and the naming of her
successor.
In connection with the resignation of D. Robert Crants, III from his
position as president of Prison Realty and as a member of the Prison Realty
board, and the resignation of Michael W. Devlin from his position as chief
operating officer of Prison Realty and as a member of the Prison Realty board,
the employment agreements previously entered into between Prison Realty and each
of Mr. Crants, III and Mr. Devlin have been terminated. Prison Realty and CCA
have entered into a severance agreement with each executive pursuant to which
payments have and shall be made to each executive totaling approximately
$633,750. Among the payments to be made to each executive pursuant to the terms
of the severance agreements are (i) a payment of $233,750, which represents
amounts that were payable to each executive pursuant to the terms of his
respective employment agreement; and (ii) a payment made to each executive on
December 31, 1999 of $300,000 in exchange for 150,000 shares of CCA common stock
(representing 75% of each executive's ownership interest in CCA). The remaining
$100,000 of the payment will be used to purchase the remainder of each
executive's remaining CCA common stock immediately prior to the closing of the
merger of Prison Realty and CCA, subject to the satisfaction of certain
conditions to the merger. Under the original terms of these severance
agreements, CCA was to purchase the initial portion of the shares of CCA common
stock held by Messrs. Crants, III and Devlin on December 31, 1999, with Prison
Realty purchasing the balance immediately prior to the closing of the merger.
However, as a result of
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restrictions on CCA's ability to purchase these shares, the rights and
obligations were assigned to and assumed by Doctor R. Crants. In connection with
this assignment, Mr. Crants received a loan in the aggregate principal amount of
$600,000 from PMSI, the proceeds of which were used to purchase the 300,000
shares of CCA common stock owned by Messrs. Crants, III and Devlin. Prison
Realty expects to pay $600,000 to Mr. Crants for the CCA shares acquired by him
from Messrs. Crants, III and Devlin immediately prior to the completion of the
merger. It is expected that Doctor R. Crants will repay the loan from PMSI on
the due date of such loan. All payments made to Messrs. Crants, III and Devlin
have been and will be applied to reduce the outstanding aggregate principal
amount of three loans granted to each executive in the aggregate principal
amount of $1.0 million under the Prison Realty Executive Equity Loan Plan.
Additionally, any stock options or similar rights which have not been exercised
by each executive, and any other awards of stock or equity interests in which
each executive has not become vested, have been terminated or forfeited to
Prison Realty.
In the event Darrell K. Massengale, the chief financial officer and
secretary of CCA, is not employed after the completion of the restructuring and
merger, pursuant to the terms of an employment agreement between CCA and Mr.
Massengale, CCA is obligated to pay Mr. Massengale his annual salary for three
years following the date of his termination. However, CCA shall be entitled to
receive as an off-set against its payments to Mr. Massengale, any amounts he may
earn in any active employment during the three year period.
In addition, all outstanding options to purchase common stock or other
securities of CCA or Prison Realty granted to Mr. Massengale after the date of
his employment agreement but prior to the date of Mr. Massengale's termination
under the terms of any stock option incentive, stock incentive, or other stock
benefit plans currently adopted and administered by CCA or Prison Realty, shall
become immediately vested and exercisable upon Mr. Massengale's termination, and
all deferred or restricted shares of common stock or other securities of CCA or
Prison Realty granted to Mr. Massengale after the date of the agreement but
prior to his termination shall become immediately vested upon his termination.
CCA has also agreed to pay Mr. Massengale a retention bonus equal to 50% of his
annual salary to be paid on September 15, 2000 for his services to CCA through
that date.
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OWNERSHIP OF PRISON REALTY COMMON STOCK
The following table sets forth certain information with respect to the
beneficial ownership of shares of Prison Realty common stock as of July 24,
2000, compared to the beneficial ownership of shares of Prison Realty common
stock outstanding immediately following the completion of the merger and related
transactions and the Prison Realty restructuring (assuming that an aggregate of
approximately 7.7 million shares of Prison Realty common stock are issued
immediately prior to and in the merger) and not including shares of Prison
Realty common stock issuable upon the exercise of warrants issued to Baron, by:
(i) each shareholder of Prison Realty that Prison Realty believes currently
holds more than a 5% beneficial interest in Prison Realty common stock, (ii)
each existing director of Prison Realty, (iii) each of Prison Realty's existing
executive officers that is anticipated to continue in such position after the
merger and related transactions and the Prison Realty restructuring, and (iv)
all directors and executive officers as a group. Except as otherwise indicated,
Prison Realty believes that the beneficial owners of the shares of Prison Realty
common stock listed below, based on information furnished by such owners and/or
from information contained in reports filed by the beneficial owner with the SEC
pursuant to Section 13 of the Exchange Act, have sole voting and investment
power with respect to such shares.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
NUMBER OF SHARES OF PRISON REALTY COMMON STOCK
PRISON REALTY COMMON STOCK EXPECTED TO BE BENEFICIALLY
BENEFICIALLY OWNED AS OF OWNED UPON CONSUMMATION
JULY 24, 2000(1) OF RESTRUCTURING TRANSACTIONS
-------------------------- ------------------------------
NUMBER OF PERCENT OF NUMBER OF PERCENT OF
NAME OF BENEFICIAL OWNER SHARES CLASS(2) SHARES CLASS(3)
------------------------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Dreman Value Management, L.L.C....... 13,324,690(4) 11.3% 13,324,690 10.6%
10 Exchange Place, Suite 2150
Jersey City, New Jersey 07302-3913
Sodexho Alliance, S.A................ 10,464,131(5) 8.8 12,789,712(5) 10.1
Port de la Bourdonnais
75007, Paris France
Scudder Kemper Investments, Inc...... 8,923,325(6) 7.5 8,923,325(6) 7.0
345 Park Avenue
New York, New York 10154
Gotham Partners, L.P................. 8,046,100(7) 6.8 8,046,100(7) 6.4
Gotham Partners III, L.P.
Gotham International Advisors,
L.L.C.
Gotham Holdings II, L.L.C.
110 East 42nd Street, 18th Floor
New York, New York 10017
Thomas W. Beasley.................... 2,490,626(8) 2.1 2,490,626(8) 2.0
J. Michael Quinlan................... 427,745(9) * 537,745(9) *
C. Ray Bell.......................... 168,281(10) * 168,281(10) *
Jean-Pierre Cuny..................... 26,250(11) * 26,250(11) *
Ted Feldman.......................... 33,614(12) * 33,614(12) *
</TABLE>
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<TABLE>
<CAPTION>
NUMBER OF SHARES OF
NUMBER OF SHARES OF PRISON REALTY COMMON STOCK
PRISON REALTY COMMON STOCK EXPECTED TO BE BENEFICIALLY
BENEFICIALLY OWNED AS OF OWNED UPON CONSUMMATION
JULY 24, 2000(1) OF RESTRUCTURING TRANSACTIONS
-------------------------- ------------------------------
NUMBER OF PERCENT OF NUMBER OF PERCENT OF
NAME OF BENEFICIAL OWNER SHARES CLASS(2) SHARES CLASS(3)
------------------------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Joseph V. Russell.................... 154,771(13) * 154,771(13) *
Charles W. Thomas.................... 80,017(12) * 80,017(12) *
All executive officers and directors
as a group......................... 3,445,316(14) 2.9 3,665,316(14) 2.9
</TABLE>
-------------------------
* Represents beneficial ownership of less than 1% of the outstanding shares
of Prison Realty common stock.
(1) Includes shares as to which such person directly or indirectly, through any
contract, arrangement, understanding, relationship, or otherwise has or
shares voting power and/or investment power as these terms are defined in
Rule 13d-3(a) of the Exchange Act. Shares of Prison Realty common stock
underlying options to purchase shares of Prison Realty common stock, which
are exercisable, or become exercisable within 60 days after June 24, 2000,
are deemed to be outstanding for the purpose of computing the outstanding
shares of Prison Realty common stock owned by the particular person and by
the group, but are not deemed outstanding for any other purpose.
(2) Based on 118,409,619 shares of Prison Realty common stock issued and
outstanding on July 17, 2000.
(3) The ownership percentages reflected in this column were computed in
compliance with the Exchange Act regulations. Based on 126,089,352 shares
of Prison Realty common stock issued and outstanding upon completion of the
merger and restructuring transactions, assuming the issuance of an
aggregate of approximately 7.7 million shares of Prison Realty common stock
in the merger transactions. Does not include an aggregate of approximately
857,000 shares of Prison Realty common stock issuable upon the exercise of
warrants to be granted to Baron under the terms of its agreement with
Prison Realty, assuming a price per share of $3.44 and $3.50 in accordance
with the terms of such agreement.
(4) This beneficial ownership information was received by Prison Realty from a
Schedule 13G filed with the SEC and dated January 5, 2000. Dreman Value
Management, L.L.C. beneficially owns, and has the sole power to vote
12,581,140 shares, and has shared voting power for 66,150 shares of Prison
Realty common stock. Dreman Value Management, L.L.C. has sole disposition
power for 13,324,690 shares of Prison Realty common stock.
(5) Includes 80,626 shares of Prison Realty common stock issuable upon the
exercise of certain options issued to Jean-Pierre Cuny and transferred by
Mr. Cuny to Sodexho. Assumes the issuance of a total of approximately $8.0
million in Prison Realty common stock, or 2,327,273 shares of Prison Realty
common stock at a price per share of $3.44, in accordance with the terms
proposed to Sodexho by Prison Realty with respect to the exchange for all
shares of CCA common stock owned by Sodexho immediately prior to the CCA
merger. Sodexho, however, has not accepted the terms of such proposal.
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(6) This beneficial ownership information was received by Prison Realty from a
Schedule 13G filed with the SEC on January 28, 2000. Scudder Kemper
Investments, Inc. beneficially owns, and has the sole power to dispose or
direct the disposition of, 8,923,325 shares of Prison Realty common stock.
Of this amount, Scudder Kemper Investments, Inc. has the sole power to vote
or direct the vote of 8,922,100 shares of Prison Realty common stock.
(7) This beneficial ownership information was received by Prison Realty from a
Schedule 13D filed with the SEC on March 31, 2000. Gotham Partners, L.P.
has sole voting and investment power with respect to 5,215,451 shares of
Prison Realty common stock. Gotham Partners III, L.P. has sole voting and
investment power with respect to 233,962 shares of Prison Realty common
stock. Gotham International Advisors, L.L.C. has sole voting and investment
power with respect to 2,204,086 shares of Prison Realty common stock.
Gotham Holdings II, L.L.C. has sole voting and investment power with
respect to 392,601 shares of Prison Realty common stock. Section H
Partners, L.P. is the sole general partner of Gotham Partners, L.P. and
Gotham Partners III, L.P. Karenina Corp., which is wholly owned by William
A. Ackman, and DPB Corp., which is wholly owned by David P. Berkowitz, are
the sole general partners of Section H Partners, L.P. Messrs. Ackman and
Berkowitz are the senior managing members of Gotham International Advisors,
L.L.C., which, pursuant to an investment management agreement, has the
power to vote and dispose of all of the shares of Prison Realty common
stock owned by Gotham Partners International, Ltd. Gotham Holdings
Management L.L.C. is the manager of Gotham Holdings II, L.L.C. Messrs.
Ackman and Berkowitz are the senior managing members of Gotham Holdings II,
L.L.C.
(8) Includes 5,000 shares of Prison Realty common stock issuable upon the
exercise of vested options, 26,211 shares of Prison Realty common stock
held in a 401(k) plan, 19,750 shares of Prison Realty common stock owned by
Thomas W. Beasley's wife, and an aggregate of 14,567 shares of Prison
Realty common stock owned by Mr. Beasley's three children.
(9) Includes 393,750 shares of Prison Realty common stock issuable upon the
exercise of vested options, 900 shares of Prison Realty common stock owned
by Mr. Quinlan's daughters, 21,000 shares of Prison Realty common stock
owned by Mr. Quinlan's wife and 2,645 shares of common stock held in an
Individual Retirement Account. A total of approximately $400,000 in Prison
Realty common stock, or approximately 110,000 shares assuming a price of
$3.50 per share, will be issued to Mr. Quinlan in the merger of CCA with
and into Prison Realty in exchange for 200,000 shares of CCA voting common
stock owned by Mr. Quinlan.
(10) Includes 20,000 shares of Prison Realty common stock issuable upon the
exercise of vested options and 1,000 shares of Prison Realty common stock
owned jointly by Mr. Bell and his wife.
(11) Mr. Cuny serves as the Senior Vice-President of The Sodexho Group, an
affiliate of Sodexho. Mr. Cuny beneficially owns 26,250 shares of Prison
Realty common stock issuable upon the exercise of vested options. This
number does not include shares of Prison Realty common stock beneficially
owned by Sodexho, of which Mr. Cuny disclaims beneficial ownership.
(12) Includes 20,000 shares of Prison Realty common stock issuable upon the
exercise of vested options.
(13) Includes 20,000 shares of Prison Realty common stock issuable upon the
exercise of vested options and 437 shares of Prison Realty common stock
owned jointly by Mr. Russell and his daughter.
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(14) Includes an aggregate of 173,126 shares of Prison Realty common stock
issuable upon the exercise of vested options. A total of approximately
$400,000 in Prison Realty common stock, or approximately 110,000 shares
assuming a price of $3.50 per share, will be issued to each of J. Michael
Quinlan and Vida H. Carroll in the merger of CCA with and into Prison
Realty in exchange for 200,000 shares of CCA voting common stock owned by
each of J. Michael Quinlan and Vida H. Carroll.
REGULATORY FILINGS AND APPROVALS REQUIRED FOR THE MERGER AND RELATED
TRANSACTIONS AND PRISON REALTY RESTRUCTURING
Prison Realty and CCA do not believe that any governmental filings in the
United States in regard to the merger and related transactions and the Prison
Realty restructuring are required, other than the following:
- filings with the Federal Trade Commission and the Antitrust Division of
the Department of Justice under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 (the "HSR Act");
- articles of amendment and restatement to the charter of Prison Realty to
be filed with the State Department of Assessments and Taxation of the
State of Maryland;
- articles supplementary to the charter of Prison Realty to be filed with
the State Department of Assessments and Taxation of the State of
Maryland classifying the series B convertible preferred stock and
setting forth the rights, terms and preferences of the shares of the
series B convertible preferred stock issued in satisfaction of Prison
Realty's remaining 1999 REIT distribution requirement;
- filings with the SEC to register Prison Realty securities to be issued
in the merger and related transactions; and
- filing of Articles of Merger with the Tennessee Secretary of State with
respect to the merger of CCA with and into the wholly owned acquisition
subsidiary of Prison Realty.
Completion of the merger and related transactions and the Prison Realty
restructuring is conditioned upon, among other things, the absence of any
preliminary or permanent injunction or other orders issued by any court or other
judicial or administrative body with competent jurisdiction which prohibits or
prevents completion of the merger and related transactions.
DESCRIPTION OF THE RESTRUCTURING OF PRISON REALTY
This section of the joint proxy statement/prospectus describes certain
aspects of the proposed restructuring of Prison Realty, including the provisions
of Prison Realty's amended and restated charter. While the companies believe
that the description covers the material terms of the restructuring, the
following summary does not purport to be complete and is qualified in its
entirety by reference to the amended and restated charter of Prison Realty,
which is attached hereto as Appendix B and incorporated herein by their
reference. All shareholders are urged to read the amended and restated charter
carefully and in its entirety for a more complete understanding of the
information discussed below and the restructuring in general.
AMENDED AND RESTATED CHARTER OF PRISON REALTY
In order to complete the restructuring, including the merger, Prison Realty
will be required to make certain amendments to its existing charter. If approved
by the affirmative vote of the holders of
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two-thirds of all the votes entitled to be cast at Prison Realty's special
shareholders' meeting, Prison Realty's existing charter will be amended and
restated.
NAME CHANGE. The amended and restated charter includes a provision
changing the name of Prison Realty from "Prison Realty Trust, Inc." to
"Corrections Corporation of America."
INCREASE IN AUTHORIZED STOCK. The proposed amended and restated charter
also contains certain changes to Prison Realty's existing charter designed to
provide Prison Realty with the ability to address future capital and operational
requirements. The proposed amended and restated charter of Prison Realty would
increase the authorized capital stock of Prison Realty to 450.0 million shares,
consisting of 400.0 million shares of common stock and 50.0 million shares of
preferred stock. Prison Realty's charter currently authorizes the issuance of
320.0 million shares of capital stock, consisting of 300.0 million shares of
common stock and 20.0 million shares of preferred stock, of which 4.3 million
shares have been designated as 8% series A preferred stock. Prison Realty has an
aggregate of approximately 118.4 million shares of common stock currently issued
and outstanding. Prison Realty also has approximately 22.8 million shares of
common stock reserved for issuance under various employee and director benefit
plans and pursuant to the conversion of an aggregate of $70.0 million of
convertible, subordinated notes. The Prison Realty charter currently provides
for "blank check" stock whereby the Prison Realty board is permitted to classify
or reclassify any unissued stock without stockholder approval. However, the
board may not issue shares of capital stock in excess of the amount authorized
under the charter.
The merger and related transactions and the Prison Realty restructuring
will require, if completed, Prison Realty to issue additional shares of its
common stock. Prison Realty will also issue shares of its series B convertible
preferred stock in satisfaction of its remaining 1999 REIT distribution. In
addition, it is possible that any settlement with respect to the existing
shareholder litigation may involve the issuance of equity securities by Prison
Realty although no settlement agreement has been reached and there can be no
assurance that any settlement will be reached. In connection with the merger and
the proposed purchase of CCA shares from Baron and Sodexho prior to the merger,
Prison Realty will issue approximately 7.7 million shares of Prison Realty
common stock in exchange for shares of CCA common stock, as well as warrants to
purchase $3.0 million in shares of Prison Realty common stock. Assuming a $3.50
per share closing price for Prison Realty common stock and applying the formulas
set out in the merger agreement, the merger transactions will result in
approximately 8.5 million shares of Prison Realty common stock being issued.
Prison Realty also will issue a minimum of $150.0 million of its series B
convertible preferred stock into shares of its common stock in satisfaction of
its remaining REIT distribution requirements for 1999. Assuming a value of
$25.00 per share, Prison Realty will issue up to 6.0 million shares of series B
convertible preferred stock. Since the shares of series B convertible preferred
stock will pay a 12% annual paid-in-kind dividend prior to conversion and are
only convertible during two separate 10 day periods, Prison Realty will be
required to issue an undetermined number of shares of Prison Realty common stock
as a result of the distribution. In addition, Prison Realty is required by the
terms of the waiver and amendment to use commercially reasonable efforts to
complete an offering of its common stock, through the distribution of rights to
purchase common stock, yielding cash proceeds to Prison Realty of $50.0 million.
Assuming a value of $3.00 per share, Prison Realty will issue approximately 16.7
million shares of common stock in an offering yielding cash proceeds of $50.0
million.
Prison Realty believes that the authorization of additional shares of
common and preferred stock will give Prison Realty the ability to meet its
immediate issuance requirements under the terms of the merger and pursuant to
the transactions required by the waiver and amendment and in satisfaction of its
REIT distribution requirements. Additionally, it is also possible that any
settlement of the stockholder lawsuits discussed herein under "Information About
Prison Realty -- Litigation" will
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include the issuance by Prison Realty of a significant amount of equity
securities. Prison Realty believes that the availability of additional shares of
common and preferred stock will enable it to act promptly to take advantage of
corporate opportunities as they arise without the delay or cost of calling a
special meeting of stockholders, including the potential completion of the
merger of each of PMSI and JJFMSI with and into Prison Realty at an undetermined
later date. Prison Realty also believes that additional authorization of shares
of preferred stock, combined with the board's ability to set the terms of the
preferred stock, such as dividend rates, conversion prices, voting rights,
redemption prices and maturity dates, in accordance with the terms of particular
transactions, will benefit Prison Realty in its efforts to address future
capital and financing needs. The increase in the number of authorized shares of
capital stock may, however, discourage attempts to acquire Prison Realty by
making them more difficult and costly.
REMOVAL OF REIT PROVISIONS. Prison Realty's existing charter contains
provisions relating to Prison Realty's operating in a manner so as to qualify as
a REIT. These provisions require the Prison Realty board to: (i) use all
reasonable efforts to ensure that Prison Realty satisfies the requirements for
qualification as a REIT; and (ii) take no action to disqualify Prison Realty as
a REIT or to otherwise revoke Prison Realty's election to be taxed as a REIT. In
addition, Prison Realty's existing charter also contains certain ownership
restrictions that, among other things, generally prohibit any individual from
owning more than 9.8% of the outstanding shares of Prison Realty common stock or
Prison Realty preferred stock. The proposed amended and restated charter of
Prison Realty would remove all provisions relating to Prison Realty's operation
as a REIT, as well as other references thereto, contained in Prison Realty's
current charter. If Prison Realty's shareholders approve the charter amendments,
Prison Realty will not operate so as to qualify as a REIT beginning with its
taxable year ending December 31, 2000.
RESTRUCTURING OF BOARD OF DIRECTORS. Prison Realty's existing charter
provides that the board of directors will consist of the number of directors
determined from time to time by resolution of the Prison Realty board in
accordance with the Prison Realty bylaws, provided that the number of directors
may be no less than the minimum numbers required by Maryland law. The Prison
Realty charter also divides the directors into three separate classes with the
number of directors in each class being as equal as possible. The charter also
requires that at least three members of the board must be "independent
directors." For purposes of Prison Realty's charter, an independent director is
defined to be an individual who is not an officer or employee of Prison Realty,
CCA, PMSI or JJFMSI, or any of Prison Realty's tenants. Each director serves for
a term ending on the third anniversary date of the special meeting of
shareholders at which he or she was elected. By resolution of the Prison Realty
board, the board is currently comprised of six members, three of whom are
independent and two of which serve on the board's independent committee.
Currently, Prison Realty has two Class I Directors whose terms expire at Prison
Realty's 2002 annual meeting, one Class II Director whose term expires at Prison
Realty's 2001 annual meeting, and three Class III Directors whose terms expire
at Prison Realty's 2000 annual meeting.
The proposed articles of amendment and restatement to Prison Realty's
charter provide that the board of directors will consist of the number of
directors determined from time to time by resolution of the board in accordance
with the Prison Realty bylaws except as otherwise provided in the charter,
provided that the number of directors may be no less than the minimum number
required by Maryland law. The proposed articles of amendment and restatement do
not divide the directors into classes. Accordingly, under Maryland law, all
directors will be elected annually for one-year terms and until the next annual
meeting of shareholders. The proposed articles of amendment and restatement also
require that at least two members of the board must be "independent directors."
For purposes of Prison Realty's amended and restated charter, an "independent
director" is defined to be an individual who: (i) is not an officer or employee
of Prison Realty; (ii) is not the beneficial owner
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of more than 5% of any class of equity securities of Prison Realty or an
officer, employer or "affiliate" of such security holder, as defined under
federal securities laws; or (iii) does not have an economic relationship with
Prison Realty that requires disclosure under federal securities laws. According
to the articles of amendment and restatement, the board will be composed of
seven directors at the time of the amendment and restatement.
Prison Realty's board of directors currently consist of six members,
including three independent directors, two of which serve on the board's
independent committee. Upon completion of the restructuring, Prison Realty's
board of directors will be restructured by increasing the size of the existing
board of directors and appointing one or more additional directors to the newly
created vacancies. In addition, certain existing directors are expected to
resign allowing the appointment of one or more directors to the vacancies
created by the resignations. Under Maryland law, each of these new directors
must stand for election at the next annual meeting of shareholders following
their appointment. It is expected that the Prison Realty 2000 annual meeting
will be held in November or December 2000.
If CCA's shareholders approve the merger and related transactions, and
Prison Realty's shareholders approve the restructuring, each of the amendments
to Prison Realty's charter described above will be effected.
OPERATIONS AND MANAGEMENT OF PRISON REALTY AFTER THE MERGER AND RELATED
TRANSACTIONS AND THE PRISON REALTY RESTRUCTURING
STRUCTURE AND OPERATIONS. In connection with the merger and related
transactions, CCA will be merged with and into a wholly owned subsidiary of
Prison Realty. Prison Realty would not be able to combine the operations of CCA
in the merger transactions and still qualify as a REIT. Because Prison Realty
will operate as a subchapter C corporation following the merger and related
transactions, it will no longer be subject to restrictions regarding the amount
and character of the revenues that it may earn, the types of assets which it may
own or the nature of the business activities which it may conduct. The absence
of these restrictions allows Prison Realty to be the sole owner of the
outstanding stock of each acquisition subsidiary after the merger transactions,
each of which will succeed to various contracts for the management and operation
of correctional and detention facilities as well as certain assets related to
these contracts from CCA. Consequently, Prison Realty will expand its current
business, the ownership and leasing of correctional and detention facilities, to
include the management and operations of correctional and detention facilities.
Although the subsidiary will maintain ownership of its assets for liability
purposes, in all practical respects, and for tax and accounting purposes the
companies will operate and will be treated as a single entity under the name
"Corrections Corporation of America." As such, the existing agreements between
Prison Realty and CCA, including a promissory note issued by CCA to Prison
Realty in the original aggregate principal amount of $137.0 million, will be
canceled and will be of no further force and effect.
MANAGEMENT. Prison Realty's board of directors currently consists of six
members, including three independent directors, two of which serve on the
independent committee of the board of directors. Upon completion of the
restructuring, Prison Realty's board of directors will be restructured by
increasing the size of the existing board of directors and appointing one or
more additional directors to the newly created vacancies. In addition, certain
existing directors are expected to resign, allowing the appointment of one or
more directors to the vacancies created by the resignations. Under Maryland law,
each of these new directors must stand for election at the next annual meeting
of shareholders following their appointment. It is expected that the Prison
Realty 2000 annual meeting will be held in November or December 2000.
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Prison Realty is currently conducting a search for a new chief executive
officer and will begin a search for a new chief financial officer. Doctor R.
Crants has been terminated as the chief executive officer of Prison Realty, as
well as the chief executive officer of CCA. Mr. Crants has informed Prison
Realty that he intends to remain a director of each of the service companies.
Thomas W. Beasley, the chairman of the board of directors of Prison Realty, is
serving as interim chief executive officer of Prison Realty while Prison Realty
completes the search for a permanent chief executive officer. Several candidates
have been identified for the position, and interviews have begun. The selection
process will be completed as expeditiously as possible. The search for a new
chief financial officer will be undertaken after the selection of a new chief
executive officer.
TAX STATUS OF THE COMBINED COMPANY. As required by the terms of its
charter, Prison Realty will elect to be taxed as a REIT for federal income tax
purposes with respect to its taxable year ending December 31, 1999. Following
consummation of the merger and related transactions, however, Prison Realty will
no longer operate as to qualify as a REIT. Therefore, commencing with its
taxable year ending December 31, 2000, Prison Realty will be taxable as an
ordinary subchapter C corporation. As a result of its failure to qualify as a
REIT, Prison Realty, commencing with its taxable year ending December 31, 2000,
will no longer be required to make annual distributions to its stockholders of
at least 95% (90% for years beginning after December 31, 2000) of its taxable
income. Furthermore, Prison Realty does not intend to make any distributions to
its common stockholders in the foreseeable future, except for distributions that
may be required for Prison Realty to qualify as a REIT for 1999.
Prison Realty's failure to qualify as a REIT for 2000 and thereafter will
result in the following charges to operations:
- Prison Realty will be required to provide for current tax liabilities
for the most recent federal and state reporting periods during which
Prison Realty did not qualify as a REIT.
- Prison Realty will be required to provide for all existing deferred tax
assets and liabilities in accordance with SFAS No. 109 related to
temporary book versus tax differences as well as certain imbedded
permanent differences in book versus tax balances contained in Prison
Realty's fixed asset balances.
Prison Realty's failure to qualify as a REIT for 2000 and thereafter will
have the following impact on its liquidity and capital resources:
- Prison Realty will no longer be required to distribute at least 95% (90%
for years beginning after December 31, 2000) of its REIT taxable income
to its stockholders. Prison Realty does not currently have the liquidity
or financial resources to make any such payments for 1999 in cash, and is
restricted by the terms of its bank credit facility from doing so. Prison
Realty's distributions per share of common stock equaled $1.80 in 1999.
Old Prison Realty, which operated as a REIT, made distributions per share
of common stock equal to $1.80 in 1998 and $0.77 in 1997 (July to
December 31). Prison Realty does not intend to make any distributions to
holders of its common stock following the completion of the merger, other
than as necessary to qualify as a REIT for its 1999 taxable year.
- Prison Realty will be required to pay income taxes each year estimated on
a quarterly basis, based upon its taxable income, beginning with its 2000
taxable year.
- Prison Realty will be able to retain after-tax earnings that would
otherwise have been required to be distributed as a REIT.
As a consequence of not qualifying as a REIT in 2000 and thereafter, Prison
Realty will instead be taxable as a subchapter C corporation. As a result,
distributions to the stockholders of Prison Realty will not be deductible for
purposes of computing Prison Realty's taxable income, and Prison
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Realty will be subject to income tax, including any applicable alternative
minimum tax, on its taxable income at regular corporate rates, without offset
for distributions of such income to stockholders. As such, Prison Realty will be
required to reflect the appropriate provision for income taxes in its financial
statements for 2000 in accordance with SFAS No. 109. Although Prison Realty
would have been required to distribute at least 95% (90% for years beginning
after December 31, 2000) of its REIT taxable income annually in order to
maintain its qualification as a REIT, no such minimum distribution requirements
will apply to Prison Realty beginning January 1, 2000, and it is expected that
no dividends will be paid with respect to shares of Prison Realty common stock
in the foreseeable future, other than as necessary to qualify as a REIT for
1999. Moreover, Prison Realty will be precluded from electing REIT status again
until the fifth taxable year after termination of REIT status. It is highly
unlikely, however, that Prison Realty will elect, or be eligible, to qualify as
a REIT at a future date.
As a result of the termination of Prison Realty's status as a REIT,
investments in Prison Realty common stock will be taxed under the general rules
applicable to investments in stock of ordinary subchapter C corporations, and a
holder of Prison Realty common stock will no longer be subject to the special
rules governing REITs. For example, no dividends paid by Prison Realty, if any,
will be eligible for the favorable treatment accorded capital gain dividends
paid by REITs, and all distributions will be taxed as ordinary income to the
extent of Prison Realty's current and accumulated earnings and profits.
Additionally, Prison Realty could pay up to 40% of its taxable income in federal
and state income taxes and would have to pay federal income tax, interest and
penalties for its 1999 taxable year that could exceed $83.5 million if REIT
status is not elected. On the other hand, distributions paid by Prison Realty to
a corporate stockholder may be eligible for the dividends received deduction,
subject to certain limitations set forth in the Code, whereas distributions paid
by REITs are not eligible for the dividends received deduction.
DISTRIBUTION POLICIES
CCA'S DISTRIBUTION POLICY
Since inception, CCA has never declared or paid a cash dividend on its
common stock. CCA's board of directors has determined that, given CCA's current
financial condition, liquidity requirements, restrictions on financing
agreements and other factors deemed relevant by CCA's board of directors, it is
in the best interests of CCA to refrain from declaring or paying such dividends.
Accordingly, it has been the policy of the board of directors of CCA to retain
all earnings of CCA to support CCA's operations.
DISTRIBUTION POLICY OF PRISON REALTY FOLLOWING THE MERGER
Following the merger and related transactions and the Prison Realty
restructuring, Prison Realty will operate so as to be treated as a taxable
subchapter C corporation for federal income tax purposes commencing with its
2000 taxable year. Prison Realty anticipates that following the merger and
related transactions and the Prison Realty restructuring, it will be the policy
of Prison Realty's board of directors to retain all earnings to support
operations and Prison Realty will not declare or pay cash dividends on shares of
Prison Realty's common stock in the foreseeable future. The terms of Prison
Realty's bank credit facility also prohibit Prison Realty from paying any cash
dividends on shares of the Prison Realty common stock without prior approval of
the lenders. Any declaration and payment of cash dividends on shares of Prison
Realty's common stock in the future will be determined based on a number of
factors, including Prison Realty's earnings, financial condition, liquidity
requirements, restrictions on financing agreements and other factors deemed
relevant by Prison Realty's board of directors.
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PROPOSAL
PROPOSAL TO APPROVE THE MERGER AND RELATED TRANSACTIONS
GENERAL
This section of the joint proxy statement/prospectus describes aspects of
the merger and related transactions. This section provides information relating
to each of Prison Realty and CCA, each company's role in the merger and related
transactions, and the effects of the merger and related transactions on its
shareholders. Shareholders of CCA should also consider carefully the other
information in this joint proxy statement/prospectus concerning the companies,
the merger and related transactions and the Prison Realty restructuring,
including the section entitled "The Merger and Related Transactions and the
Prison Realty Restructuring."
EFFECTIVE TIME
If the merger agreement is approved by the shareholders of CCA and the
other conditions are satisfied or waived, if permissible, the merger will be
completed no later than the fifth business day following the satisfaction or
waiver of such conditions, at the time of day specified in the Articles of
Merger filed with and accepted for recording by the Secretary of State of
Tennessee.
TERMS OF THE MERGER
The merger agreement provides for a business combination between Prison
Realty and CCA in which CCA will merge with and into an acquisition subsidiary
of Prison Realty, with such subsidiary as the surviving corporation in the
merger. Shareholders of CCA at the time of the merger other than Prison Realty
will receive shares of Prison Realty common stock as the merger consideration,
pursuant to the exchange ratio specified in the merger agreement and described
below in the section entitled "-- The agreement and plan of merger." The
exchange ratio for the merger depends on the average closing price of one share
of Prison Realty common stock for the five trading days ending two days prior to
the closing date for the merger. Therefore, the exchange ratio will not be known
at the time of the shareholders' meeting.
THE AGREEMENT AND PLAN OF MERGER
The following summarizes material terms of the merger agreement. The merger
agreement is attached hereto as Appendix A and is incorporated herein by
reference. The discussion below is not a complete description of the terms of
the merger agreement, and all shareholders of CCA are urged to read the merger
agreement and related agreements carefully and in their entirety for a more
complete understanding of the terms of the agreements.
GENERAL
No later than the fifth business day following the satisfaction or waiver
of conditions set forth in the merger agreement, Articles of Merger and all
other appropriate documents will be filed by the parties with the Secretary of
State of the State of Tennessee, and the merger will become effective on the
closing date at the time of day provided in the Articles of Merger.
At the effective time, CCA will be merged with and into a newly formed,
wholly owned subsidiary of Prison Realty and the management and employee
shareholders of CCA will receive shares of Prison Realty common stock with an
aggregate value of approximately $10.6 million as the merger consideration. The
separate corporate existence of CCA will cease and the subsidiary of Prison
Realty will continue as a surviving corporation. As a result of the merger, the
subsidiary of
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Prison Realty will succeed to and assume all the rights and obligations of CCA
in accordance with the TBCA.
CONVERSION OF SECURITIES
Pursuant to the merger agreement, at the effective time, each share of CCA
common stock issued and outstanding immediately prior to the effective time will
be converted into the right to receive a number of shares of Prison Realty
common stock determined by a formula that uses the average closing price of
Prison Realty common stock over the five trading days ending two trading days
prior to the closing date (the "Prison Realty Closing Price"). The number of
shares of Prison Realty common stock to be issued as merger consideration for
each share of CCA common stock will be determined as follows:
<TABLE>
<S> <C> <C> <C>
number of shares of CCA
common stock outstanding
prior to effective time, number of shares of CCA
excluding shares owned by common stock
parties to the merger outstanding prior to
$20.0 million X -------------------------- / Prison Realty / effective time, excluding
Closing Price shares owned by parties
number of shares of CCA to the merger
common stock outstanding
prior to effective time,
including shares owned by
parties to the merger
</TABLE>
For example, there are currently 10,330,454 shares of CCA common stock
outstanding, and 981,393 are owned by Prison Realty. It is anticipated that
Prison Realty will purchase 1,749,532 shares of CCA common stock from each of
Sodexho and Baron prior to the merger in exchange for non-cash consideration
consisting of Prison Realty common stock. In addition, Prison Realty will
purchase an aggregate of 300,000 shares previously owned by D. Robert Crants,
III and Michael W. Devlin from Doctor R. Crants and 100,000 shares owned by
Messrs. Crants, III and Devlin for cash consideration of $800,000. Assuming
there were 10,330,454 shares of CCA common stock outstanding, 4,880,457 of which
were owned by Prison Realty, immediately prior to the effective time, and
assuming the Prison Realty Closing Price was $3.50, the formula would be as
follows:
<TABLE>
<S> <C>
$20.0 million X 52.76% / $3.50 /
5,449,997 = .55 share of Prison
Realty common stock
</TABLE>
Therefore, in this example, for each share of CCA common stock held
immediately prior to the effective time, a CCA shareholder would receive
approximately .55 share of Prison Realty common stock.
If, however, the Prison Realty Closing Price was $2.00, the formula would
be as follows:
<TABLE>
<S> <C>
$20.0 million X 52.76% / $2.00 /
5,449,997 = .97 share of Prison
Realty common stock
</TABLE>
Therefore, in this example, for each share of CCA common stock held
immediately prior to the effective time, a CCA shareholder would receive
approximately .97 share of Prison Realty common stock.
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Promptly after the effective time, Prison Realty will send to each holder
of record of a certificate or certificates which immediately prior to the
effective time represented outstanding shares of CCA common stock, a letter of
transmittal and instructions on how to surrender the certificates in exchange
for the applicable merger consideration. The letter of transmittal will specify
that delivery will be effected, and risk of loss and title to a certificate will
pass, only upon proper delivery of such certificate to Prison Realty. Each
holder of record of a certificate will, upon surrender to Prison Realty of such
certificate, be entitled to receive in exchange therefor the applicable merger
consideration in respect of each share of CCA common stock previously
represented by such certificate. The certificate so surrendered will be
canceled. Payment of the applicable merger consideration may be made to a person
other than the person in whose name the certificate so surrendered is registered
if, and only if, such certificate represents transferrable shares and is
properly endorsed or otherwise in proper form for transfer and the person
requesting such payment pays any transfer or other taxes required by reason of
the payment of the applicable merger consideration to a person other than the
registered holder of such certificate or establishes to the satisfaction of
Prison Realty that such tax has been paid or is not applicable. Until
surrendered, each certificate will be deemed at any time after the effective
time to represent only the right to receive upon such surrender the applicable
merger consideration.
After the effective time, there will be no further registration of
transfers on the share transfer books of CCA of the shares of CCA common stock
which were outstanding immediately prior to the effective time, and if, after
the effective time, certificates are presented to Prison Realty for transfer,
they will be canceled and exchanged for the applicable merger consideration as
provided in the merger agreement.
No dividends, interest or other distributions with respect to securities of
Prison Realty constituting part of the merger consideration shall be paid to the
holder of any unsurrendered certificates until such certificates are surrendered
as provided in the merger agreement. Upon such surrender, there shall be paid,
without interest, to the person in whose name the securities of Prison Realty
have been registered, all dividends, interest and other distributions payable in
respect of such securities on a date subsequent to, and in respect of a record
date after, the effective time.
The shares of Prison Realty common stock to be issued to the shareholders
of CCA who are also wardens of the facilities operated by CCA will be subject to
the terms and provisions of a newly-adopted Prison Realty restricted stock plan.
Under the terms of the restricted stock plan, the shares of restricted stock
held by warden shareholders will vest only if they remain employed by Prison
Realty or by one of its subsidiaries from the closing date of the merger through
December 31, 2003. If a warden shareholder does not remain employed by Prison
Realty or by its subsidiaries for such period, the shares of Prison Realty
common stock issued to such warden will be forfeited but shall remain
outstanding, and such shares will be held in trust for the benefit of the
remaining wardens until December 31, 2003. At this time, such shares will vest
and will be distributed pro-rata to the wardens still employed. Shares of Prison
Realty common stock owned by other CCA shareholders and received in the merger
transactions will be subject to restrictions on transfer under the terms of a
lock-up agreement, which restrictions prohibit transfers of such stock for a
period of 180 days after the merger transactions are completed. After this
180-day period, and through December 31, 2003, transfers may be made according
to the following percentages:
- Up to 25% after 180 days;
- Up to 50% after December 31, 2001;
- Up to 75% after December 31, 2002; and
- Unlimited after December 31, 2003.
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FRACTIONAL SHARES
No fractional shares of Prison Realty common stock shall be issued as a
result of the merger, but in lieu thereof each holder of shares of CCA common
stock otherwise entitled to receive a fractional share of Prison Realty common
stock will be entitled to receive a cash payment representing such holder's
proportionate interest in the net proceeds resulting from the sale (after
deduction of all expenses resulting from such sale) on the NYSE, through one or
more of its member firms, of the fractional shares of Prison Realty common stock
that all holders of shares of CCA common stock would otherwise be entitled to
receive as a result of the merger.
WARRANTS TO PURCHASE CCA COMMON STOCK
At the effective time of the merger, each outstanding warrant to purchase
shares of CCA common stock, whether or not exercisable, shall be deemed to
constitute a warrant to acquire, on substantially the same terms and conditions
as were applicable to the original warrant to which it relates, the same number
of shares of Prison Realty common stock as the holder of such warrant would have
been entitled to receive in the merger if the holder had exercised such warrant
in full immediately prior to the effective time, at a price per share of Prison
Realty common stock computed in compliance with the terms of such warrant.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains various representations and warranties of
each of CCA and Prison Realty with respect to such party relating to, among
other things, as applicable: (a) its corporate organization, existence and good
standing and similar corporate matters; (b) its capitalization; (c) the
authorization, execution, delivery and enforceability of the merger agreement;
(d) the absence of conflicts, violations and defaults under its charter or
declaration of trust, or bylaws and certain other agreements and documents; (e)
the absence of required consents, approvals, orders, or authorizations of, or
registrations, declarations or filings with, certain government entities
relating to the merger; (f) the documents and reports filed with the SEC and the
accuracy and completeness of the information contained therein (in the case of
Prison Realty); (g) this joint proxy statement/prospectus and the accuracy and
completeness of the information contained herein; (h) the absence of a material
adverse change on such party or certain other material changes or events since
March 31, 2000; (i) the existence of necessary permits or approvals from certain
government entities, the absence of material pending or threatened litigation
and compliance with applicable laws; (j) filing of tax returns and payment of
taxes; (k) the absence of defaults under material contracts; (l) owned and
leased real property matters; (m) environmental matters; (n) labor matters; (o)
benefit plans and other matters relating to ERISA; (p) the absence of
undisclosed liabilities; (q) qualification as an investment company; (r)
reporting under the Securities Exchange Act of 1934 (in the case of Prison
Realty); (s) insurance; (t) affiliate transactions; (u) internal accounting
controls; (v) the shareholder vote required to approve the merger; (w) the
recommendation of such party's board with respect to the merger agreement; (x)
the inapplicability of state antitakeover statutes to the merger; (y) brokers'
fees and expenses; and (z) ownership of capital stock of the other parties to
the merger.
As used in the merger agreement, the term "Material Adverse Effect" means,
when used in connection with a party, any change, effect, event, occurrence or
development that is, or is reasonably likely to be, materially adverse to the
business, results of operations or financial condition of such party and its
subsidiaries, taken as a whole, other than any change, effect, event or
occurrence relating to or arising out of (a) the economy or securities markets
in general, (b) the merger
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agreement or the transactions contemplated thereby or the announcement thereof,
or (c) the private corrections industry in general, and not specifically
relating to such party or its subsidiaries.
CONDUCT OF BUSINESS PENDING THE MERGER
COVENANTS OF CCA. CCA has agreed as to itself and its subsidiaries that,
except as set forth in the merger agreement or the disclosure schedule to the
merger agreement, during the period from the date of the merger agreement until
the effective time, CCA and its subsidiaries will conduct business only in the
ordinary course of business consistent with past practice and in compliance in
all material respects with all applicable laws and regulations and will use
their reasonable efforts to preserve intact their current business organizations
and to preserve their relationships with those persons having business dealings
with them.
CCA has further agreed as to itself and its subsidiaries that (except as
expressly contemplated by the merger agreement or as set forth in its disclosure
schedule to the merger agreement), during the period from the date of the merger
agreement until the effective time, such party will not, nor will it permit any
of its subsidiaries to:
- (i) declare, set aside or pay any dividends on or make other
distributions in respect of any capital stock, (ii) split, combine or
reclassify any capital stock or issue or authorize the issuance of any
other securities in respect of, in lieu of or in substitution for
capital stock, or (iii) purchase, redeem or otherwise acquire or permit
any subsidiary to purchase or otherwise acquire, any shares of capital
stock or any debt securities, warrants or options, in each case issued
by the company or any of its subsidiaries;
- issue, deliver or sell, pledge or otherwise encumber or subject to any
lien any of its shares of capital stock or any securities convertible
into or exchangeable for, or any rights, warrants or options to acquire,
any of the foregoing;
- amend its charter or similar documents or its bylaws;
- acquire any business or any equity interest in any person not an
affiliate;
- sell, lease, exchange, license, mortgage, encumber or otherwise dispose
of any of its real properties or other assets, or enter into any new
joint ventures or development projects;
- subject to certain exceptions, change its methods of accounting;
- subject to certain exceptions, settle or compromise any pending or
threatened proceeding;
- subject to scheduled exceptions, create, renew, amend or terminate
material agreements;
- except for scheduled capital commitments and indebtedness in connection
with the merger and related transactions, and an increase to amounts
outstanding its revolving credit agreement, incur any indebtedness for
borrowed money;
- subject to scheduled exceptions, enter into any new or increase any
existing capital or take-out commitments;
- certain actions with respect to its directors, officers and employees,
including entering into employment agreements, increasing compensation
(other in the ordinary course of business consistent with past practice)
or increasing severance or termination benefits; or amending, adopting
or terminating, benefit plans;
- enter into specified related party transactions including loans, sales
or purchases of assets;
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- permit any material insurance policy to be canceled or terminated; or
- fail to advise the parties of any change or event which would cause or
constitute a material breach of any of the representations or warranties
of such party contained in the merger agreement.
COVENANTS OF PRISON REALTY. Prison Realty has agreed as to itself and its
subsidiaries that, except as set forth in the merger agreement or its disclosure
schedule, during the period from the date of the merger agreement until the
effective time of the mergers, Prison Realty and its subsidiaries will:
- carry on their respective businesses only in the usual, regular and
ordinary course consistent with past practice in all material respects
and use their reasonable best efforts to preserve intact their present
business organizations, maintain their rights and franchises, keep
available the services of their current officers and employees and
preserve their relationships with customers, suppliers and others having
business dealings with them to the end that their goodwill and ongoing
businesses shall not be impaired at the effective time of the mergers;
- conduct operations in a manner so as to continue to qualify as a REIT
under the Code;
- refrain from taking any action that would result in any of its
representations and warranties set forth in the merger agreement that
are qualified as to materiality being untrue, any of such
representations and warranties that are not so qualified being untrue in
any material respect or any of the conditions to the merger set forth in
the merger agreement not being satisfied;
- advise the other parties from time to time of the proposed structure of
Prison Realty and its subsidiaries and affiliated entities at and after
the effective time for purposes of their evaluation of the mergers; and
- advise the other parties of any change or event which would cause or
constitute a material breach of any of its representations or warranties
contained in the merger agreement and file all reports required to be
filed by it with the SEC or the NYSE between the date of the merger
agreement and the effective time of the merger and deliver to the other
parties copies of all such reports promptly after the same are filed.
CONDITIONS TO THE MERGER
CONDITIONS TO OBLIGATIONS OF EACH COMPANY. The respective obligations of
Prison Realty and CCA to effect the merger are subject to the satisfaction or
waiver at or prior to the effective time of the following conditions:
- the waiting period applicable to the completion of the merger under the
HSR Act shall have expired or been terminated;
- no temporary restraining order, preliminary or permanent injunction or
other order or decree issued by any government entity of competent
jurisdiction enjoining or otherwise preventing the completion of the
merger being in effect; provided, however, that each of such parties has
agreed to use reasonable best efforts to prevent the entry of any such
injunction or other order or decree and to cause any such injunction or
other order or decree that may be entered to be vacated or otherwise
rendered of no effect;
- the Prison Realty common stock to be issued in the merger having been
approved for listing on the NYSE, subject to official notice of
issuance, if applicable;
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- the Prison Realty Registration Statement on Form S-4 being satisfactory
in all material respects to Prison Realty and CCA and having been
declared effective, and no stop order suspending the effectiveness of
the Prison Realty Registration Statement on Form S-4 being in effect and
no proceedings for such purpose being pending before or threatened by
the SEC; and
- Prison Realty and CCA having obtained the opinion of its tax advisor
that the merger qualifies as a "Reorganization" within the meaning of
Section 368(a) of the Code.
CONDITIONS TO OBLIGATIONS OF PRISON REALTY. The obligation of Prison
Realty to effect the merger is also subject to the satisfaction of the following
conditions unless waived by Prison Realty:
- the required approvals of stockholders of Prison Realty and the
shareholders of CCA shall have been obtained;
- the representations and warranties of CCA set forth in the merger
agreement being true and correct, except that this condition will be
deemed satisfied so long as any failures of such representations and
warranties to be true and correct do not individually or in the
aggregate have a material adverse effect on CCA, as of the date of the
merger agreement and as of the effective time except as otherwise
contemplated by the merger agreement, and Prison Realty's receipt of a
certificate to such effect signed on behalf of CCA by its chief
executive officer and secretary;
- CCA having performed in all material respects all material obligations
required to be performed by it under the merger agreement at or prior to
the effective time, and Prison Realty's receipt of a certificate to such
effect signed on behalf of CCA by its chief executive officer or chief
financial officer;
- Prison Realty's receipt of evidence, in form and substance reasonably
satisfactory to it, that such consents, approvals, authorizations,
qualifications and orders of government entities and other third parties
as are necessary in connection with the transactions contemplated by the
merger agreement have been obtained, other than those the failure of
which to be obtained, individually or in the aggregate, would not have a
material adverse effect on Prison Realty or CCA;
- CCA shall have obtained consents of governmental authorities to the
performance of facility management contracts by Prison Realty or its
subsidiaries after the merger where required by applicable law or such
contracts;
- the Lock-up Agreement shall have been executed and delivered by the
holders of CCA common stock whose shares will not be subject to the new
restricted stock plan; and
- Prison Realty shall have purchased the CCA common stock held by Baron
for aggregate non-cash consideration of $8.0 million.
CONDITIONS TO OBLIGATIONS OF CCA. The obligation of CCA to effect the
merger is also subject to the satisfaction of the following conditions unless
waived by CCA:
- the representations and warranties of Prison Realty set forth in the
merger agreement being true and correct, except that condition will be
deemed satisfied so long as any failures of such representations and
warranties to be true and correct do not individually or in the
aggregate have a material adverse effect on Prison Realty, as of the
date of the merger agreement and as of the effective date of the
mergers, except as otherwise contemplated by the merger
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agreement, and CCA's receipt of a certificate to such effect signed on
behalf of Prison Realty by its chief executive officer and secretary;
- Prison Realty having performed in all material respects all material
obligations required to be performed by it under the merger agreement at
or prior to the effective date of the merger, and CCA's receipt of a
certificate to such effect signed on behalf of Prison Realty by its
chief executive officer and secretary;
- the required approvals of Prison Realty's stockholders and CCA's
shareholders shall have been obtained; and
- Prison Realty shall have purchased the CCA common stock held by Baron
for aggregate non-cash consideration of $8.0 million.
The merger agreement further provides that no party may rely on the failure
of any condition described in this section to be satisfied if such failure was
caused by such party's failure to use all reasonable best efforts to complete
the merger and the other transactions contemplated by the merger agreement.
All of the conditions to the merger may be waived by the company entitled
to assert the condition, with the exception of the material condition of the
approval of the merger agreement by the shareholders of CCA and Prison Realty,
which may not be waived.
NO SOLICITATION
NO SOLICITATION BY PRISON REALTY. Prison Realty agreed that it will not,
nor will it permit any of its subsidiaries to, nor will it authorize or permit
any officer, director or employee of, or any investment banker, attorney or
other advisor or representative of, Prison Realty or any of its subsidiaries to,
directly or indirectly, (i) solicit, initiate, encourage or knowingly facilitate
the submission of any alternative proposal (as hereinafter defined) or (ii)
enter into or participate in any discussions or negotiations regarding, or
furnish to any person any information with respect to, any alternative proposal;
provided, however, that prior to the approval of the merger agreement by the
shareholders of Prison Realty, Prison Realty may, in response to a bona fide
alternative proposal that constitutes a superior proposal (as hereinafter
defined) and that was made after the date of the merger agreement (and not
solicited by Prison Realty after the date of the merger agreement) by any
person, and subject to Prison Realty's obligations to notify CCA, as described
below, (A) furnish information with respect to Prison Realty and its
subsidiaries to such person and its representatives pursuant to a
confidentiality agreement and discuss such information with such person and its
representatives and (B) participate in negotiations regarding such alternative
proposal.
As used in the merger agreement and this joint proxy statement/prospectus,
the term "Alternative Proposal" means any inquiry, proposal or offer from any
person relating to any direct or indirect acquisition or purchase of 10% or more
of the assets (based on the fair market value thereof) of Prison Realty and its
subsidiaries, taken as a whole, other than the transactions contemplated by the
merger agreement, or of 10% or more of any class of equity securities of Prison
Realty or any of its subsidiaries or any tender offer or exchange offer
(including by Prison Realty or any of its subsidiaries) that if completed would
result in any person beneficially owning 10% or more of any class of equity
securities of Prison Realty or any of its subsidiaries, or any merger,
consolidation, business combination, sale of substantially all assets,
recapitalization, liquidation, dissolution or similar transaction involving
Prison Realty or any of its subsidiaries other than the transactions
contemplated by the equity investment and related Prison Realty restructuring.
Except as described in this section, the Prison Realty board may not (i)
withdraw or modify, or publicly propose to withdraw or modify, in a manner
adverse to CCA, the approval or
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recommendation by the Prison Realty board of the merger or the merger agreement,
(ii) approve or recommend, or propose publicly to approve or recommend, any
alternative proposal, or (iii) cause or agree to cause Prison Realty to enter
into any letter of intent, agreement in principle, acquisition agreement or
similar agreement related to any alternative proposal. Notwithstanding the
foregoing, if the Prison Realty board receives a superior proposal, the Prison
Realty board may, prior to the receipt of the approval of the merger by the
stockholders of Prison Realty, withdraw or modify its approval or recommendation
of the merger and the merger agreement, approve or recommend a superior proposal
or terminate the merger agreement, but in each case only at a time that is at
least five business days after receipt by CCA of written notice advising it that
the Prison Realty board has resolved to accept a superior proposal if it
continues to be a superior proposal at the end of such five business day period.
As used in the merger agreement and this joint proxy statement/prospectus, the
term "Superior Proposal" means any bona fide alternative proposal (which, for
purposes of the provisions described in the previous paragraph only, may be
subject to a due diligence condition), which proposal was not solicited by
Prison Realty after the date of the merger agreement, made by a third party to
acquire, directly or indirectly, for consideration consisting of cash and/or
securities, more than 10% of the shares of Prison Realty capital stock then
outstanding or all or substantially all the assets of Prison Realty and its
subsidiaries and otherwise on terms which the Prison Realty board determines in
good faith (after consultation with its financial advisor) to be more favorable
to Prison Realty's shareholders than the equity investment and related Prison
Realty restructuring and for which financing, to the extent required, is then
committed or which, in the good faith judgment of the Prison Realty board, is
reasonably capable of being financed by such third party.
In addition to the obligations of Prison Realty set forth in the preceding
paragraphs, Prison Realty will promptly advise CCA orally and in writing of any
request for information or of any alternative proposal, the material terms and
conditions of such request or alternative proposal and the identity of the
person making any such request or alternative proposal and any determination by
the Prison Realty board that an alternative proposal is or may be a superior
proposal. Prison Realty will keep CCA informed as to the status and material
details (including amendments or proposed amendments) of any such request or
alternative proposal.
NO SOLICITATION BY CCA. CCA has agreed that it will not, nor will it
permit any of its subsidiaries to, nor will it authorize or permit any officer,
director or employee of, or any investment banker, attorney or other advisor or
representative of, such company or any of its subsidiaries to, directly or
indirectly, (i) solicit, initiate, encourage or knowingly facilitate the
submission of any alternative proposal or (ii) enter into or participate in any
discussions or negotiations regarding, or furnish to any person any information
with respect to, any alternative proposal.
Except as described in this section, the board of directors of CCA may not
(i) withdraw or modify, or publicly propose to withdraw or modify, in a manner
adverse to Prison Realty, the approval or recommendation by CCA's board of the
merger or the merger agreement, (ii) approve or recommend, or propose publicly
to approve or recommend, any alternative proposal, or (iii) cause or agree to
cause such entity to enter into any letter of intent, agreement in principle,
acquisition agreement or similar agreement related to any alternative proposal.
In addition to the obligations of CCA set forth in the preceding
paragraphs, CCA will promptly advise Prison Realty orally and in writing of any
request for information or of any alternative proposal, the material terms and
conditions of such request or alternative proposal and the identity of the
person making any such request or alternative proposal. CCA will keep Prison
Realty informed as to the status and material details (including amendments or
proposed amendments) of any such request or alternative proposal.
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ACCESS TO INFORMATION
Each of Prison Realty and CCA has further agreed that it will, and will
cause each of its subsidiaries to, afford to the other party to the merger
agreement and to its officers, employees, accountants, counsel and other
representatives (including environmental consultants), reasonable access, during
normal business hours during the period prior to the effective time, to their
respective properties, books, records and personnel and, during such period,
each of Prison Realty and CCA will, and will cause each of its subsidiaries to,
furnish promptly to the other party (i) a copy of each report, schedule,
registration statement and other document filed or received by it during such
period pursuant to the requirements of federal or state securities laws, and
(ii) such other information concerning its business, properties and personnel as
the other party may reasonably request.
REASONABLE BEST EFFORTS
Subject to the terms and conditions of the merger agreement, each party
will, and will cause its subsidiaries to, use all reasonable best efforts to
take, or cause to be taken, all actions, and to do, or cause to be done, and to
assist and cooperate with the other parties in doing, all things necessary,
proper or advisable to complete and make effective, in the most expeditious
manner practicable, the merger and the other transactions contemplated by the
merger agreement, including (i) the obtaining of any necessary consent,
authorization, order or approval of, or any exemption by, any government entity
and/or any other public or private third party which is required to be obtained
by such party or any of its subsidiaries in connection with the merger and the
other transactions contemplated by the merger agreement (provided that no party
will pay or agree to pay any material amount to obtain a consent without the
prior approval of Prison Realty, which approval will not be unreasonably
withheld or delayed), and the making or obtaining of all necessary filings and
registrations with respect thereto, (ii) the defending of any lawsuits or other
legal proceedings challenging the merger agreement, and (iii) the execution and
delivery of any additional instruments necessary to complete the transactions
contemplated by, and to fully carry out the purposes of, the merger agreement.
TERMINATION
The merger agreement may be terminated at any time prior to the effective
time, whether before or after the approval of the merger agreement by the
shareholders of Prison Realty and CCA:
- by mutual written consent of the parties;
- by Prison Realty or CCA upon written notice to the other parties:
(i) if any government entity of competent jurisdiction has issued a
permanent injunction or other order or decree enjoining or
otherwise preventing the completion of the merger and such
injunction or other order or decree has become final and
nonappealable; provided that the party seeking to terminate the
merger agreement has used its reasonable best efforts to prevent
or contest the imposition of, or seek the lifting or stay of,
such injunction, order or decree;
(ii) if the merger has not been completed on or before October 31,
2000 unless the failure to complete the merger is the result of
a material breach of the merger agreement by the party seeking
to terminate the merger agreement; or
(iii) if, upon a vote at a duly held meeting of the stockholders of
Prison Realty or any adjournment thereof, the approval of the
merger agreement by such shareholders is not obtained;
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- by Prison Realty upon written notice to the other parties:
(i) unless Prison Realty is in material breach of its obligations
under the merger agreement, if CCA breaches or fails to perform
any of its representations, warranties, covenants or other
agreements under the merger agreement, which breach or failure to
perform (A) would give rise to the failure of a condition to the
closing relating to its representations and warranties or a
condition to the closing relating to its covenants or other
agreements and (B) is incapable of being cured by the party so
breaching or failing to perform or is not cured within 30 days
after Prison Realty gives written notice of such breach to the
other party and such a cure is not effected during such period;
(ii) if any of the approvals of the CCA shareholders are not obtained
upon a vote at a duly held shareholders' meeting; or
(iii) if the board of directors of CCA or any committee thereof
withdraws or modifies in a manner adverse to Prison Realty its
approval or recommendation of the merger or the merger
agreement, or resolves to do so;
- by CCA upon written notice to the remaining parties:
(i) if the Prison Realty board or any committee thereof has withdrawn
or modified in a manner adverse to such terminating party its
approval or recommendation of the merger or the merger agreement
or resolves to do so; or
(ii) unless the party seeking to terminate is in material breach of
its obligations under the merger agreement, if Prison Realty
breaches or fails to perform any of its representations,
warranties, covenants or other agreements under the merger
agreement, which breach or failure to perform (A) would give
rise to the failure of a condition to the closing relating to
its representations and warranties or a condition to the closing
relating to its covenants or other agreements and (B) is
incapable of being cured by Prison Realty or failing to perform
or is not cured within 30 days after such terminating party
gives written notice of such breach to Prison Realty and such a
cure is not effected during such period.
FEES AND EXPENSES
Whether or not the merger is completed, all costs and expenses incurred in
connection with the merger agreement and the transactions contemplated thereby
will be paid by the party incurring such costs or expenses.
AMENDMENT AND WAIVER
The merger agreement may be amended by the parties thereto at any time
before or after approval of the merger by the shareholders of Prison Realty and
CCA, provided that after such approval, no amendment may be made which by law
requires further approval by such shareholders without such further approval.
The merger agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties thereto.
At any time prior to the effective time, the parties may, to the extent
legally allowed, (a) extend the time for the performance of any of the
obligations or other acts of the other party to the merger agreement, (b) waive
any inaccuracies in the representations and warranties contained in the merger
agreement or in any document delivered pursuant thereto and (c) subject to the
provisions described
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in the preceding paragraph, waive compliance with any of the agreements or
conditions contained in the merger agreement. If material conditions to the
merger are waived by either party after the date of this joint proxy
statement/prospectus, or any supplement thereto, the companies expect to
resolicit shareholder approval of the merger. Any agreement on the part of a
party to the merger agreement to any such extension or waiver will be valid only
if set forth in a written instrument signed on behalf of such party. The failure
of any party to the merger agreement to assert any of its rights under the
merger agreement or otherwise will not constitute a waiver of those rights.
BENEFIT PLANS; STOCK AND EQUITY PLANS
The merger agreement provides that following the effective time, except as
otherwise provided in the merger agreement, Prison Realty will honor, or cause
to be honored, all obligations under employment agreements, all Prison Realty
benefit plans and all other employee benefit plans, programs, policies and
arrangements of parties to the merger in accordance with the terms thereof.
Nothing in the merger agreement prohibits new Prison Realty from amending or
terminating such agreements, programs, policies and arrangements in accordance
with the terms thereof and with applicable law.
As part of the merger and related transactions, Prison Realty will adopt
the CCA 401(k) Plan and shall cause benefits under the Prison Realty 401(k) Plan
to cease to accrue, but shall not cause the Prison Realty 401(k) Plan to be
terminated. After the merger, the Prison Realty 401(k) Plan and the CCA Prison
Realty Trust Employee Savings and Stock Ownership Plan (the benefits under which
ceased to accrue as of December 31, 1998) will be merged into the CCA 401(k)
Plan. Participants in the CCA 401(k) Plan will be permitted to direct the
investment of their account balances and will be allowed to choose from several
investment alternatives, including Prison Realty common stock.
The merger agreement also provides that as of the effective time, the
restricted stock plans of CCA shall be merged into a single restricted stock
plan with similar terms and conditions, except that any shares forfeited under
the new restricted stock plan shall be forfeited to all plan participants.
Also, following the completion of the merger and related transactions,
Prison Realty will adopt a new stock option plan and/or equity-based
compensation plan for the benefit of its employees and the employees of the new
subsidiary (formerly CCA). Under such plan, Prison Realty will be permitted to
issue incentive stock options, non-qualified stock options or other equity-based
compensation to management and other key employees.
RIGHTS OF DISSENTING SHAREHOLDERS OF CCA
Pursuant to Sections 48-23-101 through 48-23-302, inclusive, of the
Tennessee Business Corporation Act, a dissenting shareholder of CCA, who desires
to dissent from the merger of CCA and to obtain payment of the fair value of his
or her CCA common stock may do so by following the procedure described below. As
more fully discussed in the section entitled "The Special Meeting -- Required
vote" the holders of CCA capital stock are entitled to vote on the merger and
related transactions and thus only those holders may dissent and receive the
fair value of their shares. The following is a summary of the relevant
provisions of Tennessee law and is qualified in its entirety by reference to
such provisions, a copy of which is attached as Appendix C hereto.
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In order to dissent from the merger, a shareholder must:
- deliver to CCA before the shareholder vote, written notice of his or her
intent to demand payment for his or her shares if the merger is
completed; and
- not vote his or her shares in favor of the respective merger.
Any shareholder who fails to take these two steps is not entitled to payment.
If the respective merger is authorized at the shareholder meetings, CCA
must deliver a written dissenters' notice to all shareholders who complied with
the steps described above. The dissenters' notice must be sent no later than ten
days after the merger is authorized or completed, whichever is the first to
occur, and must:
- supply a form for the first payment demand that includes the date of the
first announcement to news media or to shareholders of the principal
terms of the merger and requires the shareholder to certify whether or
not he or she acquired beneficial ownership of his or her shares before
that date;
- state where the dissenting shareholder's first payment demand must be
sent and when it must be received, which date may not be fewer than one
nor more than two months after the date the dissenter's notice is
delivered; and
- inform the holders where and when certificates for certificated shares
must be deposited and to what extent transfers of uncertificated shares
will be restricted after the first payment demand is received.
Any shareholder who does not make the first payment demand or who fails to
deposit his or her share certificates where required by the date set in the
dissenters' notice is not entitled to dissent.
As soon as the merger is completed or upon receipt of the first payment
demand, whichever is later, CCA must pay each dissenter who was the beneficial
owner of his or her shares on the date set forth in the dissenters' notice the
amount CCA estimates to be the fair value of each dissenter's shares, plus
accrued interest. CCA may withhold payment from any dissenter who was not the
beneficial owner of his or her shares before the date set forth in the
dissenters' notice. If CCA chooses to withhold payment in this situation, after
the merger is completed CCA must offer to pay each such dissenter the amount CCA
estimates to be the fair value of each such dissenter's shares, plus accrued
interest and must pay this amount to any such dissenter who agrees to accept it
in full satisfaction of his or her first payment demand.
If a dissenter believes that the amount paid or offered is less than the
fair value of his or her shares or that the interest due is incorrectly
calculated or if CCA fails to pay the dissenter within two months after the
deadline for the first payment demand, a dissenter may make a second written
payment demand for his or her own estimate of the fair value of his or her
shares and the amount of interest due. This second payment demand must be made
in writing within one month after CCA made or offered payment for the
dissenter's shares.
If the second payment demand remains unsettled, CCA must commence a court
proceeding to determine the fair value of the shares and accrued interest within
two months after the receipt of the second payment demand. If CCA does not
commence the proceeding within the two month period, CCA must pay each dissenter
whose demand remains unsettled the amount demanded.
The determination of a "fair value" necessarily involves matters of
judgment upon which reasonable persons may disagree. Tennessee law provides
that, for purposes of dissenters' rights, the
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value of the CCA common stock should be determined immediately before the
consummation of the merger and that the fair value excludes any appreciation or
depreciation in anticipation of the merger.
The foregoing is only a summary of the rights of dissenting shareholders of
CCA. Any shareholder who intends to dissent should carefully review the relevant
provisions of Tennessee law as set forth in Appendix C and should consult with
an attorney. The failure of a shareholder to follow precisely the procedure
summarized above and set forth in Appendix C may result in the loss of
dissenters' rights. No further notice of the events giving rise to dissenters'
rights or any step associated therewith will be furnished to shareholders,
except as indicated above or otherwise required by law.
Any dissenting shareholder who perfects his or her right to be paid the
value of his or her shares will recognize taxable gain or loss upon receipt of
cash for the shares for U.S. federal income tax purposes. For a more complete
description of the federal income tax consequences of the merger, see the
section entitled "-- Material federal income tax consequences of the merger" on
page 164.
STOCK EXCHANGE LISTING OF PRISON REALTY COMMON STOCK
Prison Realty will apply to list the shares of Prison Realty common stock
to be issued in the merger on the NYSE, subject to official notice of issuance,
prior to the effective time.
FEDERAL SECURITIES LAW CONSEQUENCES; RESALE RESTRICTIONS
This joint proxy statement/prospectus does not cover resales of the shares
of Prison Realty common stock to be received by the management and employee
shareholders of CCA upon completion of the merger and no such persons are
authorized to make any use of this joint proxy statement/prospectus in
connection with any such resale.
All shares of Prison Realty common stock received by CCA shareholders in
the merger and related transactions will be freely transferable under the
securities laws except that the shares of Prison Realty common stock received by
persons who are deemed to be "Affiliates" (as such term is defined in the
Securities Act) of CCA and Prison Realty may be resold by them only in
transactions permitted by the resale provisions of Rule 145 of the Rules and
Regulations promulgated under the Securities Act or Rule 144 in the case of such
persons who become affiliates of Prison Realty or as otherwise permitted under
the Securities Act. Persons who may be deemed to be affiliates of CCA and Prison
Realty, generally include individuals or entities that control, are controlled
by, or are under common control with such party and may include officers and
directors of CCA and Prison Realty, as well as significant shareholders.
The shares of Prison Realty common stock to be issued to the shareholders
of CCA who are also wardens of the facilities operated by CCA will be subject to
the terms and provisions of a newly-adopted Prison Realty restricted stock plan.
Under the terms of the restricted stock plan, the shares of restricted stock
held by warden shareholders will vest only if they remain employed by Prison
Realty or by one of its subsidiaries from the closing date of the merger through
December 31, 2003. If a warden shareholder does not remain employed by Prison
Realty or by one of its subsidiaries for such period, the shares of Prison
Realty common stock issued to such warden will be forfeited but shall remain
outstanding, and such shares will be held in trust for the benefit of the
remaining wardens until December 31, 2003. At this time, such shares will vest
and will be distributed pro-rata to the wardens still employed. Shares of Prison
Realty common stock owned by other CCA shareholders and received in the merger
will be subject to restrictions on transfer under the terms of a lock-up
agreement, which restrictions prohibit transfers of such stock for a period of
180 days after
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<PAGE> 152
the merger transactions are completed. After 180 days, and through December 31,
2003, transfers may be made according to the following percentages:
- Up to 25% after 180 days;
- Up to 50% after December 31, 2001;
- Up to 75% after December 31, 2002; and
- Unlimited after December 31, 2003.
ACCOUNTING TREATMENT OF THE MERGER
Prison Realty intends to account for the merger as a purchase for financial
reporting and accounting purposes, under generally accepted accounting
principles. After the merger, the results of operations of CCA will be included
in the consolidated financial statements of Prison Realty. The purchase price
will be allocated based on the fair values of the assets acquired and the
liabilities assumed. Any excess of cost over fair value of the net tangible
assets of CCA acquired will be recorded as goodwill and other intangible assets
and will be amortized by charges to operations under generally accepted
accounting principles. These allocations will be made based upon valuations and
other studies that have not yet been finalized.
PRISON REALTY CAPITAL STOCK
This section of the joint proxy statement/prospectus describes certain
aspects of Prison Realty's capital stock. As described in this joint proxy
statement/prospectus, in connection with the merger and related transactions,
Prison Realty will issue shares of its common stock to existing CCA
shareholders. The following description of Prison Realty's capital stock,
including Prison Realty's common stock, should be read in conjunction with the
information contained in this joint proxy statement/prospectus under the heading
"Comparison of the rights of stockholders of Prison Realty after the merger
transactions and related restructuring and the rights of shareholders of CCA
before the merger and related transactions and the Prison Realty restructuring"
and with the amended and restated charter of Prison Realty attached hereto as
Appendix B.
GENERAL
The proposed amended and restated charter of Prison Realty would increase
the authorized capital stock of Prison Realty to 450.0 million shares,
consisting of 400.0 million shares of common stock and 50.0 million shares of
preferred stock. Prison Realty's charter currently authorizes the issuance of
320.0 million shares of capital stock, consisting of 300.0 million shares of
common stock and 20.0 million shares of preferred stock, of which 4.3 million
shares have been designated as 8% series A preferred stock. Prison Realty has an
aggregate of approximately 118.4 million shares of common stock currently issued
and outstanding. Prison Realty also has approximately 22.8 million shares of
common stock reserved for issuance under various employee and director benefit
plans and pursuant to the conversion of an aggregate of $70.0 million of
convertible, subordinated notes. The Prison Realty charter currently provides
for "blank check" stock whereby the Prison Realty board is permitted to classify
or reclassify any unissued stock without shareholder approval. However, the
board may not issue shares of capital stock in excess of the amount authorized
under the charter.
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<PAGE> 153
COMMON STOCK
The holders of shares of Prison Realty common stock are entitled to one
vote per share on all matters voted on by holders of Prison Realty common stock,
including the election of directors, and, except as otherwise required by law or
provided in any resolution adopted by the Prison Realty board of directors with
respect to any series of Prison Realty preferred stock establishing the powers,
designations, preferences and relative, participating, option or other special
rights of such series, the holders of such Prison Realty common stock
exclusively possess all voting power. The Prison Realty charter does not provide
for cumulative voting in the election of directors. Subject to any preferential
rights of holders of shares of the Prison Realty series A preferred stock or any
other outstanding series of Prison Realty preferred stock, the holders of shares
of Prison Realty common stock are entitled to such distributions as may be
declared from time to time by the Prison Realty board from funds available
therefor, and upon liquidation are entitled to receive pro rata all assets of
Prison Realty available for distribution to such holders. All shares of Prison
Realty common stock are fully paid and nonassessable and the holders thereof do
not have preemptive rights.
PREFERRED STOCK
Prison Realty is authorized to issue shares of Prison Realty preferred
stock, from time to time, in one or more series, with such designating powers,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications and terms or
conditions of redemption, in each case, if any, as are permitted by the MGCL and
as the Prison Realty board of directors may determine prior to issuance thereof
by filing articles supplementary to the Prison Realty charter, without any
further vote or action by Prison Realty's stockholders. An aggregate of 4.3
million shares of Prison Realty series A preferred stock have been authorized
and issued. The shares of the Prison Realty series A preferred stock represent
the only series of Prison Realty preferred stock that are currently issued. The
rights and preferences of the Prison Realty series A preferred stock can be
found in the amended and restated charter of Prison Realty attached hereto as
Appendix B.
COMPARISON OF THE RIGHTS OF STOCKHOLDERS OF PRISON REALTY AFTER THE MERGER
TRANSACTIONS AND RELATED RESTRUCTURING AND THE RIGHTS OF SHAREHOLDERS OF CCA
BEFORE THE MERGER AND RELATED TRANSACTIONS AND THE PRISON REALTY RESTRUCTURING
Prison Realty's charter, as amended, its bylaws and Maryland law currently
govern the rights of shareholders of Prison Realty. If the holders of Prison
Realty's common stock approve the proposed amendment and restatement to the
Prison Realty charter, charter provisions relating to Prison Realty's status as
a REIT will be removed, and Prison Realty's name will be changed to "Corrections
Corporation of America."
The rights of the holders of CCA common stock are currently governed by
CCA's charter, as amended and restated, its bylaws and Tennessee law. After the
completion of the merger and related transactions and the Prison Realty
restructuring, a condition of which is that the holders of Prison Realty's
common stock approve the amendment and restatement of the Prison Realty charter,
holders of CCA's voting common stock will become shareholders of Prison Realty.
As a result, the rights of holders of CCA's voting common stock will be governed
by Prison Realty's amended and restated charter and its bylaws. Furthermore,
because Prison Realty is a Maryland corporation, after the mergers, the rights
of holders of CCA's voting common stock will be governed by Maryland law, rather
than Tennessee law.
The following chart summarizes certain differences among the rights of the
holders of common stock of Prison Realty after the merger and related
transactions and the Prison Realty restructuring
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<PAGE> 154
and the rights of the holders of common stock of CCA under CCA's charter, bylaws
and the laws of Tennessee, its state of incorporation.
This summary is not a complete description of the rights of shareholders of
Prison Realty or CCA. We encourage you to read the proposed articles of
amendment and restatement to Prison Realty's charter carefully. You may obtain
the current charter and bylaws of CCA, without charge, by contacting Darrell K.
Massengale, the chief financial officer and secretary of CCA, at 10 Burton Hills
Boulevard, Nashville, Tennessee 37215.
<TABLE>
<CAPTION>
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PRISON REALTY
(MARYLAND CORPORATION)
(AFTER THE AMENDMENT AND RESTATEMENT CCA
OF THE PRISON REALTY CHARTER) (TENNESSEE CORPORATION)
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Name of corporation Prison Realty Trust, Inc. Corrections Corporation of America
----------------------------------------------------------------------------------------------------
Common stock The Prison Realty charter authorizes The CCA charter authorizes for
for issuance 400.0 million shares of issuance 200.0 million shares of
common stock. One class of common common stock. Two classes of common
stock is issued and outstanding. stock, class A common stock and
Holders are entitled to one vote per class B common stock, are issued
share. and outstanding. Holders of class A
common stock are entitled to one
vote per share. Holders of class B
common stock have no voting rights;
provided, however, that the charter
provides that the consent of the
holders of 80% of CCA's capital
stock shall be required to approve
any merger of CCA.
----------------------------------------------------------------------------------------------------
Preferred stock The Prison Realty charter authorizes The CCA charter authorizes for
for issuance 50.0 million shares of issuance 50.0 million shares of
preferred stock. Prison Realty has preferred stock. The board of
4.3 million shares of preferred directors may issue shares of
stock designated as series A, and preferred stock in one or more
will designate 8.0 million shares of series and may fix and determine
preferred stock as series B. The the relative rights and preferences
terms of the series B convertible of the shares of any series so
preferred stock are described in the established.
section entitled "Information About
Prison Realty -- Qualification as a
REIT for 1999."
----------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 155
<TABLE>
<CAPTION>
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PRISON REALTY
(MARYLAND CORPORATION)
(AFTER THE AMENDMENT AND RESTATEMENT CCA
OF THE PRISON REALTY CHARTER) (TENNESSEE CORPORATION)
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shareholder rights Under Maryland law, the board of Tennessee law does not contain a
plan directors of a corporation may set provision regarding shareholder
the terms and conditions of rights, rights plans, and CCA has not
options or warrants under a adopted a shareholder rights plan.
shareholder rights plan and may
issue rights, options or warrants
under a shareholder rights plan to
designated persons or classes of
persons. The rights plan may include
any limitation, restriction or
condition that precludes, limits,
invalidates or voids the exercise,
transfer or receipt of the rights,
options or warrants by designated
persons or classes of persons in
specified circumstances. In
addition, the rights plan may
include any limitation, restriction
or condition that limits for a
period not to exceed 180 days the
power of a future director to vote
for the redemption, modification or
termination of the rights, options
or warrants. Prison Realty has not
adopted a shareholder rights plan.
----------------------------------------------------------------------------------------------------
Entity status The Prison Realty charter does not The CCA charter does not contain
contain provisions requiring provisions requiring specific
specific actions based on its status actions based on its status as a
as a corporation. corporation.
----------------------------------------------------------------------------------------------------
Distributions The Prison Realty charter does not The CCA charter does not require
require the board of directors to the board of directors to make
make distributions to its distributions to its shareholders.
stockholders. The CCA charter provides that any
dividends or distributions, when
and as declared, shall be paid to
the holders of shares of CCA's
class A common stock and CCA's
class B common stock pari passu.
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</TABLE>
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<PAGE> 156
<TABLE>
<CAPTION>
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PRISON REALTY
(MARYLAND CORPORATION)
(AFTER THE AMENDMENT AND RESTATEMENT CCA
OF THE PRISON REALTY CHARTER) (TENNESSEE CORPORATION)
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Special meeting of Under Maryland law, a special Under Tennessee law, a special
stockholders meeting of stockholders may be meeting of the shareholders may be
called by the president, the board called by the board of directors or
of directors or any other person any person authorized to do so by
specified in the charter or the the charter or bylaws.
bylaws. In addition, Maryland law
provides that a special meeting of CCA's bylaws allow the board of
stockholders may also be called on directors, the chairman of the
the written request of the holders board or the president to call a
of at least 25% of the votes special meeting of shareholders.
entitled to be cast at the meeting, CCA's bylaws also allow the holders
or such greater or lesser of at least 20% of all the votes
percentages as the charter or bylaws entitled to be cast at the meeting
provide, of all the votes entitled to call a special meeting of
to be cast at the meeting. shareholders.
Prison Realty's bylaws allow the CCA's bylaws provide that the board
president, chairman of the board, a of directors may fix a future date
majority of the board of directors as the record date for determining
or a committee of the board of shareholders entitled to request a
directors which has been duly special meeting of shareholders and
designated by the board of directors for determining shareholders
and whose powers and authority, as entitled to notice of and to vote
provided in a resolution of the at a special meeting, provided that
board of directors or the bylaws, the record date shall not be more
include such power, to call a than 70 days before the meeting or
special meeting of the stockholders. action by the shareholders. If no
Prison Realty's bylaws also require record date is fixed by the board
the secretary of the corporation to of directors, the record date shall
call a special meeting on the be at the close of business on the
written request of the holders of at next day preceding the day on which
least a majority of all the votes notice is given, and the record
entitled to be cast at the meeting. date for the determination of
shareholders for any other purpose
Maryland law provides that the board shall be at the close of business
of directors has the sole power to on the date on which the board of
fix the record date for determining directors adopts the resolution
stockholders entitled to request a relating thereto.
special meeting of stockholders and
for determining stockholders Neither Tennessee law, nor the CCA
entitled to notice of and to vote at charter or bylaws, contain
the special meeting and to fix the provisions regarding the
date, time and place of the special determination of the date and time
meeting. of a special meeting of
shareholders. The CCA bylaws
provide that a special meeting of
shareholders shall be held at the
principal office of the corporation
or at such other place as the board
of directors, the chairman of the
board or the president shall
designate.
----------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 157
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
PRISON REALTY
(MARYLAND CORPORATION)
(AFTER THE AMENDMENT AND RESTATEMENT CCA
OF THE PRISON REALTY CHARTER) (TENNESSEE CORPORATION)
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Action by written Under Maryland law, shareholders may Under Tennessee law, shareholders
consent in lieu of take action by written consent in may take action by written consent
stockholders meeting lieu of voting at a stockholders in lieu of voting at a shareholders
meeting if an unanimous written meeting. If all shareholders
consent that sets forth the action entitled to vote on the action
is signed by each stockholder consent to taking the action
entitled to vote on the matter. without a meeting, the affirmative
vote of the number of shares that
would be necessary to authorize or
take such action at a meeting is
the act of the shareholders. The
action must be evidenced by one or
more written consents describing
the action taken, signed by each
shareholder entitled to vote and
indicating each signing
shareholder's vote or abstention on
the action.
----------------------------------------------------------------------------------------------------
Voting groups The Prison Realty charter allows the Tennessee law requires that holders
holders of preferred stock, of outstanding shares of a class of
including the holders of the Prison stock are entitled to vote as a
Realty series B preferred stock separate voting group on certain
issued in satisfaction of Prison amendments to the charter that
Realty's remaining 1999 REIT affect the standing of shares of
distribution, to vote separately on that class.
certain matters.
Under Maryland law, if two or more
classes of stock are entitled to
vote separately on any matter for
which Maryland law requires approval
by two-thirds of all the votes
entitled to be cast, the matter
shall be approved by two-thirds of
all the votes of each class.
----------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 158
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
PRISON REALTY
(MARYLAND CORPORATION)
(AFTER THE AMENDMENT AND RESTATEMENT CCA
OF THE PRISON REALTY CHARTER) (TENNESSEE CORPORATION)
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Advance notice The Prison Realty bylaws require The CCA bylaws do not contain
provisions for that nominations of persons for advance notice provisions.
director nominations election to the board of directors
and other and the proposal of business to be
proposals -- annual considered at an annual meeting of
meeting stockholders must be made by the
board of directors or by a
stockholder who gives proper notice.
If made by a shareholder, the
proposal or nomination must be made
by advance written notice given to
the corporation between 60 and 90
days prior to the first anniversary
of the preceding year's annual
meeting of stockholders, provided
that if the annual meeting is
advanced by more than 30 days or
delayed more than 60 days from such
anniversary date, notice must be
given to the corporation not earlier
than the 90th day prior to such
annual meeting and not later than
the later of the 60th day prior to
such annual meeting or the tenth day
following the day on which the date
of such annual meeting is first
publicly announced.
----------------------------------------------------------------------------------------------------
Advance notice The Prison Realty bylaws provide The CCA bylaws do not contain
provisions for that the only business that can be advance notice provisions.
director nominations conducted at special meetings of
and other stockholders will be the business
proposals -- special set forth in the notice of the
meetings special meeting. The Prison Realty
bylaws require that nominations of
persons for election to the board of
directors must be made by the board
of directors or by a shareholder who
gives proper notice. If made by a
stockholder, the proposal or
nomination must be made by advance
written notice given to the
corporation not earlier than the
90th day prior to such special
meeting and not later than the later
of the 60th day prior to such
special meeting or the tenth day
following the day on which the date
of such special meeting is first
publicly announced.
----------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 159
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
PRISON REALTY
(MARYLAND CORPORATION)
(AFTER THE AMENDMENT AND RESTATEMENT CCA
OF THE PRISON REALTY CHARTER) (TENNESSEE CORPORATION)
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Inspection of books Under Maryland law, a stockholder Under Tennessee law, a shareholder
and records may inspect and copy, during usual may inspect and copy, during usual
hours of business, the corporation's hours of business, the minutes of
bylaws, minutes of shareholders shareholders meetings, the charter,
meetings, annual statements of bylaws, annual report and certain
affairs and voting trust agreements other corporate records if the
on file with the corporation and may shareholder submits a written
view a statement showing all request at least five business days
securities issued by the corporation in advance. In addition, a
in the previous 12 months if the shareholder who makes a demand in
stockholder submits a timely written good faith and for a proper
request. In addition, Maryland law purpose, and who describes his or
allows persons who have been her purpose and the records he or
stockholders of the corporation for she desires to inspect, may, if the
more than six months and who also records are directly connected with
own at least 5% of the outstanding that purpose, inspect and copy
stock of any class of the accounting records, excerpts from
corporation, if the shareholder the minutes of board meetings,
submits a timely written request, to records of certain actions taken by
inspect and copy the corporation's committees and actions taken by the
books of account and stock ledger, shareholders or the board without a
obtain a written statement of the meeting.
corporation's affairs and obtain a
list of the corporation's
shareholders.
----------------------------------------------------------------------------------------------------
Classified board of Maryland law provides that a Tennessee law provides that a
directors corporation's charter may divide its corporation's board of directors
directors into classes with may be divided into various classes
specified terms of office. The with staggered terms of office. The
Prison Realty charter does not CCA charter does not provide for
provide for a classified board of staggered terms of office.
directors.
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</TABLE>
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<PAGE> 160
<TABLE>
<CAPTION>
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PRISON REALTY
(MARYLAND CORPORATION)
(AFTER THE AMENDMENT AND RESTATEMENT CCA
OF THE PRISON REALTY CHARTER) (TENNESSEE CORPORATION)
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Number of directors The Prison Realty charter provides The CCA bylaws provide that the
that the board of directors shall number of directors shall be fixed
consist of the number of directors from time to time by the board of
determined by resolution of the directors, provided, however, that
board of directors in accordance at no time shall the number be less
with the Prison Realty bylaws, than three nor more than seven.
except as otherwise provided by the Currently, there are six members of
charter, provided that the number of the CCA board of directors.
directors shall never be less than
the minimum number required by
Maryland law. Maryland law requires
that there shall be at least one
director. The Prison Realty bylaws
provide that the board of directors
shall not be less than three nor
more than 16, as determined from
time to time by resolution adopted
by a majority of the board of
directors.
In addition, the Prison Realty
charter provides that, in the event
of an increase or decrease in the
number of directors, directors then
serving shall continue as directors
until the expiration of their term
or until their prior death,
retirement, resignation or removal.
----------------------------------------------------------------------------------------------------
Required committees The Prison Realty bylaws require The CCA bylaws do not require
that there be an independent specific committees. Currently, CCA
committee composed solely of has not designated any committees
independent directors, an audit of the board of directors.
committee, and a compensation
committee.
----------------------------------------------------------------------------------------------------
Special meetings of The Prison Realty bylaws provide The CCA bylaws provide that the
the board of that the chairman of the board, the chairman of the board, the
directors chief executive officer, the president or any two directors may
president or a majority of the call a special meeting of the
directors then in office may call a directors. Notice of such a meeting
special meeting of the directors. must be delivered at least two days
Notice of such a meeting must be prior to the meeting.
delivered by telephone at least 24
hours prior to the meeting,
delivered personally or telegraphed
at least two days prior to the
meeting or delivered by mail at
least five days prior to the
meeting.
----------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 161
<TABLE>
<CAPTION>
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PRISON REALTY
(MARYLAND CORPORATION)
(AFTER THE AMENDMENT AND RESTATEMENT CCA
OF THE PRISON REALTY CHARTER) (TENNESSEE CORPORATION)
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Action by the board Under Maryland law, a majority of Under Tennessee law, a majority of
of directors the board of directors constitutes a the number of prescribed directors
quorum, and, if a quorum is present constitutes a quorum. Under
when a vote is taken, the Tennessee law, if a quorum is
affirmative vote of a majority of present when a vote is taken, the
the directors present is the act of affirmative vote of a majority of
the board. Notwithstanding the the directors present is the act of
foregoing, two-thirds of the the board.
directors then in office shall be
necessary to constitute a quorum to The CCA bylaws specify that at no
approve certain actions set forth in time shall a quorum consist of
the bylaws, and such actions shall fewer than one-third of the number
not be effective unless approved by of directors then prescribed.
two-thirds of the directors then in
office.
----------------------------------------------------------------------------------------------------
Standard of conduct Under Maryland law, a director must
for directors perform his duties as a director in
good faith, in a manner he
reasonably believes to be in the
best interest of the corporation and
with the care that an ordinarily
prudent person in a like position
would use under similar
circumstances. An act of a director
is presumed to satisfy these
standards.
Under Maryland law, an act of a Under Tennessee law, a director
director relating to or affecting an shall discharge his duties as a
acquisition of control of the director in good faith, in a manner
corporation may not be subject to a he reasonably believes to be in the
higher duty or greater scrutiny than best interests of the corporation
is applied to any other act of a and with the care that an
director. The duty of directors to a ordinarily prudent person in a like
corporation does not require them position would exercise under
to: similar circumstances.
- accept, recommend or respond on
behalf of the corporation to any
proposal by an acquiring person;
- authorize the corporation to
redeem any rights under, modify or
render inapplicable a shareholder
rights plan;
- take certain actions under
Maryland's anti-takeover statutes;
or
- act or fail to act solely because
of the effect an action or failure
to act may have on an acquisition of
control of the corporation, or the
amount or type of any consideration
that may be offered or paid to
shareholders in an acquisition.
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</TABLE>
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<PAGE> 162
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
PRISON REALTY
(MARYLAND CORPORATION)
(AFTER THE AMENDMENT AND RESTATEMENT CCA
OF THE PRISON REALTY CHARTER) (TENNESSEE CORPORATION)
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Removal of directors Unless the charter provides Under Tennessee law, the
otherwise, under Maryland law, if shareholders may remove directors
the stockholders of any class are with or without cause and, if so
entitled to separately elect one or provided by the charter, directors
more directors, a director so may be removed for cause by a vote
elected may not be removed without of a majority of the entire board
cause except by the affirmative vote of directors. The CCA bylaws allow
of a majority of the shares of that the shareholders to remove
class. The Prison Realty charter directors with or without cause and
provides that the shareholders may, allow a majority of the number of
at any time, remove a director, with directors then prescribed to remove
or without cause, by an affirmative directors for cause.
vote of a majority of shareholders
entitled to vote in the election of
that director.
----------------------------------------------------------------------------------------------------
Director vacancies Under Maryland law, vacancies which Under Tennessee law, vacancies may
result from the removal of a be filled by the shareholders, the
director may be filled by the board of directors or a majority of
stockholders or by a majority of the the remaining directors.
remaining directors, provided that
if the vacancy results from the
removal of a director elected by a
particular class, only the
stockholders of that particular
class or a majority of the remaining
directors elected by that particular
class may fill the vacancy.
----------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 163
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
PRISON REALTY
(MARYLAND CORPORATION)
(AFTER THE AMENDMENT AND RESTATEMENT CCA
OF THE PRISON REALTY CHARTER) (TENNESSEE CORPORATION)
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Indemnification The Prison Realty bylaws The CCA bylaws provide that the
specifically require indemnification corporation shall indemnify and
of directors and officers who have advance expenses to each director
been successful on the merits or and officer to the fullest extent
otherwise in the defense of a permitted by Tennessee law.
proceeding, and the Prison Realty
bylaws provide that directors and The CCA bylaws also provide that
officers shall be indemnified to the the corporation may indemnify and
fullest extent permitted by Maryland advance expenses to any employee or
law against any claim or liability agent of the corporation, if the
to which they become subject because board of directors determines that
of their status unless it is doing so is in the best interests
established that his or her act or of the corporation.
omission was material to the matter
giving rise to the proceeding and
was committed in bad faith or was
the result of active and deliberate
dishonesty, he or she actually
received an improper benefit in
money, property or services or, in
the case of a criminal proceeding,
he or she had reasonable cause to
believe that his or her act or
omission was unlawful.
The Prison Realty bylaws provide
that the corporation shall pay or
reimburse reasonable expenses
incurred by such person. The Prison
Realty bylaws, however, require that
before any such payment, the
corporation must have received a
written affirmation by the director
or officer of his or her good faith
belief that he or she has met the
applicable standard of conduct
necessary for indemnification by the
corporation as authorized by the
bylaws and must have received a
written undertaking by or on the
director's or officer's behalf to
repay the amount paid or reimbursed
by the corporation if it is
ultimately determined that the
applicable standard of conduct was
not met.
The Prison Realty bylaws also
provide that the corporation may,
with the approval of the Prison
Realty board of directors, indemnify
or advance expenses to any other
persons permitted to be indemnified
by Maryland law.
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</TABLE>
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<TABLE>
<CAPTION>
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PRISON REALTY
(MARYLAND CORPORATION)
(AFTER THE AMENDMENT AND RESTATEMENT CCA
OF THE PRISON REALTY CHARTER) (TENNESSEE CORPORATION)
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<S> <C> <C> <C>
Limitation of Under Maryland law, director Under Tennessee law, director
liability monetary liability to the liability may not be limited or
corporation or its shareholders may eliminated for any breach of the
not be limited or eliminated to the director's duty of loyalty to the
extent that it is proved that the corporation or its shareholders,
director or officer actually for acts or omissions not in good
received an improper benefit or faith or which involve intentional
profit in money, property or misconduct or a knowing violation
services for the amount of the of law or for unlawful
benefit or profit in money, property distributions.
or services actually received or to
the extent that a judgment or other The CCA charter provides that, to
final adjudication adverse to the the fullest extent permitted by
director or officer is entered in a Tennessee law, a director of the
proceeding based on a finding in the corporation shall not be liable to
proceeding that the director's or the corporation or its shareholders
officer's action, or failure to act, for monetary damages for breach of
was the result of active and fiduciary duty as a director.
deliberate dishonesty and was
material to the cause of the action
adjudicated in the proceeding.
The Prison Realty charter provides
that, to the maximum extent
permitted by Maryland law, no person
who is or was a director or officer
of the corporation shall be
personally liable to the corporation
or its stockholders for money
damages.
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</TABLE>
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<TABLE>
<CAPTION>
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PRISON REALTY
(MARYLAND CORPORATION)
(AFTER THE AMENDMENT AND RESTATEMENT CCA
OF THE PRISON REALTY CHARTER) (TENNESSEE CORPORATION)
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Amendments to the Under Maryland law, the charter of Under Tennessee law, the charter of
charter the corporation may be amended if the corporation may be amended if
the board of directors adopts a the board of directors recommends
resolution setting forth the the amendment to the shareholders
proposed amendment, declares it and if the shareholders approve the
advisable and directs the proposed amendment by a majority of the
amendment be submitted to the votes entitled to be cast on the
shareholders entitled to vote on the amendment by any voting group with
matter and the stockholders approve respect to which the amendment
the amendment by the affirmative would create dissenters' rights and
vote of two-thirds of all the votes by a majority of the votes cast by
entitled to be cast on the matter. all shareholders entitled to vote
on the amendment.
In addition, Maryland law allows the
board of directors of a corporation The CCA charter reserves for the
with a class of equity securities corporation the right to amend,
registered under the Exchange Act alter, change or repeal any
which elects to be subject to provision contained in the charter
certain provisions of the MGCL and in the manner prescribed by
which has at least three independent Tennessee law.
directors, without shareholder
approval and without regard to
contrary provisions in its charter
or bylaws, to:
- classify the board of directors
into three classes;
- require a two-thirds shareholder
vote for removal of directors;
- provide that the number of
directors constituting the board of
directors shall be fixed only by the
board of directors;
- provide that all vacancies on the
board of directors may be filled
only by the affirmative vote of a
majority of the remaining directors
in office, even if the remaining
directors do not constitute a
quorum; and
- require that a special
shareholders meeting be called only
at the request of stockholders
entitled to cast at least a majority
of the votes entitled to be cast at
the meeting.
The board of directors may not,
however, override charter provisions
that designate the terms and voting
powers of directors elected by a
certain class or series of stock. In
addition, the board of directors may
prohibit itself from taking such
actions by adopting a charter
provision or board resolution to
that extent. Prison Realty has not
taken any action to prohibit itself
from taking such actions.
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</TABLE>
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<TABLE>
<CAPTION>
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PRISON REALTY
(MARYLAND CORPORATION)
(AFTER THE AMENDMENT AND RESTATEMENT CCA
OF THE PRISON REALTY CHARTER) (TENNESSEE CORPORATION)
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Amendments to the The Prison Realty bylaws provide Under Tennessee law, the bylaws may
bylaws that the board of directors shall be amended or repealed, and new
have the exclusive power to adopt, bylaws may be adopted, by the board
alter or repeal any provision of the of directors or the shareholders of
bylaws and to make new bylaws. the corporation.
----------------------------------------------------------------------------------------------------
Consolidation; Under Maryland law, the corporation Under Tennessee law, the
merger; share may be consolidated or merged, its corporation may be merged or its
exchange or transfer shares may be exchanged or its shares may be exchanged if the
of assets assets may be transferred if the board of directors adopts the plan
board of directors adopts a of merger or exchange and
resolution which declares that the recommends that the shareholders
proposed transaction is advisable approve the plan and if the
and directs the matter be submitted shareholders approve the plan by a
to the stockholders entitled to vote majority of all the votes entitled
on the matter and the shareholders to be cast on the plan of merger or
approve the transaction by the exchange.
affirmative vote of two-thirds of
all the votes entitled to be cast on CCA's charter provides that CCA
the matter. shall not be merged with or sold to
another entity without the prior
consent of the holders of 80% of
the capital stock of the
corporation. In addition, pursuant
to an agreement between CCA and
Baron, CCA shall not be merged with
or sold to another entity without
the prior approval of Baron.
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</TABLE>
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<TABLE>
<CAPTION>
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PRISON REALTY
(MARYLAND CORPORATION)
(AFTER THE AMENDMENT AND RESTATEMENT CCA
OF THE PRISON REALTY CHARTER) (TENNESSEE CORPORATION)
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dissenters' rights Under Maryland law, a stockholder Under Tennessee law, a shareholder
may demand and receive payment of may dissent from, and obtain
the fair value of the shareholder's payment of the fair value of the
shares if: shareholder's shares in the event
- the corporation consolidates or of, the following corporate
merges with another corporation; actions:
- the stockholder's stock is to be - the consummation of a plan of
acquired in a stock exchange; merger or share exchange;
- the corporation transfers all or - a sale of all or substantially
substantially all of its assets; all of the assets of the
- the corporation amends its charter corporation;
in a way that substantially - an amendment to the corporation's
adversely affects the shareholder's charter that materially affects the
rights; or shareholder's rights; or
- the corporation enters into - any other action taken by the
certain transactions governed by the corporation, to the extent the
business combination provisions of charter, bylaws or a resolution of
Maryland law. the board of directors of the
corporation provides that
Under Maryland law, unless the shareholders are entitled to
transaction is governed by the dissent and obtain payment for
business combination provisions of their shares.
Maryland law, such rights are not
available if: Under Tennessee law, no shareholder
- the stock is listed on a national may dissent as to shares of any
securities exchange or designated as security which is listed on an
a national market system security on exchange registered under Section 6
an interdealer quotation system by of the Exchange Act or which is a
the National Association of "National Market System Security,"
Securities Dealers or designated for as defined in rules promulgated
trading on the NASDAQ Small Cap pursuant to the Exchange Act.
Market;
- the stock is that of a successor
in a merger, unless the merger
alters the contract rights of the
stock or the stock is converted into
something other than stock of the
successor or cash;
- a corporation limits stockholder
appraisal rights in its charter, or
the stockholders who own stock not
entitled to vote on the transaction
or who own stock acquired after the
record date for the transaction.
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</TABLE>
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<TABLE>
<CAPTION>
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PRISON REALTY
(MARYLAND CORPORATION)
(AFTER THE AMENDMENT AND RESTATEMENT CCA
OF THE PRISON REALTY CHARTER) (TENNESSEE CORPORATION)
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Business Under Maryland law, unless exempt, Under Tennessee law, "Business
combinations "Business Combinations" with Combinations" with "Interested
"Interested Stockholders" are Shareholders" are subject to a
subject to a moratorium of five moratorium of five years unless
years unless specified conditions specified conditions are met. After
are met. After this five year this five year period, any business
period, any business combination combination with an interested
with an interested shareholder must shareholder must be approved by
be approved by 80% of all voting two-thirds of the disinterested
stock and two-thirds of the voting stock or must meet certain
disinterested voting stock. These financial conditions. Unless its
provisions of Maryland law do not charter provides otherwise, a
apply to business combinations with corporation is exempt from these
interested shareholders that have restrictions if it does not have a
been exempted by resolution of the class of voting stock registered or
board of directors prior to the traded on a national securities
determination date. exchange or registered with the SEC
pursuant to Section 12(g) of the
Exchange Act. CCA's charter does
not "Opt Out" of this exemption.
----------------------------------------------------------------------------------------------------
Control share Under Maryland law, shares of the Under Tennessee law, shares of the
acquisitions corporation acquired in a "Control corporation acquired in a "Control
Share Acquisition" (as defined by Share Acquisition" (as defined by
Maryland law) will have no voting Tennessee law) have no voting
rights except to the extent approved rights except to the extent
by a vote of two-thirds of all authorized by a vote at a special
disinterested stockholders at a meeting of a majority of the
special meeting of stockholders. disinterested shareholders. This
This provision applies to the provision does not apply to the
corporation unless it "opts out" of corporation unless it "opts into"
the provisions in its charter or the provisions in its charter or
bylaws. Prison Realty has "opted bylaws. CCA has not "opted into"
out" of these provisions in its these provisions in its charter or
bylaws. bylaws.
----------------------------------------------------------------------------------------------------
Investor protection Maryland law does not contain a Under Tennessee law, persons making
provision regarding investor tender offers for purchases of CCA
protection. securities must make certain
filings with the Tennessee
Commissioner of Commerce and
Insurance. This provision does not
apply to tender offers that are
adopted by the board of directors.
----------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 169
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following discussion describes the material federal income tax
consequences applicable to CCA and its shareholders that are expected to result
from the merger of CCA with and into a newly-formed subsidiary of Prison Realty,
and the resulting exchange of the common stock of CCA for Prison Realty common
stock and cash. This discussion assumes that each holder holds stock in CCA as a
capital asset within the meaning of Section 1221 of the Internal Revenue Code.
This discussion does not address all aspects of taxation of the merger and
related transactions that may be relevant to particular shareholders in light of
their personal investment or income tax circumstances or to particular types of
shareholders subject to special tax treatment under the federal income tax laws
(including, without limitation, tax-exempt organizations, insurance companies,
financial institutions, broker-dealers, foreign persons (including foreign
corporations) and taxpayers subject to the alternative minimum tax). This
discussion is based on the Code, applicable Department of Treasury regulations,
and judicial and administrative rulings, interpretations and practice, all as of
the date of this joint proxy statement/prospectus.
SHAREHOLDERS OF CCA ARE URGED TO CONSULT THEIR OWN TAX ADVISOR REGARDING
THE SPECIFIC TAX CONSEQUENCES OF THE MERGER AND RELATED TRANSACTIONS AND THE
PRISON REALTY RESTRUCTURING, INCLUDING APPLICABLE FEDERAL, STATE, LOCAL AND
FOREIGN TAX CONSEQUENCES, AND REGARDING POTENTIAL CHANGES IN APPLICABLE TAX
LAWS.
TAX CONSEQUENCES OF THE MERGER
Stokes Bartholomew Evans & Petree, P.A., tax counsel to Prison Realty and
special tax counsel to CCA, will deliver an opinion to Prison Realty and to CCA
dated the closing date to the effect that the merger will be treated for United
States federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the Code. The opinion of Stokes Bartholomew Evans & Petree,
P.A. is based on various assumptions and on certain factual representations of
Prison Realty and CCA and is not binding on the IRS or any court. Accordingly,
no assurance can be given that the IRS will not challenge the opinion of Stokes
Bartholomew Evans & Petree, P.A. or that any such challenge would not be
successful. Stokes Bartholomew Evans & Petree, P.A. will render no opinion on
the tax consequences of the purchase by Prison Realty of the shares of CCA
common stock held by Baron or, if applicable, Sodexho.
In the opinion of Stokes Bartholomew Evans & Petree, P.A., the federal
income tax consequences of the merger will generally be as follows:
(i) CCA will not recognize gain or loss on the transfer of its assets
and liabilities to Prison Realty's acquisition subsidiary pursuant to the
terms of the merger;
(ii) Prison Realty will not recognize gain or loss on the transfer of
Prison Realty common stock to the shareholders of CCA pursuant to the
merger;
(iii) No gain or loss will be recognized by the shareholders of CCA as
a result of the merger (except as described in (vi) below);
(iv) The aggregate tax basis of the shares of Prison Realty common
stock received by a shareholder of CCA pursuant to the merger (including
any fractional share of Prison Realty common stock for which cash is
received) will be equal to the aggregate tax basis of such shareholder's
shares of CCA common stock exchanged therefor;
(v) A shareholder's holding period with respect to the Prison Realty
common stock received in the merger will include the holding period of the
CCA common stock exchanged
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<PAGE> 170
therefor if the shareholder holds its CCA common stock as a capital asset
on the closing date; and
(vi) Cash received by a shareholder of CCA in lieu of a fractional
share of Prison Realty common stock will be treated as received in exchange
for such fractional interest, and gain or loss will be recognized by such
shareholder in an amount equal to the difference between the amount of cash
received and the portion of that shareholder's adjusted tax basis in the
shares of CCA common stock allocated to such fractional interest. Such gain
or loss generally will be treated as capital gain or loss if the
shareholder holds its CCA common stock as a capital asset on the closing
date.
LIMITATIONS ON ABILITY TO UTILIZE LOSSES OF CCA
It is likely that the merger and related transactions will trigger certain
limitations on Prison Realty's and/or CCA's ability to use certain net operating
losses and capital loss carryforwards to offset taxable income generated by
Prison Realty or the acquisition subsidiary following the closing of the merger
and related transactions. As of March 30, 2000, CCA and certain affiliated
subsidiaries had net operating loss carryforwards of approximately $138.7
million.
PURCHASE OF CCA COMMON STOCK FROM BARON AND SODEXHO
BARON
Prison Realty will purchase all of the shares of the voting common stock of
CCA which are owned by Baron for non-cash consideration consisting of shares of
Prison Realty common stock valued at $8.0 million (or approximately 2.3 million
shares assuming a Prison Realty common stock price of $3.44 per share). The
number of shares of Prison Realty common stock to be issued and delivered to
Baron as the purchase price under the agreement shall be determined by dividing
$8.0 million by the lesser of: (i) $3.4375, the closing price of shares of
Prison Realty common stock on the NYSE on Friday, June 23, 2000; (ii) the
average closing price of Prison Realty common stock on the NYSE over the five
trading days ending two trading days prior to the closing of the merger; (iii)
the conversion price of Prison Realty's secured or unsecured indebtedness
existing prior to the merger; and (iv) the exercise price of any equity
securities issued by Prison Realty prior to the merger in satisfaction of its
existing contractual obligations.
As consideration for Baron's consent to the merger (as necessary in order
to effectuate the merger), Baron has required that Prison Realty issue to Baron
warrants to purchase $3.0 million in shares of Prison Realty common stock (or
approximately 857,000 shares assuming a Prison Realty common stock price of
$3.50 per share with respect to two-thirds of the warrants and a Prison Realty
common stock price of $3.44 per share with respect to one-third of the
warrants). Specifically, Prison Realty will issue and deliver to Baron (i)
series A warrants to purchase shares of Prison Realty common stock having an
aggregate value of $2.0 million, as calculated below, with an exercise price
equal to $0.01 per share and (ii) series B warrants to purchase shares of Prison
Realty common stock having an aggregate value of $1.0 million, as calculated
below, at an exercise price equal to the lesser of: (a) $3.4375, the closing
price of shares of Prison Realty common stock on the NYSE on Friday, June 23,
2000; (b) the average closing price of Prison Realty common stock on the NYSE
over the five trading days ending two trading days prior to the closing of the
merger; (c) the conversion price of any of Prison Realty's secured or unsecured
indebtedness existing prior to the merger; and (d) the exercise price of any
equity securities issued prior to the merger in satisfaction of its existing
contractual obligations. The warrants shall be exercisable for a period of five
years commencing on the date of issuance of the warrants. The number of shares
of Prison Realty common stock Baron shall receive as the result of its exercise
of the series A warrants shall be determined by dividing $2.0 million by the
lesser of: (a) $3.4375, the closing price of the shares of Prison Realty common
stock on the NYSE on Friday, June 23, 2000; (b) average closing price of Prison
Realty common stock on
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<PAGE> 171
the NYSE over the 5 trading days ending two trading days prior to the closing of
the merger; (c) the conversion price of Prison Realty's existing secured or
unsecured indebtedness existing prior to the merger; and (d) the exercise price
or conversion price of any equity securities issued by Prison Realty in
satisfaction of its existing contractual obligations. The number of shares of
Prison Realty common stock Baron shall receive as the result of its exercise of
the series B warrants shall be determined by dividing $1.0 million by the lesser
of: (a) $3.4375, the closing price of shares of Prison Realty common stock on
the NYSE on Friday, June 23, 2000; (b) the average closing price of Prison
Realty common stock on the NYSE over the five trading days ending two trading
days prior to the closing of the merger; (c) the conversion price of any of
Prison Realty's secured or unsecured indebtedness existing prior to the merger;
and (d) the exercise price of any equity securities issued by Prison Realty
prior to the merger in satisfaction of its existing contractual obligations.
In addition, certain of the agreements entered into by Baron in connection
with its initial purchase of the shares from CCA will be canceled and will be of
no further force or effect. The completion of the transactions contemplated by
the Baron stock purchase as set forth in the Baron purchase agreement is subject
to (i) the voting by Baron of their shares of CCA common stock in favor of the
merger, and (ii) obtaining the necessary shareholder approval of the merger.
Baron has designated a representative serving on the CCA board.
SODEXHO
Prison Realty is currently negotiating with Sodexho with respect to the
purchase of the shares of CCA common stock held by Sodexho. Prison Realty
expects, if it can reach an agreement with Sodexho, to pay Sodexho non-cash
consideration consisting of shares of Prison Realty common stock valued at up to
$8.0 million (or approximately 2.3 million shares assuming a Prison Realty
common stock price of $3.44 per share) for its shares of CCA common stock, under
the same terms as described above with respect to the purchase of shares of CCA
common stock held by Baron. Prison Realty has conditioned its proposed purchase
of the shares of CCA common stock from Sodexho on the elimination of Sodexho's
existing contractual right to have a representative on Prison Realty's board of
directors. Prison Realty indicated to Sodexho that it was willing to satisfy its
previous agreement to purchase the CCA shares in the form of Prison Realty
common stock valued at $8.0 million as required by Prison Realty's amended bank
credit facility. Sodexho has informed Prison Realty that it believes it should
receive the same aggregate consideration as Prison Realty agreed to pay Baron.
The merger agreement provides that Sodexho would receive fewer shares of Prison
Realty common stock in the merger pursuant to the exchange ratio set forth in
the merger agreement. Prison Realty intends to continue negotiations with
Sodexho regarding its purchase of the CCA common stock held by Sodexho for
non-cash consideration of up to $8.0 million conditioned on the elimination of
Sodexho's right to a representative on the Prison Realty board. In the event
Prison Realty does not acquire such shares prior to the merger, there can be no
assurance that Sodexho will vote the CCA common stock held by it in favor of the
merger and related transactions described herein or the Prison Realty common
stock held by it in favor of the charter amendments and the merger and related
transactions being considered by the holders of Prison Realty's common stock. If
no agreement is reached with Sodexho, Sodexho will maintain its existing
contractual right to have a representative on the Prison Realty board.
RECOMMENDATION OF THE CCA BOARD
THE CCA BOARD HAS APPROVED THE MERGER AGREEMENT, THE MERGER AND THE RELATED
TRANSACTIONS. THE CCA BOARD BELIEVES THAT THE MERGER AGREEMENT, THE MERGER AND
THE RELATED TRANSACTIONS ARE FAIR TO AND IN THE BEST INTERESTS OF, CCA AND ITS
SHAREHOLDERS AND RECOMMENDS THAT THE CCA SHAREHOLDERS VOTE FOR APPROVAL OF THE
MERGER AGREEMENT, THE MERGER AND THE RELATED TRANSACTIONS.
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ADDITIONAL INFORMATION REGARDING PRISON REALTY
The following information should be read in conjunction with the
information regarding Prison Realty included elsewhere in this joint proxy
statement/prospectus, including the information set forth under "Information
About Prison Realty."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain historical and pro forma financial information regarding Prison
Realty is included elsewhere in this joint proxy statement/prospectus. The
following discussion and analysis should be read in conjunction with that
financial information.
OVERVIEW
Prison Realty, a Maryland corporation formed in September 1998, commenced
operations on January 1, 1999 following the 1999 Merger of Old CCA and Old
Prison Realty with and into Prison Realty.
The 1999 Merger has been accounted for as a reverse acquisition of Prison
Realty by Old CCA and as an acquisition of Old Prison Realty by Prison Realty.
As such, Old CCA's assets and liabilities have been carried forward at
historical cost, and the provisions of reverse acquisition accounting prescribe
that Old CCA's historical financial statements be presented as Prison Realty'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 Prison Realty'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
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, Prison
Realty has specialized in acquiring, developing and owning correctional and
detention facilities. As required by its governing instruments, Prison Realty
currently intends to elect to be taxed as, and has operated so as to preserve
its ability to qualify as, a real estate investment trust, or REIT, for federal
income tax purposes for its taxable year ending December 31, 1999. In the event
the merger and related transactions and the Prison Realty restructuring are
approved by the stockholders of Prison Realty and CCA, Prison Realty will be
required to be taxed as a subchapter C corporation commencing with the taxable
year ended December 31, 2000. There can be no assurance, however, that Prison
Realty will qualify as a REIT for its 1999 taxable year in the event it elects
such.
Prison Realty's results of operations for all periods prior to January 1,
1999 reflect the operating results of Old CCA, and the results of operations
subsequent to January 1, 1999 reflect the operating results of Prison Realty as
a REIT. Management of Prison Realty believes the comparison between 1999 and the
years 1998 and 1997 (and the comparison between the quarter ended March 31, 2000
and the fiscal quarters ended March 31, 1998 and March 31, 1997) is not
meaningful because the financial condition, results of operations and cash flows
of the years 1998 and 1997 (and of the fiscal quarters ended March 31, 1998 and
March 31, 1997) reflect the operations of Old CCA and the
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<PAGE> 173
1999 (and the fiscal quarters ended March 31, 1999 and March 31, 2000) financial
condition, results of operations and cash flows reflect the operations of Prison
Realty as a REIT.
The following unaudited pro forma operating information presents a summary
of comparable consolidated results of combined operations as a REIT of Old CCA
and Old Prison Realty for the year ended December 31, 1998 (excluding (i) Old
CCA's historical operations, (ii) the CCA compensation charge, (iii) the
cumulative effect of accounting change, (iv) any write off of loan costs, (v)
any non-recurring expenses related to the 1999 Merger, (vi) any write-offs of
amounts due under lease arrangements, (vii) any impairment loss, (viii) any loss
or disposals of assets, and (ix) any provision for income taxes or charge in tax
status), as if the 1999 Merger had occurred as of January 1, 1998. The unaudited
pro forma operating information is presented for comparison purposes only and
does not purport to represent what Prison Realty's results of operations
actually would have been had the 1999 Merger, in fact, occurred on January 1,
1998.
<TABLE>
<CAPTION>
PRO FORMA
TWELVE MONTHS ENDED
DECEMBER 31, 1998
-------------------
(UNAUDITED)
(IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C>
Revenues.................................................... $218,587
Operating income............................................ 181,238
Net income available to common shareholders................. 174,888
Net income per common share:
Basic..................................................... 1.88
Diluted................................................... 1.73
</TABLE>
On December 31, 1998, immediately prior to the 1999 Merger, Old CCA sold to
CCA all of the issued and outstanding capital stock of certain wholly owned
corporate subsidiaries of Old CCA, certain management contracts and certain
other assets and liabilities, and entered into the trade name use agreement. In
exchange, Old CCA received the CCA note in the principal amount of $137.0
million and 100% of the non-voting common stock of CCA. The non-voting common
stock represents a 9.5% economic interest in CCA and was valued at the implied
fair market value of $4.8 million. Prison Realty succeeded to these interests as
a result of the 1999 Merger. The sale to CCA generated a deferred gain of $63.3
million.
On December 31, 1998, immediately prior to the 1999 Merger, Old CCA sold to
Prison Management Services, LLC certain management contracts and certain other
assets and liabilities relating to government-owned adult prison facilities. On
January 1, 1999, Prison Management Services, LLC merged with PMSI. In exchange,
Old CCA received 100% of the non-voting membership interest in PMSI valued at
the implied fair market value of $67.1 million. Prison Realty succeeded to this
interest as a result of the 1999 Merger. The sale to PMSI generated a deferred
gain of $35.4 million.
On December 31, 1998, immediately prior to the 1999 Merger, Old CCA sold to
Juvenile and Jail Facility Management Services, LLC certain management contracts
and certain other assets and liabilities relating to government-owned jails and
juvenile facilities. On January 1, 1999, Juvenile and Jail Facility Management
Services, LLC merged with JJFMSI. In exchange, Old CCA received 100% of the
non-voting membership interest in JJFMSI valued at the implied fair market value
of $55.9 million. Prison Realty succeeded to this interest as a result of the
1999 Merger. The sale to JJFMSI generated a deferred gain of $18.0 million.
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On January 1, 1999, Old Prison Realty merged with and into Prison Realty
(the "Prison Realty Merger"). In the Prison Realty Merger, Old Prison Realty
stockholders received 1.0 share of common stock or series A preferred stock of
Prison Realty in exchange for each Old Prison Realty common share or series A
preferred share. The Prison Realty Merger was accounted for as a purchase
acquisition of Old Prison Realty.
FINANCIAL CONDITION OF CCA AND PRISON REALTY
CCA is a private prison management company that operates and manages the
substantial majority of facilities owned by Prison Realty. As a result of the
1999 Merger and certain contractual relationships existing between Prison Realty
and CCA, Prison Realty is dependent on its significant sources of income from
CCA. In addition, Prison Realty pays CCA for services rendered to Prison Realty
in the development of its correctional and detention facilities. See the
information contained in "Information About Prison Realty" for a complete
description of the contractual relationships between Prison Realty and CCA and
recent amendments to these contractual relationships.
Prior to completion of the merger and related transactions and the Prison
Realty restructuring, Prison Realty's business will be ownership, development
and leasing of correctional and detention facilities to qualified third parties
and government agencies. As the lessor of correctional and detention facilities,
Prison Realty is currently dependent upon the ability of its tenants to make
lease payments to Prison Realty. CCA is currently the lessee of a substantial
majority of Prison Realty's facilities. At December 31, 1999, CCA leased 34 of
the 43 operating properties owned by Prison Realty, and at March 31, 2000, CCA
leased 37 of the 46 operating properties owned by Prison Realty. Therefore,
Prison Realty is currently dependent for a substantial portion of its revenues
on CCA's ability to make the lease payments required under the CCA leases for
such facilities. CCA incurred a net loss of $202.9 million for the year ended
December 31, 1999 and incurred a net loss of $62.6 million for the three months
ended March 31, 2000, and currently has a net working capital deficiency and a
net capital deficiency. As more fully described in "Information About Prison
Realty -- Recent Developments," due to CCA's liquidity position, CCA has been
unable to make timely rental payments to Prison Realty under the original terms
of the CCA leases and has been required to defer the first scheduled payment of
accrued interest on the $137.0 million promissory note payable by CCA to Prison
Realty. As of December 31, 1999, CCA was in default under the provisions of its
bank credit facility, although such events of default were waived subsequent to
December 31, 1999, as more fully described in "Information About Prison
Realty -- Recent developments." As a result of CCA's financial and liquidity
condition, the independent public accountants of CCA have indicated in their
opinion on CCA's 1999 consolidated financial statements that there is
substantial doubt about CCA's ability to continue as a going concern.
As discussed in "Information About Prison Realty -- Recent developments,"
Prison Realty and CCA have amended the original terms of the CCA leases to
defer, with interest, rental payments originally due to Prison Realty during the
period from January 2000 to June 2000 until September 30, 2000, with the
exception of certain scheduled payments. Pursuant to the terms of this
amendment, CCA will pay interest on such deferred rental payments, at an annual
rate equal to the current non-default rate of interest applicable to CCA's
credit facility (subject to adjustment if and to the extent that such rate of
interest under such existing bank credit facility is adjusted) from the date
each such payment would have been payable under the original terms of the CCA
leases until the date such payment is actually paid. CCA's obligation to make
payments under the CCA leases is not secured by any of the assets of CCA,
although the obligations under the CCA leases are cross-defaulted so that Prison
Realty could terminate all of the CCA leases if CCA fails to make required lease
payments. Under such circumstances, Prison Realty would be required to find a
suitable lessee for Prison Realty's facilities in order to generate revenue and
to maintain its ability to qualify as a
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REIT. Due to the unique nature of correctional and detention facilities, Prison
Realty may be unable to locate suitable lessees or to attract such lessees. It
is anticipated, however, that upon completion of the merger and related
transactions, the leases between Prison Realty and CCA, as amended, will be
terminated.
Continued operating losses by CCA, declarations of events of default and
acceleration actions by Prison Realty's and CCA's creditors, the continued
inability of CCA to make contractual payments to Prison Realty under the
original terms of such agreements, and Prison Realty's limited resources
currently available to meet its operating, capital expenditure and debt service
requirements will have a material adverse impact on Prison Realty's consolidated
financial position, results of operations and cash flows. In addition, these
matters concerning Prison Realty and CCA raise substantial doubt about Prison
Realty'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
Prison Realty be unable to continue as a going concern.
Prison Realty has limited resources currently available to meet its
operating, capital and debt service requirements. As a result, Prison Realty
currently is, and will continue to be, dependent on its ability to borrow funds
under the terms of its bank credit facility to meet these requirements. Due to
Prison Realty's financial condition, the availability of borrowings under its
bank credit facility is uncertain, notwithstanding the recently obtained waiver
and amendment to Prison Realty's bank credit facility. Accordingly, there can be
no assurance that Prison Realty will be able to meet its operating, capital
expenditure and debt service requirements in the future.
LENDER CONSENTS
As a result of the financial condition of Prison Realty and CCA, certain
existing or potential events of default arose under the provisions of Prison
Realty's indebtedness. In addition, certain of the proposed restructuring
transactions involving Prison Realty were not permitted under the terms of
Prison Realty's indebtedness. As more fully described in "Information About
Prison Realty -- Recent Developments" and in "-- Liquidity and Capital
Resources," Prison Realty has obtained waivers of previously existing events of
default under, and amendments to, the provisions of its bank credit facility and
its convertible, subordinated notes to permit the restructuring transactions and
the amendments to the CCA leases and the other contractual arrangements between
Prison Realty and CCA. See "Information About Prison Realty -- Recent
developments." As of July 24, 2000, the waivers and amendments remained in
effect, and, as a result, Prison Realty was not in default under the terms of
its bank credit facility, 12% senior notes or convertible, subordinated notes.
AMENDMENTS TO CCA LEASES AND OTHER AGREEMENTS
On December 31, 1999, Prison Realty and CCA amended the terms of the CCA
leases to change the annual base rent escalation formula with respect to each
facility leased to CCA. Previously, each facility's annual base rent was subject
to increase each year in an amount equal to a percentage of the total rental
payments with respect to each facility, such percentage being the greater of:
(i) 4%; or (ii) 25% of the percentage increase of gross management revenue
derived from such facility. As a result of this amendment, each facility's
annual base rent is subject to increase each year in an amount equal to the
lesser of: (i) 4% of the annualized yearly rental payments with respect to such
facility; or (ii) 10% of the excess of CCA's aggregate gross management revenues
for the prior year over a base amount of $325.0 million.
In an effort to address the liquidity needs of CCA prior to the completion
of the restructuring, and as permitted by the terms of the waiver and amendment
to Prison Realty's bank credit facility, Prison Realty and CCA have amended the
terms of the CCA leases. As previously described in
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"Information About Prison Realty -- Recent developments" and in "-- Liquidity
and capital resources," lease payments under the CCA leases will be due and
payable on June 30 and December 31 of each year, instead of monthly. In
addition, Prison Realty and CCA have agreed to defer, with interest, and with
the exception of certain scheduled payments, the first semi-annual rental
payment under the revised terms of the CCA lease agreements, due June 30, 2000,
until September 30, 2000.
As described in "Information About Prison Realty -- Recent developments,"
in connection with the amendments to the CCA leases deferring a substantial
portion of the rental payments due to Prison Realty thereunder, the terms of the
waiver and amendment to Prison Realty's bank credit facility condition the
effectiveness of the waiver and amendment to the bank credit facility upon the
deferral of Prison Realty's payment of fees to CCA which would otherwise be
payable pursuant to the terms of the amended and restated tenant incentive
agreement, the business development agreement and the amended and restated
services agreement. Also as described in "Information About Prison
Realty -- Recent developments," Prison Realty and CCA have deferred, with
interest, the payment of such amounts. The terms of CCA's recently amended
waiver and amendment to the provisions of its bank credit facility permit the
deferral of these payments.
RESULTS OF OPERATIONS
Prison Realty incurred a net loss for the three months ended March 31, 2000
of $30.0 million and was in default under its senior secured bank credit
facility (outstanding balance of $926.7 million at March 31, 2000) until June 9,
2000, when Prison Realty and its senior lenders entered into a waiver of
existing events of default under, and amendments to, the provisions of Prison
Realty's bank credit facility. Prison Realty also was in default under the
provisions of the agreements governing Prison Realty's $40.0 million
convertible, subordinated notes (outstanding balance of $40.0 million at March
31, 2000), and its $30.0 million convertible, subordinated notes (outstanding
balance of $30.0 million at March 31, 2000) until June 30, 1999, when Prison
Realty and the holders of such indebtedness executed waivers of existing events
of default under, and amendments to, the provisions of such indebtedness. In
addition, Prison Realty has significant outstanding shareholder and other
litigation matters. For a more complete description of Prison Realty's
non-compliance with the terms and covenants of its indebtedness and events of
default thereunder, as well as the waivers and amendments recently obtained by
Prison Realty, see "Information About Prison Realty -- Recent developments."
Further, CCA, Prison Realty's primary lessee, on which Prison Realty 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 had a net working capital deficiency
and a net capital deficiency at March 31, 2000.
As of March 31, 2000, approximately $80.2 million of rents due from CCA to
Prison Realty under the original terms of the CCA leases were unpaid. Prior to
March 31, 2000, CCA paid $12.9 million with respect to 1999. Subsequent to March
31, 2000, CCA paid $11.9 million with respect to 1999. Prior to the amendment of
the CCA leases, the original terms of the CCA leases provided that rental
payments were due and payable on the 25th day of each month for the current
month and that it shall be an event of default if CCA fails to pay any
installment of rent within 15 days after notice of nonpayment from Prison
Realty. During the period in which the original terms of the CCA leases were in
effect, Prison Realty did not provide a notice of nonpayment to CCA with respect
to lease payments due and payable by CCA. As previously described in
"Information About Prison Realty -- Recent developments," the CCA leases have
been amended to provide that lease payments under the CCA leases will be due and
payable on June 30 and December 31 of each year, instead of monthly.
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In addition, Prison Realty and CCA have agreed to defer, with interest, and with
the exception of certain scheduled payments, CCA's first semi-annual rental
payment under the revised terms of the CCA leases until September 30, 2000.
Subsequent to March 31, 2000, CCA paid $18.0 million of lease payments related
to 2000. At July 24, 2000, $143.8 million of lease payments were accrued but
unpaid under the original terms of the CCA leases.
On April 27, 2000, CCA obtained a waiver of existing events of default
under its bank credit facility. These events of default related to CCA's
execution of an agreement and plan of merger with respect to a proposed merger
of CCA with and into a wholly-owned subsidiary of Prison Realty in connection
with the Pacific Life restructuring, the deferral of certain of CCA's lease
payments and the payment of fees to CCA by Prison Realty, and a financial
covenant relating to CCA's net worth. This waiver, however, was to terminate
upon the occurrence of certain events, including the termination of the Pacific
Life securities purchase agreement. On June 30, 2000, CCA obtained an amendment
to its previous waiver of events of default under, and amendments to, its bank
credit facility providing for, among other things, the amendment of the CCA
leases and other agreements between CCA and Prison Realty, as well as the
termination of the Pacific Life securities purchase agreement and CCA's
execution of the merger agreement. See "Information About Prison Realty --
Recent developments" for a description of this amended waiver and amendment to
CCA's credit facility.
As previously described, as a result of CCA's liquidity position, CCA has
also been required to defer the first scheduled payment of accrued interest,
totaling approximately $16.4 million, on the $137.0 million promissory note
payable by CCA to Prison Realty. 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, potential declarations
of events of default and potential acceleration actions by Prison Realty's and
CCA's creditors in the event that either Prison Realty or CCA are unable to
maintain in effect existing waivers of events of default, the continued
inability of CCA to make contractual payments to Prison Realty under the
original terms of such agreements, and Prison Realty's limited resources
currently available to meet its operating, capital expenditure and debt service
requirements will have a material adverse impact on Prison Realty's consolidated
financial position, results of operations and cash flows.
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. Prison Realty
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.
Prison Realty has fully reserved the $16.4 million of interest accrued under the
terms of the
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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 fee is based upon gross
revenues of CCA, subject to a limitation of 2.75% of the gross revenues of
Prison Realty.
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 15.6% 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. Prison Realty 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 3.1% 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 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, Prison Realty opened one facility that is operated by CCA.
Prison Realty 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.
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, Prison Realty recognized equity in earnings of PMSI and JJFMSI of $2.1
million and $1.4 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, Prison Realty 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, Prison Realty 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, Prison Realty 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
Prison Realty's bank credit facility and Prison Realty'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
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rates due to rising market rates, the 2.0% default rate on Prison Realty's bank
credit facility, the default rate and contingent interest on the $40 million
convertible notes and less capitalized interest.
Provision for change in tax status. Prison Realty, 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, Prison
Realty'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"), Prison Realty 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, Prison Realty's results of operations
reflect a provision for change in tax status of $83.2 million for the three
months ended March 31, 1999.
Transactions with CCA. Pursuant to the terms of the CCA note, CCA was
required to make a scheduled interest payment on December 31, 1999; however,
pursuant to the terms of the subordination agreement, CCA is prohibited from
making the scheduled interest payments on the CCA note when CCA is not in
compliance with certain financial covenants. As of December 31, 1999, CCA was
not in compliance with these financial covenants and, consequently, was
prohibited from making the scheduled interest payment to Prison Realty. Pursuant
to the waiver and amendment to CCA's bank credit facility, CCA continues to be
prohibited from making interest payments to Prison Realty. Pursuant to the terms
of the subordination agreement between Prison Realty and the agent of CCA's bank
credit facility, Prison Realty is prohibited from accelerating payment of the
principal amount of the CCA note or taking any other action to enforce its
rights under the provisions of the CCA note for so long as CCA's bank credit
facility remains outstanding. During the three months ended March 31, 1999,
Prison Realty recorded $4.1 million interest accrued under the terms of the CCA
note. During December 1999, Prison Realty fully reserved the $16.4 million of
interest accrued under the terms of the CCA note during 1999. Prison Realty 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 Prison
Realty with respect to 1999 were unpaid. The original terms of the CCA leases
provide that such rental payments were due and payable on December 25, 1999.
During 2000, CCA has paid such lease payments related to 1999. As described in
"Information About Prison Realty -- Recent developments," the CCA leases have
been amended to defer, with interest, rental payments originally due during the
period from January 2000 to June 2000, with the exception of certain installment
payments. During 2000, CCA has made installment payments aggregating $18.0
million prior to July 24, 2000 with respect to 2000. At July 24, 2000, $143.8
million of lease payments were accrued but unpaid under the original terms of
the leases. For the three months ended March 31, 2000, Prison Realty 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.
Costs incurred by Prison Realty under the amended and restated services
agreement by and between Prison Realty and CCA 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. As described in "Information About Prison
Realty -- Recent developments," CCA and Prison Realty amended this agreement to
defer, with interest, payments to CCA by Prison Realty pursuant to this
agreement. As of July 24, 2000, Prison Realty has deferred the payment of
approximately $4.2 million in fees, not including interest, to CCA pursuant to
this amendment.
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Costs incurred by Prison Realty under the business development agreement by
and between Prison Realty 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 described in "Information About Prison Realty -- Recent
developments," CCA and Prison Realty have amended this agreement to defer, with
interest, payments to CCA by Prison Realty pursuant to this agreement. As of
July 24, 2000, Prison Realty has deferred the payment of approximately $1.3
million in fees, not including interest, to CCA pursuant to this amendment.
As of March 31, 2000, Prison Realty 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 ($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,
Prison Realty 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 and through July 24,
2000, CCA has paid obligations under the CCA leases for 2000 and 1999 of $18.0
million and $12.9 million, respectively. In addition, subsequent to March 31,
2000 and through July 24, 2000, CCA has paid $2.2 million for obligations under
the trade name use agreement for 1999.
Year ended December 31, 1999
Rental revenues. For the year ended December 31, 1999, rental revenues
were $270.1 million and were generated from the leasing of correctional and
detention facilities. During the year, Prison Realty began leasing five new
facilities, one in February 1999, one in April 1999, one in September 1999 and
two in December 1999, respectively, in addition to the 37 facilities which were
previously leased as of the beginning of the year.
Interest income. For the year ended December 31, 1999, interest income was
$6.9 million. This amount was a result of interest earned on cash used to
collateralize letters of credit for certain construction projects, direct
financing leases and investments of cash prior to the funding of construction
projects.
In connection with the 1999 Merger, Old CCA received the $137.0 million CCA
note. As previously described, as of December 31, 1999, the first scheduled
payment of interest, totaling approximately $16.4 million, on the CCA note was
unpaid. Prison Realty has fully reserved the $16.4 million of interest accrued
under the terms of the CCA note during 1999.
Licensing fees. For the year ended December 31, 1999, licensing fees were
$8.7 million. 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 fee is based upon gross revenues of CCA, subject to a limitation of
2.75% of the gross revenues of Prison Realty.
Depreciation and amortization. For the year ended December 31, 1999,
depreciation expense was $44.1 million. Depreciation expense as a percentage of
rental revenues for 1999 was 16.3%. Prison Realty uses the straight-line
depreciation method over 50 and five-year lives of buildings and machinery and
equipment, respectively.
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General and administrative expense. For the year ended December 31, 1999,
general and administrative expenses were $24.1 million or 8.9% of 1999 rental
revenues. General and administrative expenses consist primarily of management
salaries and benefits, legal and other administrative costs. Salaries and
related benefits represented 12% of general and administrative expenses for the
year ended December 31, 1999.
During 1999, Prison Realty was involved in various litigation including
stockholder litigation and other legal matters which are being defended and
handled in the ordinary course of business. While the ultimate results of these
individual matters cannot be exactly determined, Prison Realty incurred legal
expenses of $6.3 million during 1999. See "-- Liquidity and capital resources"
herein for further discussion of litigation issues, as well as the information
contained under the heading "Information About Prison Realty -- Recent
developments." In connection with the proposed restructuring, Prison Realty
incurred $3.9 million of costs representing consulting and legal advisory
services prior to the consummation of the proposed transaction.
As a result of Prison Realty's failure to declare the dividends discussed
in "-- Liquidity and Capital Resources" prior to December 31, 1999, and failure
to distribute, prior to January 31, 2000, dividends sufficient to distribute 95%
of its taxable income for 1999, Prison Realty is subject to excise taxes, which
are currently estimated to be $7.1 million and which have been accrued as of
December 31, 1999.
Equity in earnings of unconsolidated entities and amortization of deferred
gains. For 1999, equity in earnings of unconsolidated entities and amortization
of deferred gains were $22.9 million. For the year ended December 31, 1999,
Prison Realty recognized equity in earnings of PMSI and JJFMSI of $4.7 million
and $7.5 million, respectively, and received distributions from PMSI and JJFMSI
of $11.0 million and $10.6 million, respectively. For 1999, the amortization of
the deferred gain on the sales of contracts to the PMSI and JJFMSI was $7.1
million and $3.6 million, respectively.
Interest expense. For the year ended December 31, 1999, interest expense
was $51.9 million, respectively. Interest expense is based on outstanding
convertible notes payable balances and borrowings under Prison Realty's bank
credit facility and Prison Realty's 12% senior notes, including amortization of
loan costs and unused fees. Interest expense is reported net of capitalized
interest on construction in progress of $37.7 million for 1999.
Write off of loan costs. As a result of the amendment to the original bank
credit facility, Prison Realty incurred a write off of loan costs of $9.0
million for 1999. See "-- Liquidity and capital resources" for a discussion of
this write off.
Loss on disposal of assets. In June 1999, Prison Realty incurred a loss of
$1.6 million as a result of a settlement with the state of South Carolina for
property previously owned by Old CCA. Under the settlement, Prison Realty, as
the successor to Old CCA, will receive $6.5 million in three installments by
June 30, 2001 for the transferred assets. The net proceeds were approximately
$1.6 million less than the surrendered assets' depreciated book value. Prison
Realty received $3.5 million of the proceeds during 1999. As of December 31,
1999, Prison Realty has a receivable of $3.0 million related to this settlement.
In December 1999, Prison Realty incurred a loss of $0.4 million resulting
from a sale of a new facility in Florida. Construction on the facility was
completed by Prison Realty in May 1999. In accordance with the terms of the
management contract between Old CCA and Polk County, Florida, Polk County
exercised an option to purchase the facility. Net proceeds of $40.5 million were
received by Prison Realty.
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Write off of amounts under lease arrangements. For the year ended December
1999, Prison Realty had paid tenant incentive fees of $68.6 million, with $2.9
million of those fees amortized against rental revenues. During the fourth
quarter of 1999, Prison Realty undertook a plan that contemplates merging with
CCA and thereby eliminating the CCA leases or amending the CCA leases to
significantly reduce the lease payments to be paid by CCA to Prison Realty.
Consequently, Prison Realty determined that the remaining deferred tenant
incentive fees at December 31, 1999 were not realizable and wrote off fees
totaling $65.7 million.
Impairment loss. SFAS 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed Of," requires impairment losses to
be recognized for long-lived assets used in operations when indications of
impairment are present and the estimate of undiscounted future cash flows is not
sufficient to recover asset carrying amounts. In December 1999, the poor
financial position, results of operations and cash flows of CCA indicated to
management that certain of its correctional and detention facilities might be
impaired. In accordance with SFAS 121, Prison Realty estimated the undiscounted
net cash flows for each of its properties and compared the sum of those
undiscounted net cash flows to Prison Realty's investment in that property.
Through its analysis, Prison Realty determined that three of its correctional
and detention facilities in the state of Kentucky had been impaired. For these
three properties, Prison Realty reduced the carrying values of the underlying
assets to their estimated fair values, as determined based on anticipated future
cash flows discounted at rates commensurate with the risks involved. The
resulting impairment loss totaled $76.4 million.
Provision for change in tax status. Prison Realty, formerly a taxable
corporation, 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, Prison Realty'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"), Prison Realty 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, Prison Realty's results of operations reflect a provision for change in
tax status of $83.2 million for the year ended December 31, 1999.
Year ended December 31, 1998, as compared with year ended December 31, 1997
Management and other revenues. Total revenues increased 43.2% in 1998 as
compared to 1997, with increases in both management and transportation services.
Management revenues increased 44% in 1998, or $197.9 million. This increase was
primarily due to the opening of new facilities and the expansion of existing
facilities by Old CCA in 1997 and 1998. In 1998, Old CCA opened 10 new
facilities with an aggregate design capacity of 9,256 beds, assumed management
of eight facilities with an aggregate design capacity of 3,757 beds and expanded
seven existing facilities to increase their design capacity by an aggregate of
2,473 beds. Due to the growth in beds, compensated mandays increased 44% in 1998
from 10,524,537 to 15,107,533. Average occupancy improved to 94.4% in 1998 as
compared to 93.2% in 1997.
Transportation revenues increased $1.9 million or 15% in 1998 as compared
to 1997. This growth was primarily the result of an expanded customer base and
increased compensated mileage realized through the increased utilization of
three transportation hubs opened in 1997 and more "mass transports," which are
generally moves of 40 or more inmates per trip.
Operating expenses. Facility operating expenses increased 50.2% to $496.5
million in 1998. There were significant increases in operating expenses realized
due to the increased compensated mandays and compensated mileage that Old CCA
realized in 1998 as previously mentioned. Also Old
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CCA adopted the provisions of the AICPA's Statement of Position ("SOP") 98-5,
"Reporting on the Costs of Start-up Activities." The effect of this accounting
change for 1998 was a $14.9 million charge to operating expenses. Prior to the
adoption of SOP 98-5, project development and facility start-up costs were
deferred and amortized on a straight-line basis over the lesser of the initial
term of the contract plus renewals or five years. In conjunction with Old CCA
terminating five contractual relationships, Old CCA realized approximately $2.0
million of operating expenses related to transition costs and deferred contract
costs. Old CCA also incurred $1.0 million of non-recurring operating expenses
related to the 1999 Merger.
In 1998, Old CCA was subject to a class action lawsuit at one of its
facilities regarding the alleged violation of inmate rights which was settled
subsequent to the end of the year. Old CCA was also subject to two wrongful
death lawsuits at one of its facilities. These lawsuits were assumed by Prison
Realty in the 1999 Merger. CCA recognized $2.1 million of expenses in 1998
related to these lawsuits. See "-- Legal proceedings."
Lease expense. Lease expense increased 210.5% in 1998 compared to 1997.
Old CCA had entered into leases with Old Prison Realty in July 1997 for the
initial nine facilities that Old CCA had sold to Old Prison Realty. Throughout
1997 and 1998, Old CCA sold an additional four facilities and one expansion to
Old Prison Realty and, immediately after these sales, leased the facilities back
pursuant to long-term, triple net leases. As a result of the U.S. Corrections
Corporation acquisition, Old CCA entered into long-term leases for four
additional facilities with Old Prison Realty.
General and administrative. General and administrative expenses increased
78.6% in 1998 over 1997. Included in general and administrative expenses was
$1.3 million incurred in the fourth quarter of 1998 for an advertising and
employee relations initiative aimed at raising the public awareness of Old CCA
and the industry. Also, in connection with the 1999 Merger, CCA became subject
to a purported class action lawsuit attempting to enjoin the 1999 Merger and
seeking unspecified monetary damages. The lawsuit was settled in principle in
November 1998 with the formal settlement being completed in March 1999.
Accordingly, Old CCA recognized $3.2 million of expense in 1998 to cover legal
fees and the settlement obligation.
CCA compensation charge. Old CCA recorded a $22.9 million charge to
expense in 1998 for the implied fair value of 5.0 million shares of CCA voting
common stock issued by CCA to certain employees of Old CCA and Old Prison
Realty. The shares were granted to certain founding shareholders of CCA in
September 1998. Neither Old CCA nor CCA received any proceeds from the issuance
of these shares. The fair value of these common shares was determined at the
date of the 1999 Merger based upon the implied value of CCA, derived from $16.0
million in cash investments made by outside investors as of December 31, 1998,
as consideration for a 32% ownership interest in CCA.
Depreciation and amortization. Depreciation and amortization expenses
increased 7.4% in 1998 over 1997. The increase was due to the increase in the
number of owned facilities operated by Old CCA in 1998 as compared to 1997. Of
the 10 new facilities opened by Old CCA in 1998, Old CCA owned six.
Interest expense. Interest expense for 1998 was $8.6 million as compared
to $7.4 million in 1997.
Interest income. Interest income for 1998 was actually $11.4 million as
compared to $10.8 million of interest income in 1997. In 1998, Old CCA was still
benefiting from interest earnings on the cash proceeds that Old CCA realized in
1997 when it sold 12 facilities to Old Prison Realty.
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Write off of loan costs. In June 1998, Old CCA expanded its credit
facility from $170.0 million to $350.0 million and incurred debt issuance costs
that were being amortized over the life of the loan. The credit facility matured
at the earlier of the date of the completion of the 1999 Merger or September
1999. Accordingly, upon consummation of the 1999 Merger the credit facility was
terminated and the related unamortized issuance costs were expensed. See
"-- Liquidity and capital resources" for more detail.
Cumulative effect of accounting change, net of taxes. As previously
discussed, Old CCA adopted the provisions of SOP 98-5 in 1998. As a result, Old
CCA recorded a $16.1 million charge as a cumulative effect of accounting change,
net of taxes of $10.3 million, on periods through December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Substantially all of Prison Realty's revenues are derived from: (i) rents
received under triple net leases of correctional and detention facilities,
including the CCA leases; (ii) dividends from investments in the non-voting
stock of certain subsidiaries; (iii) interest income on the CCA note; and (iv)
license fees earned under the terms of the trade name use agreement. As of March
31, 2000, CCA leased 37 of Prison Realty's 46 operating properties pursuant to
the CCA leases. Prison Realty, therefore, is dependent for its rental revenues
upon CCA's ability to make the lease payments required under the CCA leases for
such facilities.
As discussed in "Information About Prison Realty -- Recent developments,"
Prison Realty and CCA have amended the original terms of the CCA leases to
defer, with interest, rental payments originally due to Prison Realty during the
period from January 2000 to June 2000 until September 30, 2000, with the
exception of certain scheduled payments. Pursuant to the terms of this
amendment, CCA shall pay interest on such deferred rental payments, at an annual
rate equal to the current non-default rate of interest applicable to CCA's
credit facility (subject to adjustment if and to the extent that such rate of
interest under such existing bank credit is adjusted) from the date each such
payment would have been payable under the original terms of the CCA leases until
the date such payment is actually paid. CCA's obligation to make payments under
the CCA leases is not secured by any of the assets of CCA, although the
obligations under the CCA leases are cross-defaulted so that Prison Realty could
terminate all of the CCA leases if CCA fails to make required lease payments.
Under such circumstances, Prison Realty would be required to find a suitable
lessee for Prison Realty's facilities in order to generate revenue and to
maintain its ability to qualify as a REIT. Due to the unique nature of
correctional and detention facilities, Prison Realty may be unable to locate
suitable lessees or to attract such lessees. It is anticipated, however, that
upon the completion of the merger and related transactions, the leases between
Prison Realty and CCA, as amended, will be terminated.
Prison Realty incurred a net loss for the three months ended March 31, 2000
of $30.0 million. Prior to the effectiveness of a waiver of events of default
under, and amendments to, its bank credit facility, dated as of June 9, 2000,
Prison Realty was in default under its senior secured bank credit facility
(outstanding balance of $926.7 million at March 31, 2000). In addition, prior to
obtaining waivers of events of default under, and amendments to, the provisions
of the agreements governing such indebtedness on June 30, 2000, Prison Realty
was in default under the provisions of the agreements governing Prison Realty's
$40.0 million convertible, subordinated notes (outstanding balance of $40.0
million at March 31, 2000), and its $30.0 million convertible, subordinated
notes (outstanding balance of $30.0 million at March 31, 2000). The defaults
related to Prison Realty's failure to comply with certain financial covenants,
the issuance of a going concern opinion qualification with respect to Prison
Realty's 1999 consolidated financial statements, and certain
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transactions effected by Prison Realty, including the execution of the Pacific
Life securities purchase agreement. See "Information About Prison
Realty -- Recent developments."
Prison Realty's noncompliance with the provisions of its outstanding
obligations could have resulted, and the termination or expiration of the
existing waivers and amendments relating to such obligations could result, in
Prison Realty's creditors demanding immediate repayment of these obligations. In
addition, Prison Realty has significant outstanding stockholder and other
litigation matters. For a more complete description of Prison Realty's
non-compliance with the terms and covenants of its indebtedness and events of
default thereunder, as well as Prison Realty's actions with respect to obtaining
waivers of these matters, see "Information About Prison Realty -- Recent
developments" hereunder.
CCA incurred a net loss of $202.9 million for the year ended December 31,
1999 and a net loss for the quarter ended March 31, 2000 of $62.6 million, had a
net working capital deficiency and a net capital deficiency at December 31, 1999
and as of March 31, 2000, and prior to its execution of a waiver of existing
events of default under, and amendments to, its bank credit facility, was in
default under the provisions of its credit facility. CCA's default under its
revolving credit facility related to a failure to comply with certain financial
covenants. In addition, CCA is currently in default under the CCA note as a
result of CCA's failure to pay the first scheduled interest payment under the
terms of the CCA note. CCA has also not made certain scheduled lease payments to
Prison Realty pursuant to the original terms of the CCA leases. As discussed in
"Information About Prison Realty -- Recent developments," Prison Realty and CCA
have amended the original terms of the CCA leases to defer, with interest,
rental payments originally due to Prison Realty during the period from January
2000 to June 2000 until September 30, 2000, with the exception of certain
scheduled payments.
In response to the significant losses experienced by Prison Realty and by
CCA during 1999 and in response to the then-existing defaults under Prison
Realty's debt agreements, Prison Realty had entered into an agreement with
Pacific Life with respect to a comprehensive restructuring of Prison Realty. As
more fully described in "Information About Prison Realty -- Recent
developments," Prison Realty, CCA, PMSI and JJFMSI entered into a mutual
termination of the Pacific Life securities purchase agreement, and Prison Realty
and CCA subsequently entered into an agreement and plan of merger contemplating
the merger of CCA with and into a wholly owned subsidiary of Prison Realty. The
recently obtained waivers and amendments relating to each of Prison Realty's and
CCA's indebtedness contemplated these transactions, and, as a result, the
termination of the Pacific Life securities purchase agreement and the execution
of the agreement and plan of merger did not result in an event of default under
the provisions of Prison Realty's and CCA's indebtedness.
In 1999, Prison Realty's growth strategy included acquiring, developing and
expanding correctional and detention facilities as well as other properties.
Because Prison Realty was required to distribute to its stockholders at least
95% of its taxable income to qualify as a REIT for 1999, Prison Realty relied
primarily upon the availability of debt or equity capital to fund the
construction and acquisitions of and improvements to correctional and detention
facilities.
Cash flow from operating, investing and financing activities
For the quarter ended March 31, 2000, as compared to the quarter ended
March 31, 1999. Prison Realty'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. Prison Realty'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
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cash. Prison Realty'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 Prison Realty's preferred and common
stock, and proceeds from issuance of debt and common stock.
For the year ended December 31, 1999. Prison Realty's cash flow provided
by operating activities was $79.5 million for 1999 and represents net income
plus depreciation and amortization and changes in the various components of
working capital. Prison Realty's cash flow used in investing activities was
$447.6 million for 1999 and represents acquisitions of real estate properties
and payments made under lease arrangements. Prison Realty's cash flow provided
by financing activities was $421.4 million for 1999 and represents proceeds from
the issuance of common stock, issuance of long-term debt, borrowings under the
bank credit facility and the 12% senior notes, payments of debt issuance costs
and payments of dividends on shares of Prison Realty's preferred and common
stock.
Debt Structure
Prison Realty bank credit facility. On January 1, 1999, in connection with
the completion of the 1999 Merger, Prison Realty obtained a $650.0 million
secured bank credit facility from NationsBank, N.A., as administrative agent,
and several U.S. and non-U.S. banks. The Prison Realty bank credit facility
included up to a maximum of $250.0 million in tranche B term loans and $400.0
million in revolving loans, including a $150.0 million subfacility for letters
of credit. The term loan required quarterly principal payments of $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 bank credit facility were
subject to change based on Prison Realty's senior debt rating. The Prison Realty
bank credit facility was secured by mortgages on Prison Realty's real property.
On August 4, 1999, Prison Realty completed an amendment and restatement of
the Prison Realty bank credit facility increasing amounts available to Prison
Realty under the original bank credit facility to $1.0 billion through the
addition of a $350.0 million tranche C term loan. The tranche C term loan is
payable in equal quarterly installments in the amount of $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 bank credit
facility was changed to December 31, 2002, with the maturity of the revolving
loan under the bank credit facility remaining January 1, 2002. Lehman Commercial
Paper Inc. replaced NationsBank, N.A. as administrative agent of the bank credit
facility.
The amended Prison Realty bank credit facility, similar to the original
bank credit facility, provides for interest rates, unused commitment fees and
letter of credit fees to change based on Prison Realty's senior debt rating.
Similar to the original terms of the bank credit facility, the bank credit
facility, as amended, bears interest at variable rates of interest based on a
spread over the base rate or LIBOR (as elected by Prison Realty), which spread
is determined by reference to Prison Realty'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 Prison Realty bank credit facility bear interest at a variable rate equal
to 3.75% to 4.00% in excess of LIBOR or 2.25% to 2.50% in excess of a base rate.
This rate replaced the variable rate equal to 3.25% in excess of LIBOR or 1.75%
in excess of a base rate in the bank credit facility.
The rating on Prison Realty's bank loan debt was lowered from Ba3 to Ba1
during the first quarter of 2000. The rating on Prison Realty'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
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changes, the interest rate applicable to outstanding amounts under the Prison
Realty bank credit facility was increased by 0.50%.
Upon the lenders' determination that Prison Realty is in default under the
terms of the Prison Realty bank credit facility, Prison Realty is required to
pay a default rate of interest equal to the rate of interest as determined based
on the terms described above, plus 2.00%. As discussed below, prior to the
execution of the waiver and amendment to Prison Realty's bank credit facility,
Prison Realty was in default under the Prison Realty bank credit facility and,
consequently, was subject to the default rate of interest, effective from
January 25, 2000 until June 9, 2000. As a result of the execution of the waiver
and amendment, however, Prison Realty is no longer obligated to continue to pay
the applicable default rate of interest with respect to outstanding amounts
under the bank credit facility.
As a result of the waiver and amendment to the Prison Realty bank credit
facility, the interest rate applicable to outstanding borrowings under the bank
credit facility was increased by 0.50%.
Prison Realty incurred costs of $59.2 million in consummating the bank
credit facility and the bank credit facility transactions, including $41.2
million related to the amendment and restatement. Prison Realty wrote off $9.0
million of expenses related to the bank credit facility upon completion of the
amendment and restatement. The effect of these arrangements is recognized in
interest expense. Prison Realty also incurred costs of approximately $8.0
million in consummating the June 9, 2000 waiver and amendment to its bank credit
facility.
In accordance with the terms of the Prison Realty bank credit facility,
Prison Realty 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 Prison Realty bank credit facility, as amended, similar to the original
terms of the bank credit facility, is secured by mortgages on Prison Realty's
real property. Borrowings are limited based on a borrowing base formula that
considers, among other things, eligible real estate. Prior to execution of the
waiver and amendment, the bank credit facility contained certain financial
covenants, primarily: (a) maintenance of leverage, interest coverage, debt
service coverage and total indebtedness ratios and (b) restrictions on the
incurrence of additional indebtedness. See "Information About Prison
Realty -- Recent developments" for a discussion of the waiver and amendment to
the Prison Realty bank credit facility and the new financial covenants
applicable to Prison Realty upon completion of the merger and related
transactions and Prison Realty restructuring.
The Prison Realty bank credit facility also restricted Prison Realty's
ability to make the 1999 cash payment of a special dividend unless (a) Prison
Realty had liquidity of at least $75.0 million at the dividend declaration date
after giving effect to the payment of the special dividend, (b) Prison Realty
received at least $100.0 million in cash proceeds for the issuance of equity or
similar securities from a new investor receiving representation on Prison
Realty'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 Prison Realty bank credit facility also restricts the
cash payment of a special dividend in 2000.
Waivers of events of default under, and amendments to, provisions of the
Prison Realty bank credit facility. As a result of: (i) the current financial
condition of Prison Realty and CCA; (ii) the transactions undertaken by Prison
Realty and CCA in an attempt to resolve current liquidity issues of Prison
Realty and CCA; and (iii) the transactions contemplated by the Pacific Life
securities purchase agreement, certain existing or potential events of default
arose under the provisions of the
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Prison Realty bank credit facility. These events of default are more fully
described in "Information About Prison Realty -- Recent developments."
Following the approval of the requisite senior lenders under its bank
credit facility, Prison Realty, certain of its wholly owned subsidiaries,
various lenders and Lehman Commercial Paper Inc., as administrative agent,
executed a waiver and amendment, dated as of June 9, 2000, to the provisions of
the Prison Realty bank credit facility. As more fully described in "Information
About Prison Realty -- Recent developments," upon effectiveness the waiver and
amendment to the bank credit facility waived all existing events of default
under the provisions of the bank credit facility. The waiver and amendment also
contained certain amendments to the bank credit facility, as more fully
described in "Information About Prison Realty -- Recent developments," including
the replacement of existing financial ratios contained in the bank credit
facility applicable to Prison Realty with new financial ratios following
completion of the merger.
In its pursuit of the waiver and amendment, Prison Realty agreed to
complete certain transactions which were incorporated as covenants in the waiver
and amendment. The waiver and amendment provides that Prison Realty must
complete the following transactions, among others: (i) merge with CCA on or
before a specified date, upon terms and conditions specified in the waiver and
amendment; (ii) pending requisite shareholder approval, elect not be taxed as a
REIT for federal income tax purposes commencing with its taxable year ending
December 31, 2000; (iii) restructure existing management; and (iv) pay a
dividend, in the form of preferred stock, in satisfaction of Prison Realty's
remaining REIT distribution requirements for the fiscal year ending December 31,
1999. These transactions, as well as certain additional transactions required to
be completed, are described in more detail in "Information About Prison
Realty -- Recent developments."
The waiver and amendment also provides that Prison Realty may, but is not
required to, complete certain transactions and amends the terms of the bank
credit facility to permit the following transactions, among others: (i) the
amendment of the CCA leases and the other contractual arrangements between
Prison Realty and CCA; and (ii) the merger of each of PMSI and JJFMSI with
Prison Realty, upon terms and conditions specified in the waiver and amendment.
These transactions, as well as certain additional transactions permitted to be
completed, are described in more detail in "Information About Prison
Realty -- Recent developments."
Prison Realty has limited resources currently available to it to meet its
operating, capital expenditure and debt service requirements. As a result,
Prison Realty currently is, and will continue to be, dependant on its ability to
borrow funds under the terms of the Prison Realty bank credit facility to meet
these requirements. As a result of the waiver and amendment, Prison Realty
borrowed $25.0 million at the time of the execution of the waiver and amendment
and is entitled to borrow up to an additional $30.0 million under the bank
credit facility at various times during 2000. However, the continued
effectiveness of the waiver and amendment to the Prison Realty bank credit
facility is subject to the satisfaction of certain conditions described above
and as more fully set forth in "Information About Prison Realty -- Recent
developments." If Prison Realty is unable to comply with and maintain the waiver
and amendment, Prison Realty would be unable to borrow additional amounts under
the Prison Realty bank credit facility until a waiver of such events of default
is obtained. Accordingly, there can be no assurance that Prison Realty will be
able to meet its operating, capital expenditure and debt service requirements in
the future. Moreover, if an event of default arises under the terms of the bank
credit facility, including as a result of the termination or expiration of the
waiver and amendment or as the result of the acceleration of Prison Realty's
other indebtedness, the senior lenders under the Prison Realty bank credit
facility are entitled, at their discretion, to exercise certain remedies,
including acceleration of the outstanding borrowings under the Prison Realty
bank credit facility.
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In addition, Prison Realty's 12% senior notes, Prison Realty's $40.0
million convertible, subordinated notes and Prison Realty's $30.0 million
convertible, subordinated notes contain provisions which allow the holders of
these notes to accelerate this debt and seek remedies if Prison Realty has a
payment default under the Prison Realty bank credit facility or if the
obligations under the Prison Realty bank credit facility have been accelerated.
If the senior lenders under the Prison Realty bank credit facility elect to
exercise their rights to accelerate Prison Realty's obligations under the bank
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 senior notes or its convertible, subordinated notes,
which would have a material adverse effect on Prison Realty's liquidity and
financial position. Prison Realty does not have sufficient working capital to
satisfy its debt obligations in the event of an acceleration of all of Prison
Realty's outstanding indebtedness.
As of July 24, 2000, Prison Realty has made all required principal and
interest payments under the bank credit facility.
12% senior notes. On June 11, 1999, Prison Realty completed its offering
of $100.0 million aggregate principal amount of 12% senior notes due 2006.
Interest on the 12% senior notes is paid semi-annually in arrears, and the 12%
senior notes have a seven-year non-callable term due June 1, 2006. Net proceeds
from the offering were approximately $95.0 million after deducting expenses
payable by Prison Realty in connection with the offering. Prison Realty used the
net proceeds from the sale of the 12% senior notes for general corporate
purposes and to repay revolving bank borrowings under its bank credit facility.
Prison Realty believes that it currently is not in default under the terms
of the indenture governing its $100.0 million 12% senior notes. The terms of the
indenture governing the 12% senior notes restrict amendments to the CCA lease
agreements, the amended and restated tenant incentive agreement, the business
development agreement and the amended and restated services agreement without
the delivery of an opinion as to the fairness, from a financial point of view,
to Prison Realty of such amendments, issued by an accounting, appraisal,
consulting or investment banking firm of national standing, to the trustee under
the indenture of the 12% senior notes. In connection with the amendments to
these agreements described in "Information About Prison Realty -- Recent
developments," Prison Realty has delivered to the trustee under the indenture a
fairness opinion meeting the requirements of the indenture.
The indenture governing the 12% senior notes, however, contains a provision
which allows the holders thereof to accelerate the outstanding principal amount
of the 12% senior notes and to seek additional remedies if Prison Realty has a
payment default under Prison Realty's bank credit facility or if Prison Realty's
obligations under the bank credit facility have been accelerated. However, the
amounts outstanding under the 12% senior notes are effectively subordinated to
Prison Realty's obligations under the bank credit facility to the extent of the
value of the assets securing the bank credit facility. In the event of
acceleration of outstanding principal amounts under both the 12% senior notes
and the bank credit facility, the lenders under the bank credit facility will be
entitled to proceed against the collateral that secures Prison Realty's
obligations under the bank credit facility, and such collateral will not be
available to satisfy any amounts owed under the 12% senior notes.
$40.0 million convertible, subordinated notes. On January 29, 1999, Prison
Realty 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 Prison Realty to issue an aggregate of $40.0 million of
convertible, subordinated notes, with the first $20.0 million tranche issued in
December 1998 under substantially similar terms. The $40.0 million convertible,
subordinated notes require that Prison Realty revise the conversion
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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 $40.0 million convertible, subordinated notes was $23.63 per share
as compared to $28.00 per share at issuance. This conversion price of the notes,
however, is subject to adjustment in connection with the waiver and amendment to
the provisions of the note purchase agreement governing these notes.
As more fully described in "Information About Prison Realty -- Recent
developments," certain existing or potential events of default arose under the
provisions of the note purchase agreement relating to the $40.0 million
convertible, subordinated notes as a result of Prison Realty's financial
condition and a "change of control" arising from Prison Realty's execution of
the Pacific Life securities purchase agreement. This "change of control" gave
rise to a right of the holders of such notes to require Prison Realty 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 Prison Realty. In addition, Prison Realty's defaults under the provisions of
the note purchase agreement gave rise to the right of the holders of such notes
to require Prison Realty to pay an applicable default rate of interest of 20%.
In addition to the default rate of interest, as a result of the default, Prison
Realty was obligated, under the original terms of the $40.0 million convertible,
subordinated notes, to pay the holders of the notes contingent interest
sufficient to permit the holders to receive a 15% rate of return, excluding the
effect of the default rate of interest, on the $40.0 million principal amount,
unless the holders of the notes elect to convert the notes into Prison Realty's
common stock under the terms of the note agreement. Such contingent interest is
retroactive to the date of issuance of the notes.
As more fully described in "Information About Prison Realty -- Recent
developments," Prison Realty and the holders of the notes executed a waiver and
amendment to the provisions of the note purchase agreement governing the notes.
This waiver and amendment provides for a waiver of all existing events of
default under the provisions of the note purchase agreement. In addition, as
more fully described in "Information About Prison Realty -- Recent
developments," the waiver and amendment to the note purchase agreement amended
the economic terms of the notes to increase the applicable interest rate of the
notes by 0.50% per annum and adjusted the conversion price of the notes to a
price equal to 125% of the average trading price of Prison Realty's common stock
during a specified period. In addition, the waiver and amendment to the note
purchase agreement provides for the amendment of financial ratios applicable to
Prison Realty.
There can be no assurance that Prison Realty will be able to maintain the
effectiveness of this waiver and amendment to the note purchase agreement. If
Prison Realty is unable to do so, and if the holders of these notes do not
consent to an additional proposed waiver of events of default under, and
amendments to, the note purchase agreement, Prison Realty may be required to
repurchase or redeem the outstanding principal amount of the notes. If the
aggregate principal amount of such convertible, subordinated notes were
accelerated, however, the repayment of such amounts would be subordinate to the
rights of the senior lenders under Prison Realty's bank credit facility. Any
requirement to repurchase or redeem the outstanding principal amount of this
indebtedness prior to its stated maturity would also trigger an event of default
under the provisions of Prison Realty's other indebtedness, including the
provisions of Prison Realty's bank credit facility.
As of July 24, 2000, Prison Realty has made all required interest payments
under the $40.0 million convertible, subordinated notes.
$30.0 million convertible, subordinated notes. Prison Realty's $30.0
million convertible, subordinated notes issued to PMI Mezzanine Fund, L.P.
require that Prison Realty 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 $30.0 million
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convertible, subordinated notes was $23.63 per share as compared to $27.42 per
share at issuance. This conversion price of the notes, however, is subject to
adjustment in connection with the waiver and amendment to the provisions of the
note purchase agreement governing these notes.
As more fully described in "Information About Prison Realty -- Recent
developments," certain existing or potential events of default arose under the
provisions of the note purchase agreement relating to the $30.0 million
convertible, subordinated notes as a result of Prison Realty's financial
condition and as a result of the contemplated restructuring transactions
involving Prison Realty.
As more fully described in "Information About Prison Realty -- Recent
developments," Prison Realty and the holder of the notes executed a waiver and
amendment to the provisions of the note purchase agreement governing the notes.
This waiver and amendment provides for a waiver of all existing events of
default under the provisions of the note purchase agreement. In addition, as
more fully described in "Information About Prison Realty -- Recent
developments," the waiver and amendment to the note purchase agreement amended
the economic terms of the notes to increase the applicable interest rate of the
notes by 0.5% per annum and adjusted the conversion price of the notes to a
price equal to 125% of the average trading price of Prison Realty's common stock
during a specified period. In addition, the waiver and amendment to the note
purchase agreement provides for the amendment of financial ratios applicable to
Prison Realty.
There can be no assurance that Prison Realty will be able to maintain the
effectiveness of this waiver and amendment to the note purchase agreement. If
Prison Realty is unable to do so, and if the holders of these notes do not
consent to an additional proposed waiver of events of default under, and
amendments to, the note purchase agreement, Prison Realty may be required to
repurchase or redeem the outstanding principal amount of the notes. If the
aggregate principal amount of such convertible, subordinated notes were
accelerated, however, the repayment of such amounts would be subordinate to the
rights of the senior lenders under Prison Realty's bank credit facility. Any
requirement to repurchase or redeem the outstanding principal amount of this
indebtedness prior to its stated maturity would also trigger an event of default
under the provisions of Prison Realty's other indebtedness, including the
provisions of Prison Realty's bank credit facility.
As of July 24, 2000, Prison Realty has made all required interest payments
under the $30.0 million convertible, subordinated notes.
CCA's revolving credit facility. As more fully described in "Information
About Prison Realty -- Recent developments," CCA previously obtained the consent
of the requisite percentage of the lenders under its bank credit facility for a
waiver of its bank credit facility's restrictions relating to CCA's violation of
a financial covenant and certain transactions effected or to be effected by
Prison Realty. However, the terms of this waiver provided that it would expire
upon the termination of the Pacific Life securities purchase agreement.
Accordingly, as more fully described in "Information About Prison
Realty -- Recent developments," CCA subsequently obtained an amendment to the
waiver and amendment to its bank credit facility which, among other things
continued to waive the previously-waived events of default and permitted: (i)
the termination of the Pacific Life securities purchase, and the related
termination of the merger agreement contemplated by such securities purchase
agreement; and (ii) CCA's execution of the agreement and plan of merger with
Prison Realty.
There can be no assurance that CCA will be able to comply with and maintain
the waiver and amendment to its bank credit facility. In the event CCA is unable
to comply with and maintain the waiver and amendment, the senior lenders under
the CCA bank credit facility are entitled, at their discretion, to exercise
certain remedies, including acceleration of the outstanding borrowings under the
bank credit facility. If the senior lenders elect to exercise their rights to
accelerate CCA's
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obligations under CCA's bank 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 indebtedness under
CCA's bank credit facility.
In addition, as described in "Information About Prison Realty -- Recent
developments," the terms of the Prison Realty bank credit facility waiver and
amendment provide that a condition to the continued effectiveness of the Prison
Realty bank credit facility waiver and amendment is conditioned upon the
continued effectiveness of a waiver of all existing events of default under
CCA's bank credit facility. Prison Realty's bank credit facility, as modified by
the Prison Realty bank credit facility waiver and amendment, also provides that
the occurrence of an event of default under CCA's bank credit facility will
result in an event of default under Prison Realty's bank credit facility. As a
result of such an event of default, the senior lenders under Prison Realty's
bank credit facility would be entitled, at their discretion, to exercise certain
remedies, including acceleration of the outstanding borrowings under the bank
credit facility.
Other debt transactions. On March 8, 1999, Prison Realty issued a $20.0
million convertible subordinated note to Sodexho pursuant to a forward contract
assumed by Prison Realty from Old CCA in the 1999 Merger. The note bore interest
at LIBOR plus 1.35% and was convertible into shares of Prison Realty's common
stock at a conversion price of $7.80 per share. On March 8, 1999, Sodexho
converted (i) a $7.0 million convertible subordinated note bearing interest at
8.5% into 1.7 million shares of Prison Realty's common stock at a conversion
price of $4.09 per share, (ii) a $20.0 million convertible subordinated note
bearing interest at 7.5% into 700,000 shares of Prison Realty's common stock at
a conversion price of $28.53 per share and (iii) a $20.0 million convertible
subordinated note bearing interest at LIBOR plus 1.35% into 2.6 million shares
of Prison Realty's common stock at a conversion price of $7.80 per share.
In 1998, convertible subordinated notes with a face value of $5.8 million
were converted into 2.9 million shares of common stock. At December 31, 1999 and
1998, Prison Realty had $16.3 million and $1.6 million in letters of credit,
respectively. The letters of credit were issued to secure Prison Realty's
construction of one facility and Old CCA's worker's compensation insurance
policy, performance bonds and utility deposits. Prison Realty is required to
maintain cash collateral for the letters of credit.
Maturities of long-term debt (excluding acceleration or demand provisions)
for the next five years and thereafter are:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
2000........................................................ $ 6,084
2001........................................................ 6,093
2002........................................................ 916,337
2003........................................................ 114
2004........................................................ 126
Thereafter.................................................. 170,237
----------
$1,098,991
==========
</TABLE>
Prospective restructuring transactions. In order to address the capital
and liquidity constraints facing Prison Realty and CCA, as well as concerns
regarding the corporate structure and management of Prison Realty, Prison Realty
entered into a securities purchase agreement with Pacific Life, pursuant to
which Prison Realty was to complete a comprehensive restructuring, including,
among other things: (i) the combination of Prison Realty with each of CCA, PMSI
and JJFMSI; (ii) a $200.0 million equity investment in Prison Realty; and (iii)
a restructuring of Prison Realty's
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existing board of directors and management. These transactions were intended to
serve as an alternative to a series of restructuring transactions provided for
under an agreement entered into between Prison Realty and the
Fortress/Blackstone investor group.
As more fully discussed in "Information about Prison Realty -- Recent
developments," based on certain statements from Pacific Life, the boards of
directors of Prison Realty, CCA, PMSI and JJFMSI determinated that it was
unclear whether the waiver and amendment to Prison Realty's bank credit facility
would satisfy the condition contained in the Pacific Life securities purchase
agreement that the renewal of the Prison Realty's bank credit facility would be
in a form reasonably acceptable to Pacific Life. Also, given the requirements of
the Prison Realty bank credit facility waiver and amendment that a proxy
statement be filed by Prison Realty with the SEC by July 1, 2000 with respect to
a restructuring, the boards of directors of Prison Realty, CCA, PMSI and JJFMSI
approved the execution of an agreement with Pacific Life mutually terminating
the securities purchase agreement with Pacific Life. The boards of directors of
Prison Realty and CCA subsequently approved the merger and related transactions
and the Prison Realty restructuring, including the execution of the merger
agreement described herein.
Equity capital. On January 11, 1999, Prison Realty filed a Registration
Statement on Form S-3 (the "Shelf Registration Statement") to register an
aggregate of $1.5 billion in value of its common stock, preferred stock, common
stock rights, warrants and debt securities for sale to the public. Proceeds from
sales under the Shelf Registration Statement have been and will be used for
general corporate purposes, including the acquisition and development of
correctional and detention facilities. During 1999, Prison Realty issued and
sold approximately 6.7 million shares of its common stock under the Shelf
Registration Statement, resulting in net proceeds to Prison Realty of
approximately $120.0 million.
On May 7, 1999, Prison Realty registered 10.0 million shares of Prison
Realty's common stock for issuance under Prison Realty's Dividend Reinvestment
and Direct Stock Purchase Plan (the "DRSPP"). The DRSPP provides a method of
investing cash dividends in, and making optional monthly cash purchases of,
Prison Realty's common stock, at prices reflecting a discount between 0% and 5%
from the market price of the common stock on NYSE. As of December 31, 1999,
Prison Realty had issued 1,261,431 shares under the DRSPP, with 1,253,232 of
these shares issued under the DRSPP's optional cash feature resulting in
proceeds of $12.3 million. Prison Realty has suspended the DRSPP pending the
completion of the merger and related transactions and the Prison Realty
restructuring.
Distributions to stockholders. Prison Realty, as a REIT, cannot complete
any taxable year with accumulated earnings and profits from a taxable
corporation. Accordingly, Prison Realty 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, Prison Realty
made $217.7 million of distributions related to its common stock and series A
preferred stock. Prison Realty 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, Prison
Realty, 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 Prison Realty's taxable
income for 1999 have not been declared as of March 31, 2000 or July 17, 2000,
Prison Realty 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. Prison Realty is currently
considering the exact timing and method of the payment of these required
distributions. Prison Realty
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may partially satisfy these requirements through the payment of a one-time
special dividend (the "Special Dividend"); however, certain provisions of the
Prison Realty bank credit facility restrict Prison Realty's ability to pay these
required distributions in cash. In January 2000, $2.2 million of distributions
relating to the series A preferred stock, which are eligible to reduce the
distribution requirement for the taxable year ending December 31, 1999, have
been paid. The remaining $147.8 million of distributions that must be paid to
shareholders in 2000 in order for Prison Realty 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, Prison Realty's
governing instruments require that it operate as a REIT. However, if Prison
Realty completes the merger and related transactions and the Prison Realty
restructuring following shareholder approval to modify its governing
instruments, Prison Realty intends to be taxed as a subchapter C corporation
commencing with its taxable year ending December 31, 2000.
Cash flow related to CCA. As of December 31, 1999, CCA leased 34 of the 42
operating facilities owned by Prison Realty.
CCA note. In connection with the 1999 Merger, Old CCA received the $137.0
million CCA note due. Prison Realty succeeded to the CCA note as a result of the
1999 Merger. Interest on the CCA note is payable annually at the rate of 12%.
Interest only is payable for the first four years of the CCA note. Principal is
due in six equal annual installments of approximately $22.8 million, beginning
December 31, 2003. In addition, notwithstanding the waiver and amendment to
CCA's credit facility, as of December 31, 1999, CCA was, and CCA currently is,
prohibited under the terms of its credit facility, and a related subordination
agreement, from making the first scheduled interest payment under the terms of
the CCA note, totaling approximately $16.4 million. Prison Realty has fully
reserved the $16.4 million of interest accrued under the terms of the CCA note
during 1999 and the $8.2 million of interest accrued through the first two
quarters of 2000.
CCA leases. For the year ended December 31, 1999, Prison Realty recognized
gross rental revenue from CCA of $263.5 million. Based on the CCA leases in
effect at December 31, 1999, the future minimum lease payments scheduled to be
received by Prison Realty under the original terms of the CCA leases as of
January 1, 2000 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Years Ending December 31:
2000...................................................... $ 310,651
2001...................................................... 310,651
2002...................................................... 310,651
2003...................................................... 310,651
2004...................................................... 310,651
Thereafter................................................ 1,890,193
----------
$3,443,448
==========
</TABLE>
As of March 31, 2000, approximately $92.1 million of rents due from CCA to
Prison Realty under the original terms of the CCA leases were unpaid. Subsequent
to March 31, 2000, CCA paid $11.9 million of rents with respect to 1999,
representing the remainder of rents to Prison Realty with respect to 1999. The
original terms of the CCA leases provide that such rental payments were due and
payable on December 25, 1999. Under the terms of the CCA leases, an event of
default occurs if CCA fails to pay all required lease payments owed to Prison
Realty under the CCA leases within 15 days of receiving a notice of nonpayment
from Prison Realty. No such notice of nonpayment was provided by Prison Realty.
As described in "Information About Prison Realty -- Recent develop-
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ments," the CCA leases have been amended to defer, with interest, rental
payments originally due during the period from January 2000 to June 2000, with
the exception of certain installment payments. Subsequent to March 31, 2000 and
through July 24, 2000, CCA paid $18.0 million of lease payments related to 2000
in accordance with the payment schedule previously agreed upon by Prison Realty
and CCA. At July 24, 2000, $143.8 million of lease payments were accrued but
unpaid under the original terms of the CCA leases.
In addition, Prison Realty expects that, in connection with the merger and
related transactions and the Prison Realty restructuring, the CCA leases will be
canceled.
Amended and restated tenant incentive agreement. For the year ended
December 1999, Prison Realty had paid tenant incentive fees of $68.6 million,
with $2.9 million of those fees amortized against rental revenues. During the
fourth quarter of 1999, Prison Realty 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 Prison Realty during
2000. Consequently, Prison Realty determined that the remaining deferred tenant
incentive fees under the existing lease arrangements at December 31, 1999 were
not realizable and wrote off fees totaling $65.7 million. As described in
"Information About Prison Realty -- Recent developments," CCA and Prison Realty
amended this agreement to defer, with interest, payments to CCA by Prison Realty
pursuant to this agreement. At July 24, 2000, $8.4 million of payments under the
amended and restated tenant incentive agreement were accrued but unpaid under
the original terms of this agreement. It is anticipated that, in connection with
the merger and related transactions and the Prison Realty restructuring, this
agreement will be canceled.
Trade name use agreement. For the year ended December 31, 1999, Prison
Realty recognized income of $8.7 million from CCA under the terms of the trade
name use agreement. As of December 31, 1999, Prison Realty had recorded a
receivable of $2.2 million from CCA for licensing fees due under the trade name
use agreement. It is anticipated that, in connection with the merger and related
transactions and the Prison Realty restructuring, this agreement will be
canceled.
Amended and restated services agreement. Costs incurred by Prison Realty
under 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 $41.6 million for the year ended December 31, 1999. As described in
"Information About Prison Realty -- Recent developments," CCA and Prison Realty
amended this agreement to defer, with interest, payments to CCA by Prison Realty
pursuant to this agreement. At July 24, 2000, $0.6 million of payments under the
amended and restated services agreement were accrued but unpaid under the
original terms of this agreement. It is anticipated that, in connection with the
merger and related transactions and the Prison Realty restructuring, this
agreement will be canceled.
Business development agreement. Costs incurred by Prison Realty under the
business development agreement are capitalized as part of the facilities'
development cost. Costs incurred under the business development agreement and
capitalized as part of the facilities' development cost totaled $15.0 million
for the year ended December 31, 1999. As described in "Information About Prison
Realty -- Recent developments," CCA and Prison Realty amended this agreement to
defer, with interest, payments to CCA by Prison Realty pursuant to this
agreement. At July 24, 2000, $4.3 million of payments under the business
development agreement were accrued but unpaid under the original terms of this
agreement. It is anticipated that, in connection with the merger and related
transactions and the Prison Realty restructuring, this agreement will be
canceled.
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<PAGE> 196
CCA operating losses. CCA has utilized cash from borrowings under its
revolving credit facility and payments from Prison Realty for tenant incentive
arrangements and other services to offset the cash requirements of its operating
losses. CCA expects to continue to use these sources of cash to offset its
anticipated losses from operations; however, there can be no assurance that
amounts presently anticipated to be available to CCA will be sufficient to
offset all of CCA's expected future operating losses.
Commitments and Contingencies
Litigation. Prison Realty is subject to a variety of legal proceedings,
some of which if resolved against Prison Realty, could have a material adverse
effect upon the business and financial position of Prison Realty. A complete
description of the litigation currently commenced against Prison Realty,
including certain shareholder litigation, is set forth herein under the headings
"Information About Prison Realty -- Recent developments."
Income tax contingencies. As required by its governing instruments, Prison
Realty currently intends to elect to be taxed as a REIT for the year ended
December 31, 1999. In order to qualify as a REIT, Prison Realty is required to
distribute 95% of its taxable income for 1999. Although dividends sufficient to
distribute 95% of Prison Realty's taxable income for 1999 have not been declared
as of December 31, 1999, Prison Realty intends to pay sufficient dividends
either in cash or in securities to satisfy all distribution requirements for
qualification as a REIT for 1999 and estimates that $150.0 million will be
distributed in 2000 to meet this requirement. Prison Realty is currently
considering the exact timing and method of the payment of these required
distributions. As of December 31, 1999, $2.2 million of distributions relating
to the series A preferred stock were declared and accrued on Prison Realty's
consolidated balance sheets, and such distributions were paid subsequent to
December 31, 1999. The remaining $147.8 million of distributions that must be
paid to shareholders in 2000 in order for Prison Realty to qualify as a REIT
have not been declared by the board of directors and, accordingly, have not been
accrued in Prison Realty's consolidated balance sheets. Prison Realty's failure
to distribute 95% of its taxable income for 1999 or the failure of Prison Realty
to comply with other requirements for REIT qualification under the Code would
have a material adverse impact on Prison Realty's consolidated financial
position, results of operations and cash flows.
If Prison Realty elects REIT status for its taxable year ended December 31,
1999, such election will be subject to review by the IRS for a period of three
years from the date of filing of its 1999 tax return. Should the IRS review
Prison Realty's election to be taxed as a REIT for the 1999 taxable year and
reach a conclusion requiring Prison Realty to be treated as a taxable
corporation for the 1999 taxable year, Prison Realty would be subject to income
taxes and interest on its 1999 taxable income and possibly subject to fines
and/or penalties. Income taxes for the year ended December 31, 1999 could exceed
$83.5 million, which would have an adverse impact on Prison Realty's
consolidated financial position, results of operations and cash flows.
In connection with the 1999 Merger, Prison Realty assumed the tax
obligations of Old CCA resulting from disputes with federal and state taxing
authorities related to tax returns filed by Old CCA in 1998 and prior taxable
years. The IRS is currently conducting an audit of Old CCA's federal tax return
for the taxable year ending December 31, 1997. Prison Realty 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 Prison Realty
or Old CCA by the IRS or by other taxing authorities; however, it is possible
that such audits will result in claims against Prison Realty in excess of the
$5.5 million of income taxes payable and the $32.0 million of deferred tax
liability currently recorded by Prison Realty. In addition, to the extent that
IRS audit adjustments increase
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the Accumulated Earnings and Profits of Old CCA, Prison Realty would be required
to make timely distribution of the Accumulated Earnings and Profits of Old CCA
to shareholders. Such results would have a material adverse impact on Prison
Realty's financial position, results of operations and cash flows.
Guarantees. Prison Realty has guaranteed the bond indebtedness
(outstanding balance of $69.1 million at December 31, 1999) and forward purchase
agreement (estimated obligation of $6.9 million at December 31, 1999) of a
governmental entity for which PMSI currently provides management services at a
302-bed correctional facility. Under the terms of its guarantee agreements,
Prison Realty is required to maintain a restricted cash account (balance of $6.9
million at December 31, 1999) to collateralize the guarantee of the forward
purchase agreement.
In September 1997, Old CCA received a discretionary bonus of approximately
$4.1 million in connection with its management of a correctional facility
located in Hardeman County, Tennessee. The construction of the facility was
financed with correction facilities revenue bonds in the total principal amount
of approximately $72.7 million. The tax-exempt nature of the bonds is under
review by the IRS. Because of the contractual relationship between Old CCA and
the correctional facility, in the event the IRS determines that the bonds are
taxable, there exists the risk that Prison Realty as the successor to Old CCA
may be required to remit all or a portion of the bonus received, or, in the
alternative, repurchase the principal amount of the bonds, plus accrued
interest. Prison Realty intends to contest this matter vigorously.
LIQUIDITY AND CAPITAL RESOURCES FOR THE YEAR ENDED DECEMBER 31, 1998 AS COMPARED
TO THE YEAR ENDED DECEMBER 31, 1997
Old CCA's current ratio decreased to .33 in 1998 as compared to 2.41 in
1997. The decrease was due in part to the sale of $95.0 million of net current
assets to Old CCA, JJFMSI and PMSI. In addition, during 1998, Old CCA utilized
approximately $100.0 million of excess cash on hand at December 31, 1997 from
the sale of 12 facilities to Old Prison Realty in 1997.
Old CCA's cash flow from operations for 1998 was $54.5 million as compared
to $92.0 million for 1997. The decrease in cash flow in 1998 was primarily a
result of increased lease payments to Old Prison Realty of $39.3 million over
1997. However, cash flow from operations, calculated on a EBITDAR basis, was
$112.0 million for 1998 as compared to $115.8 million for 1997. Included in
these 1998 cash flow results are two significant non-cash charges, $22.9 million
for the Old CCA compensation and $26.5 million for the cumulative effect of
accounting change due to the adoption of SOP-98-5. At December 31, 1998, Old CCA
had strengthened its cash flow through its expanded business, additional focus
on larger, more profitable facilities, the expansion of existing facilities
where economies of scale can be realized, and the continuing effort of cost
containment.
On November 4, 1998 Old CCA filed a Registration Statement on Form S-3 that
allowed it, over the following two years, to sell Old CCA common stock in one or
more offerings up to a total dollar amount of $100.0 million. As of December 31,
1998, Old CCA had sold 2,882,296 shares of Old CCA common stock under this
registration statement, generating net proceeds to Old CCA of approximately
$65.5 million. Old CCA used the net proceeds from the sale of Old CCA common
stock for general corporate purposes including without limitation, repayment of
indebtedness, financing capital expenditures and working capital.
In June 1998, Old CCA increased its revolving credit facility with a group
of banks to $350.0 million. The facility matured on the earlier of the date of
the completion of the 1999 Merger or September 6, 1999 and was used for general
corporate purposes and the issuance of letters of credit. The credit facility
bore interest, at the election of Old CCA, at either the bank's prime rate or a
rate
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<PAGE> 198
which was 1.25% above the applicable 30, 60, or 90 day LIBOR rate. Interest was
payable quarterly with respect to prime rate loans and at the expiration of the
applicable LIBOR period with respect to LIBOR based loans. There were no
prepayment penalties associated with the credit facility. The credit facility
required Old CCA, among other things, to maintain certain net worth, leverage
and debt service coverage ratios. The facility also limited certain payments and
distributions. Borrowings on the facility at December 31, 1998 were $222.0
million and letters of credit totaling $98.7 million had been issued as of such
date. In connection with the 1999 Merger, JJFMSI and PMSI each assumed $5.0
million of debt related to this facility, resulting in an unused commitment of
$19.3 million. In January 1999, PMSI and JJFMSI paid off their portions of the
outstanding debt and the credit facility was replaced with a new credit facility
as discussed below.
Old CCA also had a $2.5 million credit facility with a bank that provided
for the issuance of letters of credit and which matured on the earlier of the
date of the completion of the 1999 Merger or September 6, 1999. At December 31,
1998, letters of credit totaling $1.6 million had been issued leaving an unused
commitment of $947,000. On January 1, 1999, in connection with the 1999 Merger,
this facility was replaced with Prison Realty's credit facility as discussed
herein. In July 1997, Old CCA sold 10 of its facilities to Old Prison Realty for
approximately $378.3 million. The proceeds were used to pay off $131.0 million
of Old CCA's credit facility debt, $42.2 million of first mortgage debt and $9.4
million of senior secured notes. The remaining proceeds were used to fund
existing construction projects and for general working capital purposes. In
October 1997, Old CCA sold an additional facility to Old Prison Realty for
approximately $38.5 million. In November and December 1997, Old CCA paid $74.4
million for two correctional facilities. Subsequently, Old CCA sold these
facilities to Old Prison Realty for $74.4 million in December 1997 and January
1998, respectively.
YEAR 2000 COMPLIANCE
In 1999, Prison Realty 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, Prison Realty determined that these key
information systems were Year 2000 compliant. Prison Realty also evaluated its
non-critical information technology systems for Year 2000 compliance and
determined that such non-critical systems were compliant. Prison Realty's
systems did not subsequently experience any significant disruptions as a result
of the century change on January 1, 2000. In 1999, Prison Realty also completed
communications with third parties with whom it has important financial or
operational relationships, including CCA, the lessee of the substantial majority
of Prison Realty'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, Prison Realty determined that there were no third party related
Year 2000 noncompliance issues that would have a material adverse impact on
Prison Realty'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 Prison Realty's
operations.
Prison Realty's information systems were Year 2000 compliant when acquired
in the 1999 Merger, and as such, Prison Realty incurred no significant expenses
through March 31, 2000, and Prison Realty 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
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<PAGE> 199
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 Prison Realty to incur and
service debt and make capital expenditures. Prison Realty 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 Prison Realty's financial performance or to cash flows from
operating activities (determined in accordance with GAAP) as a measure of Prison
Realty's liquidity, nor is it indicative of funds available to fund Prison
Realty's cash needs, including its ability to make distributions. Prison Realty
believes that in order to facilitate a clear understanding of the consolidated
operating results of Prison Realty, Funds from Operations should be examined in
conjunction with net income as presented in the consolidated financial
statements.
The following table presents Prison Realty'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
-------------- --------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
FUNDS FROM OPERATIONS:
Net loss available to common shareholders................... $(29,950) $(24,755)
Plus: real estate depreciation.............................. 12,924 9,917
Add back: provision for change in tax status................ -- 83,200
-------- --------
$(17,026) $ 68,362
======== ========
</TABLE>
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The following table presents Prison Realty's Funds from Operations for the
year ended December 31, 1999:
<TABLE>
<CAPTION>
1999
--------------
(IN THOUSANDS)
<S> <C>
Net income available to common Shareholders................. $(61,976)
Plus: real estate depreciation.............................. 44,062
Add back non-recurring items:
Change in tax status........................................ 83,200
Write off of loan costs..................................... 14,567
Loss on disposal of assets.................................. 1,995
Write off of amounts under lease Arrangements............... 65,677
Impairment loss............................................. 76,433
--------
Funds from operations....................................... $223,958
========
</TABLE>
INFLATION
Prison Realty 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 Prison Realty to pass through to CCA certain
operating costs, including real estate taxes, utilities and insurance, thereby
reducing Prison Realty's exposure to increases in costs and operating expenses
resulting from inflation. Additionally, the CCA leases contain provisions which
provide Prison Realty with the opportunity to achieve increases in rental income
in the future. It is anticipated that, in connection with the merger and related
transactions and the Prison Realty restructuring, this agreement will be
canceled.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Prison Realty's primary market risk exposure is to changes in U.S. interest
rates. Prison Realty is exposed to market risk related to its bank 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 Prison Realty bank credit facility and
such other indebtedness is subject to fluctuations in the market. If the
interest rate for Prison Realty's outstanding indebtedness under the bank credit
facility was 100 basis points higher or lower in 1999, Prison Realty's interest
expense, net of amounts capitalized, would have been increased or decreased by
approximately $5.1 million. If the interest rate for the Prison Realty bank
credit facility debt was 100 basis points higher or lower during the three
months ended March 31, 2000, Prison Realty's interest expense net of amounts
capitalized would have been increased or decreased by approximately $2.9
million.
As of December 31, 1999 and March 31, 2000, Prison Realty had outstanding
$100.0 million of its 12% senior notes with a fixed interest rate of 12.0%,
$40.0 million of convertible notes with a fixed interest rate of 9.5%, $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
December 31, 1999 and March 31, 2000, Prison Realty 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 Prison
Realty. The Prison Realty bank credit facility required Prison Realty to hedge
$325.0 million of its floating rate debt on or before August 16, 1999. Prison
Realty has entered into certain swap arrangements guaranteeing that it will not
pay an index rate greater than 6.51% on outstanding
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balances of at least (a) $325.0 million through December 31, 2001 and (b) $200.0
million through December 31, 2002.
Additionally, Prison Realty 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.
Prison Realty 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, Prison Realty 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, Prison Realty
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, Prison Realty may occasionally enter into interest rate protection
agreements. Prison Realty does not believe it has any other material exposure to
market risks associated with interest rates.
Prison Realty does not use derivative financial instruments in its
operations or investment portfolio. Except as described in this paragraph,
Prison Realty does not have other material exposures to risks associated with
foreign currency fluctuations related to its operations. In connection with the
construction and development of Prison Realty's HMP Forrest Bank facility,
located in Salford, England, Prison Realty entered into a 25-year lease and
recognized a receivable of $89.2 million, which amount represents the discounted
cash flows to be received by Prison Realty over the lease term and is included
in "Investments in Direct Financing Leases" in Prison Realty's consolidated
balance sheet. Under the terms of the agreements relating to such payments, such
payments to Prison Realty are denominated in English pounds, rather than in U.S.
dollars. As a result, Prison Realty bears the risk of fluctuations in the
relative exchange rate between English pounds and U.S. dollars. A hypothetical
10% increase or decrease in the relative exchange rate would have resulted in a
$8.9 million increase or decrease in the amount designated on Prison Realty's
balance sheet as "Investments in Direct Financing Leases", and, accordingly,
Prison Realty would have recognized a $8.9 million gain or loss on foreign
currency transactions and a resulting $8.9 million increase or decrease in its
results of operation.
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<PAGE> 202
BUSINESS OBJECTIVES AND STRATEGIES
GENERAL
The following discussion outlines the business objectives and strategies
related to Prison Realty's current business -- the ownership and development of
correctional and detention facilities -- and Prison Realty's operation so as to
preserve its ability to qualify as a REIT. For a discussion of the objectives
and strategies expected to be adopted by Prison Realty upon the completion of
the merger and related transactions and the Prison Realty restructuring see the
section of this joint proxy statement/prospectus entitled "Information About
Prison Realty -- Business of Prison Realty following the completion of the
merger and related transactions and the Prison Realty restructuring."
BUSINESS OBJECTIVES
As an entity which has operated so as to preserve its ability to qualify as
a REIT, Prison Realty's primary business objectives are to generate increasing
returns to its shareholders through increases in cash flow available for
distribution and to maximize long-term total returns to its shareholders. Prison
Realty generally seeks to achieve these objectives by:
- expanding its existing portfolio of correctional and detention
facilities by: (i) designing, building and/or developing correctional
and detention facilities for both government entities and qualified
third-party operators; and (ii) selectively acquiring correctional and
detention facilities that demonstrate potential for significant revenue
and cash flow from both private prison managers and government entities;
- expanding the design capacity of its existing facilities; and
- leasing its facilities pursuant to leases under which its lessees pay
base rent with certain annual escalations and pay certain expenses in
connection with the operation of the property, such as real estate
taxes, insurance, utilities and services, maintenance and other
operating expenses.
Following the merger and related transactions and the Prison Realty
restructuring, Prison Realty's primary business objectives will be to increase
revenues and its position as the largest owner, developer and manager of
privatized correctional and detention facilities worldwide.
THE INDUSTRY
Prison Realty believes the United States private corrections industry is in
a period of significant growth as governments of all types face continuing
pressure to control costs and improve the quality of services. As the number of
crimes committed each year, and the corresponding number of arrests, increase,
governments are increasingly willing to consider privatization of correctional
and detention services as a means of controlling costs and improving the quality
of services.
According to the Private Adult Correctional Facility Census (the "Census"),
prepared by Charles W. Thomas, a director of and consultant to Prison Realty,
the design capacity of privately managed adult correctional and detention
facilities worldwide has increased dramatically since the first privatized
facility was opened by Old CCA in 1984. The majority of this growth has occurred
since 1989, as the number of privately managed adult correctional and detention
facilities in operation or under construction worldwide increased from 26
facilities with a design capacity of 10,973 beds in 1989 to 188 facilities with
a design capacity of 145,160 beds in 1999. The majority of all private prison
management contracts are in the United States. According to the Census, at
December 31,
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<PAGE> 203
1999, 158 of the 188 private correctional facilities were in the United States,
with the remaining 30 divided between Australia, the United Kingdom, South
Africa, the Netherlands Antilles and New Zealand. According to the Census, the
aggregate capacity of private facilities in operation or under construction rose
from 132,572 beds at December 31, 1998, to 145,160 beds at December 31, 1999, an
increase of 9.5%.
The Census reports that at December 31, 1999 there were 30 state
jurisdictions, the District of Columbia and Puerto Rico, within which there were
private facilities in operation or under construction. Further, all three
federal agencies with prisoner custody responsibilities (i.e., the United States
Bureau of Prisons (the "BOP"), the U.S. Immigration and Naturalization Service
(the "INS") and the U.S. Marshals Service (the "USMS")) continued to contract
with private management firms. Management believes that the continued trend is a
result of the fact that private companies competing with each other are
incentivized to keep costs down and to improve the quality of services. Various
industry studies show that cost savings from privately operated prisons may be
in the range of 10-15%. Further, based on recidivism rates, the quality of
services is generally better in privately operated prisons than in public
prisons.
Management believes that the trend of increasing privatization of the
corrections industry will also continue, in large part, because of the general
shortage of beds available in United States correctional and detention
facilities. According to reports issued by the United States Department of
Justice, Bureau of Justice Statistics ("BJS"), the number of inmates housed in
United States federal and state prison and jail facilities increased from
744,208 at December 31, 1985 to approximately 1,825,400 at December 31, 1998, a
compound annual growth rate of 7.3%. As of December 31, 1998, the BJS reported
that one in every 149 United States residents was incarcerated. Further, at
December 31, 1998, at least 33 state prison systems, as well as the federal
prison system and the District of Columbia system are operating at 100% or more
of their highest capacity. Industry reports also indicate that inmates convicted
of violent crimes generally serve only one-third of their sentence, with the
majority of them being repeat offenders. Accordingly, there is a perceived
public demand for, among other things, longer prison sentences, as well as
prison terms for juvenile offenders, resulting in even more overcrowding in
United States correctional and detention facilities. Finally, numerous courts
and other government entities in the United States have mandated that additional
services offered to inmates be expanded and living conditions be improved. Many
governments do not have the readily-available resources to make the changes
necessary to meet such mandates.
LEASES AND OTHER CONTRACTUAL RELATIONSHIPS WITH CCA
Prison Realty currently derives a significant portion of its income from
its leases and other contractual relationships, including the CCA note and the
trade name use agreement, with CCA, its primary tenant. As discussed herein
under the heading "Information About Prison Realty," Prison Realty and CCA have
amended the terms of the CCA leases to restructure the lease payments due Prison
Realty under the CCA leases, and CCA has been required to defer payment of the
initial installment of accrued interest due December 31, 1999 under the CCA
note. As the result of the restructuring and related transactions, if completed,
the CCA leases, as well as the other contractual arrangements between Prison
Realty and CCA, will be canceled and of no further force and effect.
Notwithstanding the foregoing, the following discussion outlines the terms of
the existing CCA leases and certain other contractual relationships between
Prison Realty and CCA.
LEASES
CCA is Prison Realty's primary tenant, leasing 36 of Prison Realty's 45
currently operating facilities. In connection with the 1999 Merger, Prison
Realty and CCA entered into the CCA leases
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with a primary term of 12 years (the "Fixed Term") with respect to each facility
currently leased by CCA. Each CCA lease conveys a leasehold interest in the
land, the buildings and structures and other improvements thereon, easements,
rights and similar appurtenances to such land and improvements, and permanently
affixed equipment, machinery and other fixtures relating to the operation of the
facility and all personal property necessary to operate the facility for its
intended purpose (collectively, the "CCA Leased Property"). Each CCA lease
permits CCA to operate the CCA Leased Property only as a correctional or
detention facility. CCA has the responsibility in each CCA lease to obtain and
maintain all licenses, certificates and permits in order to use and operate each
facility.
The rent for the first year for each facility under the CCA leases was
initially set at a fixed amount (the "Annual Base Rent") and was scheduled to
increase each year by a designated amount (the "Additional Rent"). See
"Information About Prison Realty -- Recent developments" for a discussion of the
recent amendments to the CCA leases. Under the CCA leases, as amended, Annual
Base Rent and Additional Rent for each CCA Leased Property will be payable in
semi-annual installments (rather than in monthly installments as set forth in
the initial terms of the CCA leases). The obligations of CCA under each CCA
lease are cross-defaulted to each of the other CCA leases with respect to
payment and certain other defaults. Prison Realty has general recourse to CCA
under the CCA leases, although CCA's payment obligations under such CCA leases
are not secured by any assets of CCA.
The CCA lease for each CCA Leased Property may be extended at fair market
rates for three additional five-year terms beyond the Fixed Term (the "Extended
Terms"), but only upon the mutual agreement of Prison Realty and CCA. Fair
market rates for Extended Terms will be determined mutually by Prison Realty and
CCA based on their respective analyses of the market for the relevant facility.
The Fixed Term and Extended Terms under each CCA lease are subject to earlier
termination upon the occurrence of certain contingencies described in the CCA
lease. Additionally, each CCA lease may be terminated by Prison Realty, at its
option, at any time after the first five years of the CCA lease, upon 18 months'
written notice to CCA.
Each CCA lease is what is commonly known as a "triple-net" lease or
"absolute net" lease, under which CCA is to pay the Annual Base Rent and all
additional charges. Under each CCA lease, CCA must, at its sole cost and
expense, maintain each CCA Leased Property in good order, repair and appearance
and must make structural improvements or repairs which may be necessary and
appropriate to keep such CCA Leased Property in good order, repair and
appearance, excluding ordinary wear and tear. CCA, at its sole cost and expense,
may make alterations, additions, changes and/or improvements to each CCA Leased
Property with the prior written consent of Prison Realty, provided that the
value and primary intended use of such CCA Leased Property is not impaired. Each
CCA lease provides that, at the request of CCA, Prison Realty may make capital
additions. In certain situations, a capital addition to CCA Leased Property may
be made directly by CCA and financed by third parties, with the prior written
consent of Prison Realty. In the case of a capital addition not undertaken or
financed by Prison Realty, Prison Realty will have an option to acquire and
lease back to CCA such capital addition for a period of 10 years following the
date on which inmates are first received at such capital addition, at a cost
equal to the fair market value of such capital addition and at an annual rental
rate equal to fair market rental rates.
The CCA leases provide that CCA may not, without the prior written consent
of Prison Realty, assign, sublease, mortgage, pledge, hypothecate, encumber or
otherwise transfer any CCA lease or any interest therein with respect to all or
any part of the CCA Leased Property.
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OTHER CONTRACTUAL RELATIONSHIPS
In connection with the 1999 Merger, Prison Realty and CCA entered into a
right to purchase agreement, whereby Prison Realty has an option to acquire, and
lease back to CCA at fair market value, any correctional or detention facility
acquired or developed and owned by CCA in the future, for a period of 10 years
following the date on which service is commenced with respect to such facility.
For facilities acquired pursuant to the right to purchase agreement, the initial
annual rental rates will be the fair market rental rates, as determined by
Prison Realty and CCA. Additionally, Prison Realty has a right of first refusal
in the event CCA obtains an acceptable third party offer to acquire or provide
mortgage secured financing to finance more than 90% of the cost of any
correctional or detention facility owned by CCA or which is acquired or
developed by CCA or its subsidiaries in the future. With respect to a sale of
any such facility, if Prison Realty declines to purchase such facility, CCA will
be free to sell such facility for a specified period of time at a price at least
equal to the price offered to Prison Realty and on terms and conditions
substantially consistent with those offered to Prison Realty. With respect to a
first mortgage financing of 90% of the cost of any such facility, if Prison
Realty declines to provide such financing on the terms set forth in such third
party offer, CCA will be free to obtain first mortgage financing from a third
party on terms and conditions no less favorable to CCA than those contained in
the third party offer.
Prison Realty has also entered into: (i) an amended and restated services
agreement with CCA pursuant to which CCA is to serve as a facilitator of the
construction and development of additional facilities on behalf of Prison Realty
for a term of five years from the date of such agreement; (ii) an amended and
restated tenant incentive agreement with CCA pursuant to which Prison Realty
will pay to CCA an incentive fee to induce CCA to enter into CCA leases with
respect to those facilities developed and facilitated by CCA; and (iii) a
business development agreement with CCA pursuant to which CCA will provide
marketing and other business development services on behalf of Prison Realty.
With respect to the amended and restated services agreement, in consideration of
a fee, CCA has agreed to perform, at the direction of Prison Realty, services
needed in the construction and development of correctional and detention
facilities, including services related to identification of potential additional
facilities, preparation of proposals, project bidding, project design,
government relations and project marketing. With respect to the amended and
restated tenant incentive agreement, Prison Realty has agreed to pay an
incentive fee to CCA for each facility leased by CCA for which CCA has served as
developer and facilitator. Pursuant to the business development agreement,
Prison Realty has agreed to pay CCA a fee for the marketing and business
development services provided to Prison Realty. Prison Realty and CCA have
amended the terms of these agreements to defer all fees to be paid by Prison
Realty to CCA under these agreements until the termination of these agreements
at the time of the merger and related transactions. See "Information About
Prison Realty -- Recent developments."
GOVERNMENT REGULATION
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in such property. Such laws often impose liability whether or not
the owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances. As an owner of correctional and detention
facilities, Prison Realty has been subject to these laws, ordinances and
regulations, and such laws, rules and regulations. In addition, upon the
completion of the merger and related transactions and the Prison Realty
restructuring, Prison Realty will also be subject to these laws, ordinances and
regulations as the result of Prison Realty's, and its subsidiaries', operation
and management of the correctional and detention facilities
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currently managed and operated by CCA. The cost of complying with environmental
laws could materially adversely affect Prison Realty's financial condition and
results of operations.
Phase I environmental assessments have been obtained on substantially all
of the facilities currently owned by Prison Realty. The purpose of a Phase I
environmental assessment is to identify potential environmental contamination
that is made apparent from historical reviews of such facilities, review of
certain public records, visual investigations of the sites and surrounding
properties, toxic substances and underground storage tanks. The Phase I
environmental assessment reports do not reveal any environmental contamination
that Prison Realty believes would have a material adverse effect on Prison
Realty's business, assets, results of operations or liquidity, nor is Prison
Realty aware of any such liability. Nevertheless, it is possible that these
reports do not reveal all environmental liabilities or that there are material
environmental liabilities of which Prison Realty is unaware. In addition,
environmental conditions on properties owned by Prison Realty may affect the
operation or expansion of facilities located on the properties.
Under the terms of the existing CCA leases, CCA has made various
representations and warranties relating to environmental matters with respect to
each CCA Leased Property. Each CCA lease requires CCA to indemnify and hold
harmless Prison Realty and any CCA mortgagee from and against all liabilities,
costs and expenses imposed upon or asserted against Prison Realty or the CCA
Leased Property on account of, among other things, any federal, state or local
law, ordinance, regulation, order or decree relating to the protection of human
health or the environment in respect of the CCA Leased Property. Upon completion
of the merger and related transactions and the Prison Realty restructuring, the
CCA leases will be canceled and will be of no further force and effect.
AMERICANS WITH DISABILITIES ACT
Prison Realty's properties, and those correctional and detention facilities
operated and managed by CCA, are subject to the Americans with Disabilities Act
of 1990, as amended (the "ADA"). The ADA has separate compliance requirements
for "public accommodations" and "commercial facilities" but generally requires
that public facilities such as correctional and detention facilities be made
accessible to people with disabilities. These requirements became effective in
1992. Compliance with the ADA requirements could require removal of access
barriers and other modifications or capital improvements at the facilities.
Noncompliance could result in imposition of fines or an award of damages to
private litigants.
Under Prison Realty's existing leases, including the CCA leases, the lessee
is required to make any necessary modifications or improvements to comply with
the ADA. However, Prison Realty does not believe that such costs will be
material because it believes that relatively few modifications are necessary to
comply with the ADA. Upon completion of the merger and related transactions and
related Prison Realty restructuring and related transactions, however, the CCA
leases will be canceled and will be of no further force and effect and Prison
Realty, or a subsidiary of Prison Realty, will be subject to these obligations.
INSURANCE
Prison Realty maintains a general liability insurance policy of $2.0
million for all of its operations, as well as insurance in amounts it deems
adequate to cover property and casualty risks, workers' compensation and
directors and officers liability. In addition, each lease between Prison Realty
and its lessees, including the CCA leases, provides that the lessee will
maintain insurance on each leased property under the lessee's insurance policies
providing for the following coverages: (i) fire, vandalism and malicious
mischief, extended coverage perils, and all physical loss perils; (ii)
comprehensive general public liability (including personal injury and property
damage); and
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(iii) worker's compensation. Under each of these leases, Prison Realty has the
right to periodically review its lessees' insurance coverage and provide input
with respect thereto. CCA currently maintains general liability coverage of
$80.0 million.
Upon completion of the merger and related transactions and related Prison
Realty restructuring, the CCA leases will be canceled and will be of no further
force and effect. As such, Prison Realty will be required to obtain and maintain
liability insurance substantially equivalent to that currently held by CCA to
cover liabilities arising from the operation, and in some cases, the leasing of
correctional and detention facilities currently being operated by CCA.
EMPLOYEES AND LABOR MATTERS
At July 24, 2000, Prison Realty had four full-time employees and no
part-time employees. Of such full-time employees, all were employed at Prison
Realty's corporate offices. None of Prison Realty's employees are subject to a
collective bargaining agreement, and Prison Realty has experienced no
labor-related work stoppages. Prison Realty generally considers its relations
with its personnel to be good.
COMPETITION
Prison Realty's existing correctional and detention facilities are, and any
additional correctional and detention facilities acquired by Prison Realty, will
be, subject to competition for inmates from private prison managers. In
addition, the correctional and detention facilities currently managed by CCA are
subject to competition for inmates from other private prison managers. In
addition, upon the completion of the merger and related transactions and the
Prison Realty restructuring, Prison Realty and its subsidiary, as the manager of
facilities formerly operated by CCA, will be subject to competition for inmates
from other private prison managers. As such, the number of inmates in a
particular area could have a material adverse effect on the operating revenues
of Prison Realty's facilities. In addition, revenues of the facilities will be
affected by a number of factors, including the demand for inmate beds and
general economic conditions. Prison Realty will also be subject to competition
for the acquisition of correctional and detention facilities with other
purchasers of correctional and detention facilities.
PROPERTIES
GENERAL
At July 24, 2000, Prison Realty owned or was in the process of developing
50 correctional and detention facilities in 17 states, the District of Columbia
and the United Kingdom, of which 45 facilities were operating, two were under
construction, and three were in the planning stages. At July 24, 2000, Prison
Realty leased 36 facilities to CCA, its primary tenant, six facilities to
government agencies and three facilities to private operators. Upon the
completion of the merger and related transactions and the Prison Realty
restructuring, Prison Realty will continue to own these correctional and
detention facilities and will operate each of the facilities currently leased to
CCA. Prison Realty will also continue to own 100% of the non-voting common stock
of PMSI and JJFMSI, each of which operate detention facilities owned by various
governmental entities.
THE FACILITIES
GENERAL. The facilities owned or under development by Prison Realty can
generally be classified according to the level(s) of security at such facility.
Minimum security facilities are facilities having open housing within an
appropriately designed and patrolled institutional perimeter. Medium security
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facilities are facilities having either cells, rooms or dormitories, a secure
perimeter, and some form of external patrol. Maximum security facilities are
facilities having single occupancy cells, a secure perimeter and external patrol
or detention services. Multi-security facilities are facilities with various
areas encompassing either minimum, medium or maximum security. Prison Realty's
facilities can also be classified according to the type(s) of inmates or other
detainees held at such facility, or with respect to its juvenile educational
facilities, the level of security provided for the students attending
educational programs at such facilities. The facilities can, generally be
grouped in this manner into the following five facility types:
- Correctional facilities. Correctional facilities are used to house
inmates on a permanent basis for the duration of their sentences.
- Detention facilities. Detention facilities are multi-security level
facilities used to house inmates of all levels, including pre-trial and
pre-sentence prisoners for the USMS, inmates sentenced but not yet
housed in correctional facilities, inmates awaiting trial, sentencing or
hearing and persons detained by the INS.
- Juvenile educational facilities. Juvenile educational facilities leased
to Community Education Partners, Inc. ("CEP") are used to provide
services to at-risk juveniles attending educational programs in a secure
setting. These facilities may be generally classified as
juvenile/minimum security facilities.
- Processing centers. Processing centers are used to house undocumented
aliens for the INS and are classified as minimum to medium security
facilities.
- Pre-Parole transfer facilities. Pre-parole transfer facilities are used
to hold inmates who have been arrested for technical violations of their
parole agreements with a State Department of Criminal Justice, Board of
Pardons and Paroles. Pre-parole transfer facilities are classified as
minimum security facilities.
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FACILITIES CURRENTLY OPERATING. Each of Prison Realty's facilities has
been pledged to secure borrowings under Prison Realty's existing bank credit
facility. Information regarding each facility owned by Prison Realty as of July
24, 2000 is set forth below, grouped by state:
<TABLE>
<CAPTION>
DESIGN EXPIRATION
FACILITIES LOCATION CAPACITY(1) SECURITY LEVEL TENANT DATE(2)
---------- -------- ----------- -------------- ------ ----------
<S> <C> <C> <C> <C> <C>
DOMESTIC:
Eloy Detention Center..... Eloy, Arizona 1,500 medium CCA 2010
Central Arizona Detention
Center.................. Florence, Arizona 2,304 multi CCA 2010
Florence Correctional
Facility................ Florence, Arizona 1,600 medium CCA 2010
California Correctional
Facility................ California City, California 2,304 medium CCA 2010
Leo Chesney Correctional
Center.................. Live Oak, California 240 minimum Cornell Corrections 2003
San Diego Correctional
Facility................ San Diego, California 1,200 medium CCA 2012
Kit Carson Correctional
Center.................. Burlington, Colorado 768 medium CCA 2010
Bent County Correctional
Facility................ Las Animas, Colorado 700 medium CCA 2010
Huerfano County
Correctional
Center(3)............... Walsenburg, Colorado 752 medium CCA 2010
D.C. Correctional
Treatment Facility(4)... Washington, D.C. 866 medium District of Columbia 2017
Coffee Correctional
Facility(5)............. Nicholls, Georgia 1,524 medium CCA 2010
McRae Correctional
Facility................ McRae, Georgia 1,524 medium CCA 2012
Millen Correctional
Facility................ Millen, Georgia 1,524 medium CCA 2012
Wheeler Correctional
Facility(5)............. Alamo, Georgia 1,524 medium CCA 2010
Leavenworth Detention
Center.................. Leavenworth, Kansas 327(6) maximum CCA 2010
Lee Adjustment Center..... Beattyville, Kentucky 756 medium CCA 2010
River City Correctional
Center.................. Louisville, Kentucky 363 medium CCA 2010
Marion Adjustment Center.. St. Mary, Kentucky 856 minimum CCA 2010
Otter Creek Correctional
Center.................. Wheelwright, Kentucky 656 medium CCA 2010
Crossroads Correctional
Center(7)............... Shelby, Montana 512 medium CCA 2010
Prairie Correctional
Facility................ Appleton, Minnesota 1,338 medium CCA 2010
Tallahatchie County
Correctional Center..... Tallahatchie, Mississippi 1,104 medium CCA 2012
Southern Nevada Women's
Correctional Facility... Las Vegas, Nevada 500 medium State of Nevada(8) 2015
New Mexico Women's
Correctional Facility... Grants, New Mexico 322(6) medium CCA 2010
Cibola County Corrections
Center.................. Milan, New Mexico 1,012 medium CCA 2010
Torrance County Detention
Facility................ Estancia, New Mexico 910 multi CCA 2010
Pamlico Correctional
Facility(9)............. Bayboro, North Carolina 528 medium State of North 2008
Carolina(10)
Mountain View Correctional
Facility(9)............. Spruce Pine, North Carolina 528 medium State of North 2008
Carolina(9)
</TABLE>
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<TABLE>
<CAPTION>
DESIGN EXPIRATION
FACILITIES LOCATION CAPACITY(1) SECURITY LEVEL TENANT DATE(2)
---------- -------- ----------- -------------- ------ ----------
<S> <C> <C> <C> <C> <C>
Queensgate Correctional
Facility................ Cincinnati, Ohio 850 medium Hamilton County, Ohio 2004
Northeast Ohio
Correctional Center..... Youngstown, Ohio 2,016 medium CCA 2010
North Fork Correctional
Facility................ Sayre, Oklahoma 1,440 medium CCA 2010
Diamondback Correctional
Facility................ Watonga, Oklahoma 1,440(6) medium CCA 2010
Cimarron Correctional
Facility(11)............ Cushing, Oklahoma 960 medium CCA 2010
Davis Correctional
Facility(11)............ Holdenville, Oklahoma 960 medium CCA 2010
Shelby Training
Center(12).............. Memphis, Tennessee 200 medium CCA 2010
West Tennessee Detention
Facility................ Mason, Tennessee 600 multi CCA 2010
Whiteville Correctional
Facility................ Whiteville, Tennessee 1,536 medium CCA 2010
Bridgeport PPT Facility... Bridgeport, Texas 200 minimum CCA 2010
Eden Detention Center..... Eden, Texas 1,225 medium CCA 2011
Community Education
Partners -- Dallas
County School for
Accelerated Learning.... Dallas, Texas (13) juvenile/ CEP 2008
minimum
Community Education
Partners -- Southeast
Houston School for
Accelerated Learning.... Houston, Texas (13) juvenile/ CEP 2008
minimum
Houston Processing
Center.................. Houston, Texas 411 medium CCA 2010
Laredo Processing
Center.................. Laredo, Texas 258 medium CCA 2010
Webb County Detention
Facility................ Laredo, Texas 480 maximum CCA 2011
Mineral Wells PPT
Facility................ Mineral Wells, Texas 2,103 minimum CCA 2010
T. Don Hutto Correctional
Center.................. Taylor, Texas 480 medium CCA 2010
INTERNATIONAL:
HMP Forrest Bank.......... Salford, England 800 medium U.K. Detention 2025
Services Limited
</TABLE>
-------------------------
(1) Design capacity measures the number of beds, and accordingly, the number of
inmates each facility is designed to accommodate. Management believes
design capacity is an appropriate measure for evaluating prison operations,
because the revenues generated by each facility are based on a per diem or
monthly rate per inmate housed at the facility paid by the corresponding
contracting government entity. The ability of CCA or another private
operator to satisfy its financial obligations under its leases with Prison
Realty is based in part on the revenues generated by the facilities, which
in turn depends on the design capacity of each facility.
(2) Does not include any extensions of original lease term which may be
provided under the terms of the applicable leases.
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<PAGE> 211
(3) The facility is subject to a purchase option held by Huerfano County which
grants Huerfano County the right to purchase the facility upon an early
termination of the lease at a price determined by a formula set forth in
the lease agreement.
(4) Ownership of the facility automatically reverts to the District of Columbia
upon expiration of the lease term.
(5) The facility is subject to a purchase option held by the Georgia Department
of Corrections (the "GDOC") which grants the GDOC the right to purchase the
facility for the lesser of the facility's depreciated book value or fair
market value at any time during the term of the management contract between
CCA and the GDOC.
(6) The facility is currently being expanded by Prison Realty.
(7) The state of Montana has an option to purchase the facility at fair market
value generally at any time during the term of the management contract with
CCA.
(8) The state of Nevada has contracted with CCA to manage and operate the
facility.
(9) The state of North Carolina has an option to purchase the facility at the
end of the sixth year of the lease and at the end of each year of the lease
thereafter at a purchase price equal to depreciated book value.
(10) The state of North Carolina has contracted with CCA to manage and operate
the facility.
(11) The facility is subject to a purchase option held by the Oklahoma
Department of Corrections (the "ODC") which grants the ODC the right to
purchase the facility at its fair market value at any time.
(12) Upon the conclusion of the thirty-year lease between Prison Realty and
Shelby County, Tennessee, the facility will become the property of Shelby
County. Prior to such time, (a) if the county terminates the lease without
cause, Prison Realty may purchase the property for $150,000; (b) if the
state fails to fund the contract, then Prison Realty may purchase the
property for $150,000; (c) if Prison Realty terminates the lease without
cause, then Prison Realty shall purchase the property for its fair market
value as agreed to by the county and Prison Realty; (d) If Prison Realty
breaches the lease contract, then Prison Realty may purchase the property
for its fair market value as agreed to by the county and Prison Realty; and
(e) if the county breaches the lease contract, then Prison Realty may
purchase the property for $150,000.
(13) This alternative educational facility is currently configured to
accommodate 900 at-risk juveniles and may be expanded to accommodate a
total of 1,400 at-risk juveniles. Prison Realty believes that design
capacity does not generally apply to educational facilities, and,
therefore, the aggregate design capacity of Prison Realty's facilities
referred to in this joint proxy statement/prospectus does not include the
total number of at-risk juveniles which can be accommodated at this
facility.
FACILITIES UNDER CONSTRUCTION OR DEVELOPMENT. In addition to owning the
facilities listed in the preceding tables, Prison Realty is currently in the
process of planning, developing or constructing three facilities. Set forth
below is a brief description of each of the facilities currently under
development or construction by Prison Realty, grouped by state. Unless indicated
otherwise, upon completion of each of the facilities, pending and subject to the
completion of the merger and related transactions and Prison Realty
restructuring, each of the facilities will be leased to, and managed by, CCA.
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<PAGE> 212
Mendota Correctional Facility. The Mendota Correctional Facility will be
located on 265 acres in Mendota, California. The 261,000 square foot, medium
security facility will have a design capacity of 1,024 beds and is scheduled to
open after 2001.
Stewart County Detention Center. The Stewart County Detention Center will
be located in Stewart County, Georgia. The 297,550 square foot medium security
facility will have a design capacity of 1,524 beds and is scheduled to open in
2001.
Northeast Indiana Youth Village. The Northeast Indiana Youth Village will
be located in Warsaw, Indiana. The juvenile/minimum security facility will have
a design capacity of 144 beds upon completion. No timetable for completion has
been determined.
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is information regarding each of the six current directors
of Prison Realty. Also set forth below is information concerning current and
former executive officers of Prison Realty. Upon completion of the merger and
related transactions and the Prison Realty restructuring, Prison Realty's board
of directors will be restructured by increasing the size of the existing board
of directors and appointing one or more additional directors to the newly
created vacancies. In addition, certain existing directors are expected to
resign, allowing the appointment of one or more new directors to the vacancies
created by the resignations. Under Maryland law, each of these new directors
must stand for election at the next annual meeting of shareholders following
their appointment. It is expected that the Prison Realty 2000 annual meeting
will be held in November or December 2000.
INFORMATION REGARDING MEMBERS OF THE CURRENT BOARD OF DIRECTORS
Prison Realty's board of directors is currently composed of six directors,
divided into three classes (Class I, Class II and Class III). On July 5, 2000,
Doctor R. Crants resigned as a member of the board of directors.
Set forth below is information regarding the current members of the Prison
Realty board of directors and the classes in which they serve. The directors
listed below as "independent directors" are not directors, officers or employees
of Prison Realty, CCA, and are not otherwise affiliated with any tenants of
Prison Realty, including CCA, or with PMSI or JJFMSI.
Class I directors -- (terms to expire in 2002)
THOMAS W. BEASLEY, 57, was appointed by Prison Realty's board of directors
in December 1999 to serve as a director and as the chairman of Prison Realty's
board of directors. Mr. Beasley also currently serves as the interim chief
executive officer of Prison Realty and as the interim chief executive officer of
CCA, and serves as the chairman of the PMSI board of directors. Mr. Beasley is a
co-founder of Old CCA and served as its chairman emeritus from June 1994 to
December 31, 1998. From 1974 through 1978, Mr. Beasley served as chairman of the
Tennessee Republican Party, and he continues to be active in Tennessee politics.
Mr. Beasley graduated from the United States Military Academy at West Point in
1966 and received a Doctor of Jurisprudence degree from Vanderbilt University
School of Law in 1973.
TED FELDMAN, 47, is an independent director and is the chairman of the
audit committee of Prison Realty's board of directors. Mr. Feldman served as a
trustee of Old Prison Realty from April 1997 to December 1998. Mr. Feldman
served as the chief operating officer of StaffMark, Inc. ("StaffMark"), a
publicly traded provider of diversified staffing services to business, medical,
professional and service organizations and governmental agencies from October
1996 through October
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<PAGE> 213
1999. Prior to joining StaffMark, Mr. Feldman founded HRA, Inc., a Nashville
provider of staffing services, in 1991 and served as its president and chief
executive officer from that time until it merged with StaffMark in October 1996.
Class II director -- (term to expire in 2000)
JOSEPH V. RUSSELL, 59, is an independent director and is the chairman of
the independent and compensation committees of Prison Realty's board of
directors. Mr. Russell also serves as the chairman of the special committee and
served as a trustee of Old Prison Realty from April 1997 to December 1998. Mr.
Russell is the president and chief financial officer of Elan-Polo, Inc., a
Nashville-based, privately-held, worldwide producer and distributor of footwear.
Mr. Russell is also the vice president of and a principal in RCR Building
Corporation, a Nashville-based, privately-held builder and developer of
commercial and industrial properties. He also serves on the boards of directors
of Community Care Corp., the Footwear Distributors of America Association and US
Auto Insurance Company. Mr. Russell graduated from the University of Tennessee
in 1963 with a B.S. in Finance.
Class III directors -- (terms to expire in 2001)
C. RAY BELL, 59, is a director of Prison Realty and served as a trustee of
Old Prison Realty from April 1997 to December 1998. Mr. Bell is the president
and owner of Ray Bell Construction, Inc., which specializes in the construction
of a wide range of commercial buildings, and has constructed approximately 40
correctional and detention facilities, consisting of over 15,000 beds in seven
states, on behalf of various government entities and private companies,
including Prison Realty and Old CCA. Mr. Bell is a founding member of the Middle
Tennessee Chapter of Associated Builders and Contractors. Mr. Bell is a graduate
of the University of the South.
JEAN-PIERRE CUNY, 43, is a director of Prison Realty and served as a
director of Old CCA from July 1994 to December 1998. Mr. Cuny serves as the
senior vice president of The Sodexho Group, a French-based, leading supplier of
catering and various other services to institutions and an affiliate of Sodexho.
From February 1982 to June 1987, he served as vice president in charge of
Development for the Aluminum Semi-Fabricated Productions Division of Pechiney, a
diversified integrated producer of aluminum and other materials. Mr. Cuny
graduated from Ecole Polytechnique in Paris in 1977 and from Stanford University
Engineering School in 1978. Pursuant to the terms of a contractual arrangement
between Sodexho and Prison Realty, Sodexho has designated Mr. Cuny to serve as a
director of Prison Realty. Prison Realty and Sodexho are currently negotiating
with respect to this contractual agreement.
CHARLES W. THOMAS, PH.D., 57, is a director of Prison Realty and served as
a trustee of Old Prison Realty from April 1997 to December 1998. Dr. Thomas is a
private consultant who has taught and written on the criminal justice and
private corrections fields for more than 30 years. Until 1999, he was a
Professor of Criminology and the Director of the Private Corrections Project of
the Center for Studies in Criminology and Law at the University of Florida,
Gainesville, positions he held from 1980 and 1989, respectively. While serving
as Director of the Center, Dr. Thomas authored the Center's annual Private Adult
Correctional Facility Census. In connection with the 1999 Merger, Dr. Thomas
performed certain consulting services for each of Old Prison Realty and Old CCA.
Dr. Thomas continues to perform consulting services for CCA relating to its
business objectives. Dr. Thomas graduated from McMurry University in 1966 with a
B.S. in Secondary Education and from the University of Kentucky with a M.A. in
Sociology in 1969 and a Ph.D. in Sociology in 1971.
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INFORMATION REGARDING EXECUTIVE OFFICERS OF PRISON REALTY WHO ARE NOT DIRECTORS
Prison Realty is currently conducting a search for a new chief executive
officer and will begin a search for a new chief financial officer. Doctor R.
Crants has been terminated as the chief executive officer of Prison Realty, as
well as the chief executive officer of CCA. Mr. Crants has informed Prison
Realty that he intends to remain a director of each of PMSI and JJFMSI. Thomas
W. Beasley, the chairman of the board of directors of Prison Realty and a
founder of Prison Realty's predecessor company, is serving as interim chief
executive officer of Prison Realty while Prison Realty completes the search for
a permanent chief executive officer. Several candidates have been identified for
the position, and interviews have begun. The selection process will be completed
as expeditiously as possible. The search for a new chief financial officer will
be undertaken after the selection of a new chief executive officer.
J. MICHAEL QUINLAN, 58, has served as president of Prison Realty since
December 1999. Mr. Quinlan also serves as the president and chief operating
officer of CCA and as a member of CCA's board of directors, positions he has
held since June 1999. From January 1999 until May 1999, Mr. Quinlan served as a
member of the board of directors of Prison Realty and as vice-chairman of Prison
Realty's board of directors. From April 1997 until January 1999, Mr. Quinlan
served as a member of the board of trustees and as chief executive officer of
Old Prison Realty. From July 1987 to December 1992, Mr. Quinlan served as the
Director of the Federal Bureau of Prisons. In such capacity, Mr. Quinlan was
responsible for the total operations and administration of a federal agency with
an annual budget of more than $2 billion, more than 26,000 employees and 75
facilities. In 1988, Mr. Quinlan received the Presidential Distinguished Rank
Award, which is the highest award given by the United States government to civil
servants for service to the United States. In 1992, he received the National
Public Service Award of the National Academy of Public Administration and the
American Society of Public Administration, awarded annually to the top three
public administrators in the United States. Mr. Quinlan is a 1963 graduate of
Fairfield University with a B.S.S. in History, and he received a J.D. from
Fordham University Law School in 1966. He also received an L.L.M. from the
George Washington University School of Law in 1970.
VIDA H. CARROLL, 40, currently serves as Prison Realty's chief financial
officer, secretary and treasurer. Ms. Carroll has resigned from each of these
positions effective September 15, 2000. Ms. Carroll served as the chief
financial officer, secretary and treasurer of Old Prison Realty from its
inception until December 1998. From 1991 to 1996, Ms. Carroll, as a sole
proprietor, worked as a financial consultant, specializing in accounting
conversions and systems design. Prior to this time, she worked in public
accounting, including working as an audit manager with KPMG Peat Marwick. Ms.
Carroll holds a Bachelor of Science Degree from Tennessee Technological
University and is a certified public accountant.
COMMITTEES OF PRISON REALTY'S BOARD
Pursuant to the authority granted under Company's bylaws, Prison Realty's
board of directors has designated an audit committee, compensation committee and
an independent committee. In addition, Prison Realty's board, together with the
boards of directors of CCA, formed a special committee to consider the
restructuring.
COMPENSATION OF PRISON REALTY'S DIRECTORS
Currently, Prison Realty pays its directors who are not employees of Prison
Realty or one of its lessees or any of their affiliates or subsidiaries an
annual retainer of $12,000 for their services. In addition, non-employee
directors receive a fee of $1,000 for each meeting of Prison Realty's board
which they attend and an additional fee of $500 for each meeting they attend of
committees on
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which they serve. Non-employee members of the independent committee and the
special committee, did not, however, receive the $500 fee for their attendance
at meetings of these committees relating to the restructuring and related
transactions. Instead, they each received a retainer fee of $50,000 for their
services in 1999, and Mr. Russell received a retainer fee of $75,000 for his
services to Prison Realty in 1999. Mr. Russell will also receive $50,000 in
shares of Prison Realty common stock for his services in 2000. In addition,
Messrs. Beasley and Bartholomew each received a retainer fee of $50,000 for
their services on the special committee. Non-employee directors may elect, on an
annual basis, to receive up to 100% of their regular compensation in shares of
Common Stock. Non-employee directors are reimbursed for reasonable expenses
incurred to attend Prison Realty's board and committee meetings. Non-employee
directors also participate in the Non-Employee Directors' Share Option Plan,
whereby they receive options to purchase 5,000 shares of Common Stock for each
year of service with Prison Realty's board.
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EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain summary information concerning the
compensation paid to Doctor R. Crants and the compensation paid to each of Mr.
Quinlan, Ms. Carroll, D. Robert Crants, III and Michael W. Devlin, the four most
highly compensated executive officers of Prison Realty other than Doctor R.
Crants whose annualized compensation exceeded $100,000 (collectively, the "Named
Executive Officers"), for the fiscal years ended December 31, 1997, 1998 and
1999. As discussed more fully in "The Merger and Related Transactions and the
Prison Realty Restructuring -- Interests of directors, officers, affiliates and
shareholders in the merger and Related transactions and the Prison Realty
restructuring," each of Mr. Crants, III and Mr. Devlin resigned from their
positions with Prison Realty, effective as of December 31, 1999. In addition, on
July 28, 2000, Doctor R. Crants was terminated as Prison Realty's chief
executive officer. Vida H. Carroll has resigned effective September 15, 2000.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------
AWARDS
-------------------------
ANNUAL COMPENSATION RESTRICTED SECURITIES
------------------------------ OTHER ANNUAL STOCK UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) AWARDS ($) OPTIONS (#)
--------------------------- ---- ---------- --------- ---------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Doctor R. Crants.............. 1999 $175,000(1) $ 34,488(2) -- $103,465(3) 113,750(4)
Chief Executive Officer 1998 385,933(5) -- -- -- 17,500(6)
1997 359,423(8) -- -- -- 113,125(9)
J. Michael Quinlan............ 1999 79,583(11) -- -- -- 10,000(12)
President 1998 155,625 -- -- -- --
1997 150,000(14) -- -- -- 375,000(15)
Vida H. Carroll............... 1999 141,667 81,387(16) -- 19,160(17) 26,250(18)
Chief Financial Officer 1998 88,813 -- -- -- --
Secretary and Treasurer 1997 75,000(14) -- -- -- 65,000(20)
D. Robert Crants, III......... 1999 155,000 113,320(21) -- 114,961(22) 52,500(23)
President 1998 103,750 -- -- -- --
1997 100,000(14) (25) -- -- 225,000(26)
Michael W. Devlin............. 1999 155,000 113,320(21) -- 114,961(22) 52,500(23)
Chief Operating Officer 1998 103,750 -- -- -- --
1997 100,000(14) (25) -- -- 225,000(26)
<CAPTION>
LONG-TERM COMPENSATION
------------------------------
PAYOUTS
------------------------------
LTIP ALL OTHER
NAME AND PRINCIPAL POSITION PAYOUTS ($) COMPENSATION ($)
--------------------------- ----------- ----------------
<S> <C> <C>
Doctor R. Crants.............. -- --
Chief Executive Officer -- $ 7,450(7)
-- 7,450(10)
J. Michael Quinlan............ -- --
President -- 5,000(13)
-- --
Vida H. Carroll............... -- 42,500(19)
Chief Financial Officer -- 3,000(13)
Secretary and Treasurer -- --
D. Robert Crants, III......... -- 238,750(24)
President -- 5,000(13)
-- --
Michael W. Devlin............. -- 238,750(24)
Chief Operating Officer -- 5,000(13)
-- --
</TABLE>
-------------------------
(1) Represents Mr. Crants' base salary as chief executive officer and chairman
of the board of directors of Prison Realty during 1999. Mr. Crants has
resigned from his position as chairman and as a member of the board of
directors of Prison Realty, and has been terminated as chief executive
officer of Prison Realty.
(2) Mr. Crants was awarded 1,687 restricted shares of Prison Realty's common
stock on March 4, 1999 pursuant to Prison Realty's 1997 Employee Share
Incentive Plan, which was assumed by Prison Realty in the 1999 Merger.
Pursuant to the terms of a restricted stock agreement between Prison Realty
and Mr. Crants, these shares of Prison Realty's common stock were vested
immediately upon the award of such shares to Mr. Crants. The value of these
shares on the date of award was $34,488, based on the average of the high
and low sales prices of Prison Realty's common stock on the NYSE on March
3, 1999, $20.44. As of December 31, 1999, the closing market price of
Prison Realty's common stock on the NYSE was $5.06 per share, reducing the
aggregate value of the shares awarded to Mr. Crants to $8,536.
(3) Mr. Crants was awarded 5,063 restricted shares of Prison Realty's common
stock on March 4, 1999 pursuant to Prison Realty's 1997 Employee Share
Incentive Plan. Pursuant to the terms of
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a Restricted Stock Agreement between Prison Realty and Mr. Crants, such
restricted shares vest ratably on each of the first three anniversaries of
the date of such award. The value of these shares on the date of award was
$103,465, based on the average of the high and low sales prices of Prison
Realty's common stock on the NYSE on March 3, 1999, $20.44. In connection
with Mr. Crants' termination as Prison Realty's chief executive officer on
July 28, 2000, these shares were forfeited by Mr. Crants to the extent such
shares had not vested.
(4) In connection with Mr. Crants' termination as Prison Realty's chief
executive officer on July 28, 2000, these options were forfeited by Mr.
Crants.
(5) Represents the compensation paid by Old CCA, Prison Realty's predecessor,
to such individual for the fiscal year ended December 31, 1999.
(6) These options were granted by Old CCA under Old CCA's 1995 Stock Incentive
Plan. In connection with the 1999 Merger, Prison Realty assumed all of the
options outstanding under the 1995 Stock Incentive Plan, with all of such
options being converted into options exercisable for shares of Prison
Realty's common stock, based on the exchange ratio in the 1999 Merger. In
connection with Mr. Crants' termination as Prison Realty's chief executive
officer on July 28, 2000, these options were forfeited by Mr. Crants.
(7) Amount represents the contribution by Old CCA, Prison Realty's predecessor,
to Old CCA's Amended and Restated Employee Stock Option Plan (the "Old CCA
ESOP") during the fiscal year ended December 31, 1998.
(8) Represents the compensation paid by Old CCA, Prison Realty's predecessor,
to such individual for the fiscal year ended December 31, 1997.
(9) 13,125 of the options were granted by Old CCA under Old CCA's 1995 Stock
Incentive Plan. The balance of the options, which vest in 25% increments
over a three-year period, with the first such increment having vested on
July 15, 1997, were granted by Old Prison Realty under Old Prison Realty's
1997 Employee Share Incentive Plan. In connection with the 1999 Merger,
Prison Realty assumed all of the options outstanding under Old CCA's 1995
Stock Incentive Plan and Old Prison Realty's 1997 Employee Share Incentive
Plan, with all of such options being converted into options exercisable for
shares of Prison Realty's common stock, based on the exchange ratio in the
1999 Merger. In connection with Mr. Crants' termination as Prison Realty's
chief executive officer on July 28, 2000, these options were forfeited by
Mr. Crants.
(10) Amount represents the contribution by Old CCA, Prison Realty's predecessor,
to the Old CCA ESOP during the fiscal year ended December 31, 1997.
(11) From January 1, 1999 until May 11, 1999, Mr. Quinlan served as
Vice-Chairman of Prison Realty's board of directors. From May 11, 1999
until June 28, 1999, Mr. Quinlan served as Prison Realty's vice-president,
special projects. On June 28, 1999, Mr. Quinlan resigned from all positions
with Prison Realty to become president and chief operating officer of CCA.
Mr. Quinlan became president of Prison Realty, effective upon the
resignation of D. Robert Crants, III.
(12) Pursuant to Prison Realty's 1997 Employee Share Incentive Plan, these
options to purchase shares of Prison Realty's common stock initially were
to vest in 25% increments over a three-year period, with the first such
increment having vested on March 4, 1999. Upon Mr. Quinlan's resignation
from all positions with Prison Realty on June 28, 1999, all outstanding
unvested options held by Mr. Quinlan became fully vested upon action by
Prison Realty's board of directors. These options are exercisable at a
price of $19.94 per share, the closing market price
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on the NYSE of Prison Realty's common stock on March 4, 1999, the date of
grant of these options.
(13) Amount represents the contribution by Old Prison Realty, Prison Realty's
predecessor, to Old Prison Realty's Amended and Restated Employee Share
Ownership Plan for the fiscal year ended December 31, 1998.
(14) Amounts are annualized salaries for the fiscal year ended December 31,
1997.
(15) All but 25,000 of these options to purchase Prison Realty's Common Stock
initially vested in 25% increments over a three-year period with the first
such increment having vested on July 15, 1997. The balance of these options
initially vested in 25% increments over a three-year period, with the first
such increment having vested on December 2, 1997. All of these options were
granted under Old Prison Realty's 1997 Employee Share Incentive Plan. In
connection with the 1999 Merger, the Company assumed all of the options
outstanding under Old Prison Realty's 1997 Employee Share Incentive Plan,
with all of such options being converted into options exercisable for
shares of Prison Realty's common stock, based on the exchange ratio in the
1999 Merger. Upon Mr. Quinlan's resignation from all positions with Prison
Realty on June 28, 1999, all outstanding unvested options held by Mr.
Quinlan became fully vested upon action by Prison Realty's board of
directors.
(16) Ms. Carroll was awarded 312 restricted shares of Prison Realty's common
stock on March 4, 1999 pursuant to Prison Realty's 1997 Employee Share
Incentive Plan. Pursuant to the terms of a Restricted Stock Agreement
between Prison Realty and Ms. Carroll, these shares were vested immediately
upon the award of such shares. The value of these shares on the date of
award was $6,387, based on the average of the high and low sales prices of
Prison Realty's common stock on the NYSE on March 3, 1999, $20.44. As of
December 31, 1999, the closing market price of Prison Realty's common stock
on the NYSE was $5.06 per share, reducing the aggregate value of the shares
awarded to $1,579. Ms. Carroll also received a cash bonus of $75,000 in
March 1999.
(17) Ms. Carroll was awarded 938 restricted shares of Prison Realty's common
stock on March 4, 1999 pursuant to Prison Realty's 1997 Employee Share
Incentive Plan. Pursuant to the terms of a Restricted Stock Agreement
between Prison Realty and Ms. Carroll, such restricted shares vest ratably
on each of the first three anniversaries of the date of such award. The
value of these shares on the date of award was $19,160, based on the
average of the high and low sales prices of Prison Realty's common stock on
the NYSE on March 3, 1999, $20.44. As of December 31, 1999, the closing
market price of Prison Realty's common stock on the NYSE was $5.06 per
share, reducing the aggregate value of the shares awarded to $4,746. It is
expected that these shares will be forfeited upon the effectiveness of Ms.
Carroll's resignation as Prison Realty's chief financial officer, secretary
and treasurer to the extent such shares are not vested.
(18) Pursuant to Prison Realty's 1997 Employee Share Incentive Plan, these
options to purchase shares of Prison Realty's common stock vest in 25%
increments over a three-year period, with the first such increment having
vested on March 4, 1999, and are exercisable at a price of $19.94 per
share, the closing market price on the NYSE of Prison Realty's common stock
on March 4, 1999, the date of grant of these options. It is expected that
all unexercised options will be terminated upon the effectiveness of Ms.
Carroll's resignation.
(19) Represents three-months' severance of $37,500 paid in advance to Ms.
Carroll and a contribution of $5,000 by Prison Realty to the Prison Realty
Trust, Inc. 401(k) Savings and Retirement Plan on Ms. Carroll's behalf
during the fiscal year ended December 31, 1999.
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(20) All but 15,000 of these options to purchase Prison Realty's Common Stock
vest in 25% increments over a three-year period with the first such
increment having vested on July 15, 1997. The balance of the options vest
in 25% increments over a three-year period with the first such increment
having vested on December 2, 1997. All of these options were granted under
Old Prison Realty's 1997 Employee Share Incentive Plan. In connection with
the 1999 Merger, Prison Realty assumed all of the options outstanding under
Old Prison Realty's 1997 Employee Share Incentive Plan, with all of such
options being converted into options exercisable for shares of Prison
Realty's common stock, based on the exchange ratio in the 1999 Merger. It
is expected that all unexercised options will be terminated upon the
effectiveness of Ms. Carroll's resignation.
(21) This individual was awarded 1,875 restricted shares of Prison Realty's
Common Stock on March 4, 1999 pursuant to Prison Realty's 1997 Employee
Share Incentive Plan. Pursuant to the terms of a Restricted Stock Agreement
between Prison Realty and such individual, these shares were vested
immediately upon the award of such shares. The value of those shares on the
date of award was $38,320, based on the average of the high and low sales
prices of Prison Realty's common stock on the NYSE on March 3, 1999,
$20.44. As of December 31, 1999, the closing market price of Prison
Realty's common stock on the NYSE was $5.06 per share, reducing the
aggregate value of the shares awarded to $9,488. This individual also
received a cash bonus of $75,000 in March 1999.
(22) The value of these shares on the date of award was $114,961, based on the
average of the high and low sales prices of Prison Realty's common stock on
the NYSE on March 3, 1999, $20.44. In connection with the individual's
resignation from all positions with Prison Realty on December 31, 1999,
these shares were forfeited by such individual.
(23) In connection with the individual's resignation from all positions with
Prison Realty on December 31, 1999, these options were forfeited by such
individual.
(24) In connection with the individual's resignation from all positions with
Prison Realty on December 31, 1999, Prison Realty made a cash payment of
$233,750 to the individual, which represented the outstanding amount of
Prison Realty's obligations under such individual's employment agreement
with Prison Realty. Prison Realty also contributed $5,000 to the Prison
Realty Trust, Inc. 401(k) Savings and Retirement Plan on the individual's
behalf during the fiscal year ended December 31, 1999.
(25) This individual was awarded 150,000 common shares of Old Prison Realty
issued as a development fee and as reimbursement for actual costs incurred
with the promotion and formation of Old Prison Realty, the consummation of
Old Prison Realty's initial public offering of common shares and Old Prison
Realty's purchase of nine correctional and detention facilities from Old
CCA.
(26) All of these options were forfeited upon the individual's resignation from
all positions with Prison Realty on December 31, 1999.
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OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth the options granted with respect to the year
ended December 31, 1999 to the chief executive officer and each of Prison
Realty's Named Executive Officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
---------------------------------------------------------- AT
NUMBER OF PERCENTAGE OF TOTAL ASSUMED RATES OF STOCK
SECURITIES OPTIONS GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES IN OPTION TERM(1)
OPTIONS FISCAL EXERCISE EXPIRATION --------------------------
NAME GRANTED (#) YEAR(2) PRICE(3) DATE 5% ($) 10% ($)
---- ----------- ------------------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Doctor R. Crants............ 113,750(4) 35.8% $19.94 03/04/09 $1,428,950(5) $3,606,398(5)
J. Michael Quinlan.......... 10,000(6) 3.1 19.94 03/04/09 125,622 317,046
Vida H. Carroll............. 26,250(7) 8.3 19.94 03/04/09 329,758(8) 832,245(8)
D. Robert Crants, III....... 52,500(9) 16.5 19.94 03/04/09 0(10) 0(10)
Michael W. Devlin........... 52,500(9) 16.5 19.94 03/04/09 0(10) 0(10)
</TABLE>
-------------------------
(1) The dollar amounts under these columns are the result of calculations at the
5% and 10% rates set by the SEC and therefore are not intended to forecast
future appreciation, if any, of the price of Prison Realty's common stock.
(2) The percentage of total stock options granted to the chief executive officer
and each Named Executive Officer is based on the total number of options to
purchase Prison Realty's common stock granted during 1999, which amounted to
options to purchase 317,500 shares.
(3) All options to purchase shares of Prison Realty common stock granted to
Named Executive Officers in 1999 have exercise prices equal to the fair
market value (closing price per share of Prison Realty's common stock on the
NYSE) on the date of grant, March 4, 1999.
(4) These options, which were terminated in connection with Doctor R. Crants'
termination as the chief executive officer of Prison Realty on July 28,
2000, initially were subject to the following vesting schedule: 25% of the
options vested on March 4, 1999, the date of grant, and the remainder of the
options to vest in equal 25% installments on each of the first three
anniversaries of the date of grant.
(5) All options held by Mr. Crants were terminated upon Mr. Crants' termination
as Prison Realty's chief executive officer on July 28, 2000.
(6) In connection with Mr. Quinlan's resignation from all positions with Prison
Realty on June 28, 1999, all of these options became fully vested upon
action by Prison Realty's board of directors.
(7) 25% of the options vested on March 4, 1999, the date of the grant, and the
remainder of the options will vest in equal 25% installments on each of the
first three anniversaries of the grant; provided, however, that it is
expected that these options (to the extent not exercised) will be terminated
upon the effectiveness of Ms. Carroll's resignation as Prison Realty's chief
financial officer, secretary and treasurer.
(8) All unexercised options held by Ms. Carroll are expected to be terminated
upon the effectiveness of her resignation as Prison Realty's chief financial
officer, secretary and treasurer.
(9) These options, which were terminated in connection with the resignation of
each of D. Robert Crants, III and Michael W. Devlin from all positions with
Prison Realty on December 31, 1999, initially were subject to the following
vesting schedule: 25% of the options vested on March 4, 1999, the date of
grant, and the remainder of the options were to vest in equal 25%
installments on each of the first three anniversaries of the date of grant.
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<PAGE> 221
(10) All options held by each of D. Robert Crants, III and Michael W. Devlin
terminated upon the resignation of Messrs. Crants, III and Devlin from all
positions with Prison Realty on December 31, 1999.
AGGREGATED OPTION/SAR EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table sets forth information with respect to the value of
unexercised options to purchase Prison Realty's common stock held by the Named
Executive Officers on December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT IN-THE-MONEY OPTIONS
SHARES ACQUIRED DECEMBER 31, 1999 AT DECEMBER 31, 1999(2)
ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Doctor R. Crants(3)...... 52,500 $435,908 296,563 135,313 0 0
J. Michael Quinlan(4).... -- -- 393,750 0 0 0
Vida H. Carroll(5)....... -- -- 55,312 35,938 0 0
D. Robert Crants,
III(6)................. -- -- 0 0 0 0
Michael W. Devlin(7)..... -- -- 0 0 0 0
</TABLE>
-------------------------
(1) Represents the market value of the underlying shares of Prison Realty's
common stock on the date of exercise, less the applicable exercise price.
(2) As of December 31, 1999 (the last trading date in 1999) the market price of
Prison Realty's common stock (the closing price per share of Common Stock on
the NYSE) was $5.06 per share. As a result, none of the unexercised options
to purchase Prison Realty's common stock were in-the-money at December 31,
1999.
(3) As a result of Doctor R. Crants' termination as Prison Realty's chief
executive officer on July 28, 2000, all of his outstanding options to
purchase shares of Prison Realty common stock were terminated.
(4) In connection with Mr. Quinlan's resignation from all positions with Prison
Realty on June 28, 1999, the Compensation Committee of the board of
directors of Prison Realty accelerated the date of exercise of all of Mr.
Quinlan's outstanding options to purchase shares of Prison Realty's common
stock. Mr. Quinlan was later appointed president of Prison Realty, effective
upon the resignation of D. Robert Crants, III.
(5) It is expected that upon the effectiveness of Ms. Carroll's resignation as
Prison Realty's chief financial officer, secretary and treasurer, all of her
outstanding options to purchase shares of Prison Realty common stock will be
terminated.
(6) As a result of the resignation of D. Robert Crants, III, all of his
outstanding options to purchase Prison Realty's Common Stock were
terminated.
(7) As a result of the resignation of Michael W. Devlin, all of his outstanding
options to purchase Prison Realty's Common Stock were terminated.
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<PAGE> 222
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prison Realty commenced operations on January 1, 1999 following the 1999
Merger. CCA commenced operations on January 1, 1999 as the result of the
contribution and assignment of certain facility management contracts and related
assets by Old CCA to CCA in connection with the 1999 Merger. Prison Realty
currently leases the substantial majority of the correctional and detention
facilities owned by it to CCA pursuant to the CCA leases. For a discussion of
the amounts paid by CCA to Prison Realty under the terms of the CCA leases, see
"Information About Prison Realty -- Business and operations" herein. If the
merger and related transactions and Prison Realty restructuring are completed,
the CCA leases will be canceled and will be of no further force and effect.
Prison Realty and CCA also entered into a series of additional contractual
arrangements in connection with the completion of the 1999 Merger, as described
herein. For a discussion of the amounts paid by Prison Realty to CCA under the
terms of these agreements, see "Information About Prison Realty -- Business and
operations." If the merger and related transactions and the Prison Realty
restructuring are completed, each of these agreements will be canceled and will
be of no further force and effect.
Also in connection with the 1999 Merger, CCA executed a promissory note in
the aggregate principal amount of $137.0 million, which bears interest at a rate
of 12% per annum. 10% of the outstanding principal amount of the CCA Note is
personally guaranteed by Doctor R. Crants. As of June 30, 2000, the entire
original principal amount of the note remained outstanding. Pursuant to the
terms of the CCA note, payments of accrued interest are due and payable annually
on December 31 of each year, with the first such payment due and payable on
December 31, 1999. As a result of CCA's current liquidity position, CCA has been
required to defer the first scheduled payment of accrued interest on the CCA
note. Pursuant to the terms of the subordination agreement between Prison Realty
and CCA's senior lenders, however, Prison Realty is prohibited from accelerating
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 the CCA bank credit
facility remains outstanding. If the merger and related transactions and the
Prison Realty restructuring are completed, the CCA note will be canceled and
will be of no further force and effect. For further discussion on the CCA note
and CCA's failure to make interest payments to Prison Realty thereunder, see
"Information About Prison Realty."
Prison Realty owns 100% of CCA's non-voting common stock, which represents
approximately 9.5% of CCA's issued and outstanding capital stock. The terms of
CCA's non-voting common stock provide for the payment of dividends as and if
declared by the CCA board of directors on a parity with shares of CCA's voting
common stock. No dividends have been declared or paid to Prison Realty by CCA
since its inception. If the merger and related transactions and Prison Realty
restructuring are completed, Prison Realty's entire ownership interest in CCA
will be canceled.
As described herein under "Information About Prison Realty," Prison Realty
also owns 100% of the outstanding non-voting common stock of each of PMSI and
JJFMSI, which entitles Prison Realty to receive cash dividends equal to 95% of
each entity's net income, as defined. For a discussion of amounts paid to Prison
Realty as cash dividends by PMSI and JJFMSI, respectively, see "Information
About Prison Realty" herein.
Jean-Pierre Cuny, a member of Prison Realty's and CCA's board of directors,
is the Senior Vice-President of The Sodexho Group, an affiliate of Sodexho.
Sodexho, which beneficially owns approximately 8.8% of Prison Realty's
outstanding common stock, has a contractual right to require Prison Realty to
nominate Mr. Cuny for election as a director. Sodexho also owns 16.9% of CCA's
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<PAGE> 223
outstanding capital stock. Prison Realty is currently negotiating with Sodexho
with respect to the shares of CCA common stock held by it. Prison Realty has
conditioned any purchase by it of CCA common stock held by Sodexho on the
elimination of Sodexho's contractual right to have a representative on Prison
Realty's board of directors.
In connection with the merger and related transactions and Prison Realty
restructuring, Prison Realty will purchase from Baron all Baron's interest in
the voting common stock of CCA, representing approximately 16.9% of CCA's
outstanding voting common stock, in exchange for non-cash consideration
consisting of shares of Prison Realty common stock valued at $8.0 million, and,
as consideration for Baron's consent to the merger, will issue Baron warrants to
purchase $3.0 million in shares of Prison Realty common stock.
Doctor R. Crants resigned as a member of the Prison Realty board of
directors on July 5, 2000 and has been terminated as Prison Realty's chief
executive officer as well as the chief executive officer of CCA. Mr. Crants also
resigned as a member of the board of directors of CCA. Mr. Crants has informed
Prison Realty that he intends to remain as a member of each of the PMSI board
and the JJFMSI board. J. Michael Quinlan, President of Prison Realty, is also
President of CCA and a member of its board of directors. Thomas W. Beasley,
Chairman of the board of directors of Prison Realty, is also chairman of the
board of directors of PMSI. C. Ray Bell, a member of Prison Realty's board of
directors, is the principal of a construction company which, as a part of its
business, builds correctional and detention facilities, including facilities for
Prison Realty. In 1999, Mr. Bell's construction company received fees in the
amount of $26.5 million for construction services provided to Prison Realty.
During 1998, Old CCA and Old Prison Realty paid $40.8 million and $8.7 million,
respectively to Mr. Bell's construction company for construction services.
During 1999, DC Investment Partners, LLC, a private investment manager of which
D. Robert Crants, III and Michael W. Devlin are principals, leased certain
office space from Prison Realty. In connection with the 1999 Merger, Charles W.
Thomas, a director of Prison Realty, received a total of $3.0 million from
Prison Realty and Old CCA for the provision of certain consulting services to
each of Prison Realty and Old CCA.
Stokes Bartholomew Evans & Petree, P.A. is tax and securities counsel to
Prison Realty, and Stokes Bartholomew Evans & Petree, P.A. also provides certain
legal services to CCA, PMSI and JJFMSI. Samuel W. Bartholomew, Jr., a
shareholder of Stokes Bartholomew Evans & Petree, P.A., is chairman of the board
of directors of JJFMSI. Prior to the 1999 Merger, Mr. Bartholomew was a member
of the board of directors of Old CCA. During 1999, Prison Realty paid $5.8
million in legal fees to Stokes & Bartholomew, P.A.
Joseph F. Johnson, Jr. is a member of the board of directors of JJFMSI and,
prior to the 1999 Merger, served as a member of the board of directors of Old
CCA. Old CCA paid fees of approximately $1.6 million and $1.3 million in 1998
and 1997, respectively to Mr. Johnson, or an entity controlled by Mr. Johnson,
for consulting services related to various contractual relationships and
services rendered at one of Old CCA's facilities. No fees were paid to Mr.
Johnson by Prison Realty in 1999.
Pursuant to Prison Realty's Executive Equity Loan Plan, Prison Realty
granted a loan in the aggregate principal amount of $1.0 million to each of
Doctor R. Crants, D. Robert Crants, III and Michael W. Devlin in May and June
1999. The loans were to be used for the purpose of purchasing shares of Prison
Realty's Common Stock. Each loan, which bears interest at a rate of 250 basis
points over the thirty-day LIBOR, adjusted quarterly, initially had a term of
five years from the date of the grant, with interest payable annually. Pursuant
to the terms of a severance agreement by and between Prison Realty and each of
D. Robert Crants, III and Michael W. Devlin, the terms of the loans granted to
each of them have been modified. As a result of this modification, the
outstanding
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<PAGE> 224
principal amount of the loans to each of D. Robert Crants, III and Michael W.
Devlin as of March 15, 2000 is $547,823 and $546,375, respectively, with
interest only payable on such principal amount for a period of three years and
with the principal amount, plus interest, payable in equal installments over the
following three years. This balance will be reduced to $447,823 for Mr. Crants,
III and $446,375 for Mr. Devlin upon application of the proceeds received from
each of Messrs. Crants, III and Devlin from the purchase of the CCA common stock
held by each of them. Under the original terms of these severance agreements,
CCA was to purchase a portion of the shares of CCA common stock held by each of
Messrs. Crants, III and Devlin. However, as a result of restrictions on CCA's
ability to purchase these shares, this right and obligation was assigned to and
assumed by Doctor R. Crants. In connection with this assignment, Mr. Crants
received a loan in the aggregate principal amount of $600,000 from PMSI, the
proceeds of which were used to purchase the 300,000 shares of CCA Common Stock
owned by Messrs. Crants, III and Devlin. If the stockholders of Prison Realty
and CCA approve the merger and related transactions and Prison Realty
restructuring, Prison Realty will purchase these shares from Mr. Crants
immediately prior to the completion of the transactions. It is expected that
Doctor R. Crants will use the proceeds from Prison Realty's purchase of these
shares to repay the loan from PMSI on the due date of such loan. For a
discussion of the terms of the modifications of the loans to Messrs. Crants, III
and Devlin, see "The Merger and Related Transactions and the Prison Realty
Restructuring -- Interests of certain persons in the merger and related
transactions and the Prison Realty restructuring."
In connection with Doctor R. Crants' resignation as a member of Prison
Realty's board of directors and his termination as Prison Realty's chief
executive officer, the terms of Mr. Crants' loans from Prison Realty have been
amended whereby the outstanding principal amount of the loan will not become
immediately due and payable upon Mr. Crants' resignation or termination as chief
executive officer, but rather Mr. Crants will make interest only payments on the
loans for the first three years following the modification at a rate of 250
basis points over the thirty day LIBOR rate in effect on such date and 33.3% of
the principal amount of the loans, and all accrued and unpaid interest thereon,
shall be paid in three equal amounts on the fourth, fifth and sixth
anniversaries of the modification. The outstanding principal amount of the loans
to Doctor R. Crants as of July 24, 2000 is $1.0 million. See "The Merger and
Related Transactions and the Prison Realty Restructuring -- Interests of certain
persons in the merger and related transactions and the Prison Realty
restructuring."
OTHER MATTERS
As of the date of this joint proxy statement/prospectus, the board of
directors of CCA knows of no matters that will be presented for consideration at
the CCA special meeting other than as described in this joint proxy
statement/prospectus. If any other matters shall properly come before any of the
meetings and be voted upon, the enclosed proxy will be deemed to confer
discretionary authority on the individuals named as proxies therein to vote the
shares represented by such proxies as to any such matters. The persons named as
proxies intend to vote or not to vote in accordance with the recommendation of
the management of CCA.
LEGAL MATTERS
Certain legal matters, including the legality of the securities and federal
income tax considerations, have been passed upon for Prison Realty by Stokes
Bartholomew Evans & Petree, P.A., as corporate, securities and tax counsel.
Stokes Bartholomew Evans & Petree, P.A. will rely, as to all matters of Maryland
law, upon the opinion of Miles & Stockbridge P.C., Baltimore, Maryland.
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Sherrard & Roe, PLC, Nashville, Tennessee, has served as counsel to CCA. Stokes
Bartholomew Evans & Petree, P.A., Nashville, Tennessee, has served as counsel to
PMSI and JJFMSI.
EXPERTS
The audited financial statements of the companies included in this joint
proxy statement/ prospectus, to the extent and for the periods indicated in
their reports, have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports thereto, and are included in reliance
upon the authority of said firm as experts in giving said reports. Reference is
made to said reports, which include explanatory paragraphs with respect to the
uncertainty regarding Prison Realty's and CCA's ability to continue as going
concerns as discussed in the notes to the financial statements of the respective
companies.
WHERE YOU CAN FIND MORE INFORMATION
As a privately held company, CCA is not subject to the rules and
regulations of the SEC. However, as a publicly-traded company, Prison Realty is
required to disclose certain information through filings with the SEC.
Accordingly, Prison Realty has filed with the SEC a Registration Statement on
Form S-4 under the Securities Act, of which this joint proxy
statement/prospectus is a part, that registers the shares of Prison Realty
common stock to be issued in the merger and related transactions. This
Registration Statement on Form S-4, including the attached exhibits and
schedules, contains additional relevant information about Prison Realty. The
rules and regulations of the SEC allow Prison Realty to omit certain information
included in the Registration Statement on Form S-4 from this joint proxy
statement/prospectus.
In addition, Prison Realty has filed, and will continue to file, reports,
proxy statements and other information with the SEC under the Exchange Act. You
may read and copy this information at the following public reference facilities
maintained by the SEC:
<TABLE>
<S> <C> <C>
Public Reference Room New York Regional Office Chicago Regional Office
Judiciary Plaza Seven World Trade Center Citicorp Center
450 Fifth Street, N.W. 13th Floor 500 West Madison Street
Room 1024 New York, NY 10048 Suite 1400
Washington, DC 20549 Chicago, IL 60661-2511
</TABLE>
You may also obtain copies of this information by mail at prescribed rates
from the Public Reference Section of the SEC, 450 Fifth Street, N.W., Room 1024,
Washington, DC 20549, or by calling the SEC at 1-800-SEC-0330.
The SEC also maintains an Internet site on the World Wide Web that contains
reports, proxy statements and other information about issuers, including Prison
Realty, who file electronically with the SEC. The address of the site is
"www.sec.gov."
You can also inspect reports, proxy statements and other information about
Prison Realty at the offices of the NYSE, 20 Broad Street, New York, NY 10005.
You should rely only on the information contained in this joint proxy
statement/prospectus in considering how to vote your shares at the CCA special
meeting. Prison Realty and CCA have not authorized anyone to provide you with
information that is different from the information contained in this document.
This joint proxy statement/prospectus is dated August 3, 2000. You should not
assume that the information contained in this document is accurate as of any
date other than that
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date. Neither the mailing of this joint proxy statement/prospectus nor the
issuance of shares of Prison Realty common stock to be issued upon completion of
the merger and related transactions shall create any implication to the
contrary.
SELLING STOCKHOLDER
After the completion of the merger and related transactions, Baron is
expected to beneficially own approximately 3,182,581 shares, or approximately
2.1% on a fully diluted basis, of Prison Realty common stock (assuming a $3.44
per share stock price), and this prospectus will cover the reoffer and resale by
Baron of all of such shares. If Baron sold all of such shares, it would
beneficially own no shares of Prison Realty common stock after the sale. The
full name and address of Baron is Baron Asset Fund, c/o Baron Capital Group, 767
Fifth Avenue, 49th Floor, New York, New York, 10153. A representative of Baron
is a member of the CCA board and Baron owns 16.9% of CCA common stock. Resales
may be made on the NYSE or any exchange on which Prison Realty common stock may
be listed, in the over-the-counter market, in private transactions or pursuant
to underwriting agreements. Securities dealers, acting as broker or dealer, may
act as the seller's agent and may be paid a commission, including negotiated
commissions or mark-ups to the extent permissible.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PRO FORMA FINANCIAL INFORMATION OF PRISON REALTY TRUST, INC.
Pro Forma Combined Balance Sheet (Unaudited) as of March 31,
2000...................................................... F-5
Notes to Pro Forma Combined Balance Sheet as of March 31,
2000...................................................... F-7
Pro Forma Combined Statement of Operations (Unaudited) for
the Three Months Ended March 31, 2000..................... F-12
Notes to Pro Forma Combined Statement of Operations for the
Three Months Ended March 31, 2000......................... F-13
Pro Forma Combined Statement of Operations (Unaudited) for
the Year Ended December 31, 1999.......................... F-17
Notes to Pro Forma Combined Statement of Operations for the
Year Ended December 31, 1999 (Unaudited).................. F-18
CONSOLIDATED FINANCIAL STATEMENTS OF PRISON REALTY TRUST,
INC.
Condensed Consolidated Balance Sheets (Unaudited) as of
March 31, 2000 and December 31, 1999...................... F-22
Condensed Consolidated Statements of Income (Unaudited) for
the three months ended March 31, 2000 and 1999............ F-23
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the three months ended March 31, 2000 and 1999........ F-24
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................... F-26
CONSOLIDATED FINANCIAL STATEMENTS OF PRISON REALTY TRUST,
INC.
Report of Independent Public Accountants.................... F-51
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... F-52
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997.......................... F-53
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997.............. F-54
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... F-55
Notes to Consolidated Financial Statements.................. F-59
CONSOLIDATED FINANCIAL STATEMENTS OF CORRECTIONS CORPORATION
OF AMERICA
Condensed Consolidated Balance Sheets (Unaudited) as of
March 31, 2000 and December 31, 1999...................... F-101
Condensed Consolidated Statements of Operations (Unaudited)
for the three months ended March 31, 2000 and 1999........ F-102
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the three months ended March 31, 2000 and 1999........ F-103
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................... F-104
</TABLE>
F-1
<PAGE> 228
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF CORRECTIONS CORPORATION
OF AMERICA
Report of Independent Public Accountants.................... F-114
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... F-115
Consolidated Statement of Operations for the year ended
December 31, 1999......................................... F-116
Consolidated Statements of Stockholders' Equity for the year
ended December 31, 1999 and for the period from September
11, 1998 through December 31, 1998........................ F-117
Consolidated Statements of Cash Flows for the year December
31, 1999 and for the period from September 11, 1998
through December 31, 1998................................. F-118
Notes to Consolidated Financial Statements.................. F-120
</TABLE>
F-2
<PAGE> 229
PRISON REALTY TRUST, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following sets forth the unaudited combined pro forma financial
statements as of and for the three months ended March 31, 2000 and for the year
ended December 31, 1999.
The unaudited pro forma combined financial statements as of and for the
three months ended March 31, 2000 and for the year ended December 31, 1999
presents the pro forma effects of the merger of Prison Realty and CCA (assuming
Sodexho receives $8.0 million in shares of Prison Realty common stock) as well
as certain effects of the Waiver and Amendment to Prison Realty's bank credit
facility and other financing transactions (as discussed below) related to Prison
Realty's outstanding $40 million, 9.5% and $30 million, 7.5% convertible notes.
The merger transactions will be accounted for as the purchase of CCA by
Prison Realty. As such, Prison Realty will be treated as the acquiring company
for financial reporting purposes. The general provisions of the purchase method
of accounting prescribe that: (1) CCA assets and liabilities be recorded at fair
market value, as required by Accounting Principles Board Opinion No. 16; and (2)
Prison Realty's assets and liabilities be carried forward at historical cost.
The purchase method of accounting prescribes that the assets and
liabilities owned by CCA be adjusted to estimated fair market value with any
excess of cost over fair value being recorded as goodwill and other intangible
assets to be amortized over the respective life of the intangibles. The fair
market values of the assets and liabilities of CCA have been determined based
upon preliminary estimates and are subject to change as additional information
is obtained. Management does not anticipate that the preliminary allocation of
purchase costs based upon the estimated fair market value of the assets and
liabilities will materially change; however, the allocation of purchase costs
reflected in the following unaudited pro forma combined financial statements is
subject to final determination and may differ from the amounts ultimately
determined.
In connection with the proposed merger agreement, Prison Realty has
negotiated a Waiver and Amendment to its bank credit facility that, among other
terms and requirements discussed herein, removes the existing additional 2%
default rate of interest applied to the outstanding balance of Prison Realty's
bank credit facility and applies the original interest rates to the bank credit
facility subsequent to completion of the merger transactions. In addition,
Prison Realty has initiated other financing transactions whereby Prison Realty
has negotiated separate waivers of default with its holders of Prison Realty's
$40 million, 9.5% and $30 million, 7.5% convertible notes. In connection with
the waivers obtained by Prison Realty associated with the 9.5% and 7.5%
convertible notes, Prison Realty will not be subject to a significant default
rate of interest under the $40 million, 9.5% convertible notes, but Prison
Realty will have to pay an additional 0.5% interest rate to the holders of each
of the 9.5% and 7.5% convertible notes subsequent to the completion of the
merger transactions. Prison Realty incurred approximately $10,356 in additional
loan costs to obtain the Waiver and Amendment and to complete the other
financing transactions. Due to the expected significant effects of the Waiver
and Amendment and other financing transactions to Prison Realty's financial
statements subsequent to the merger, Prison Realty has elected to present the
pro forma effects of the Waiver and Amendment and other financing transactions
as if the bank credit facility, the $40 million, 9.5% convertible notes and the
$30 million, 7.5% convertible notes had been refinanced.
The Unaudited Pro Forma Combined Statements of Operations are presented as
if the merger transactions, effects of the Waiver and Amendment and other
financing transactions had occurred as of the beginning of the period indicated
and therefore incorporates certain assumptions that are included in the Notes to
Pro Forma Combined Statements of Operations. The Unaudited Pro Forma Combined
Balance Sheet is presented as if the merger transactions, effects of the Waiver
and Amendment and other financing transactions had occurred on March 31, 2000
and therefore
F-3
<PAGE> 230
incorporates certain assumptions that are included in the Notes to Pro Forma
Combined Balance Sheet. The pro forma financial statements do not purport to
represent what Prison Realty's financial position or results of operations
actually would have been had the merger transactions, Waiver and Amendment and
other financing transactions, in fact, occurred on such date or at the beginning
of the period indicated, or to project Prison Realty's financial position or
results of operations at any future date or for any future period.
F-4
<PAGE> 231
PRISON REALTY TRUST, INC.
PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
PRISON REALTY PRISON REALTY
PRISON REALTY PRO FORMA TRANSACTIONS AND TRUST, INC.
TRUST, INC. ACQUISITION INTERCOMPANY PRO FORMA
(HISTORICAL) CCA ADJUSTMENTS ELIMINATIONS CC
------------- --------- ----------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash, cash equivalents and restricted
cash................................ $ 37,475 $ 2,504 $ (8,867)C $ (2,499)S $ 15,596
(2,661)Z
(10,356)BB
Accounts receivable, net of
allowances.......................... -- 71,710 -- -- 71,710
Prepaid expenses...................... -- 3,196 -- -- 3,196
Deferred tax assets................... -- -- 4,166L 36,851V 41,017
Receivable from CCA................... 25,839 -- -- (25,839)Q --
Other current assets.................. 14,184 4,798 (600)C -- 18,382
---------- --------- --------- ----------- ----------
Total current assets.............. 77,498 82,208 (5,301) (4,504) 149,901
---------- --------- --------- ----------- ----------
Property and equipment, net............... 2,153,953 19,453 -- 2,173,406
Other long term assets:
Note receivable....................... 137,000 -- -- (137,000)P --
Investments in direct financing
leases.............................. 162,254 -- -- -- 162,254
Deferred tax assets................... -- -- 10,589L 668V 11,257
Investments in affiliates and
others.............................. 120,974 -- (4,750)B -- 116,224
Other assets.......................... 46,932 8,097 -- (3,979)R 61,406
10,356BB
Investments in contracts.............. -- 66,160 (66,160)D 22,351U 91,192
600C (6,951)W
26,551A
2,290A
4,750B
8,867C
(10,589)L
112,472K
(4,166)L
(1,646)M
(63,337)N
---------- --------- --------- ----------- ----------
$2,698,611 $ 175,918 $ 10,170 $ (119,059) $2,765,640
========== ========= ========= =========== ==========
</TABLE>
(continued)
F-5
<PAGE> 232
PRISON REALTY TRUST, INC.
PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 2000
(UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
PRO FORMA
PRISON REALTY PRISON REALTY
PRISON REALTY PRO FORMA TRANSACTIONS AND TRUST, INC.
TRUST, INC. ACQUISITION INTERCOMPANY PRO FORMA
(HISTORICAL) CCA ADJUSTMENTS ELIMINATIONS CC
------------- --------- ----------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Current liabilities:
Accounts payable...................... $ 37,225 $ 120,234 $ (71,182)F $ (25,839)Q $ 53,487
(6,951)W
Accrued salaries and wages............ 214 5,658 -- -- 5,872
Accrued property taxes................ -- 7,822 -- -- 7,822
Accrued interest...................... 21,938 20,539 (20,539)G -- 21,938
Distributions payable................. 2,150 -- -- -- 2,150
Income taxes payable.................. 5,917 -- -- -- 5,917
Other accrued expenses................ 7,830 16,518 -- 26,350S 54,658
3,960X
Current portion of long-term debt..... 997,471 143,180 -- (137,000)P 12,267
(991,384)AA
---------- --------- --------- ----------- ----------
Total current liabilities......... 1,072,745 313,951 (91,721) (1,130,864) 164,111
Long-term debt, net of current portion.... -- -- -- 991,384AA 991,384
Senior notes.............................. 100,000 -- -- -- 100,000
Deferred credits.......................... -- 105,202 (105,202)E -- --
Deferred gains on sales of contracts...... 103,376 -- (63,337)N -- 40,039
Deferred tax liabilities.................. -- -- -- 180,282T 180,282
Other liabilities......................... 32,000 -- -- -- 32,000
---------- --------- --------- ----------- ----------
Total liabilities................. 1,308,121 419,153 (260,260) 40,802 1,507,816
---------- --------- --------- ----------- ----------
Commitments and contingencies
Stockholders' equity:
Preferred stock- Series A........... 107,500 -- -- -- 107,500
Preferred stock- Series B........... -- -- -- 146,040X 136,210
(7,302)Y
(2,528)Z
Common stock- Class A............... 1,184 93 (93)H 21Y 1,281
76A
Common stock- Class B............... -- 10 (10)H -- --
Additional paid-in capital.......... 1,347,318 25,133 26,475A 1,954O 1,235,185
2,290A
(66,160)D (150,000)X
105,202E 7,281Y
93H (133)Z
10H
(2,913)I
(265,558)J
20,539G
71,182F
112,472K
Deferred compensation............... -- (2,913) 2,913I -- (1,646)
(1,646)M
Treasury stock...................... (242) -- -- -- (242)
Retained earnings (deficit)......... (65,270) (265,558) 265,558J (1,954)O (220,464)
22,351U
(28,849)S
37,519V
(180,282)T
(3,979)R
---------- --------- --------- ----------- ----------
Total stockholders' equity........ 1,390,490 (243,235) 270,430 (159,861) 1,257,824
---------- --------- --------- ----------- ----------
$2,698,611 $ 175,918 $ 10,170 $ (119,059) $2,765,640
========== ========= ========= =========== ==========
</TABLE>
F-6
<PAGE> 233
NOTES TO PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 2000
A To record the effects of the Prison Realty common shares and other
consideration to be issued to CCA's shareholders in connection with the
merger transactions. Pursuant to the terms of the Agreement and Plan of
Merger, the value of Prison Realty common shares and other consideration
to be issued is as follows:
<TABLE>
<S> <C> <C>
Issuance of Prison Realty common stock for all
shares of CCA common stock held by CCA and
Prison Realty management and employee
shareholders for an aggregate purchase price of
$10,551. Based on the assumed pro forma common
share stock price of $3.50 as of the closing
date, the number of Prison Realty common shares
to be issued is estimated to be 3,015........... $10,551
Issuance of Prison Realty common stock for all
shares of CCA common stock held by Baron and
Sodexho for an aggregate purchase price of
$16,000, or $8,000 each, valued at the lower of
the June 23, 2000 common share stock price or
the assumed pro forma common share stock price
of $3.50 as of the closing date. Based on the
Prison Realty common stock price of $3.4375 as
of June 23, 2000, the number of Prison Realty
common shares to be issued is estimated to be
4,655........................................... 16,000
-------
Prison Realty common stock issued to CCA
shareholders............................ $26,551
=======
Prison Realty will also issue to Baron, warrants
to purchase $2,000 of Prison Realty common stock
with an exercise price of $0.01. The number of
common shares to be issued is based upon the
trading price of Prison Realty's common stock at
the exercise date. The estimated fair market
value of the warrants is approximately $2,000.
Assuming a pro forma common share stock price of
$3.50, the number of Prison Realty's common
shares to be issued is estimated to be 571...... $ 2,000
Prison Realty will also issue to Baron, warrants
to purchase $1,000 of Prison Realty common
stock. The number of common shares to be issued
and the exercise price is based upon the lower
of the June 23, 2000 Prison Realty stock price
of $3.4375 or the Prison Realty common stock
price as of the date the merger is completed.
The estimated fair market value of the warrants
is approximately $290. Assuming the stock price
at June 23, 2000 of $3.4375, the number of
Prison Realty's common shares to be issued is
estimated to be 291............................. 290
-------
Additional consideration in the form of
warrants................................ $ 2,290
=======
</TABLE>
F-7
<PAGE> 234
NOTES TO PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 2000 -- (CONTINUED)
B To record the application of Prison Realty's historical investment in
CCA in accordance with the purchase method of accounting as prescribed
by APB Opinion No. 16.
C To record the payment of estimated merger costs to be capitalized in
accordance with the purchase method of accounting as prescribed by APB
Opinion No. 16.
D To eliminate CCA's historical intangible assets related to CCA's
investment in contracts against the net equity of CCA. The CCA
intangible assets related to the historical investment in contracts
originated from the December 31, 1998 purchase of management contracts
and related assets from Prison Realty.
E To eliminate CCA's liabilities related to CCA's deferred lease credits
against CCA's net equity. CCA's deferred lease credits originated from
CCA's income deferral of service and incentive fees received from Prison
Realty during 1999.
F To eliminate a portion of CCA's lease payable to Prison Realty against
CCA's net equity. This portion of CCA's lease payable had been fully
reserved by Prison Realty during the first quarter of 2000.
G To eliminate CCA's interest payable to PZN against CCA's net equity.
H To eliminate the historical par value of the CCA common stock.
I To eliminate the unamortized portion of the CCA warden deferred
compensation. As discussed in Note M, Prison Realty will issue common
shares of Prison Realty as part of the merger transactions in exchange
for the CCA common shares currently held by the wardens' restricted
stock plan.
J To eliminate CCA's retained earnings balance.
K Pro forma adjustments D through J reduce the CCA paid in capital balance
to an amount representing the net liabilities to be acquired by Prison
Realty in the merger transactions. This adjustment records the increase
in the investment in contracts related to the combined net liabilities
assumed by Prison Realty in the merger transactions in accordance with
the purchase method of accounting prescribed by APB Opinion No. 16.
L To record the decrease in the investment in contracts related to certain
deferred tax assets acquired from CCA in accordance with the purchase
method of accounting as prescribed by APB Opinion No. 16.
M To record the value of the Prison Realty common shares to be issued to
the CCA wardens' restricted stock plans in exchange for the CCA shares
currently held by those plans. The estimated value is based on a Prison
Realty common share price of $3.50.
N To record the reduction in the investment in contracts related to Prison
Realty's historical deferred gain on sales of contracts to CCA in
accordance with the purchase method of accounting as prescribed by APB
Opinion No. 16. Prison Realty's deferred gains originated from the sale
of management contracts and other assets to CCA in December 1998.
O To record Prison Realty's compensation expense related to the
unamortized portion of deferred stock awards previously granted to
certain key CCA employees. Due to the merger transactions, the deferred
stock awards become fully vested as of the date of Prison Realty's
acquisition of CCA.
F-8
<PAGE> 235
NOTES TO PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 2000 -- (CONTINUED)
P To eliminate the $137,000 note payable from CCA to Prison Realty
subsequent to the merger transactions.
Q To eliminate all remaining intercompany assets and liabilities between
Prison Realty, and CCA subsequent to the merger transactions.
R To record write-off of previously capitalized transaction costs that are
not applicable to the proposed transactions.
S To record the payment of estimated transactional costs related to the
proposed transactions that are not eligible to be capitalized in
accordance with the provisions of APB Opinion No. 16 and related
interpretations. This adjustment includes an estimated $23,850 to be
paid to the Fortress/Blackstone investor group and an estimated $2,500
to be paid to Pacific Life as reimbursement of costs.
T To record the effects of recognizing certain deferred tax liabilities in
accordance with SFAS No. 109 related to Prison Realty's change in tax
status from a REIT to a C-Corporation. As of March 31, 2000, Prison
Realty's fixed asset balances on the balance sheet contained book basis
versus tax basis differences arising from Old Prison Realty's
acquisition of US Corrections Corporation ("USCC") in April 1998 and
Prison Realty's acquisition of Old Prison Realty in January 1999. The
adjustment is determined as follows:
<TABLE>
<S> <C>
USCC related book versus tax differences at March 31,
2000.................................................... $171,488
SFAS No. 121 asset impairment of two USCC facilities
(limited to actual book versus tax differences existing
at December 31, 1999 for each facility)................. (71,503)
Old Prison Realty related book versus tax differences at
March 31, 2000.......................................... 362,278
--------
Total book versus tax differences in Prison
Realty's fixed asset balances at March 31,
2000......................................... 462,263
Statutory tax rate.............................. 39%
--------
Deferred tax liability to be recorded........ $180,282
========
</TABLE>
U To reverse $22,351 of the January 1999 write-off of Prison Realty's
deferred tax assets related to the change in Prison Realty's tax status
from a REIT to a C-Corporation in accordance with the provisions of SFAS
No. 109. This entry also increases the investment in contracts in
accordance with the purchase method of accounting prescribed by APB
Opinion No. 16 in relation to Prison Realty's acquisition of CCA. The
$22,351 deferred tax asset was originally established in connection with
Prison Realty's establishment of the deferred gains on sales of
contracts to CCA (See Note N).
V To record Prison Realty's current and long term deferred tax assets in
accordance with the provisions of SFAS No. 109.
W To apply Prison Realty's unpaid tenant incentive fees, facility
preparation fees and construction development fees against the
investment in contract balance as Prison Realty will not be required to
pay the liabilities to CCA upon consummation of the merger.
X To record the issuance of $150,000 of Preferred Series B shares to
comply with REIT dividend requirements, offset by $3,960 in foreign
taxes applicable to certain foreign shareholders resulting in a net of
$146,040 in Preferred Series B shares outstanding.
F-9
<PAGE> 236
NOTES TO PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 2000 -- (CONTINUED)
Y To record the assumed immediate conversion of 5% of Preferred Series B
shares into common stock of Prison Realty. Based on an assumed
conversion price of $3.50 per common share, the assumed number of common
shares issued equals 2,086.
Z To record the payment of the estimated costs of issuing the Preferred
Series B shares totaling $2,661. Based on the assumed immediate
conversion of 5% of the Preferred Series B shares into common shares, an
amount of $133 or 5% of the costs have been allocated to the common
shares issued upon conversion. The estimated issuance costs of the
Preferred Series B and the common shares have been allocated as a
reduction to the carrying value of the Preferred Series B and as a
reduction to the common stock additional paid-in capital, respectively.
AA To record the appropriate classification of Prison Realty's debt as if
the Waiver and Amendments and other financing transactions had occurred
on March 31, 2000.
BB To record the payment of estimated loan costs associated with Prison
Realty's recently obtained Waiver and Amendment to its existing credit
facility including approximately $9,500 paid to the agent and
participating lenders.
CC Among other terms and conditions contained in the Waiver and Amendment
to Prison Realty's bank credit facility, the Waiver and Amendment
includes the following:
(a) Allows Prison Realty to borrow up to an additional $55 million
under terms consistent with the existing bank credit facility at
various times during the 2000 calendar year;
(b) Requires Prison Realty to use commercially reasonable efforts to
complete a rights offering of at least $50 million of common stock
on or before December 31, 2000 to Prison Realty's then current
shareholders, with 40% of any proceeds to be applied to the
repayment of Prison Realty's indebtedness under the bank credit
facility;
(c) Requires Prison Realty to effect an offering of securities by a
subsidiary of Prison Realty, backed by lease payments from the
U.K. government relating to a prison facility located in Salford,
England, yielding net cash proceeds to Prison Realty of at least
L45,000 on or before February 28, 2001;
(d) Allows Prison Realty to sell its headquarter real estate for cash
proceeds of at least $12,000 and subsequently lease such
headquarters from the purchaser on satisfactory terms to the
senior lenders under the bank credit facility;
(e) Allows Prison Realty to complete mergers of each PMSI and JJFMSI,
upon the terms and conditions specified in the Waiver and
Amendment;
(f) Requires Prison Realty to pay an additional 0.5% interest rate
above the otherwise applicable interest rate through and including
September 15, 2000;
(g) Requires Prison Realty to pay an additional amendment fee equal to
0.375% of the bank credit facility if the merger transactions with
CCA are not completed by September 15, 2000;
F-10
<PAGE> 237
NOTES TO PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 2000 -- (CONTINUED)
(h) If Prison Realty were to default under the terms and conditions of
the Waiver and Amendment, Prison Realty would become subject to a
default rate of interest of an additional 2.0% and the lenders
could accelerate the maturity of the bank credit facility.
Due to the subjective nature and uncertainties surrounding the above
requirements and that certain of the above requirements are not
applicable subsequent to the completion of the merger transactions,
Prison Realty has not reflected the pro forma effects of items (a) - (h)
in these pro forma financial statements.
F-11
<PAGE> 238
PRISON REALTY TRUST, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
ACQUISITION,
TRANSACTIONS AND PRISON REALTY
PRISON REALTY ELIMINATION TRUST, INC.
TRUST, INC. ADJUSTMENTS PRO FORMA
(HISTORICAL) CCA QQ NN, OO, PP
-------------- -------- ---------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Management and other................................. $ -- $137,952 $ -- $137,952
Rental............................................... 11,460 -- (9,000)AA 2,460
Licensing fees....................................... 2,576 -- (2,576)CC --
Interest income...................................... 3,312 -- (3,312)EE --
-------- -------- -------- --------
17,348 137,952 (14,888) 140,412
-------- -------- -------- --------
Expenses:
Operating............................................ -- 105,485 -- 105,485
Lease................................................ -- 79,314 (80,204)AA 977
1,435BB
147BB
285BB
General and administrative........................... 2,543 6,159 -- 8,702
Write-off of amounts under lease arrangements........ 4,000 -- (4,000)JJ --
Impairment loss...................................... -- -- -- --
Depreciation and amortization........................ 12,924 2,170 (1,203)GG 15,909
2,073GG
(55)HH
Trade name use....................................... -- 2,576 (2,576)CC --
-------- -------- -------- --------
19,467 195,704 (84,098) 131,073
-------- -------- -------- --------
Operating income (loss).................................. (2,119) (57,752) 69,210 9,339
Equity earnings in subsidiaries and amortization of
deferred gain...................................... (6,113) -- -- (6,113)
Interest (income) expense............................ 31,794 4,888 (4,099)DD 26,566
(3,312)EE
(2,705)FF
Write-off of loan costs.............................. -- -- -- --
Loss on disposal of assets........................... -- -- -- --
-------- -------- -------- --------
Income (loss) before income taxes........................ (27,800) (62,640) 79,326 (11,114)
Benefit for income taxes................................. -- -- (3,146)II (3,146)
-------- -------- -------- --------
Net income (loss)........................................ (27,800) (62,640) 82,472 (7,968)
Dividends to preferred shareholders -- A................. 2,150 -- -- 2,150
Dividends to preferred shareholders -- B................. -- -- 4,662KK 4,662
-------- -------- -------- --------
Net income (loss) available to common shareholders....... $(29,950) $(62,640) $ 77,810 $(14,780)
======== ======== ======== ========
Net loss per common share:
Basic................................................ $ (0.25) n/a $ (0.12)
Diluted.............................................. $ (0.25) n/a $ (0.12)
Weighted average common shares outstanding, basic........ 118,395 7,670LL 128,151
2,086MM
Weighted average common shares outstanding, diluted...... 118,395 7,670LL 128,151
2,086MM
</TABLE>
F-12
<PAGE> 239
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
AA To eliminate the gross rental revenue recognized by Prison Realty and
the gross lease expense recognized by CCA pursuant to the lease
agreements between Prison Realty and CCA.
BB To eliminate the amortization of deferred fees paid by Prison Realty to
CCA pursuant to the Tenant Incentive Agreement, the Business Development
Agreement and the Services Agreement.
CC To eliminate the license fee revenue recognized by Prison Realty and the
license fee expense recognized by CCA related to licensing fees paid by
CCA to Prison Realty.
DD To eliminate the interest expense recognized by CCA related to the
interest accrued on the $137,000 CCA Note.
EE To reclassify Prison Realty's historical interest income to conform with
the adjusted pro forma presentation.
FF To record the aggregate pro forma decrease in Prison Realty's interest
expense related to the following:
<TABLE>
<S> <C>
Reduction in pro forma gross interest expense related to
the pro forma reversal of default rates of interest
accrued by Prison Realty during the first quarter 2000 as
if the Waiver and Amendment and other financing
transactions had occurred on January 1, 2000;............ $(4,577)
Increase in the pro forma gross interest expense resulting
from a pro forma increased interest rate of 0.5% applied
to Prison Realty's outstanding convertible notes as if
the other financing transactions associated with the
convertible notes had occurred on January 1, 2000........ 88
Increase in the pro forma gross interest expense resulting
from the pro forma amortization of $10,356 in loan costs
incurred to obtain the Waiver and Amendment and other
financing transactions;.................................. 1,328
Increase in the pro forma interest expense due to a pro
forma decrease in the capitalized interest based on the
difference between historical and pro forma construction
in progress balances resulting from the pro forma removal
of capitalized fees paid to CCA by Prison Realty during
the first quarter 2000................................... 456
-------
Net pro forma reduction in interest expense.............. $(2,705)
=======
</TABLE>
On a pro forma basis for the three months ended March 31, 2000,
approximately $4,706 of the combined companies' $34,584 gross interest
expense would have been capitalized in construction in progress.
GG To remove the historical amortization of investment in contracts
previously recognized by CCA and to record the pro forma amortization of
investment in contracts based on the pro forma investment in contracts
balance of $91,192 amortized over the pro forma average life (11 years)
of the contracts acquired in the merger transactions.
HH To remove the historical depreciation expense recognized by Prison
Realty related to capitalized fees paid by Prison Realty to CCA during
2000.
F-13
<PAGE> 240
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 -- (CONTINUED)
II To adjust Prison Realty's historical income tax provision to reflect the
pro forma effective tax rate.
JJ To remove the historical non-recurring write-off of deferred tenant
incentive fees recorded by Prison Realty during 2000.
KK To record the effect of the Series B preferred dividends to be accrued
as a result of the issuance of $138,738 (net of the assumed conversion
of $7,302) of Series B convertible preferred stock as if the equity
issuance had occurred on January 1, 1999. The terms of the Series B
convertible preferred stock require a 12% PIK dividend during the first
three years with a 12% cash dividend thereafter. The 12% PIK dividend
results in an increasing dividend payment in each successive quarter.
LL To adjust Prison Realty's outstanding shares for the effects of the new
common shares to be issued to CCA shareholders in the merger
transactions. The estimated number of Prison Realty common shares to be
issued is as follows:
<TABLE>
<S> <C> <C>
Value of Prison Realty common shares to be issued...... $10,551
Estimated share price of Prison Realty common shares at
the time of issuance................................. $ 3.50
-------
Pro forma number of Prison Realty common shares to
be issued in the merger transactions............ 3,015
------
Value of Prison Realty common shares to be issued...... $16,000
Estimated share price of Prison Realty common shares at
the time of issuance................................. $3.4375
-------
Pro forma number of Prison Realty common shares to
be issued in the merger transactions............ 4,655
------
Total pro forma number of Prison Realty
common shares to be issued to CCA
shareholders.............................. 7,670
======
</TABLE>
MM To adjust Prison Realty's outstanding shares for the effects of the
assumed immediate conversion of 5% or 2,086 shares of Series B
convertible preferred shares into common shares during the conversion
periods.
NN Among other terms and conditions contained in the Waiver and Amendment
to Prison Realty's bank credit facility, the Waiver and Amendment
includes the following:
(a) Allows Prison Realty to borrow up to an additional $55 million
under terms consistent with the existing bank credit facility at
various times during the 2000 calendar year;
(b) Requires Prison Realty to use commercially reasonable efforts to
complete a rights offering of at least $50 million of common stock
on or before December 31, 2000 to Prison Realty's then current
shareholders, with 40% of any proceeds to be applied to the
repayment of Prison Realty's indebtedness under the bank credit
facility;
(c) Requires Prison Realty to effect an offering of securities by a
subsidiary of Prison Realty, backed by lease payments from the
U.K. government relating to a prison facility located in Salford,
England, yielding net cash proceeds to Prison Realty of at least
L45,000 on or before February 28, 2001;
F-14
<PAGE> 241
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 -- (CONTINUED)
(d) Allows Prison Realty to sell its headquarter real estate for cash
proceeds of at least $12,000 and subsequently lease such
headquarters from the purchaser on satisfactory terms to the
senior lenders under the bank credit facility;
(e) Allows Prison Realty to complete mergers of each PMSI and JJFMSI,
upon the terms and conditions specified in the Waiver and
Amendment;
(f) Requires Prison Realty to pay an additional 0.5% interest rate
above the otherwise applicable interest rate through and including
September 15, 2000;
(g) Requires Prison Realty to pay an additional amendment fee equal to
0.375% of the bank credit facility if the merger transactions with
CCA are not completed by September 15, 2000;
(h) If Prison Realty were to default under the terms and conditions of
the Waiver and Amendment, Prison Realty would become subject to a
default rate of interest of an additional 2.0% and the lenders
could accelerate the maturity of the bank credit facility.
Due to the subjective nature and uncertainties surrounding the above
requirements and that certain of the above requirements are not
applicable subsequent to the completion of the merger transactions,
Prison Realty has not reflected the pro forma effects of items (a) - (h)
in these pro forma financial statements.
OO CCA expects to incur approximately $1,000 in additional loan costs to
obtain a waiver of non-compliance under its credit facility through
September 15, 2000. Due to the subjective nature and uncertainties
surrounding the expected waiver, Prison Realty has not reflected the pro
forma effects of this fee in these pro forma financial statements.
PP Pursuant to the terms of the Agreement and Plan of Merger by and among
Prison Realty, CCA and Baron, Baron will receive Prison Realty common
stock warrants, resulting in an additional potential dilution in common
shares as follows:
Prison Realty will issue to Baron, warrants to purchase $2,000 of
Prison Realty common stock with an exercise price of $0.01. The
number of common shares to be issued is based upon the trading price
of Prison Realty's common stock at the exercise date. Assuming a pro
forma common share stock price of $3.50, the number of Prison
Realty's common shares to be issued is estimated to be 571.
Prison Realty will also issue to Baron, warrants to purchase $1,000
of Prison Realty common stock. The number of common shares to be
issued and the exercise price is based upon the lower of the June 23,
2000 Prison Realty stock price of $3.4375 or the Prison Realty common
stock price as of the date the merger is completed. Assuming the
stock price at June 23, 2000 of $3.4375, the number of Prison
Realty's common shares to be issued is estimated to be 291.
As indicated in Note QQ, the effects of the potential dilution have
not been reflected in the pro forma financial statements.
F-15
<PAGE> 242
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 -- (CONTINUED)
QQ The provisions of SFAS No. 128 prohibit the inclusion of the effects of
potentially issuable common shares in periods that a company reports
losses from continuing operations. As such, the pro forma statement of
operations for the three months ended March 31, 2000 does not include
the effects of Prison Realty's potentially issuable common shares such
as convertible debt and equity securities, options and warrants.
F-16
<PAGE> 243
PRISON REALTY TRUST, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
ACQUISITION,
TRANSACTIONS AND PRISON REALTY
PRISON REALTY ELIMINATION TRUST, INC.
TRUST, INC. ADJUSTMENTS PRO FORMA
(HISTORICAL) CCA UU RR, SS, TT
------------- --------- ---------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Management and other.............................. $ -- $ 499,292 $ (8,062)BB $491,230
Rental............................................ 270,134 -- (263,500)AA 9,580
2,946BB
Licensing fees.................................... 8,699 -- (8,699)CC --
Interest income................................... 6,885 -- (6,885)EE --
-------- --------- --------- --------
285,718 499,292 (284,200) 500,810
-------- --------- --------- --------
Expenses:
Operating......................................... -- 376,724 5,634BB 382,358
Lease............................................. -- 261,546 (263,500)AA 2,473
161BB
4,098BB
168BB
General and administrative........................ 24,125 26,166 (7,100)NN 39,303
(3,888)MM
Write-off of amounts under lease arrangements..... 65,677 -- (65,677)LL --
Impairment loss................................... 76,433 -- -- 76,433
Depreciation and amortization..................... 44,062 8,601 (4,188)HH 56,550
8,290HH
(215)II
Trade name use.................................... -- 8,699 (8,699)CC --
-------- --------- --------- --------
210,297 681,736 (334,916) 557,117
-------- --------- --------- --------
Operating income (loss)............................. 75,421 (182,444) 50,716 (56,307)
Equity earnings in subsidiaries and amortization
of deferred gain................................ (22,886) -- -- (22,886)
Interest (income) expense......................... 51,921 20,474 (16,440)DD 52,234
(6,885)EE
(2,706)FF
5,870GG
Write-off of loan costs........................... 14,567 -- -- 14,567
Loss on disposal of assets........................ 1,995 -- -- 1,995
-------- --------- --------- --------
Income (loss) before income taxes................... 29,824 (202,918) 70,877 (102,217)
Provision (benefit) for income taxes................ 83,200 -- (83,200)JJ (36,465)
(36,465)KK
-------- --------- --------- --------
Net income (loss)................................... (53,376) (202,918) 190,542 (65,752)
Dividends to preferred shareholders -- A............ 8,600 -- -- 8,600
Dividends to preferred shareholders -- B............ -- -- 17,413OO 17,413
-------- --------- --------- --------
Net income (loss) available to common
shareholders...................................... $(61,976) $(202,918) $ 173,129 $(91,765)
======== ========= ========= ========
Net loss per common share:
Basic............................................. $ (0.54) n/a $ (0.73)
Diluted........................................... $ (0.54) n/a $ (0.73)
Weighted average common shares outstanding, basic... 115,097 7,670PP 124,853
2,086QQ
Weighted average common shares outstanding,
diluted........................................... 115,097 7,670PP 124,853
2,086QQ
</TABLE>
F-17
<PAGE> 244
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
AA To eliminate the gross rental revenue recognized by Prison Realty and
the gross lease expense recognized by CCA pursuant to the lease
agreements between Prison Realty and CCA.
BB To eliminate the amortization of deferred fees paid by Prison Realty to
CCA pursuant to the Tenant Incentive Agreement, the Business Development
Agreement and the Services Agreement.
CC To eliminate the license fee revenue recognized by Prison Realty and the
license fee expense recognized by CCA related to licensing fees paid by
CCA to Prison Realty.
DD To eliminate the interest expense recognized by CCA related to the
interest accrued on the $137,000 CCA Note.
EE To reclassify Prison Realty's historical interest income to conform with
the adjusted pro forma presentation.
FF To remove the historical non-recurring write-off of loan costs resulting
from debt refinancing by CCA during 1999 which was charged to interest
expense.
GG To record the aggregate pro forma increase in Prison Realty's interest
expense related to the following:
<TABLE>
<S> <C>
Increase in the pro forma gross interest expense resulting
from a pro forma increased interest rate of 0.5% applied
to Prison Realty's outstanding convertible notes as if the
other financing transactions associated with the
convertible notes had occurred on January 1, 1999;........ $ 350
Increase in the pro forma gross interest expense resulting
from the pro forma amortization of $10,356 in loan costs
incurred to obtain the Waiver and Amendment and other
financing transactions as if the Waiver and Amendment and
other financing transactions had occurred on January 1,
1999;..................................................... 5,324
Increase in the pro forma interest expense due to a pro
forma decrease in the capitalized interest based on the
difference between historical and pro forma construction
in progress balances resulting from the pro forma removal
of capitalized fees paid to CCA by Prison Realty during
the year ended December 31, 1999 as if the merger
transactions had occurred on January 1, 1999.............. 196
------
Net pro forma increase in interest expense................ $5,870
======
</TABLE>
On a pro forma basis for the year ended December 31, 1999, approximately
$38,080 of the combined companies' $99,905 gross interest expense would
have been capitalized in construction in progress.
HH To remove the historical amortization of investment in contracts
previously recognized by CCA and to record the pro forma amortization of
investment in contracts based on the pro forma investment in contracts
balance of $91,192 amortized over the pro forma average life (11 years)
of the contracts acquired in the merger transactions.
II To remove the historical depreciation expense recognized by Prison
Realty related to capitalized fees paid by Prison Realty to CCA during
1999.
F-18
<PAGE> 245
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999 -- (CONTINUED)
JJ To remove the non-recurring effect of the historical write-off of Prison
Realty deferred tax assets occurring in January 1999.
KK To adjust Prison Realty's historical income tax provision to reflect the
pro forma effective tax rate.
LL To remove the historical non-recurring write-off of deferred tenant
incentive fees recorded by Prison Realty during 1999.
MM To remove the historical non-recurring expenses associated with the
proposed merger and related transactions that Prison Realty had recorded
during 1999.
NN To remove the historical non-recurring effect of the excise tax accrued
by Prison Realty as a result of Prison Realty's deferral of the required
1999 dividend payments.
OO To record the effect of the Series B preferred dividends to be accrued
as a result of the issuance of $138,738 (net of the assumed conversion
of $7,302) of Series B convertible preferred stock as if the equity
issuance had occurred on January 1, 1999. The terms of the Series B
convertible preferred stock require a 12% PIK dividend during the first
three years with a 12% cash dividend thereafter. The 12% PIK dividend
results in an increasing dividend payment in each successive quarter.
PP To adjust Prison Realty's outstanding shares for the effects of the new
common shares to be issued to CCA shareholders in the merger
transactions. The estimated number of Prison Realty common shares to be
issued is as follows:
<TABLE>
<S> <C> <C>
Value of Prison Realty common shares to be
issued........................................... $10,551
Estimated share price of Prison Realty common
shares at the time of issuance................... $ 3.50
-------
Pro forma number of Prison Realty common
shares to be issued in the merger
transactions................................ 3,015
------
Value of Prison Realty common shares to be
issued........................................... $16,000
Estimated share price of Prison Realty common
shares at the time of issuance................... $3.4375
-------
Pro forma number of Prison Realty common
shares to be issued in the merger
transactions................................ 4,655
------
Total pro forma number of Prison Realty common
shares to be issued to CCA shareholders..... 7,670
======
</TABLE>
QQ To adjust Prison Realty's outstanding shares for the effects of the
assumed immediate conversion of 5% or 2,086 shares of Series B
convertible preferred shares into common shares during the conversion
periods.
RR Among other terms and conditions contained in the Waiver and Amendment
to Prison Realty's bank credit facility, the Waiver and Amendment
includes the following:
(a) Allows Prison Realty to borrow up to an additional $55 million
under terms consistent with the existing bank credit facility at
various times during the 2000 calendar year;
(b) Requires Prison Realty to use commercially reasonable efforts to
complete a rights offering of at least $50 million of common stock
on or before December 31, 2000 to
F-19
<PAGE> 246
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999 -- (CONTINUED)
Prison Realty's then current shareholders, with 40% of any
proceeds to be applied to the repayment of Prison Realty's
indebtedness under the bank credit facility;
(c) Requires Prison Realty to effect an offering of securities by a
subsidiary of Prison Realty, backed by lease payments from the
U.K. government relating to a prison facility located in Salford,
England, yielding net cash proceeds to Prison Realty of at least
45,000 British pounds on or before February 28, 2001;
(d) Allows Prison Realty to sell its headquarter real estate for cash
proceeds of at least $12,000 and subsequently lease such
headquarters from the purchaser on satisfactory terms to the
senior lenders under the bank credit facility;
(e) Allows Prison Realty to complete mergers of each of PMSI and
JJFMSI, upon the terms and conditions specified in the Waiver and
Amendment;
(f) Requires Prison Realty to pay an additional 0.5% interest rate
above the otherwise applicable interest rate through and including
September 15, 2000;
(g) Requires Prison Realty to pay an additional amendment fee equal to
0.375% of the bank credit facility if the merger transactions with
CCA are not completed by September 15, 2000;
(h) If Prison Realty were to default under the terms and conditions of
the Waiver and Amendment, Prison Realty would become subject to a
default rate of interest of an additional 2.0% and the lenders
could accelerate the maturity of the bank credit facility.
Due to the subjective nature and uncertainties surrounding the above
requirements and that certain of the above requirements are not
applicable subsequent to the completion of the merger transactions,
Prison Realty has not reflected the pro forma effects of items (a)-(h)
in these pro forma financial statements.
SS CCA expects to incur approximately $1,000 in additional loan costs to
obtain a waiver of noncompliance under its credit facility through
September 15, 2000. Due to the subjective nature and uncertainties
surrounding the expected waiver, Prison Realty has not reflected the pro
forma effects of this fee in these pro forma financial statements.
F-20
<PAGE> 247
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999 -- (CONTINUED)
TT Pursuant to the terms of the Agreement and Plan of Merger by and among
Prison Realty, CCA and Baron, Baron will receive Prison Realty common
stock warrants resulting in an additional potential dilution in common
shares as follows:
Prison Realty will issue to Baron, warrants to purchase $2,000 of
Prison Realty common stock with an exercise price of $0.01. The
number of common shares to be issued is based upon the trading price
of Prison Realty's common stock at the exercise date. Assuming a pro
forma common share stock price of $3.50, the number of Prison
Realty's common shares to be issued is estimated to be 571.
Prison Realty will also issue to Baron, warrants to purchase $1,000
of Prison Realty common stock. The number of common shares to be
issued and the exercise price is based upon the lower of the June 23,
2000 Prison Realty stock price of $3.4375 or the Prison Realty common
stock price as of the date the merger is completed. Assuming the
stock price at June 23, 2000 of $3.4375, the number of Prison
Realty's common shares to be issued is estimated to be 291.
As indicated in Note UU, the effects of the potential dilution have
not been reflected in the pro forma financial statements.
UU The provisions of SFAS No. 128 prohibit the inclusion of the effects of
potentially issuable common shares in periods that a company reports
losses from continuing operations. As such, the pro forma statement of
operations for the year ended December 31, 1999 does not include the
effects of Prison Realty's potentially issuable common shares such as
convertible debt and equity securities, options and warrants.
F-21
<PAGE> 248
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
========== ==========
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.
F-22
<PAGE> 249
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.
F-23
<PAGE> 250
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>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
(continued)
F-24
<PAGE> 251
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.
F-25
<PAGE> 252
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
F-26
<PAGE> 253
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
nevertheless be taxed as a C corporation with respect to its taxable year ended
December 31, 2000 and thereafter.
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
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
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
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 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.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- 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.
- 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.
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PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- 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 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.
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PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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% 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
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
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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 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
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (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
following information under this Note 11 updates the activity or the specific
transaction and contractual relationships.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
collectibility 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 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
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- 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.
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
-------------- --------------
(UNAUDITED AND AMOUNTS IN THOUSANDS)
<S> <C> <C>
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
-------------- -----------------
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
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>
F-45
<PAGE> 272
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
-------------- -----------------
(UNAUDITED AND AMOUNTS IN THOUSANDS)
<S> <C> <C>
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 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
-------------- --------------
(UNAUDITED AND AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Revenues................................................ $73,967 $69,082
Net income.............................................. 3,625 5,276
</TABLE>
F-46
<PAGE> 273
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, DECEMBER 31,
2000 1999
--------- ------------
(UNAUDITED AND AMOUNTS
IN THOUSANDS)
<S> <C> <C>
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 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
F-47
<PAGE> 274
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 B convertible preferred stock. The Series B 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, 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
F-48
<PAGE> 275
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
F-49
<PAGE> 276
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
F-50
<PAGE> 277
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Prison Realty Trust, Inc:
We have audited the accompanying consolidated balance sheets of PRISON
REALTY TRUST, INC. (a Maryland corporation and formerly Prison Realty
Corporation -- See Note 1) and subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of Prison Realty Trust, Inc.'s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Prison
Realty Trust, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
The accompanying consolidated financial statements have been prepared
assuming that Prison Realty Trust, Inc. will continue as a going concern. As
discussed in Notes 2, 12 and 22 to the consolidated financial statements, Prison
Realty Trust, Inc. is in default under its secured bank credit facility, is in
default under certain of its convertible subordinated notes payable obligations
and has significant outstanding shareholder and other litigation matters. Also,
Prison Realty Trust, Inc. has limited resources currently available to meet its
operating, capital expenditure and debt service requirements during 2000. In
addition, as discussed in Notes 2 and 5 to the consolidated financial
statements, Prison Realty Trust, Inc.'s primary lessee, Corrections Corporation
of America, incurred a net loss of $202.9 million for the year ended December
31, 1999, has a net working capital deficiency and a net capital deficiency at
December 31, 1999, is in default under its revolving credit facility and is in
default under its promissory note payable to Prison Realty Trust, Inc. Also, the
independent public accountants of Corrections Corporation of America have
indicated in their opinion on the respective 1999 consolidated financial
statements that there is substantial doubt about Corrections Corporation of
America's ability to continue as a going concern. These matters concerning
Prison Realty Trust, Inc. and Corrections Corporation of America raise
substantial doubt about Prison Realty Trust, Inc.'s ability to continue as a
going concern. Management's plans in regard to these matters are described in
Notes 2 and 23. The accompanying 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 Prison Realty Trust, Inc.
be unable to continue as a going concern.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
March 27, 2000
F-51
<PAGE> 278
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
ASSETS:
REAL ESTATE PROPERTIES:
Correctional and detention facilities....................... $2,258,281 $ 637,640
Less accumulated depreciation............................... (49,785) (10,251)
---------- ----------
Net real estate properties............................. 2,208,496 627,389
Cash and cash equivalents................................... 84,493 31,141
Restricted cash............................................. 24,409 --
Note receivable from New CCA................................ 137,000 137,000
Investments in affiliates................................... 118,232 127,691
Investments in direct financing leases...................... 74,059 77,809
Deferred tax assets......................................... -- 51,200
Receivable from New CCA..................................... 28,608 --
Other assets................................................ 60,625 38,207
---------- ----------
Total assets........................................... $2,735,922 $1,090,437
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Distributions payable....................................... $ 2,150 $ --
Bank credit facility........................................ 928,234 222,000
Senior notes payable........................................ 100,000 --
Convertible subordinated notes and other debt............... 70,757 77,833
Accounts payable and accrued expenses....................... 70,911 81,200
Income taxes payable........................................ 5,476 14,966
Deferred gains on real estate transactions.................. -- 125,751
Deferred gains on sales of contracts........................ 106,045 116,701
Other liabilities........................................... 32,000 --
---------- ----------
Total liabilities...................................... 1,315,573 638,451
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock -- Series A -- $.01 (one cent) par value;
20,000 shares authorized; 4,300 shares issued and
outstanding at December 31, 1999; stated at liquidation
preference of $25 (twenty five dollars) per share......... 107,500 --
Common stock -- $.01 (one cent) par value; 300,000 shares
authorized; 118,406 and 79,956 shares issued and 118,394
and 79,956 shares outstanding at December 31, 1999 and
1998, respectively........................................ 1,184 800
Treasury stock, 12 shares, at cost.......................... (242) --
Additional paid-in capital.................................. 1,347,227 398,493
Retained earnings........................................... -- 52,693
Cumulative net income....................................... 29,824 --
Accumulated distributions................................... (65,144) --
---------- ----------
Total stockholders' equity............................. 1,420,349 451,986
---------- ----------
Total liabilities and stockholders' equity............. $2,735,922 $1,090,437
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-52
<PAGE> 279
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Rental revenues............................................. $270,134 $ -- $ --
Interest income............................................. 6,885 -- --
Licensing fees.............................................. 8,699 -- --
Management and other revenues............................... -- 662,059 462,249
-------- -------- --------
285,718 662,059 462,249
-------- -------- --------
EXPENSES:
Depreciation and amortization............................... 44,062 14,363 13,378
General and administrative.................................. 24,125 28,628 16,025
Operating................................................... -- 496,522 330,470
Lease....................................................... -- 58,018 18,684
Write-off of amounts under lease arrangements............... 65,677 -- --
Impairment loss............................................. 76,433 -- --
New CCA compensation charge................................. -- 22,850 --
-------- -------- --------
210,297 620,381 378,557
-------- -------- --------
Operating income............................................ 75,421 41,678 83,692
-------- -------- --------
OTHER INCOME (EXPENSE):
Equity in earnings of unconsolidated entities and
amortization of deferred gain............................. 22,886 -- --
Interest expense............................................ (51,921) (8,619) (7,368)
Interest income............................................. -- 11,389 10,772
Write-offs of loan costs.................................... (14,567) (2,043) --
Loss on disposals of assets................................. (1,995) -- --
-------- -------- --------
(45,597) 727 3,404
-------- -------- --------
Income before income taxes.................................. 29,824 42,405 87,096
Provision for change in tax status.......................... 83,200 -- --
Provision for income taxes.................................. -- 15,424 33,141
-------- -------- --------
Income (loss) before cumulative effect of accounting
change.................................................... (53,376) 26,981 53,955
Cumulative effect of accounting change, net of taxes........ -- 16,145 --
-------- -------- --------
Net income (loss)....................................... (53,376) 10,836 53,955
Dividends to preferred shareholders......................... (8,600) -- --
-------- -------- --------
Net income (loss) available to common shareholders...... $(61,976) $ 10,836 $ 53,955
======== ======== ========
Basic net income (loss) available to common shareholders per
common share:
Before cumulative effect of accounting change............. $ (.54) $ .38 $ .80
Cumulative effect of accounting change.................... -- (.23) --
-------- -------- --------
$ (.54) $ .15 $ .80
======== ======== ========
Diluted net income (loss) available to common shareholders
per common share:
Before cumulative effect of accounting change............. $ (.54) $ .34 $ .69
Cumulative effect of accounting change.................... -- (.20) --
-------- -------- --------
$ (.54) $ .14 $ .69
======== ======== ========
Weighted average common shares outstanding, basic........... 115,097 71,380 67,568
======== ======== ========
Weighted average common shares outstanding, diluted......... 115,097 78,939 78,959
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-53
<PAGE> 280
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------------------------ ------------------------------------- ADDITIONAL
SERIES A SERIES B ISSUED TREASURY STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
------ -------- ------- ------ ------- ------- ------ -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996........ -- $ -- -- $ -- 65,650 $ 656 (20) $ (726) $ 239,690
Exchange of preferred stock for
acquisition of American
Corrections Transport.......... -- -- 380 380 -- -- (665) (32,812) 32,432
Stock options and warrants
exercised.................... -- -- -- -- 3,672 37 (36) (1,975) 14,786
Stock repurchased................ -- -- -- -- -- -- (108) (5,329) --
Income tax benefits of incentive
stock option exercises......... -- -- -- -- -- -- -- -- 6,328
Conversion of long-term debt..... -- -- -- -- 879 9 -- -- 1,668
Compensation expense related to
deferred stock awards and stock
options........................ -- -- -- -- -- -- -- -- 457
Net income (loss)................ -- -- -- -- -- -- -- -- --
------ -------- ------- ------ ------- ------ ------ -------- ----------
BALANCE, DECEMBER 31, 1997........ -- -- 380 380 70,201 702 (829) (40,842) 295,361
------ -------- ------- ------ ------- ------ ------ -------- ----------
Conversion of preferred stock.... -- -- (380) (380) 610 6 -- -- 374
Stock options and warrants
exercised...................... -- -- -- -- 5,161 52 (818) (20,148) 22,478
Stock repurchased................ -- -- -- -- -- -- (175) (7,600) --
Income tax benefits of incentive
stock option exercises......... -- -- -- -- -- -- -- -- 4,475
Conversion of long-term debt..... -- -- -- -- 1,805 18 1,075 51,029 3,633
Retirement of treasury stock..... -- -- -- -- (747) (7) 747 17,561 (17,554)
CMSC stock issued to Old CCA
employees...................... -- -- -- -- -- -- -- -- 22,850
Issuance of common stock......... -- -- -- -- 2,926 29 -- -- 66,119
Compensation expense related to
deferred stock awards and stock
options........................ -- -- -- -- -- -- -- -- 757
Net Income....................... -- -- -- -- -- -- -- -- --
------ -------- ------- ------ ------- ------ ------ -------- ----------
BALANCE, DECEMBER 31, 1998........ -- -- -- -- 79,956 800 -- -- 398,493
------ -------- ------- ------ ------- ------ ------ -------- ----------
Acquisition of Old Prison
Realty......................... 4,300 107,500 -- -- 25,316 253 -- -- 952,927
Effect of election of status as a
real estate investment trust... -- -- -- -- -- -- -- -- 52,693
Issuance of common stock....... -- -- -- -- 7,981 79 -- -- 131,898
Stock options exercised.......... -- -- -- -- 146 2 (12) (242) 406
Conversion of long-term debt..... -- -- -- -- 4,975 50 -- -- 45,789
Shares issued to trustees........ -- -- -- -- 9 -- -- -- 125
Compensation expense related to
deferred stock awards and
stock options................ -- -- -- -- 23 -- -- -- 606
Net income....................... -- -- -- -- -- -- -- -- (83,200)
Distributions to shareholders.... -- -- -- -- -- -- -- -- (152,510)
------ -------- ------- ------ ------- ------ ------ -------- ----------
BALANCE, DECEMBER 31, 1999........ 4,300 $107,500 -- $ -- 118,406 $1,184 (12) $ (242) $1,347,227
====== ======== ======= ====== ======= ====== ====== ======== ==========
<CAPTION>
TOTAL
RETAINED CUMULATIVE ACCUMULATED STOCKHOLDERS'
EARNINGS NET INCOME DISTRIBUTIONS EQUITY
--------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996........ $ 42,132 $ -- $ -- $ 281,752
Exchange of preferred stock for
acquisition of American
Corrections Transport.......... -- -- -- --
Stock options and warrants
exercised.................... (3,612) -- -- 9,236
Stock repurchased................ -- -- -- (5,329)
Income tax benefits of incentive
stock option exercises......... -- -- -- 6,328
Conversion of long-term debt..... -- -- -- 1,677
Compensation expense related to
deferred stock awards and stock
options........................ -- -- -- 457
Net income (loss)................ 53,955 -- -- 53,955
-------- ------- -------- ----------
BALANCE, DECEMBER 31, 1997........ 92,475 -- -- 348,076
-------- ------- -------- ----------
Conversion of preferred stock.... -- -- -- --
Stock options and warrants
exercised...................... (1,733) -- -- 649
Stock repurchased................ -- -- -- (7,600)
Income tax benefits of incentive
stock option exercises......... -- -- -- 4,475
Conversion of long-term debt..... (48,885) -- -- 5,795
Retirement of treasury stock..... -- -- -- --
CMSC stock issued to Old CCA
employees...................... -- -- -- 22,850
Issuance of common stock......... -- -- -- 66,148
Compensation expense related to
deferred stock awards and stock
options........................ -- -- -- 757
Net Income....................... 10,836 -- -- 10,836
-------- ------- -------- ----------
BALANCE, DECEMBER 31, 1998........ 52,693 -- -- 451,986
-------- ------- -------- ----------
Acquisition of Old Prison
Realty......................... -- -- -- 1,060,680
Effect of election of status as a
real estate investment trust... (52,693) -- -- --
Issuance of common stock....... -- -- -- 131,977
Stock options exercised.......... -- -- -- 166
Conversion of long-term debt..... -- -- -- 45,839
Shares issued to trustees........ -- -- -- 125
Compensation expense related to
deferred stock awards and
stock options................ -- -- -- 606
Net income....................... -- 29,824 -- (53,376)
Distributions to shareholders.... -- -- (65,144) (217,654)
-------- ------- -------- ----------
BALANCE, DECEMBER 31, 1999........ $ -- $29,824 $(65,144) $1,420,349
======== ======= ======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-54
<PAGE> 281
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................................... $ (53,376) $ 10,836 $ 53,955
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization expense............... 44,062 14,363 13,378
Amortization of debt issuance costs................. 7,901 1,610 715
Provision for change in tax status.................. 83,200 -- --
Deferred and other noncash income taxes............. -- (40,719) (6,329)
Other noncash items................................. 3,679 757 457
(Gain) loss on disposals of assets.................. 1,995 1,083 (881)
Equity in earnings of unconsolidated entities and
amortization of deferred gains................... (22,886) (535) (916)
Recognized gain on real estate transactions......... -- (13,984) (5,906)
Write-off of amounts under lease arrangements....... 65,677 -- --
Impairment loss..................................... 76,433 -- --
Write-offs of loan costs............................ 14,567 2,043 --
New CCA compensation charge......................... -- 22,850 --
Cumulative effect of accounting change.............. -- 26,468 --
Changes in assets and liabilities, net of
acquisitions and divestitures:
Payments under lease arrangements................ (68,623) -- --
Receivable from New CCA.......................... (28,608) -- --
Other assets..................................... (2,732) (39,678) 13,157
Accounts payable and accrued expenses............ (32,302) 68,565 11,106
Income taxes payable............................. (9,490) 838 13,242
----------- --------- ---------
Net cash provided by operating activities...... 79,497 54,497 91,978
----------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment................... (528,935) (417,215) (297,293)
(Increase) decrease in restricted cash and
investments......................................... (7,221) -- 4,037
Cash acquired in purchase of Old Prison Realty........ 21,894 -- --
Increase in other assets.............................. 3,536 -- (17,868)
Merger costs.......................................... -- (26,270) --
Distributions from investments in PMSI and JJFMSI..... 21,668 -- --
Distributions from investments in affiliates, net..... -- 603 1,707
Proceeds from disposals of assets..................... 43,959 61,299 457,802
Investment in notes receivable........................ (6,117) (1,549) (38,156)
Increase in direct financing leases................... -- -- (84,295)
Payments received on direct financing leases and notes
receivable.......................................... 3,643 4,713 3,462
Acquisition of USCC contracts, net of cash acquired... -- (9,341) --
</TABLE>
(continued)
F-55
<PAGE> 282
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
Cash acquired by New CCA, PMSI and JJFMSI in sales of
contracts........................................... $ -- $ (4,754) $ --
----------- --------- ---------
Net cash provided by (used in) investing
activities.................................. (447,573) (392,514) 29,396
----------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt.............. 40,000 20,000 --
Payments on long-term debt............................ (76) (151) (57,194)
Proceeds from line of credit, net..................... 426,634 162,000 66,000
Proceeds from issuance of senior notes................ 100,000 -- --
Payment of debt issuance costs........................ (59,619) (9,485) (2,772)
Proceeds from issuance of common stock................ 131,977 66,148 --
Distributions paid on common stock.................... (209,054) -- --
Distributions paid on preferred stock................. (8,600) -- --
Proceeds from exercise of stock options and
warrants............................................ 166 2,099 9,236
Purchase of treasury stock............................ -- (7,600) (5,329)
----------- --------- ---------
Net cash provided by financing activities...... 421,428 233,011 9,941
----------- --------- ---------
Net increase (decrease) in cash and cash
equivalents......................................... 53,352 (105,006) 131,315
Cash and cash equivalents, beginning of year.......... 31,141 136,147 4,832
----------- --------- ---------
Cash and cash equivalents, end of year................ $ 84,493 $ 31,141 $ 136,147
=========== ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amounts capitalized of $37,700,
$11,800 and $6,300 in 1999, 1998 and 1997,
respectively)....................................... $ 28,022 $ 4,424 $ 6,579
=========== ========= =========
Income taxes.......................................... $ 9,490 $ 44,341 $ 24,351
=========== ========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Long-term debt was converted into common stock:
Other assets........................................ $ 1,161 $ 5 $ 23
Long-term debt...................................... (47,000) (5,800) (1,700)
Common stock........................................ 50 18 9
Additional paid-in capital.......................... 45,789 3,633 1,668
Treasury stock...................................... -- 51,029 --
Retained earnings................................... -- (48,885) --
----------- --------- ---------
$ -- $ -- $ --
=========== ========= =========
Preferred stock was converted into common stock:
Preferred stock..................................... $ -- $ (380) $ --
Common stock........................................ -- 6 --
Additional paid-in capital.......................... -- 374 --
----------- --------- ---------
$ -- $ -- $ --
=========== ========= =========
</TABLE>
(continued)
F-56
<PAGE> 283
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
Property and equipment were acquired through the
forgiveness of the direct financing lease receivable
and the issuance of a credit toward future
management fees:
Accounts receivable................................. $ -- $ 3,500 $ --
Property and equipment.............................. -- (16,207) --
Investment in direct financing lease................ -- 12,707 --
----------- --------- ---------
$ -- $ -- $ --
=========== ========= =========
Property and equipment were acquired through the
forgiveness of a note receivable:
Note receivable..................................... $ -- $ 57,624 $ --
Property and equipment.............................. -- (58,487) --
Long-term debt...................................... -- 863 --
----------- --------- ---------
$ -- $ -- $ --
=========== ========= =========
Stock warrants were exercised for shares of Old CCA's
common stock:
Other assets........................................ $ -- $ 1,450 $ --
Common stock........................................ -- 38 --
Additional paid-in capital.......................... -- 15,892 --
Treasury stock...................................... -- (17,380) --
----------- --------- ---------
$ -- $ -- $ --
=========== ========= =========
The Company acquired treasury stock and issued common
stock in connection with the exercise of stock
options:
Additional paid-in capital.......................... $ 242 $ -- $ --
Treasury stock, at cost............................. (242) -- --
----------- --------- ---------
$ -- $ -- $ --
=========== ========= =========
The Company acquired Old Prison Realty's assets and
liabilities for stock:
Restricted cash..................................... $ (17,188) $ -- $ --
Property and equipment.............................. (1,223,370) -- --
Other assets........................................ 22,422 -- --
Accounts payable and accrued expenses............... 23,351 -- --
Deferred gains on real estate transactions.......... (125,751) -- --
Line of credit...................................... 279,600 -- --
Distributions payable............................... 2,150 -- --
Common stock........................................ 253 -- --
Preferred stock..................................... 107,500 -- --
Additional paid-in capital.......................... 952,927 -- --
----------- --------- ---------
$ 21,894 $ -- $ --
=========== ========= =========
</TABLE>
(continued)
F-57
<PAGE> 284
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
Sales of contracts to Old CCA, PMSI and JJFMSI:
Accounts receivable................................. $ -- $ 105,695 $ --
Prepaid expenses.................................... -- 5,935 --
Deferred tax assets................................. -- 2,960 --
Other current assets................................ -- 14,865 --
Property and equipment, net......................... -- 63,083 --
Notes receivable.................................... -- (135,854) --
Investments in affiliates........................... -- (120,916) --
Other long-term assets.............................. -- 10,124 --
Accounts payable.................................... -- (25,559) --
Accrued salaries and wages.......................... -- (7,401) --
Accrued expenses.................................... -- (24,387) --
Current portion of deferred gains on sales of
contracts........................................ -- 16,671 --
Long-term debt...................................... -- (10,000) --
Deferred gains on sales of contracts................ -- 104,784 --
----------- --------- ---------
$ -- $ -- $ --
=========== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-58
<PAGE> 285
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS 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
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 a lessor. As required by its governing instruments, the
Company currently intends to elect to be taxed as a real estate investment trust
("REIT") for the year ended December 31, 1999. In the event that the Company
completes the Fortress/Blackstone Restructuring, as defined in Note 23, under
its existing terms following required shareholder approval in 2000, the Company
will be required to be taxed as a C corporation commencing with the taxable year
ended December 31, 1999. See Note 22 for information on the Company's contingent
tax liabilities. In either event, the Company expects that it will be taxed as a
C corporation in the taxable year ending December 31, 2000 and thereafter.
The Company's results of operations for all periods prior to January 1,
1999 reflect the operating results of Old CCA, and the results of operations
subsequent to January 1, 1999 reflect the operating results of the Company as a
REIT. Management believes the comparison between 1999 and prior years is not
meaningful because the prior years' financial condition, results of operations,
and cash flows reflect the operations of Old CCA and the 1999 financial
condition, results of operations and cash flows reflect the operations of the
Company as a REIT.
F-59
<PAGE> 286
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited pro forma operating information presents a summary
of comparable consolidated results of combined operations as a REIT of Old CCA
and Old Prison Realty for the year ended December 31, 1998 (excluding (i) Old
CCA's historical operations, (ii) the New CCA compensation charge, (iii) the
cumulative effect of accounting change, (iv) any write off of loan costs, (v)
any non-recurring expenses related to the 1999 Merger, (vi) any write-off of
amounts under lease arrangements, (vii) any impairment loss, (viii) any loss on
disposals of assets, and (ix) any provision for income taxes or change in tax
status), as if the 1999 Merger had occurred as of January 1, 1998. The unaudited
pro forma operating information is presented for comparison purposes only and
does not purport to represent what the Company's results of operations actually
would have been had the 1999 Merger, in fact, occurred on January 1, 1998.
<TABLE>
<CAPTION>
PRO FORMA
TWELVE MONTHS
ENDED
DECEMBER 31, 1998
-----------------
(UNAUDITED)
<S> <C>
Revenues.................................................... $218,587
Operating income............................................ 181,238
Net income available to common shareholders................. 174,888
Net income per common share:
Basic..................................................... 1.88
Diluted................................................... 1.73
</TABLE>
2. GOING CONCERN MATTERS
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company is in
default under its secured bank credit facility (the "Amended Credit Facility",
outstanding balance of $928.2 million at December 31, 1999) and is in default
under its 9.5% convertible subordinated notes (the "9.5% Convertible Notes",
outstanding balance of $40.0 million at December 31, 1999). The defaults relate
to failure to comply with certain financial covenants, the issuance of a going
concern opinion qualification, and a "change in control" provision, as defined
in the agreements. The noncompliance with the requirements under these
outstanding obligations could result in the creditors demanding immediate
repayment of these obligations. The events of default have not been formally or
informally declared and no acceleration actions have been taken by the
creditors. The Company has not obtained waivers of the noncompliance issues.
Also, Prison Realty Trust, Inc. has limited resources currently available to
meet its operating, capital expenditure and debt service requirements during
2000. In addition, as discussed in Note 22, the Company has significant
outstanding shareholder and other litigation matters.
The Company's primary lessee, Corrections Corporation of America ("New
CCA"), 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, has
a net working capital deficiency and a net capital deficiency at December 31,
1999, and is in default under its revolving credit facility. New CCA's default
under its revolving credit facility relates to failure to comply with certain
financial covenants. In addition, New CCA is in default under the $137.0 million
promissory note payable by New CCA to the Company (the "CCA Note"). As of
December 31, 1999, approximately $24.9 million of rents due from New CCA to the
Company under the master lease agreement and leases with respect to each
F-60
<PAGE> 287
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
leased property between New CCA and the Company (the "CCA Leases") were unpaid.
The terms of the CCA Leases provide that rental payments were due and payable on
December 25, 1999. During 2000, New CCA has paid $12.9 million of lease payments
related to 1999.
New CCA's defaults under the CCA Note relate to failure to make timely
contractual payments. As of December 31, 1999, the first scheduled payment of
interest, totaling approximately $16.4 million, on the CCA Note was unpaid.
Pursuant to the terms of the CCA Note, New 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 New CCA's revolving credit facility, New CCA is prohibited from making the
scheduled interest payments on the CCA Note when New CCA is not in compliance
with certain financial covenants. New CCA is not in compliance with these
financial covenants and, consequently, is prohibited from making the scheduled
interest payments to the Company. Pursuant to the terms of the subordination
agreement between the Company and the agent of New CCA's revolving credit
facility, the Company is prohibited from accelerating payment of the principal
amount of the CCA Note or taking any other action to enforce its rights under
the provisions of the CCA Note for so long as New CCA's revolving credit
facility remains outstanding. Also, the independent public accountants of New
CCA have indicated in their opinion on the respective 1999 consolidated
financial statements that there is substantial doubt about New CCA's ability to
continue as a going concern.
Continued operating losses by New CCA, declarations of events of default
and acceleration actions by the Company's and New CCA's creditors, the continued
inability of New 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 New 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 the Company and by New
CCA during 1999 and in response to the defaults under the Company's debt
agreements, the Company's Board of Directors is considering various capital
infusion proposals through one or more strategic investors, as well as various
restructurings. A complete discussion of the Company's plan and recent
developments affecting the Company's plan is included in Note 23.
3. 1999 MERGER TRANSACTIONS
On December 31, 1998, immediately prior to the 1999 Merger, Old CCA sold to
New CCA all of the issued and outstanding capital stock of certain wholly owned
corporate subsidiaries of Old CCA, certain management contracts and certain
other assets and liabilities, and entered into a trade name use agreement as
described in Note 5. In exchange, Old CCA received the CCA Note and 100% of the
non-voting common stock of New CCA. The non-voting common stock represents a
9.5% economic interest in New CCA and was valued at the implied fair market
value of $4.8 million. The Company succeeded to these interests as a result of
the 1999 Merger. The sale to New CCA generated a deferred gain of $63.3 million.
See Note 5 for discussion of the accounting for the CCA Note, the investment in
New CCA and the deferred gain and for discussion of ongoing relationships with
New CCA.
F-61
<PAGE> 288
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On December 31, 1998, immediately prior to the 1999 Merger, Old CCA sold to
a newly-created company, Prison Management Services, LLC ("PMS LLC"), certain
management contracts and certain other assets and liabilities relating to
government-owned adult prison facilities. On January 1, 1999, PMS LLC merged
with Prison Management Services, Inc., a privately-held Tennessee corporation
("PMSI"). In exchange, Old CCA received 100% of the non-voting membership
interest in PMSI valued at the implied fair market value of $67.1 million. The
Company succeeded to this interest as a result of the 1999 Merger. The sale to
PMSI generated a deferred gain of $35.4 million.
On December 31, 1998, immediately prior to the 1999 Merger, Old CCA sold to
a newly-created company, Juvenile and Jail Facility Management Services, LLC
("JJFMS LLC"), certain management contracts and certain other assets and
liabilities relating to government-owned jails and juvenile facilities. On
January 1, 1999, JJFMS LLC merged with Juvenile and Jail Facility Management
Services, Inc., a privately-held Tennessee corporation ("JJFMSI"). In exchange,
Old CCA received 100% of the non-voting membership interest in JJFMSI valued at
the implied fair market value of $55.9 million. The Company succeeded to this
interest as a result of the 1999 Merger. The sale to JJFMSI generated a deferred
gain of $18.0 million.
On January 1, 1999, Old Prison Realty merged with and into the Company (the
"Prison Realty Merger"). In the Prison Realty Merger, Old Prison Realty
shareholders received 1.0 share of common stock or 8.0% Series A Cumulative
Preferred Stock of the Company in exchange for each Old Prison Realty common
share or Series A Cumulative Preferred Share. The Prison Realty Merger was
accounted for as a purchase acquisition of Old Prison Realty. Subsequent to the
Prison Realty Merger, the Company acquires, develops and leases properties
rather than operating and managing prison facilities.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
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 PMSI and
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 New CCA, are accounted
for under the cost method. All material intercompany transactions and balances
have been eliminated in consolidation.
REAL ESTATE PROPERTIES
Property and equipment is carried at cost. Betterments, renewals and
extraordinary repairs that extend the life of an asset are capitalized; other
repair and maintenance costs are expensed. Interest is capitalized to the asset
to which it relates in connection with the construction of major facilities. The
cost and accumulated depreciation applicable to assets retired are removed from
the accounts and the gain or loss on disposition is recognized in income.
Depreciation is computed by the straight-line method for financial reporting
purposes and accelerated methods for tax reporting purposes based upon the
estimated useful lives of the related assets of up to 50 years.
F-62
<PAGE> 289
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTING FOR THE IMPAIRMENT OF LONG LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of" ("SFAS 121"), the Company continually evaluates the recoverability
of the carrying values of its long-lived assets when events suggest that an
impairment may have occurred. In these circumstances, the Company utilizes
estimates of undiscounted cash flows to determine if an impairment exists. If an
impairment exists, it is measured as the amount by which the carrying amount of
the asset exceeds the fair value of the asset.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents.
RESTRICTED CASH
Restricted cash at December 31, 1999 was $24.4 million, of which $15.5
million represents cash collateral for an irrevocable letter of credit issued in
connection with the construction of a facility and $6.9 million represents cash
collateral for a guarantee agreement. The remaining $2.0 million represents cash
collateral for outstanding letters of credit securing workers' compensation
claims related to Old CCA.
INVESTMENTS IN DIRECT FINANCING LEASES
Investments in direct financing leases represent the portion of Old CCA's
management contracts with governmental agencies that represent payments on
building and equipment leases. The leases are accounted for using the financing
method and, accordingly, the minimum lease payments to be received over the term
of the leases less unearned income are capitalized as the Company's investments
in the leases. Unearned income is recognized as income over the term of the
leases using the interest method.
DEBT ISSUANCE COSTS
Debt issuance costs are amortized on a straight-line basis over the life of
the related debt and reflected as interest expense.
DEFERRED GAINS ON REAL ESTATE TRANSACTIONS
Deferred gains on real estate transactions were generated in 1997 and 1998
as a result of the sale of real estate properties to Old Prison Realty by Old
CCA. Effective with the Prison Realty Merger on January 1, 1999, the Company
eliminated the deferred gains on real estate transactions and reduced the value
of the real estate properties received in connection with the Prison Realty
Merger.
DEFERRED GAINS ON SALES OF CONTRACTS
The Company amortizes these deferred gains into income in accordance with
the Securities and Exchange Commission's Staff Accounting Bulletin No. 81. The
deferred gain from the sale to New CCA will be amortized over the six year
period in which principal payments on the CCA Note will be received. The
deferred gains from the sales to PMSI and JJFMSI are being amortized over a five
F-63
<PAGE> 290
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
year period commencing January 1, 1999, which represents the average remaining
lives of the contracts sold to PMSI and JJFMSI, plus any contractual renewal
options.
RENTAL REVENUES
Rental revenues are recognized based on the terms of the Company's leases.
Tenant incentive fees paid to lessees, including New CCA, are deferred and
amortized as a reduction of rental revenue over the term of related leases. The
realizability of capitalized tenant incentive fees is continually evaluated.
INCOME TAXES
Prior to 1999, income taxes were accounted for under the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). SFAS 109 generally requires the Company to record deferred
income taxes for the tax effect of differences between book and tax bases of its
assets and liabilities. For the year ended December 31, 1999, as required by the
Company's governing instruments, the Company currently intends to elect to
qualify as a REIT under the Internal Revenue Code of 1986, as amended (the
"Code"). As a result, the Company will generally not be subject to income tax on
its taxable income at corporate rates to the extent it distributes annually at
least 95% of its taxable income to its shareholders and complies with certain
other requirements. Accordingly, no provision has been made for income taxes in
the accompanying 1999 consolidated financial statements. 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 ("IRS"), for a period of three years from
the date of filing of its 1999 tax return. In the event that the Company
completes the Fortress/Blackstone Restructuring, as defined in Note 23, under
its existing terms following required shareholder approval in 2000, the Company
will be required to be taxed as a C corporation commencing with the taxable year
ended December 31, 1999. See Note 22 for additional information on the Company's
contingent tax liabilities.
FAIR VALUE OF FINANCIAL INSTRUMENTS
To meet the reporting requirements of Statement of Financial Accounting
Standards No. 107, "Disclosures About Fair Value of Financial Instruments"
("SFAS 107"), the Company calculates the fair value of financial instruments
using quoted market prices of similar instruments and discounted cash flow
techniques. At December 31, 1999 and 1998, there were no differences between the
carrying amounts and fair values of the Company's financial instruments, other
than as disclosed in this note.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1999 1998
------------------------- ----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- --------- ----------
<S> <C> <C> <C> <C>
Investments in direct financing leases.... $ 74,059 $ 62,650 $ 77,809 $ 71,612
Debt...................................... (1,098,991) (1,103,171) (299,833) (307,806)
Interest rate swap arrangement............ -- 2,407 -- --
Forward contract for convertible
subordinated notes...................... -- -- -- (51,663)
</TABLE>
F-64
<PAGE> 291
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISKS
The Company's credit risks related primarily to cash and cash equivalents,
restricted cash, investments in direct financing leases and notes and other
receivables from New CCA. See Notes 2 and 5 for discussion of credit risk
related to New CCA. Cash and cash equivalents and restricted cash are primarily
held in bank accounts and overnight investments. The Company's investments in
direct financing leases represent amounts due from governmental agencies. The
Company's financial instruments are subject to the possibility of loss in
carrying value as a result of either the failure of other parties to perform
according to their contractual obligations or changes in market prices that make
the instruments less valuable.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), effective for fiscal years beginning after December 15,
1997. SFAS 130 requires that changes in the amounts of certain items, including
gains and losses on certain securities, be shown in the financial statements.
The Company's adoption of SFAS 130, effective January 1, 1998, has had no
significant impact on the Company's results of operations as comprehensive
income (loss) was equivalent to the Company's reported net income (loss) for the
years ended December 31, 1999, 1998 and 1997.
SEGMENT DISCLOSURES
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS 131"), effective for fiscal years beginning after December 15, 1997. SFAS
131 establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. SFAS 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. The Company adopted the provisions of SFAS 131 effective
January 1, 1998. However, the Company operates in one industry segment and,
accordingly, the adoption of SFAS 131 had no significant effect on the Company.
START UP COSTS
Effective January 1, 1998, Old CCA adopted the provisions of the AICPA's
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities"
("SOP 98-5"). As a result, Old CCA recorded a $16.1 million charge as a
cumulative effect of accounting change, net of taxes of $10.3 million, for the
effect of this change on periods through December 31, 1997. The effect of this
accounting change for the year ended December 31, 1998 was a $14.9 million
charge reflected in operating expenses. Prior to adoption of SOP 98-5, project
development and facility start-up costs
F-65
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PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
were deferred and amortized on a straight-line basis over the lesser of the
initial term of the contract plus renewals or five years.
MANAGEMENT CONTRACTS
Prior to 1999, Old CCA had maintained contracts with various governmental
entities to manage their facilities for fixed per diem rates or monthly fixed
rates. Old CCA also maintained contracts with various federal, state and local
governmental entities for the housing of inmates in Old CCA owned facilities at
fixed per diem rates. These contracts usually contained expiration dates with
renewal options ranging from annual to multi-year renewals. Most of these
contracts had current terms that required renewal every two to five years. Old
CCA expected to renew these contracts for periods consistent with the remaining
renewal options allowed by the contracts or other reasonable extensions. Fixed
monthly rate revenue has been recorded in the month earned and fixed per diem
revenue has been recorded based on the per diem rate multiplied by the number of
inmates housed during the respective period. Old CCA recognized development
revenue on the percentage-of-completion method and recognized any additional
management service revenues when earned or awarded by the respective
authorities. As discussed in Note 3, Old CCA sold its management contracts and
related net assets on December 31, 1998.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards requiring that
every derivative instrument be recorded in the balance sheet as either an asset
or liability measured at its fair value. SFAS 133 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.
RECLASSIFICATIONS
Certain reclassifications of 1998 and 1997 amounts have been made to
conform with the 1999 presentation.
5. RELATIONSHIP WITH NEW CCA
New 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 New CCA, the Company is dependent on its significant sources of income from
New CCA. In addition, the Company pays New CCA tenant incentive fees and fees
for services rendered to the Company in development of its correctional and
detention facilities. As of December 31, 1999, New CCA leased 34 of the 42
operating facilities owned by the Company.
F-66
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PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CCA NOTE
As discussed in Note 3, in connection with the 1999 Merger, Old CCA
received a $137.0 million promissory note due from New CCA. The Company
succeeded to the CCA Note as a result of the 1999 Merger. Interest on the CCA
Note is payable annually at the rate of 12%. Principal is due in six equal
annual installments beginning December 31, 2003. Ten percent of the outstanding
principal of the CCA Note is personally guaranteed by the Company's Chief
Executive Officer, who also serves as the Chief Executive Officer and a member
of the Board of Directors of New CCA. As discussed in Note 2, as of December 31,
1999, the first scheduled payment of interest, totaling approximately $16.4
million, on the CCA Note was unpaid. Pursuant to the terms of the CCA Note, New
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 New CCA's revolving credit facility, New
CCA is prohibited from making the scheduled interest payments on the CCA Note
when New CCA is not in compliance with certain financial covenants. New CCA is
not in compliance with these financial covenants and, consequently, is
prohibited from making the scheduled interest payments to the Company. Pursuant
to the terms of the subordination agreement between the Company and the agent of
New CCA's revolving credit facility, the Company is prohibited from accelerating
payment of the principal amount of the CCA Note or taking any other action to
enforce its rights under the provisions of the CCA Note for so long as New CCA's
revolving credit facility remains outstanding. The Company has fully reserved
the $16.4 million of interest accrued under the terms of the CCA Note during
1999.
INVESTMENT IN NEW CCA
As discussed in Note 3, in connection with the 1999 Merger, Old CCA
received 100% of the non-voting common stock of New CCA. The Company succeeded
to the investment in New CCA as a result of the 1999 Merger. The non-voting
common stock represents a 9.5% economic interest in New CCA. The investment in
New CCA is valued at $4.8 million and is included in Investments in affiliates
in the accompanying consolidated balance sheets. For the year ended December 31,
1999, the Company recognized no income or loss related to its stock ownership
investment in New CCA.
DEFERRED GAIN ON SALE TO NEW CCA
As discussed in Note 3, the sale to New CCA generated a deferred gain of
$63.3 million. The $63.3 million deferred gain is included in deferred gains on
sales of contracts in the accompanying consolidated balance sheets. No
amortization of the New CCA deferred gain occurred during the year ended
December 31, 1999.
CCA LEASES
On January 1, 1999, immediately after the 1999 Merger, all existing leases
between Old CCA and Old Prison Realty were cancelled and the Company entered
into the CCA Leases. The terms of the CCA Leases are for twelve years and may be
extended at fair market rates for three additional five-year periods upon the
mutual agreement of the Company and New CCA.
As of December 31, 1999, the annual base rent with respect to each facility
is subject to increase each year in an amount equal to the lesser of: (i) 4% of
the annualized yearly rental payment with respect to such facility or (ii) 10%
of the excess of New CCA's aggregate gross management revenues for the prior
year over a base amount of $325.0 million.
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PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For the year ended December 31, 1999, the Company recognized gross rental
revenue from New CCA of $263.5 million.
Based on the CCA Leases in effect at December 31, 1999, the future minimum
lease payments scheduled to be received by the Company under the CCA Leases as
of January 1, 2000 are as follows:
<TABLE>
<S> <C>
Years Ending December 31:
2000...................................................... $ 310,651
2001...................................................... 310,651
2002...................................................... 310,651
2003...................................................... 310,651
2004...................................................... 310,651
Thereafter................................................ 1,890,193
----------
$3,443,448
==========
</TABLE>
As discussed in Note 2, New CCA failed to make timely contractual payments
under the CCA Leases. As of December 31, 1999, approximately $24.9 million of
rents due from New 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, New CCA has paid $12.9 million of lease payments related to 1999 and no
lease payments related to 2000.
In addition, the Company expects that the CCA Leases will be materially
impacted by either the prospective equity investment and related restructuring
discussed in Note 23 or by renegotiation of the CCA Leases with New CCA.
TENANT INCENTIVE ARRANGEMENT
On May 4, 1999, the Company and New CCA entered into an amended and
restated tenant incentive agreement (the "Amended and Restated Tenant Incentive
Agreement"), effective as of January 1, 1999, providing for (i) a tenant
incentive fee of up to $4,000 (four thousand dollars) per bed payable with
respect to all future facilities developed and facilitated by New CCA, as well
as certain other facilities which, although operational on January 1, 1999, had
not achieved full occupancy, and (ii) an $840 (eight hundred forty dollars) per
bed allowance for all beds in operation at the beginning of January 1999,
approximately 21,500 beds, that were not subject to the tenant allowance in the
first quarter of 1999. The amount of the amended tenant incentive fee includes
an allowance for rental payments to be paid by New CCA prior to the facility
reaching stabilized occupancy. The term of the Amended and Restated Tenant
Incentive Agreement is four years, unless extended upon the written agreement of
the Company and New CCA. The incentive fees with New CCA were deferred and the
Company expected to amortize them as a reduction to rental revenues over the
respective lease term.
For the year ended December 1999, the Company had paid tenant incentive
fees of $68.6 million, with $2.9 million of those fees amortized against rental
revenues. During the fourth quarter of 1999, the Company undertook a plan that
contemplates either merging with New CCA and thereby eliminating the CCA Leases
or amending the CCA Leases to reduce the lease payments to be paid by New 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.
F-68
<PAGE> 295
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TRADE NAME USE AGREEMENT
In connection with the 1999 Merger, Old CCA entered into a trade name use
agreement with New CCA (the "Trade Name Use Agreement"). Under the Trade Name
Use Agreement, which has a term of ten years, Old CCA granted to New CCA the
right to use the name "Corrections Corporation of America" and derivatives
thereof, subject to specified terms and conditions therein. The Company
succeeded to this interest as a result of the 1999 Merger. In consideration for
such right under the terms of the Trade Name Use Agreement, New CCA will pay a
fee equal to (i) 2.75% of the gross revenues of New CCA for the first three
years, (ii) 3.25% of New CCA's gross revenues for the following two years, and
(iii) 3.625% of New CCA's gross revenues for the remaining term, provided that
after completion of the 1999 Merger the amount of such fee may not exceed (a)
2.75% of the gross revenues of the Company for the first three years, (b) 3.5%
of the Company's gross revenues for the following two years, and (c) 3.875% of
the Company's gross revenues for the remaining term.
For the year ended December 31, 1999, the Company recognized income of $8.7
million from New CCA under the terms of the Trade Name Use Agreement.
CCA RIGHT TO PURCHASE AGREEMENT
On January 1, 1999, immediately after the 1999 Merger, the Company and New
CCA entered into a Right to Purchase Agreement (the "CCA Right to Purchase
Agreement") pursuant to which New CCA granted to the Company a right to acquire,
and lease back to New CCA at fair market rental rates, any correctional or
detention facility acquired or developed and owned by New CCA in the future for
a period of ten years following the date inmates are first received at such
facility. The initial annual rental rate on such facilities will be the fair
market rental rate as determined by the Company and New CCA. Additionally, New
CCA granted the Company a right of first refusal to acquire any New CCA-owned
correctional or detention facility should New CCA receive an acceptable third
party offer to acquire any such facility. Since January 1, 1999, the Company has
not purchased any assets from New CCA under the CCA Right to Purchase Agreement.
CCA SERVICES AGREEMENT
On January 1, 1999, immediately after the 1999 Merger, the Company entered
into a services agreement (the "CCA Services Agreement") with New CCA pursuant
to which New CCA will serve as a facilitator of the construction and development
of additional facilities on behalf of the Company for a term of five years from
the date of the CCA Services Agreement. In such capacity, New CCA will perform,
at the direction of the Company, such services as are customarily needed in the
construction and development of correctional and detention facilities, including
services related to construction of the facilities, project bidding, project
design, and governmental relations. In consideration for the performance of such
services by New CCA, the Company agreed to pay a fee equal to 5% of the total
capital expenditures (excluding the incentive fee discussed below and the 5% fee
herein referred to) incurred in connection with the construction and development
of a facility, plus an amount equal to approximately $560 (five hundred sixty
dollars) per bed for facility preparation services provided by New CCA prior to
the date on which inmates are first received at such facility. The Board of
Directors of the Company has authorized payments up to an additional 5% of the
total capital expenditures (as determined above) to New CCA if additional
services are requested by the Company. A majority of the Company's current
development projects have been subject to a fee totaling 10%.
F-69
<PAGE> 296
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Costs incurred by the Company under the CCA Services Agreement 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 $41.6 million for the year ended December 31, 1999.
BUSINESS DEVELOPMENT AGREEMENT
On January 1, 1999, immediately after the 1999 Merger, the Company entered
into a four year business development agreement (the "Business Development
Agreement") with New CCA, which provides that New CCA will perform, at the
direction of the Company, services designed to assist the Company in identifying
and obtaining new business. Pursuant to the agreement, the Company has agreed to
pay to New CCA a total fee equal to 4.5% of the total capital expenditures
(excluding the amount of the tenant incentive fee and the services fee discussed
above as well as the 4.5% fee) incurred in connection with the construction and
development of each new facility, or the construction and development of an
addition to an existing facility, for which New CCA performed business
development services.
Costs incurred by the Company under the Business Development Agreement are
capitalized as part of the facilities' development cost. Costs incurred under
the Business Development Agreement and capitalized as part of the facilities'
development cost totaled $15.0 million for the year ended December 31, 1999.
RECEIVABLE FROM NEW CCA
As of December 31, 1999, the Company had recorded a receivable of $28.6
million from New CCA. This receivable was comprised primarily of rent due under
the CCA Leases for the month of December 1999 ($24.9 million) and licensing fees
due under the Trade Name Use Agreement ($2.2 million).
NEW CCA FINANCIAL INFORMATION
The following summarized operating information presents New CCA's results
of operations for the year ended December 31, 1999:
<TABLE>
<S> <C>
Revenues.................................................... $ 499,292
Net loss.................................................... (202,918)
</TABLE>
The following summarized balance sheet information presents New CCA's
financial position as of December 31, 1999:
<TABLE>
<S> <C>
Current assets.............................................. $ 88,647
Total assets................................................ 184,701
Current liabilities......................................... 258,421
Deferred credits............................................ 107,070
Total liabilities........................................... 365,491
Stockholders' deficit....................................... (180,790)
</TABLE>
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<PAGE> 297
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summary presents New CCA's cash flows for the year ended
December 31, 1999:
<TABLE>
<S> <C>
Cash flows used in operating activities..................... $(16,332)
Cash flows used in investing activities..................... (2,091)
Cash flows provided by financing activities................. 10,089
--------
Net decrease in cash for 1999............................... $ (8,334)
========
</TABLE>
New CCA has utilized cash from borrowings under its revolving credit
facility, equity issuances and payments from the Company for tenant incentive
arrangements and other services to offset the cash requirements of its operating
losses. New CCA expects to continue to use these sources of cash to offset its
anticipated losses from operations; however, amounts presently anticipated to be
available to New CCA will not be sufficient to offset all of New CCA's expected
future operating losses.
6. REAL ESTATE PROPERTIES
At December 31, 1999, 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 44 properties were operating, five
were under construction or expansion and three were in the planning stages, with
a total aggregate cost of $2.3 billion. At December 31, 1999, New CCA leased 36
properties from the Company, governmental agencies leased five facilities from
the Company and private operators leased three facilities from the Company. The
Company expects to lease four of the facilities under construction or
development to New CCA.
Real estate properties as of December 31, 1999 consist of the following:
<TABLE>
<CAPTION>
COSTS CAPITALIZED
SUBSEQUENT TOTAL HISTORICAL COST AT
INITIAL COST TO ACQUISITION DECEMBER 31, 1999
------------------------- ---------------------- --------------------------------------
BUILDINGS, BUILDINGS, BUILDINGS,
IMPROVEMENTS, IMPROVEMENTS, IMPROVEMENTS,
EQUIPMENT, EQUIPMENT, EQUIPMENT
CONSTRUCTION IN CONSTRUCTION IN CONSTRUCTION IN ACCUMULATED
LAND PROGRESS LAND PROGRESS LAND PROGRESS TOTAL DEPRECIATION
------- --------------- ---- --------------- ------- --------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Texas (9 properties).... $ 2,930 $ 275,059 $559 $ 4,959 $ 3,489 $ 280,018 $ 283,507 $ 7,141
Oklahoma (4
properties)........... 826 225,572 -- 7,998 826 233,570 234,396 5,599
Kentucky (4
properties)........... 1,818 25,028 -- 33,489 1,818 58,517 60,335 1,293
Tennessee (5
properties)........... 15,485 114,052 -- 2,948 15,485 117,000 132,485 7,197
New Mexico (3
properties)........... 1,376 88,618 403 23,813 1,779 112,431 114,210 3,166
Arizona (3
properties)........... 2,688 401,666 -- 1,462 2,688 403,128 405,816 7,737
Colorado (3
properties)........... 956 78,978 -- 18,665 956 97,643 98,599 4,497
Georgia (5
properties)........... 1,297 154,058 -- -- 1,297 154,058 155,355 2,252
California (4
properties)........... 3,699 231,824 -- -- 3,699 231,824 235,523 802
North Carolina (2
properties)........... 406 83,448 -- -- 406 83,448 83,854 2,348
Ohio (2 properties)..... 1,507 163,967 -- 2,215 1,507 166,182 167,689 4,104
All Other States (7
properties)........... 3,462 194,026 -- 873 3,462 194,899 198,361 3,649
United Kingdom (1
property)............. -- 88,151 -- -- -- 88,151 88,151 --
------- ---------- ---- ------- ------- ---------- ---------- -------
$36,450 $2,124,447 $962 $96,422 $37,412 $2,220,869 $2,258,281 $49,785
======= ========== ==== ======= ======= ========== ========== =======
</TABLE>
F-71
<PAGE> 298
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following schedule is a reconciliation of the total changes in the
historical cost of real estate properties and accumulated depreciation for the
Company for the period December 31, 1998 to December 31, 1999:
<TABLE>
<CAPTION>
HISTORICAL ACCUMULATED
COSTS DEPRECIATION
--------------- ------------
<S> <C> <C>
Balance, December 31, 1998.................................. $ 637,640 $10,251
Old Prison Realty Merger.................................... 1,223,371 --
Depreciation expense........................................ -- 44,062
Disposals of assets......................................... (53,586) (2,882)
Impairment loss............................................. (78,079) (1,646)
Additions of property and equipment......................... 528,935 --
---------- -------
Balance, December 31, 1999.................................. $2,258,281 $49,785
========== =======
</TABLE>
Pursuant to the 1999 Merger, the Company acquired all of the assets and
liabilities of Old Prison Realty on January 1, 1999, including 23 leased
facilities and one real estate property under construction. The real estate
properties acquired by the Company in conjunction with the acquisition of Old
Prison Realty have been recorded at estimated fair market value in accordance
with the purchase method of accounting prescribed by APB 16 resulting in a $1.2
billion increase to real estate properties at January 1, 1999.
SFAS 121 requires impairment losses to be recognized for long-lived assets
used in operations when indications of impairment are present and the estimate
of undiscounted future cash flows is not sufficient to recover asset carrying
amounts. In December 1999, the poor financial position, results of operations
and cash flows of New CCA indicated to management that certain of its
correctional and detention facilities might be impaired. In accordance with SFAS
121, the Company estimated the undiscounted net cash flows for each of its
properties and compared the sum of those undiscounted net cash flows to the
Company's investment in that property. Through its analysis, the Company
determined that three of its correctional and detention facilities in the state
of Kentucky had been impaired. For these three properties, the Company reduced
the carrying values of the underlying assets to their estimated fair values, as
determined based on anticipated future cash flows discounted at rates
commensurate with the risks involved. The resulting impairment loss totaled
$76.4 million.
Eight of the facilities owned by the Company are subject to options that
allow various governmental agencies to purchase those facilities. In addition,
two of the facilities are constructed on land that the Company leases from
governmental agencies under ground leases. Under the terms of those ground
leases, the facilities become the property of the governmental agencies upon
expiration of the ground leases. The Company depreciates these two properties
over the term of the ground lease.
7. ACQUISITIONS AND DIVESTITURES
In April 1998, Old CCA acquired all of the issued and outstanding capital
stock of eight subsidiaries of U.S. Corrections Corporation ("USCC") (the "USCC
Acquisition") for approximately $10.0 million, less cash acquired. The
transaction was accounted for as a purchase transaction and the purchase price
was allocated to the assets and liabilities acquired based on the fair value of
the assets and liabilities acquired. By virtue of the USCC Acquisition, Old CCA
acquired contracts to manage four currently operating facilities in Kentucky,
each of which was
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PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
owned by Old Prison Realty at December 31, 1998, one facility in Florida, which
is owned by a governmental entity in Florida, as well as one facility in Texas,
which is owned by a governmental entity in Texas. During 1998, subsequent to the
USCC Acquisition, the contract to manage the Texas facility expired and was not
renewed. Old CCA also obtained the right to enter into contracts to manage two
North Carolina facilities previously owned by Old Prison Realty, both of which
were under construction as of the date of the USCC Merger. During 1998, both
North Carolina facilities became operational and Old CCA entered into contracts
to manage those facilities upon completion of the construction.
In April 1999, the Company purchased the Eden Detention Center in Eden,
Texas for $28.1 million. The facility has a design capacity of 1,225 beds and is
leased to New CCA under lease terms substantially similar to the CCA Leases.
In June 1999, the Company incurred a loss of $1.6 million as a result of a
settlement with the State of South Carolina for property previously owned by Old
CCA. Under the settlement, the Company, as the successor to Old CCA, will
receive $6.5 million in three installments by June 30, 2001 for the transferred
assets. The net proceeds were approximately $1.6 million less than the
surrendered assets' depreciated book value. The Company received $3.5 million of
the proceeds during 1999. As of December 31, 1999, the Company has a receivable
of $3.0 million related to this settlement.
In December 1999, the Company incurred a loss of $0.4 million resulting
from a sale of a new facility in Florida. Construction on the facility was
completed by the Company in May 1999. In accordance with the terms of the
management contract between Old CCA and Polk County, Florida, Polk County
exercised an option to purchase the facility. Net proceeds of $40.5 million were
received by the Company.
8. INVESTMENTS IN AFFILIATES
As discussed in Note 3, 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. For the year ended December 31, 1999, the Company recognized equity in
earnings of PMSI and JJFMSI of $4.7 million and $7.5 million, respectively, and
received distributions from PMSI and JJFMSI of $11.0 million and $10.6 million,
respectively.
Investments in affiliates consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Investment in PMSI.......................................... $ 60,756 $ 67,059
Investment in JJFMSI........................................ 52,726 55,882
Investment in New CCA....................................... 4,750 4,750
-------- --------
$118,232 $127,691
======== ========
</TABLE>
F-73
<PAGE> 300
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following operating information presents a combined summary of the
results of operations of PMSI and JJFMSI for the year ended December 31, 1999:
<TABLE>
<S> <C>
Revenues.................................................... $288,289
Net income.................................................. 12,851
</TABLE>
The following balance sheet information presents a combined summary of the
financial position of PMSI and JJFMSI as of December 31, 1999:
<TABLE>
<S> <C>
Current assets.............................................. $ 60,741
Total assets................................................ 151,167
Current liabilities......................................... 31,750
Total liabilities........................................... 32,622
Stockholders' equity........................................ 118,545
</TABLE>
9. INVESTMENTS IN DIRECT FINANCING LEASES
At December 31, 1999, the Company's investments in direct financing leases
represent net receivables under building and equipment leases between the
Company and certain governmental agencies. Certain of the agreements contain
provisions that allow the governmental agencies to purchase the buildings and
equipment for predetermined prices at specific intervals during the term of the
agreement.
A schedule of future minimum rentals to be received under direct financing
leases in years subsequent to December 31, 1999, is as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
2000........................................................ $ 5,101
2001........................................................ 5,101
2002........................................................ 5,101
2003........................................................ 5,101
2004........................................................ 5,101
Thereafter.................................................. 60,293
--------
Total minimum obligation.................................... 85,798
Less unearned interest income............................... (11,739)
--------
Investments in direct financing leases...................... $ 74,059
========
</TABLE>
During the years ended December 31, 1999, 1998 and 1997, the Company
recorded interest income of $3.4 million, $3.5 million and $3.3 million,
respectively, under these leases.
In May 1998, the Company agreed to pay a governmental agency $3.5 million
in consideration of the governmental agency's relinquishing its rights to
purchase a facility. As a result, the Company converted the facility from a
direct financing lease to property and equipment.
F-74
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PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1999 1998
------- -------
<S> <C> <C>
Debt issuance costs, less accumulated amortization of $5,888
and $627, respectively.................................... $41,462 $ 7,028
Receivable from Agecroft Prison Management, Inc............. 4,665 1,549
Receivable for South Carolina settlement.................... 3,000 --
Deferred acquisition costs.................................. 2,514 26,270
Executive notes receivable.................................. 2,094 --
Receivable from PMSI........................................ 1,283 --
Other assets................................................ 5,607 3,360
------- -------
$60,625 $38,207
======= =======
</TABLE>
In connection with procuring the Company's $1.0 billion Amended Credit
Facility discussed in Note 12, the Company incurred $41.2 million of debt
issuance costs, of which $5.1 million has been amortized as of December 31,
1999. In connection with procuring the Company's $100.0 million Senior Notes
discussed in Note 12, the Company incurred $5.5 million of debt issuance costs,
of which $0.4 million has been amortized as of December 31, 1999.
In 1998, Old CCA entered into an agreement with Agecroft Prison Management,
Inc. ("APM") to loan APM approximately $5.0 million. The Company succeeded to
this interest as a result of the 1999 Merger. Interest at 13.367% is payable
semi-annually. All principal is due January 2025. APM manages an 800 bed
medium-security prison in Salford, England for an agency of the British
government.
In connection with the prospective equity investment and related
restructuring discussed in Note 23, the Company has incurred a total of $6.4
million of costs, of which $2.5 million have been deferred as other assets. The
Company anticipates it will begin amortization of these deferred costs following
the consummation of the prospective equity investment and related restructuring.
In the event the proposed transactions are not completed, the Company will
expense these costs in the period during which their continuing value is
determined to be impaired.
The executive notes receivable were issued to three key executives.
Interest at the thirty day London Interbank Offered Rate ("LIBOR") rates plus
2.5% is payable annually. The original principal amount of the executive notes
was $3.0 million. The reduction in principal resulted from payments made during
1999 in relation to severance agreements with two of the executives. The
remaining principal payments begin in 2003 and conclude in 2005.
The receivable from PMSI represents amounts loaned to PMSI on a short-term
basis to fund construction costs of PMSI. The loan is non-interest bearing.
Principal is due on demand.
11. DISTRIBUTIONS TO SHAREHOLDERS
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
F-75
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PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. For purposes of meeting the distribution
requirements discussed above, $152.5 million of the total distributions in 1999
have been designated as distributions of the Accumulated Earnings and Profits.
In addition to distributing the Accumulated Earnings and Profits, the
Company, as a REIT, is also 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 December 31, 1999, the Company
currently intends to pay sufficient dividends either in cash or in securities to
satisfy all distribution requirements for qualification as a REIT for 1999 and
currently estimates that $143.7 million 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. The Company may partially satisfy
these requirements through the payment of a one-time special dividend (the
"Special Dividend"). Certain provisions of the Amended Credit Facility restrict
the Company's ability to pay these required distributions in cash. As of
December 31, 1999, $2.2 million of distributions relating to the 8.0% Series A
Cumulative Preferred Shares have been declared and accrued in the accompanying
consolidated balance sheets. The remaining $141.5 million of distributions that
must be paid to shareholders in 2000 in order for the Company to maintain its
status as a REIT have not been declared by the Board of Directors and,
accordingly, have not been accrued in the accompanying consolidated balance
sheets. If the Company completes the Fortress/Blackstone Restructuring, as
defined in Note 23, under its existing terms following required shareholder
approval in 2000, the Company will be required to be taxed as a C corporation
commencing with the taxable year ended December 31, 1999, and no further
dividends would be paid on the Company's common stock.
As a result of the Company's failure to declare, prior to December 31,
1999, and failure to distribute, prior to January 31, 2000, dividends sufficient
to distribute 95% of its taxable income for 1999, the Company is subject to
excise taxes, which are currently estimated to be $7.1 million and which have
been accrued as of December 31, 1999 in accounts payable and accrued expenses in
the consolidated balance sheets.
Quarterly distributions and the resulting tax classification for common
stock distributions are as follows:
<TABLE>
<CAPTION>
DECLARATION RECORD PAYMENT DISTRIBUTION ORDINARY RETURN OF
DATE DATE DATE PER SHARE INCOME CAPITAL
----------- -------- -------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C>
03/04/99 03/19/99 03/31/99 $0.60 100.0% 0.0%
05/11/99 06/18/99 06/30/99 0.60 100.0 0.0
08/27/99 09/17/99 09/30/99 0.60 100.0 0.0
</TABLE>
Quarterly distributions and the resulting tax classification for the 8.0%
Series A Cumulative Preferred Shares are as follows:
<TABLE>
<CAPTION>
DECLARATION RECORD PAYMENT DISTRIBUTION ORDINARY RETURN OF
DATE DATE DATE PER SHARE INCOME CAPITAL
----------- -------- -------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C>
03/04/99 03/31/99 04/15/99 $0.50 100.0% 0.0%
05/11/99 06/30/99 07/15/99 0.50 100.0 0.0
08/27/99 09/30/99 10/15/99 0.50 100.0 0.0
12/22/99 12/31/99 01/15/00 0.50 100.0 0.0
</TABLE>
F-76
<PAGE> 303
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1999 1998
---------- --------
<S> <C> <C>
Amended Credit Facility, principal payable quarterly with
remaining unpaid balances due at maturity in 2002,
interest payable periodically at a variable rate (10.0% at
December 31, 1999)........................................ $ 928,234 $ --
Senior Notes, principal due at maturity in June 2006,
interest payable semi-annually at 12%..................... 100,000 --
9.5% Convertible Subordinated Notes, principal due at
maturity in December 2008, interest payable semi-annually
at 9.5%................................................... 40,000 20,000
7.5% Convertible Subordinated Notes, principal due at
maturity in February 2005 with call provisions beginning
in February 2003, interest payable quarterly at 7.5%...... 30,000 30,000
Old CCA Revolving Credit Facility payable to a group of
banks, interest at a variable rate, repaid in 1999........ -- 222,000
Convertible Subordinated Notes, interest at 7.5%, converted
in 1999................................................... -- 20,000
Convertible Subordinated Notes, interest at 8.5%, converted
in 1999................................................... -- 7,000
Other....................................................... 757 833
---------- --------
$1,098,991 $299,833
========== ========
</TABLE>
THE CREDIT FACILITY AND AMENDED CREDIT FACILITY
At December 31, 1998, the Company was successor to Old CCA's outstanding
revolving credit borrowings of $222.0 million under a revolving credit facility
providing for borrowings up to $350.0 million. The facility bore interest at the
bank's prime rate or LIBOR plus 1.25%. In connection with the merger
transactions and divestitures discussed in Note 3, PMSI and JJFMSI each assumed
$5.0 million of debt related to the Company's revolving credit facility. In
January 1999, PMSI and JJFMSI repaid their portions of the outstanding debt
balance. Old CCA's revolving credit facility was replaced on January 1, 1999
with a new credit facility discussed below.
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 $0.625 million 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 $0.875 million
F-77
<PAGE> 304
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
through the calendar quarter ending September 30, 2002, with the balance to be
paid in full on December 31, 2002. Under the Amended Credit Facility, Lehman
Commercial Paper Inc. replaced NationsBank, N.A. as Administrative Agent.
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.
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 become subject
to the default rate of interest effective on 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.
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 the 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) New 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.
The current financial condition of the Company, the inability of New CCA to
make certain of its payment obligations to the Company, the ongoing process
surrounding the prospective equity investment and related restructuring, and the
actions taken by the Company and New CCA in attempts to resolve current
liquidity issues of the Company and New CCA have rendered a series of
F-78
<PAGE> 305
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
default or potential default issues under the Amended Credit Facility. These
defaults and potential defaults consist of the following:
- Restrictions upon the ability of the Company to amend the terms of its
agreements with New CCA without the consent of its senior lenders create
a potential default due to the Company's anticipation of required
amendments to alter the timing and amount of payments under the terms of
the CCA Leases, as well as interest payments on the CCA Note, as
discussed in Note 23.
- 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, create the need for a consent based upon the execution
of a securities purchase agreement with a prospective equity investor (as
discussed in Note 23) and the appointment of a new Chairman of the Board
of Directors of the Company and a new President of the Company.
- For the fiscal quarter ending December 31, 1999, the Company was not in
compliance with the following financial covenants, as defined in the
Amended Credit Facility: (i) the Company's interest coverage ratio and
(ii) the Company's leverage ratio.
- The existence of explanatory paragraphs in the reports of each of the
Company's and New CCA's reports of independent public accountants
relating to the Company's and New CCA's financial statements as to the
ability of each of the Company and New CCA to continue as a going concern
render the Company in violation of the provisions of the Amended Credit
Facility requiring unqualified opinions for the Company and New CCA.
- The March 21, 2000 declaration of the quarterly dividend on the 8.0%
Series A Cumulative Preferred Stock for the quarter ended March 31, 2000,
payable April 17, 2000, constituted an event of default, based on the
Company's unwaived defaults at the time the dividend was declared.
- New CCA's revolving credit facility requires that New CCA have a net
worth in excess of certain specified amounts. On December 31, 1999, New
CCA was not, and it currently is not, in compliance with this financial
covenant, which is an event of default under the Company's Amended Credit
Facility.
- As of March 31, 2000, the Company projects that it will not be in
compliance with the following financial covenants, as defined in the
Amended Credit Facility: (i) the Company's debt service coverage ratio;
(ii) the Company's interest coverage ratio; (iii) the Company's leverage
ratio; and (iv) the Company's ratio of total indebtedness to total
capitalization.
- In addition, as described below, the Company is in default under the
provisions of the 9.5% Convertible Notes. Due to cross-default provisions
existing between the Amended Credit Facility and the 9.5% Convertible
Notes, the Company has been considered in default of this provision of
the Amended Credit Facility since January 25, 2000.
The Company 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 certain amendments of the Company's
agreements with New CCA. The Company also plans to request the consent of such
lenders with respect to an additional waiver of the Amended Credit Facility's
financial covenants described above, as well as a temporary amendment to the
Amended Credit Facility changing the definition of the Company's borrowing base
to alleviate the adverse effect
F-79
<PAGE> 306
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the deferred rental payments on the Company's borrowing base. In connection
with the waiver of the financial covenants, the Company will request that the
calculation of the Company's interest coverage ratio and the Company's leverage
ratio as of December 31, 1999 be amended. In addition, the Company anticipates
the request of the waiver, subject to certain conditions, of events of default
under the provisions of the Amended Credit Facility relating to certain defaults
under the 9.5% Convertible Notes. These proposed waivers of, and amendment to,
the terms of the Amended Credit Facility would remain in effect only until the
earlier to occur of: (i) the completion of a prospective equity investment and
related restructuring, (ii) termination of the agreements with the
Fortress/Blackstone Investors or (iii) a yet undetermined date.
Management expects the conditions to the effectiveness of all of the
proposed waivers of, and amendment to, the provisions of the Amended Credit
Facility will include, among other conditions (i) New CCA having obtained a
waiver of, and an amendment to, certain provisions of its revolving credit
facility and (ii) the Company having delivered to the trustee of the Company's
$100.0 million Senior Notes 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 Business Development Agreement, the CCA Services
Agreement and the Amended and Restated Tenant Incentive Agreement issued by an
accounting, appraisal or investment banking firm of national standing.
There can be no assurance that the lenders under the Amended Credit
Facility will consent to any proposed waiver of, and amendments to, the note
agreement, 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, and amendments to, the Company's bank credit facility
is subject to the satisfaction of the conditions described above and the
attainment of the waivers of, and amendments to, the applicable provisions of
New CCA's bank credit facility. In the event the Company is unable to obtain the
necessary waivers or amendments to the bank 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 Company's bank credit facilities are
entitled, at their discretion, to exercise certain remedies, including
acceleration of the outstanding borrowings under the bank credit facility. In
addition, the Company's Senior Notes (as defined herein), the $40.0 million 9.5%
convertible, subordinated MDP Notes and the $30.0 million 7.5% convertible,
subordinated notes payable to PMI contain provisions which allow those creditors
to accelerate their debt and seek remedies if the Company has a payment default
under its bank credit facility or if the obligations under the Company's bank
credit facility have been accelerated. If the senior lenders under the Company's
bank credit facility elect to exercise their rights to accelerate the Company's
obligations under the bank 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 (as
defined herein) 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.
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 its bank credit facility to meet these
requirements. Due to the Company's financial condition and non-compliance with
certain covenants under the terms of its bank credit facility, the availability
of borrowing under its bank
F-80
<PAGE> 307
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
credit facility is uncertain. Accordingly, there can be no assurance that the
Company will be able to meet its operating, capital expenditure and debt service
requirement in the future.
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.
As of December 31, 1999, the Company is not in default under the terms of
the Senior Notes. However, amendment of the Company's agreements with New CCA
without prior delivery of fairness opinions, as described above, to the trustee
of the Senior Notes would constitute an event of default.
In addition, the indenture governing the Senior Notes contains a provision
which allows the holders thereof to accelerate the Senior Notes and seek
remedies if the Company has a payment default under its bank credit facility or
if the obligations under the Company's bank 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%. This issuance constituted the second tranche of a commitment by the
Company to issue an aggregate of $40.0 million of convertible subordinated
notes, with the first $20.0 million tranche issued in December 1998 under
substantially similar terms. The 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 December
31, 1999, the conversion price for the 9.5% Convertible Notes was $23.63 per
share as compared to $28.00 per share at issuance. This change in conversion
price resulted from dividends paid by the Company in 1999 and from the March 8,
1999 conversion of a $7.0 million convertible subordinated note issued to
Sodexho into 1.7 million shares of common stock at a conversion price of $4.09
per share and the conversion of a $20.0 million convertible subordinated note
issued to Sodexho into 2.6 million shares of common stock at a conversion price
of $7.80 per share, as provided in the original terms of the 9.5% Convertible
Notes.
The provisions of the 9.5% Convertible Notes provide that the execution of
the securities purchase agreement with the prospective equity investor as
discussed in Note 23 by the Company 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 holder to the Company. In addition, as of February 5,
2000, the Company was no longer in compliance with a financial covenant
contained in the note agreement relating to the ratio of the Company's total
indebtedness to total capitalization. As a result of the violation of these
covenants, the Company is in default under the provisions of the note 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
F-81
<PAGE> 308
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the note 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 those note 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. Because the conversion into common stock is at the
election of the note holders, the Company has accrued the contingent interest
from the date of issuance through December 31, 1999 of approximately $2.1
million.
The Company has initiated 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 the prospective equity
investor, thereby extinguishing the Company's obligation to repurchase the notes
at a premium. In addition, the Company has requested that the provisions of the
note agreement be amended to: (i) remove the financial covenant relating to the
Company's total indebtedness to total capitalization; (ii) remove a covenant
requiring the Company to use its best efforts to qualify as a REIT for federal
income tax purposes; and (iii) 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 these notes will consent to
any proposed waiver of, and amendments to, the note agreement, or will not seek
to declare an event of default prior to the execution of any proposed waiver and
amendments.
7.5% CONVERTIBLE SUBORDINATED NOTES
The $30.0 million 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 December 31, 1999, the
conversion price for the note was $23.63 per share as compared to $27.42 per
share at issuance. This change in conversion price resulted from dividends paid
by the Company in 1999 and from the March 8, 1999 conversion of a $7.0 million
convertible subordinated note issued to Sodexho into 1.7 million shares of
common stock at a conversion price of $4.09 per share and the conversion of a
$20.0 million convertible subordinated note issued to Sodexho into 2.6 million
shares of common stock at a conversion price of $7.80 per share, as provided in
the original terms of the 7.5% Convertible Notes.
The provisions of the note agreement contain financial covenants relating
to: (i) the Company's debt service coverage ratio; (ii) the Company's interest
coverage ratio; and (iii) the Company's ratio of total indebtedness to total
capitalization. It is likely that as of March 31, 2000, the Company will not be
in compliance with one or more of these financial covenants. If one or more of
these covenants are violated, such a violation would result in an event of
default under the provisions of the note agreement, and the holder of such notes
may, at its option, accelerate all or a portion of the outstanding principal
amount of this indebtedness.
If an event of default occurs under the provisions of the note agreement,
the Company will initiate discussions with the holder of such notes and attempt
to obtain a waiver of, or amendment to, the financial covenants contained in the
note agreement violated by the Company. In addition, in order to prevent an
event of default under the note agreement, prior to completion of a prospective
equity investment and related restructuring, the Company will be required to
amend the provisions of
F-82
<PAGE> 309
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the note agreement to remove a covenant requiring the Company to elect to be
taxed as a REIT for federal income tax purposes, if necessary.
There can be no assurance that the holder of these notes will consent to
any proposed waiver of, and amendments to, the note agreement, or will not seek
to declare an event of default prior to the execution of any proposed waiver and
amendments.
OTHER DEBT TRANSACTIONS
On March 8, 1999, the Company issued a $20.0 million convertible
subordinated note to Sodexho pursuant to a forward contract assumed by the
Company from Old CCA in the 1999 Merger. The note bore interest at LIBOR plus
1.35% and was convertible into shares of the Company's common stock at a
conversion price of $7.80 per share. On March 8, 1999, Sodexho converted (i) a
$7.0 million convertible subordinated note bearing interest at 8.5% into 1.7
million shares of the Company's common stock at a conversion price of $4.09 per
share, (ii) a $20.0 million convertible subordinated note bearing interest at
7.5% into 700,000 shares of the Company's common stock at a conversion price of
$28.53 per share and (iii) a $20.0 million convertible subordinated note bearing
interest at LIBOR plus 1.35% into 2.6 million shares of the Company's common
stock at a conversion price of $7.80 per share.
In 1998, convertible subordinated notes with a face value of $5.8 million
were converted into 2.9 million shares of common stock.
At December 31, 1999 and 1998, the Company had $16.3 million and $1.6
million in letters of credit, respectively. The letters of credit were issued to
secure the Company's construction of one facility and Old CCA's worker's
compensation insurance policy, performance bonds and utility deposits. The
Company is required to maintain cash collateral for the letters of credit.
The Company capitalized interest of $37.7 million, $11.8 million and $6.3
million in 1999, 1998 and 1997, respectively.
Maturities of long-term debt (excluding acceleration or demand provisions)
for the next five years and thereafter are:
<TABLE>
<S> <C>
2000........................................................ $ 6,084
2001........................................................ 6,093
2002........................................................ 916,337
2003........................................................ 114
2004........................................................ 126
Thereafter.................................................. 170,237
----------
$1,098,991
==========
</TABLE>
F-83
<PAGE> 310
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. DEFERRED GAINS ON SALES OF CONTRACTS
Deferred gains on the sales of contracts consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Deferred gain from sale to New CCA.......................... $ 63,337 $ 63,316
Deferred gain from sale to PMSI............................. 28,290 35,363
Deferred gain from sale to JJMS............................. 14,418 18,022
-------- --------
$106,045 $116,701
======== ========
</TABLE>
For the year ended December 31, 1999, the Company recognized $7.1 million
and $3.6 million of amortization of the deferred gains from the sales to PMSI
and JJFMSI, respectively.
14. INCOME TAXES
The Company, formerly a taxable corporation, currently 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 year ended
December 31, 1999.
The provision for income taxes is comprised of the following components:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
-------- --------- ---------
<S> <C> <C> <C>
Current Provision:
Federal............................................... $ -- $ 41,904 $ 35,930
State................................................. -- 7,914 3,540
------- -------- --------
-- 49,818 39,470
------- -------- --------
Income Taxes Charged to Equity:
Federal............................................... -- 4,016 5,679
State................................................. -- 459 649
------- -------- --------
-- 4,475 6,328
------- -------- --------
Deferred Provision (Benefit):
Federal............................................... 74,664 (34,848) (11,360)
State................................................. 8,536 (4,021) (1,297)
------- -------- --------
83,200 (38,869) (12,657)
------- -------- --------
Provision for income taxes....................... $83,200 $ 15,424 $ 33,141
======= ======== ========
</TABLE>
In addition to the above, the cumulative effect of accounting change for
1998 was reported net of $10.3 million of estimated tax benefit. Of the $10.3
million total tax benefit related to the
F-84
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PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
cumulative effect of accounting change, approximately $4.0 million related to
current tax benefit and approximately $6.3 million related to deferred tax
benefit.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31, 1998 are as
follows:
<TABLE>
<S> <C>
Current Deferred Tax Assets:
Asset reserves and liabilities not yet deductible for
tax.................................................... $ 2,750
Deferred revenue.......................................... 2,300
Other..................................................... 796
-------
Total current deferred tax assets...................... 5,846
-------
Noncurrent Deferred Tax Assets:
Deferred gain on real estate transactions and sales of
contracts.............................................. 44,779
Other..................................................... 2,055
-------
Total noncurrent deferred tax assets................... 46,834
-------
Noncurrent Deferred Tax Liabilities:
Tax in excess of book depreciation........................ (411)
Income items not yet taxable and other.................... (1,069)
-------
Total noncurrent deferred tax liabilities.............. (1,480)
-------
Net deferred tax assets................................ $51,200
=======
</TABLE>
A reconciliation of the statutory federal income tax rate and the effective
tax rate as a percentage of pretax income for the years ended December 31, 1998
and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
----- ----
<S> <C> <C>
Statutory federal rate...................................... 35.0% 35.0%
State taxes, net of federal tax benefit..................... 4.0 4.0
New CCA compensation charge................................. 21.0 --
Deductions not previously benefited......................... (29.4) --
Other items, net............................................ 5.8 (.9)
----- ----
36.4% 38.1%
===== ====
</TABLE>
In the event that the Company completes the Fortress/Blackstone
Restructuring, as defined in Note 23, under its existing terms following
required shareholder approval in 2000, the Company will be required to be taxed
as a C corporation commencing with the taxable year ended December 31, 1999. See
Note 22 for additional information on the Company's contingent tax liabilities.
15. NEW CCA COMPENSATION CHARGE
Old CCA recorded a $22.9 million charge to expense in 1998 for the implied
fair value of approximately 5.0 million shares of New CCA voting common stock
issued by New CCA to certain employees of Old CCA and Old Prison Realty. The
shares were granted to certain founding shareholders of New CCA in September
1998. Neither the Company, Old CCA nor New CCA received any proceeds from the
issuance of these shares. The fair value of these common shares was
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PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
determined at the date of the 1999 Merger based upon the implied value of New
CCA derived from $16.0 million in cash investments made by outside investors in
December 1998 in return for a 32% ownership interest in New CCA.
16. EARNINGS PER SHARE
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS 128"). Under the standards
established by SFAS 128, earnings per share is measured at two levels: basic
earnings per share and diluted earnings per share. Basic earnings per share 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 year ended December 31, 1999, the Company's stock options and
warrants and convertible subordinated notes were convertible into 0.2 million
and 3.2 million shares, respectively. These incremental shares were excluded
from the computation of diluted earnings per share for the year ended December
31, 1999 as the effect of their inclusion would have been anti-dilutive.
In computing diluted earnings per common share, the Company's stock
warrants and stock options are considered dilutive using the treasury stock
method, and the Series B convertible preferred stock and the various convertible
subordinated notes are considered dilutive using the if-converted method for the
years ended December 31, 1998 and 1997. The following table presents information
necessary to calculate diluted earnings per share for the years ended December
31:
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Net income (loss) available to common shareholders.......... $(61,976) $10,836 $53,955
Interest expense applicable to convertible subordinated
notes, net of tax......................................... -- 366 700
-------- ------- -------
Adjusted net income (loss) available to common
shareholders.............................................. $(61,976) $11,202 $54,655
======== ======= =======
Weighted average common shares outstanding.................. 115,097 71,380 67,568
Effect of dilutive options and warrants..................... -- 3,689 6,369
Conversion of preferred stock............................... -- 481 159
Conversion of convertible subordinated notes................ -- 3,389 4,863
-------- ------- -------
Adjusted diluted common shares outstanding.................. 115,097 78,939 78,959
======== ======= =======
Diluted earnings (loss) per share........................... $ (.54) $ .14 $ .69
======== ======= =======
</TABLE>
17. STOCKHOLDERS' EQUITY
PREFERRED STOCK
During 1998, the Company authorized 20.0 million shares of $.01 (one cent)
par value preferred stock of which 4.3 million shares are designated as 8.0%
Series A Cumulative Preferred Stock.
As discussed in Note 3, in connection with the Prison Realty Merger, Old
Prison Realty shareholders received 1.0 share of Series A Cumulative Preferred
Stock of the Company in exchange for each Old Prison Realty Series A Cumulative
Preferred Share. Consequently, the Company issued
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PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4.3 million shares of its 8.0% Series A Cumulative Preferred Stock on January 1,
1999. The Series A Cumulative Preferred Shares are redeemable at any time by the
Company on or after January 30, 2003 at $25 per share, plus dividends accrued
and unpaid to the redemption date. The 8.0% Series A Cumulative Preferred Shares
have no stated maturity, sinking fund provision or mandatory redemption and are
not convertible into any other securities of the Company. Dividends on the 8.0%
Series A Cumulative Preferred Shares are cumulative from the date of original
issue of such shares and are payable quarterly in arrears on the fifteenth day
of January, April, July and October of each year, to shareholders of record on
the last day of March, June, September and December of each year, respectively,
at a fixed annual rate of 8.0%.
Old CCA had authorized 400,000 shares of $1 (one dollar) par value Series B
convertible preferred stock. During 1997, Old CCA issued approximately 380,000
shares of Series B convertible preferred stock. The preferred stock had the same
voting rights as Old CCA's common stock.
Dividends were to be paid on the preferred stock at a rate equal to two
times the dividend being paid on each share of Old CCA's common stock. Each
share of the preferred stock was convertible into 1.94 shares of Old CCA's
common stock. On October 2, 1998, pursuant to the terms of an Exchange Agreement
by and among Old CCA, American Corrections Transport, Inc. ("ACT") and certain
shareholders of ACT, and the charter of Old CCA, as amended, Old CCA converted
each share of its Series B convertible preferred stock into 1.94 shares of Old
CCA's common stock. Old CCA received no cash proceeds as a result of the
transaction.
STOCK OFFERINGS
On November 4, 1998, Old CCA filed a Registration Statement on Form S-3 to
register up to 3.0 million shares of Old CCA common stock for sale on a
continuous and delayed basis using a "shelf" registration process. During
December 1998, Old CCA sold, in a series of private placements, 2.9 million
shares of Old CCA common stock to institutional investors pursuant to this
registration statement. The net proceeds of approximately $65.4 million were
utilized by Old CCA for general corporate purposes, including the repayment of
indebtedness, financing capital expenditures and working capital.
On January 11, 1999, the Company filed a Registration Statement on Form S-3
to register an aggregate of $1.5 billion in value of its common stock, preferred
stock, common stock rights, warrants and debt securities for sale to the public
(the "Shelf Registration Statement"). Proceeds from sales under the Shelf
Registration Statement have been and will be used for general corporate
purposes, including the acquisition and development of correctional and
detention facilities. During 1999, the Company issued and sold approximately 6.7
million shares of its common stock under the Shelf Registration Statement,
resulting in net proceeds to the Company of approximately $120.0 million.
On May 7, 1999, the Company registered 10.0 million shares of the Company's
common stock for issuance under the Company's Dividend Reinvestment and Stock
Purchase Plan (the "Plan"). The Plan provides a method of investing cash
dividends in, and making optional monthly cash purchases of, the Company's
common stock, at prices reflecting a discount between 0% and 5% from the market
price of the common stock on the New York Stock Exchange ("NYSE"). As of
December 31, 1999, the Company has issued 1,261,431 shares under the Plan, with
1,253,232 of these shares issued under the Plan's optional cash feature
resulting in proceeds of $12.3 million.
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PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK WARRANTS
Old CCA had issued stock warrants to certain affiliated and unaffiliated
parties for providing certain financing, consulting and brokerage services to
Old CCA and to stockholders as a dividend. All outstanding warrants were
exercised in 1998 for 3.9 million shares of common stock with no cash proceeds
received by Old CCA.
TREASURY STOCK
Old CCA's Board of Directors approved a stock repurchase program for up to
an aggregate of 350,000 shares of Old CCA's stock for the purpose of funding the
employee stock options, stock ownership and stock award plans. In September
1997, Old CCA repurchased 108,000 shares of its stock from a member of the Board
of Directors of Old CCA at the market price pursuant to this program. In March
1998, the Old CCA repurchased 175,000 shares from its Chief Executive Officer at
the market price pursuant to this program.
On December 31, 1998, all then outstanding treasury stock was retired in
connection with the 1999 Merger. Treasury stock was recorded in 1999 related to
the cashless exercise of stock options.
STOCK OPTION PLANS
The Company has incentive and nonqualified stock option plans under which
options were granted to "key employees" as designated by the Board of Directors.
The options are granted with exercise prices equal to the market value at the
date of grant. In general, one-fourth of the options granted to employees vest
immediately, with the remaining options becoming exercisable ratably on the
first, second and third anniversary of the dates of grant. Options granted to
non-employee trustees vest at the date of grant. The term of such options is ten
years from the date of grant.
In connection with the 1999 Merger, all options outstanding at December 31,
1998 to purchase Old CCA common stock and all options outstanding at January 1,
1999 to purchase Old Prison Realty common stock, were converted into options to
purchase shares of the Company's common stock after giving effect to the
exchange ratio and carryover of the vesting and other relevant terms. Options
granted under Old CCA's stock option plans are exercisable after the later of
two years from the date of employment or one year after the date of grant until
ten years after the date of grant. Options granted under Old Prison Realty's
stock option plans were granted with terms similar to the terms of the Company's
plans.
F-88
<PAGE> 315
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock option transactions relating to the Company's incentive and
nonqualified stock option plans are summarized below:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
--------- ----------------
(IN THOUSANDS, EXCEPT
EXERCISE PRICES)
<S> <C> <C>
Outstanding at December 31, 1996............................ 3,276 $10.76
Granted................................................... 397 27.23
Exercised................................................. (943) 8.69
Cancelled................................................. (23) 29.95
------ ------
Outstanding at December 31, 1997............................ 2,707 13.73
------ ------
Granted................................................... 467 38.55
Exercised................................................. (1,393) 6.21
Cancelled................................................. (51) 28.23
------ ------
Outstanding at December 31, 1998............................ 1,730 26.08
------ ------
Old Prison Realty options................................. 1,222 22.92
Granted................................................... 397 19.93
Exercised................................................. (144) 2.82
Cancelled................................................. (783) 24.21
------ ------
Outstanding at December 31, 1999............................ 2,422 $25.48
====== ======
Available for future grant.................................. 781 --
====== ======
Exercisable................................................. 2,142 $26.04
====== ======
</TABLE>
The weighted average fair value of options granted during 1999, 1998 and
1997 was $3.88, $16.43, and $11.59 per option, respectively, based on the
estimated fair value using the Black-Scholes option-pricing model.
Stock options outstanding at December 31, 1999 are summarized below:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS REMAINING OPTIONS
OUTSTANDING AT CONTRACTUAL LIFE WEIGHTED AVERAGE EXERCISABLE AT
EXERCISE PRICE DECEMBER 31, 1999 (IN YEARS) EXERCISE PRICE DECEMBER 31, 1999
-------------- ----------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
$1.46 7 2.17 $ 1.46 7
$2.21 - $2.43 42 3.78 2.23 42
$4.75 - $6.50 148 5.05 5.88 148
$10.04 24 5.42 10.04 24
$16.71 - $23.00 1,065 7.83 20.49 796
$27.71 - $40.00 1,136 7.36 34.05 1,125
----- -----
2,422 2,142
===== =====
</TABLE>
During 1995, Old CCA authorized the issuance of 295,000 shares of common
stock to certain key employees as a deferred stock award. The award becomes
fully vested ten years from the date of grant based on continuous employment
with the Company. The Company is expensing the $3.7 million of awards over the
vesting period.
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<PAGE> 316
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1997, Old CCA granted 70,000 stock options to a member of the Board
of Directors of Old CCA to purchase Old CCA's common stock. The options were
granted with an exercise price less than the market value on the date of grant
and were exercisable immediately. As of December 31, 1998, Old CCA had
recognized $0.5 million of compensation expense related to the issuance of these
stock options.
During 1999, the Company authorized the issuance of 23,000 shares of common
stock to four executives as deferred stock awards. The value of the awards on
the date of grant was approximately $0.5 million. The awards vested 25%
immediately upon date of the grant with the remaining shares vesting 25% on each
anniversary date of the grant in each of the next three years. Effective
December 31, 1999, two of the executives that received the awards resigned from
the Company. All unvested shares issued to those two executives were forfeited
upon their resignation. The Company expensed $0.1 million related to the shares
in 1999.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") and accounts for stock-based compensation using the
intrinsic value method as prescribed in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" and related Interpretations. As a
result, no compensation cost has been recognized for the Company's stock option
plans under the criteria established by SFAS 123. Had compensation cost for the
stock option plans been determined based on the fair value of the options at the
grant date for awards in 1999, 1998 and 1997 consistent with the provisions of
SFAS 123, the Company's net income and net income per share would have been
reduced to the pro forma amounts indicated below for the years ended December
31:
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Net income (loss) -- as reported............................ $(61,976) $10,836 $53,955
Net income (loss) -- pro forma.............................. (64,974) 6,769 48,911
Net income (loss) per share -- Basic -- as reported......... (.54) .15 .80
Net income (loss) per share -- Basic -- pro forma........... (.56) .09 .72
Net income (loss) per share -- Diluted -- as reported....... (.54) .14 .69
Net income (loss) per share -- Diluted -- pro forma......... (.56) .09 .62
</TABLE>
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the pro forma compensation cost may not be
representative of that to be expected in future years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Expected dividend yield..................................... 9.0% 0.0% 0.0%
Expected stock price volatility............................. 49.1% 47.7% 40.4%
Risk-free interest rate..................................... 5.4% 4.6% 5.3%
Expected life of options.................................... 10 years 4 years 4 years
</TABLE>
PRISON REALTY TRUST 401(K) SAVINGS AND RETIREMENT PLAN
On December 17, 1998, the Company's Board of Directors adopted the Prison
Realty Trust, Inc. 401(k) Savings and Investment Plan (the "401(k) Plan").
Effective January 1, 1999, in conjunction
F-90
<PAGE> 317
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
with the 1999 Merger, the Employee Savings and Stock Ownership Plan (the "ESOP")
of Old Prison Realty was replaced by the 401(k) Plan. The 401(k) Plan is a
voluntary compensation deferral plan under Section 401(k) of the Code. All
employees of the Company are eligible to participate upon reaching age 18 and
completing six months of qualified service, as defined in the 401(k) Plan.
Eligible employees may elect to defer from 1% to 15% of their compensation. The
Company will match a discretionary percentage of the employees' salary deferral,
and the deferrals are invested securities and investments as permitted by the
401(k) Plan and directed by each employee. For the year ended December 31, 1999,
the Company contributed $0.037 million to the 401(k) Plan.
18. REVENUES AND EXPENSES
Approximately 95% of the Company's revenues for the year ended December 31,
1999 relates to amounts earned under lease arrangements from tenants, primarily
New CCA. See Note 5 for discussion of lease arrangements with New CCA.
Approximately 96% and 98% of Old CCA's revenues for the years ended
December 31, 1998 and 1997, respectively, relate to amounts earned from federal,
state and local governmental management and transportation contracts. Old CCA
had revenues of 18% and 21% from the federal government and 65% and 59% from
state governments for the years ended December 31, 1998 and 1997, respectively.
One state government accounted for revenues of 10% and 13% for the years ended
December 31, 1998 and 1997, respectively. In 1997, Old CCA recognized $7.9
million of additional management service revenues. Old CCA recognized after tax
development fee income of $2.5 million in 1997 related to a contract to design,
construct and equip a managed detention facility.
Accounts payable at December 31, 1999 and 1998, consists of the following:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Trade....................................................... $10,099 $21,999
Construction................................................ 32,252 44,665
------- -------
$42,351 $66,664
======= =======
</TABLE>
Salaries and related benefits represented 12% of general and administrative
expenses for the year ended December 31, 1999. Salaries and related benefits
represented 61% and 66% of operating expenses for the years ended December 31,
1998 and 1997, respectively.
F-91
<PAGE> 318
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Selected quarterly financial information for each of the quarters in the
years ended December 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues..................................... $ 71,986 $73,841 $74,975 $ 64,916
Operating income (loss)...................... 61,187 61,614 61,772 (109,152)
Net income (loss)............................ (22,605) 60,423 48,145 (139,339)
Net income (loss) available to common
shareholders............................... (24,755) 58,273 45,995 (141,489)
Net income (loss) per common share:
Basic...................................... (0.23) 0.50 0.39 (1.20)
Diluted.................................... (0.23) 0.50 0.39 (1.20)
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1998
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues.................................... $141,298 $164,071 $179,136 $177,554
Operating income (loss)..................... 22,143 26,198 28,534 (35,197)
Income (loss) before cumulative effect of
accounting change......................... 18,443 21,088 21,102 (33,652)
Cumulative effect of accounting change, net
of taxes.................................. -- -- -- 16,145
Net income (loss)........................... 18,443 21,088 21,102 (49,797)
Net income (loss) available to common
shareholders.............................. 18,443 21,088 21,102 (49,797)
Net income (loss) per common share:
Basic..................................... 0.27 0.30 0.30 (.67)
Diluted................................... 0.23 0.27 0.27 (.67)
</TABLE>
20. INTERNATIONAL ALLIANCE
Old CCA entered into an International Alliance (the "Alliance") with
Sodexho to pursue prison management business outside the United States. In
conjunction with the Alliance, Sodexho purchased an equity position in Old CCA
by acquiring several instruments. In 1994, Old CCA sold Sodexho 2.5 million
shares of common stock at $4.29 per share and a $7.0 million convertible
subordinated note bearing interest at 8.5%. Sodexho also received warrants that
were exercised in 1998 for 3.9 million shares of common stock. In consideration
of the placement of the aforementioned securities, Old CCA paid Sodexho $4.0
million over a four-year period ending in 1998. These fees include debt issuance
costs and private placement equity fees. These fees have been allocated to the
various instruments based on the estimated cost to Old CCA of raising the
various components of capital and are charged to debt issuance costs or equity
as the respective financings are completed.
In 1995, Old CCA and Sodexho entered into a forward contract whereby
Sodexho would purchase up to $20.0 million of convertible subordinated notes at
any time prior to December 1997. In 1997, Old CCA and Sodexho extended the
expiration date of this contract to December 1999. As
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<PAGE> 319
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
discussed in Note 12, on March 8, 1999, the Company issued the $20.0 million
convertible, subordinated notes to Sodexho. The notes bore interest at LIBOR
plus 1.35% and were convertible into shares of the Company's common stock at a
conversion price of $7.80 per share.
In 1996, Old CCA sold $20.0 million of convertible notes to Sodexho
pursuant to their contractual preemptive right. The notes had an interest rate
of 7.5% and were convertible into common shares at a conversion price of $28.53
per share.
As discussed in Note 12, on March 8, 1999, Sodexho converted (i) the $7.0
million convertible subordinated note bearing interest at 8.5% into 1.7 million
shares of the Company's common stock at a conversion price of $4.09 per share,
(ii) the $20.0 million convertible subordinated note bearing interest at 7.5%
into 700,000 shares of the Company's common stock at a conversion price of
$28.53 per share and (iii) the $20.0 million convertible subordinated note
bearing interest at LIBOR plus 1.35% into 2.6 million shares of the Company's
common stock at a conversion price of $7.80 per share.
21. RELATED PARTY TRANSACTIONS
Old CCA paid legal fees to a law firm of which one of the partners is a
stockholder of the Company and had been a member of the Old CCA Board of
Directors. Legal fees, including fees related to Old CCA's mergers and
acquisitions, paid to the law firm amounted to $3.0 million and $1.1 in 1998 and
1997, respectively. The Company paid $5.8 million to this law firm during 1999.
Old CCA paid $0.3 million and $0.4 million in 1998 and 1997, respectively,
to a member of the Old CCA Board of Directors for consulting services related to
various contractual relationships. The Company did not make any payments to this
individual during 1999.
Old CCA paid $1.3 million and $0.9 million in 1998 and 1997, respectively,
to a company that is majority-owned by an individual that was a member of the
Old CCA Board of Directors, for services rendered at one of its facilities. The
Company did not make any payments to this individual during 1999.
During 1999, the Company paid $26.5 million to a construction company that
is owned by a member of the Company's Board of Directors, for services rendered
in the construction of facilities. During 1998, Old CCA paid $40.8 million and
Old Prison Realty paid $8.7 million to this construction company.
During 1998, the Company paid $3.0 million in 1998 to a member of the
Company's Board of Directors for consulting services rendered in connection with
the merger transactions discussed in Note 3. The Company did not make payments
to this individual during 1999 other than Board of Director fees.
22. COMMITMENTS AND CONTINGENCIES
LITIGATION
As a result of the 1999 Merger, the Company became subject to a variety of
legal proceedings outstanding as of December 31, 1998 against Old CCA arising in
the ordinary course of Old CCA's business, including certain claims brought by
and on behalf of inmates and employees of facilities managed and operated by Old
CCA prior to the 1999 Merger. The Company does not believe that such litigation,
if resolved against the Company, would have a material adverse effect upon its
consolidated financial position, results of operations and cash flows. Also, as
a result of the 1999
F-93
<PAGE> 320
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Merger, the Company became subject to certain legal proceedings outstanding as
of January 1, 1999 against Old Prison Realty arising in the ordinary course of
Old Prison Realty's business, including certain claims arising in connection
with the construction and development of its facilities. The Company does not
believe that such litigation, if resolved against the Company, would have a
material adverse effect upon its consolidated financial position, results of
operations and cash flows.
At December 31, 1998, Old CCA was a party to two inmate lawsuits at the
Northeast Ohio Correctional Center for wrongful deaths. These lawsuits were
assumed by the Company in the 1999 Merger. While the outcome of these lawsuits
is not determinable, the Company does not believe that such litigation, if
resolved against the Company, would have a material adverse effect upon its
consolidated financial position, results of operations and cash flows.
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 as the investors in
the prospective equity investment and related restructuring discussed in Note
23. 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 prospective equity investment and related
restructuring or having taken steps to maximize stockholder value. The
plaintiffs seek an injunction preventing the completion of the equity investment
and related 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. The plaintiffs in these three actions have
moved for consolidation.
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 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. 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.
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
F-94
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PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
connection with the agreements entered into by the Company and New CCA in May
1999 to increase payments made by the Company to New 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 New 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. 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, New CCA
and persons who were directors at the time the Company entered into the
agreements regarding the increased payments to New CCA. The derivative action
alleges, among other things, that the directors of the Company violated their
fiduciary duties in approving the increased payments to New CCA. The plaintiffs
in this action have also moved for a preliminary injunction to prevent the
completion of the proposed equity investment and 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, New 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 in connection with the proposed equity investment and related
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,
F-95
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PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 Fortress/Blackstone Restructuring, as defined in
Note 23, under its existing terms following required shareholder approval in
2000, the Company will be required to be taxed as a C corporation commencing
with the taxable year ended December 31, 1999. As discussed in Note 11, in order
to qualify as a REIT, the Company is required to distribute 95% of its taxable
income for 1999. Although dividends sufficient to distribute 95% of the
Company's taxable income for 1999 have not been declared as of December 31,
1999, the Company intends to pay sufficient dividends either in cash or in
securities to satisfy all distribution requirements for qualification as a REIT
for 1999 and estimates that $143.7 million 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. As of December 31, 1999,
$2.2 million of distributions relating to the 8.0% Series A Cumulative Preferred
Shares have been declared and accrued in the accompanying consolidated balance
sheets. The remaining $141.5 million of distributions that must be paid to
shareholders in 2000 in order for the Company to maintain its status as a REIT
have not been declared by the Board of Directors and, accordingly, have not been
accrued in the accompanying consolidated balance sheets. It is likely that the
Company's debt holders would be required to consent to the Company's payment of
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 Code 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 IRS for a period of three years from
the date of filing of its 1999 tax return. Should the IRS review the Company's
election to be taxed as a REIT for the 1999 taxable year and reach a conclusion
requiring the Company to be treated as a taxable corporation for the 1999
taxable year, the Company would be subject to income taxes and interest on its
1999 taxable income and possibly subject to fines and/or penalties. In the event
that the Company completes the Fortress/Blackstone Restructuring, as defined in
Note 23, under its existing terms following required shareholder approval in
2000, the Company will be required to be taxed as a C corporation commencing
with the taxable year ended December 31, 1999. Income taxes for the year ended
December 31, 1999 could exceed $83.5 million, which would have an adverse impact
on the Company's consolidated financial position, results of operations and cash
flows.
In connection with the 1999 Merger, the Company assumed any 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
F-96
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PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 shareholders. Such results would have a
material adverse impact on the Company's financial position, results of
operations and cash flows.
GUARANTEES
The Company has guaranteed the bond indebtedness (outstanding balance of
$69.1 million at December 31, 1999) and forward purchase agreement (estimated
obligation of $6.9 million at December 31, 1999) of a governmental entity for
which PMSI currently provides management services at a 302-bed correctional
facility. Under the terms of its guarantee agreements, the Company is required
to maintain a restricted cash account (balance of $6.9 million at December 31,
1999) to collateralize the guarantee of the forward purchase agreement.
23. PROSPECTIVE EQUITY INVESTMENT AND RELATED RESTRUCTURING
RESTRUCTURING AND RELATED TRANSACTIONS
During the third quarter of 1999, the Company and New CCA retained Merrill
Lynch & Co. ("Merrill Lynch") as their financial advisor to assist them in
completing a sale of equity and/or debt securities as required by the Amended
Credit Facility in order to make the Special Dividend payment in cash. Following
extensive analysis by Merrill Lynch concerning the Company's capital structure,
liquidity, and potential investor candidates, the advisor recommended that the
Board of Directors consider more comprehensive investment alternatives.
In order to address the capital and liquidity constraints facing the
Company and New CCA and concerns regarding the corporate structure and
management of the Company, the Company intends to complete a comprehensive
restructuring (the "Restructuring") pursuant to which it is currently
anticipated that the Company will:
- merge with each of New CCA, PMSI and JJFMSI and operate under the name
"Corrections Corporation of America" as a taxable corporation, rather
than a REIT, for federal income tax purposes (the "Combination");
- raise additional equity (the "Equity Investment");
- refinance all or a portion of its existing indebtedness, including its
existing $1.0 billion Amended Credit Facility; and
- incorporate changes to existing executive management.
PROPOSED RESTRUCTURING LED BY AFFILIATES OF FORTRESS AND BLACKSTONE
On December 26, 1999, the Company entered into a series of agreements
concerning a proposed Restructuring led by a group of institutional investors
(the "Fortress/Blackstone Investors") consisting of an affiliate of Fortress
Investment Group LLC and affiliates of The Blackstone Group, together with an
affiliate of Bank of America Corporation (the "Fortress/Blackstone
Restructuring"). Under the terms of the Fortress/Blackstone Restructuring, the
Company would:
- complete the Combination and operate as a taxable corporation commencing
with the Company's 1999 taxable year;
F-97
<PAGE> 324
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- raise up to $350.0 million by selling shares of convertible preferred
stock and warrants to purchase shares of common stock to the
Fortress/Blackstone Investors in a private placement and to the Company's
existing common stockholders in a $75.0 million rights offering;
- obtain a new $1.2 billion credit facility;
- incorporate changes to existing management through a newly constituted
Board of Directors and executive management team; and
- amend the Company's existing charter and bylaws to accommodate the
Fortress/Blackstone Restructuring.
Approval of the holders of the Company's common stock will be required in
order to complete the Fortress/Blackstone Restructuring and related
transactions. In this regard, on February 17, 2000, the Company filed a
preliminary proxy statement with the Securities and Exchange Commission to be
used in connection with a special meeting of the Company's stockholders expected
to be held during 2000.
In connection with the Fortress/Blackstone Restructuring, through December
31, 1999, the Company has incurred a total of $6.4 million of costs and
expenses. In addition to these costs and expenses already incurred, the Company
will incur certain costs and expenses in 2000 related to the performance of
various parties under contractual agreements. Regardless of whether or not the
Fortress/Blackstone Restructuring is completed, the Company is presently
obligated to pay to the Fortress/Blackstone Investors a $15.7 million
transaction fee, which is payable upon the earlier of (i) the issuance of the
convertible preferred stock and warrants to purchase shares of common stock
described above, (ii) four months from December 26, 1999, or (iii) the
completion of an alternative Restructuring.
If the Fortress/Blackstone Restructuring is completed, the Company will
bear all costs and expenses, including the fees and expenses of advisors,
accountants, attorneys, consultants and other parties engaged by the Company and
by the Fortress/Blackstone Investors in connection with the evaluation,
negotiation and consummation of Fortress/Blackstone Restructuring. Under the
terms of the Fortress/Blackstone Restructuring, these costs and expenses will
include an annual monitoring fee of $1.5 million to be paid to the
Fortress/Blackstone Investors until a newly constituted executive management
team, which has been approved by the Company's Board of Directors and the
Fortress/Blackstone Investors, is in place.
In addition, if prior to the consummation of the Fortress/Blackstone
Restructuring or during a period of one year following any termination of the
Fortress/Blackstone Restructuring, the Company, New CCA, PMSI or JJFMSI enters
into any agreement with a third party without the consent of the
Fortress/Blackstone Investors providing for the issuance of equity or
convertible securities with proceeds in excess of $100.0 million or providing
for any merger, consolidation, transfer of substantial assets, any tender or
exchange offer, or similar transactions involving the Company, New CCA, PMSI or
JJFMSI, then the Company must pay a $7.5 million break-up fee to the
Fortress/Blackstone Investors.
PROPOSED RESTRUCTURING LED BY PACIFIC LIFE
On February 23, 2000, the Board of Directors of the Company received an
unsolicited proposal from Pacific Life Insurance Company ("Pacific Life")
regarding a proposed Restructuring intending to serve as an alternative to the
Fortress/Blackstone Restructuring (the "Pacific Life Restructuring").
F-98
<PAGE> 325
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the receipt of the unsolicited proposal regarding the Pacific
Life Restructuring, the Company's Board of Directors determined, after reviewing
the proposal with its financial and legal advisors, that it is appropriate for
the Company and its financial advisors to commence negotiations with Pacific
Life regarding a potential Restructuring led by Pacific Life.
TRANSACTIONS BETWEEN THE COMPANY AND NEW CCA
As of December 31, 1999, approximately $24.9 million of December 1999 rents
due from New CCA to the Company were unpaid. In an effort to address the
liquidity needs of the Company and New CCA prior to the Restructuring, the
Company and New CCA currently intend to amend the terms of the CCA Leases.
Pursuant to this proposed amendment, rent will be payable on each June 30 and
December 31, instead of monthly. In addition, the proposed amendment provides
that New CCA is required to make certain scheduled monthly installment payments
to the Company from January 1, 2000 through June 30, 2000. Approximately $12.9
million of the balance outstanding at December 31, 1999 was paid February 14,
2000, and the Company expects that the remaining $12.0 million of 1999 rents
will be received during the second quarter of 2000. In regard to rent accruing
from January 1, 2000 through June 30, 2000, the Company and New CCA are
currently negotiating the scheduled monthly installment payments that are to
occur during the second quarter of 2000. At the time these installment payments
are made, New 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 the Amended
Credit Facility.
The Company and New CCA also intend to amend the terms of certain other
agreements between the Company and New CCA (the Business Development Agreement,
the CCA 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 New CCA until September 30, 2000.
LENDER CONSENTS
The proposed amendments to the contractual agreements between the Company
and New CCA as described above are subject to the consent of the Company's and
New CCA's lenders. The consummation of the Restructuring, absent a refinancing
of the Company's debt, also is subject to the consent of the Company's and New
CCA's lenders.
No assurance can be given that the Restructuring and related transactions
will be consummated. In addition, no assurance can be given that the amendment
of the various contractual agreements between the Company and New CCA and the
various lenders' consent to such amendments will be obtained and be sufficient
to address the liquidity needs of the Company and New CCA prior the
Restructuring. The failure to consummate the Restructuring and/or the failure to
amend the various contractual agreements between the Company and New CCA and to
gain the various lenders' consent to such amendments could have a material
adverse impact on the Company's consolidated financial position, results of
operations and cash flows.
CURRENT STATUS
The Company is currently in discussion with each of the Fortress/Blackstone
Investors and representatives from Pacific Life with respect to the terms of the
proposed Restructuring. In the event the Company is unable to reach an agreement
with these parties or complete a Restructuring with
F-99
<PAGE> 326
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
another third party, the Company and New CCA will be forced to pursue certain
standalone alternatives not involving a third party investor and such
alternatives have significant drawbacks. In connection with such standalone
alternatives, the Company will be forced to restructure or renegotiate its
existing indebtedness which may not be possible or, if possible, obtained on
significantly less favorable terms, given New CCA's recent operating performance
and failure to meet its projected results. No assurance, however, can be given
that any debt restructuring or renegotiation could be accomplished. Further, a
standalone combination would not address the Company's capital needs with
respect to the construction and expansion of correctional and detention
facilities as well as its financial ability to expand its existing and
perspective business opportunities.
F-100
<PAGE> 327
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
(UNAUDITED AND AMOUNTS IN
THOUSANDS)
<S> <C> <C>
ASSETS
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 ASSETS:
Investment in contracts................................. 66,160 67,363
Other................................................... 8,097 8,732
--------- ---------
Total assets....................................... $ 175,918 $ 184,701
========= =========
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
Other accrued expenses.................................. 16,518 17,514
Short-term debt......................................... 6,180 16,214
Promissory note to Prison Realty........................ 137,000 137,000
--------- ---------
Total current liabilities.......................... 313,951 258,421
Deferred lease incentives and service fees received from
Prison Realty......................................... 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;
100,000 shares authorized; 9,349 issued and
outstanding........................................... 93 93
Common stock -- Class B; $0.01 (one cent) par value;
100,000 shares authorized; 981 issued and
outstanding........................................... 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>
The accompanying notes are an integral part of these consolidated statements.
F-101
<PAGE> 328
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT 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
------------------ ------------------
(UNAUDITED AND AMOUNTS IN THOUSANDS)
<S> <C> <C>
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 accompanying notes are an integral part of this consolidated statement.
F-102
<PAGE> 329
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF 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
---------------- ----------------
(UNAUDITED AND AMOUNTS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................ $(62,640) $(39,766)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization......................... 2,170 2,062
Amortization of lease incentives and service fees
received from Prison Realty........................ (1,868) (160)
Deferred income taxes................................. -- (27,358)
Lease incentives and service fees 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 (used in) 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 Period.......... 10,725 19,057
-------- --------
Cash and Cash Equivalents, End of Period................ $ 2,504 $ 10,918
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.............................................. $ 464 $ --
======== ========
Income taxes.......................................... $ -- $ --
======== ========
</TABLE>
F-103
<PAGE> 330
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
1. ORGANIZATION AND FORMATION TRANSACTIONS
Correctional Management Services Corporation, a Tennessee corporation, was
formed on September 11, 1998, and changed its name to Corrections Corporation of
America in 1999 (the "Company"). The Company was formed in anticipation of the
expected merger transaction (the "1999 Merger") between Corrections Corporation
of America ("Old CCA"), CCA Prison Realty Trust ("Old Prison Realty") and Prison
Realty Trust, Inc. ("Prison Realty", formerly Prison Realty Corporation). On
September 22, 1998, the Company issued 5.0 million shares of Class A voting
common stock to certain founding shareholders at par value. Additionally, on
September 22, 1998, the Company issued 0.8 million restricted shares of Class A
voting common stock to certain wardens of Old CCA facilities at the implied fair
value of $3.9 million. Immediately prior to the acquisition of management
contracts discussed in Note 2, the Company issued 3.5 million shares of Class A
voting common stock to outside investors in consideration of cash proceeds
totaling $16.0 million. The Company operates and manages prisons and other
correctional facilities and provides prisoner transportation services for
governmental agencies.
2. ACQUISITION OF MANAGEMENT CONTRACTS AND OTHER RELATIONSHIPS WITH PRISON
REALTY
Immediately after the issuance of the Class A voting common stock discussed
in Note 1, on December 31, 1998, the Company acquired all of the issued and
outstanding capital stock of certain wholly owned corporate subsidiaries of Old
CCA, certain management contracts and certain other related assets and
liabilities of Old CCA, and entered into a trade name use agreement with Old
CCA, as described below. In exchange, the Company issued an installment
promissory note in the principal amount of $137.0 million that bears interest at
12% per annum and is payable over 10 years (the "Promissory Note") and 1.0
million shares of the Company's Class B non-voting common stock, which
represents 9.5% of the Company's outstanding stock. The Class B non-voting
common stock was valued at the implied fair market value of $4.75 million.
The acquisition of the capital stock, the management contracts and related
assets and liabilities was accounted for as a purchase transaction in accordance
with Accounting Principles Board Opinion No. 16 "Business Combinations," and the
aggregate purchase price of $141.8 million was allocated to the assets and
liabilities acquired based on management's estimates of the fair value of the
assets and liabilities acquired. An amount of $67.8 million was initially
assigned to the value of the management contracts acquired and is being
amortized over a fifteen-year period, which represents the average remaining
lives of the contracts acquired plus any contractual renewal options. During
1999, the Company continued to evaluate the values assigned to the management
contracts and the assets and liabilities acquired. As a result, the Company
increased the value of the management contracts by approximately $4.4 million.
TRADE NAME USE AGREEMENT
On December 31, 1998, immediately prior to the 1999 Merger in connection
with the transactions described above, the Company entered into a trade name use
agreement with Old CCA (the "Trade Name Use Agreement"). Under the Trade Name
Use Agreement, which has a term of ten years, the Company obtained the right to
use the name, "Corrections Corporation of America" and derivatives thereof,
subject to specified terms and conditions therein. In consideration for such
right, the Company agreed to pay a fee equal to (i) 2.75% of the Company's gross
revenues for the
F-104
<PAGE> 331
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
first three years of the Trade Name Use Agreement, (ii) 3.25% of the Company's
gross revenues for the following two years of the Trade Name Use Agreement, and
(iii) 3.625% of the Company's gross revenues for the remaining term of the Trade
Name Use Agreement, provided that the amount of such fee may not exceed (a)
2.75% of Prison Realty's gross revenues for the first three years of the Trade
Name Use Agreement, (b) 3.5% of Prison Realty's gross revenues for the following
two years of the Trade Name Use Agreement, and (c) 3.875% of Prison Realty's
gross revenues for the remaining term of the Trade Name Use Agreement. The
Company incurred $2.6 million and $2.1 million of expenses under this agreement
for the three months ended March 31, 2000 and 1999, respectively. At March 31,
2000, the Company had a payable to Prison Realty totaling $4.8 million related
to expense under this agreement.
CCA LEASES
On January 1, 1999, the Company entered into a master lease agreement and
leases with respect to the thirty-six leased properties with Prison Realty (the
"CCA Leases"). The initial terms of the CCA Leases are 12 years and may be
extended at fair market rates for three additional five-year periods upon the
mutual agreement of the Company and Prison Realty. As of March 31, 2000, the
Company leased thirty-seven properties with Prison Realty.
On December 31, 1999, Prison Realty and the Company amended the terms of
the CCA Leases to change the annual base rent escalation formula with respect to
each facility leased to the Company. Previously, the annual base rent payable
with respect to each facility was subject to increase each year in an amount
equal to a percentage of the total rental payments with respect to each
facility, such percentage being the greater of (i) 4%; or (ii) 25% of the
percentage increase of gross management revenue derived from such facility. As a
result of this amendment, the annual base rent with respect to each facility is
subject to increase each year in an amount equal to the lesser of (i) 4% of the
annualized yearly rental payments with respect to such facility; or (ii) 10% of
the excess of the Company's aggregate gross management revenues for the prior
year over a base amount of $325.0 million.
During the three months ended March 31, 2000, the Company has failed to
make timely contractual payments under the terms of the CCA Leases. As of March
31, 2000 and December 31, 1999, approximately $92.1 million and $24.9 million of
rents were payable to Prison Realty, respectively. For the three months ended
March 31, 2000, the Company incurred gross lease expense of $80.2 million.
During the first three quarters of 1999, the Company recognized lease expense on
a straight-line basis over the life of the lease. As previously discussed, the
Company leases were amended in the fourth quarter of 1999, and the Company
records actual lease expense as incurred. Gross lease expense disregarding
straight-line rent accruals was $62.6 million for the three months ended March
31, 1999.
CCA RIGHT TO PURCHASE AGREEMENT
Effective January 1, 1999, the Company and Prison Realty entered into a
Right to Purchase Agreement (the "CCA Right to Purchase Agreement") pursuant to
which the Company granted to Prison Realty the right to acquire and lease back
to the Company at fair market rental rates, any correctional or detention
facility acquired or developed and owned by the Company in the future for a
period of ten years following the date inmates are first received at such
facility. The initial annual rental rate on such facilities will be the fair
market rental rate as determined by the Company and Prison Realty. Additionally,
the Company granted Prison Realty the right of first refusal to acquire
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
any Company-owned correctional or detention facility should the Company receive
an acceptable third party offer to acquire any such facility. The Company has
sold no facilities to Prison Realty under the CCA Right to Purchase Agreement.
CCA SERVICES AGREEMENT
On January 1, 1999, immediately after the 1999 Merger, the Company entered
into a services agreement (the "CCA Services Agreement") with Prison Realty
pursuant to which the Company agreed to serve as a facilitator of the
construction and development of additional facilities on behalf of Prison Realty
for a term of five years from the date of the CCA Services Agreement. In such
capacity, the Company will perform, at the direction of Prison Realty, such
services as are customarily needed in the construction and development of
correctional and detention facilities, including services related to
construction of the facilities, project bidding, project design and governmental
relations. In consideration for the performance of such services by the Company,
Prison Realty agreed to pay a fee equal to 5% of the total capital expenditures
(excluding the incentive fee discussed below and the 5% fee herein referred to)
incurred in connection with the construction and development of a facility, plus
an amount equal to approximately $560 (five hundred sixty dollars) per bed for
facility preparation services provided by the Company prior to the date on which
inmates are first received at such facility. The Company may receive payments up
to an additional 5% of the total capital expenditures (as determined above) from
Prison Realty if additional services are requested by Prison Realty. The Company
has received a fee of 10% on a majority of the construction and development
services provided to Prison Realty. Amounts that exceed the reimbursement of
actual costs incurred by the Company on facilities the Company will lease from
Prison Realty are being deferred and amortized as reductions in lease expense
over the terms of the respective leases. For the three months ended March 31,
2000, the Company collected $2.2 million of the amounts billed in 1999, billed
$3.0 million and recognized $0.3 million as a reduction of lease expense. As a
result of the uncertainty regarding the collectibility of the $3.0 million
billed in 2000 due to the financial condition of Prison Realty, the Company has
recorded a reserve for the entire amount and has not recognized any revenue or
reductions to lease expense related to this amount.
TENANT INCENTIVE AGREEMENT
On January 1, 1999, immediately after the 1999 Merger, the Company entered
into a tenant incentive agreement with Prison Realty pursuant to which Prison
Realty agreed to pay the Company an incentive fee to induce the Company to enter
into leases with respect to those facilities developed and facilitated by the
Company. The amount of the incentive fee was initially set at $840 (eight
hundred forty dollars) per bed for each facility leased by the Company where the
Company has served as developer and facilitator. On May 4, 1999, Prison Realty
and the Company entered into an amended and restated tenant incentive agreement
(the "Amended and Restated Tenant Incentive Agreement"), effective as of January
1, 1999, providing for: (i) a tenant incentive fee of up to $4,000 (four
thousand dollars) per bed payable with respect to all future facilities
developed and facilitated by the Company, as well as certain other facilities
which, although operational on January 1, 1999, had not achieved full occupancy,
and (ii) an $840 (eight hundred forty dollars) per bed allowance for all beds in
operation at the beginning of January 1999, approximately 21,500 (twenty-one
thousand five hundred) beds, that were not subject to the tenant allowance in
the first quarter of 1999. The term of the Amended and Restated Tenant Incentive
Agreement is four years unless extended upon the written agreement of the
Company and Prison Realty. The incentive fees received by the Company are being
deferred and amortized as reductions in lease expense over the terms of the
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respective leases. For the three months ended March 31, 2000, the Company billed
$4.0 million and recognized $1.1 million as reductions to lease expense relating
to amounts billed and collected in 1999. As a result of the uncertainty
regarding the collectibility of the $4.0 million billed in 2000 due to the
financial condition of Prison Realty, the Company has recorded a reserve for the
entire amount and has not recognized any reductions to lease expense related to
this amount.
BUSINESS DEVELOPMENT AGREEMENT
Effective January 1, 1999, the Company entered into a business development
agreement (the "Business Development Agreement") with Prison Realty which
provides that the Company will perform, at the direction of Prison Realty,
services designed to assist Prison Realty in identifying and obtaining new
business. Such services include, but are not limited to, marketing and other
business development services designed to increase awareness of Prison Realty
and the facility development and construction services its offers, identifying
potential facility sites and pursuing all applicable zoning approvals related
thereto, identifying potential tenants for Prison Realty's facilities and
negotiation agreements related to the acquisition of the new facility management
contract for Prison Realty's tenants. Pursuant to the Business Development
Agreement, Prison Realty will also reimburse the Company for expenses related to
third-party entities providing government and community relations services to
the Company, in connection with the provisions of the business development
services described above. In consideration for the Company's performance of the
business development services, and in order to reimburse the Company for the
third-party government and community relations expenses described above, Prison
Realty has agreed to pay the Company a total fee equal to 4.5% of the total
capital expenditures (excluding the amount of the tenant incentive fee and the
services fee discussed above as well as the 4.5% fee referred to herein)
incurred in connection with the construction and development of each new
facility, or the construction and development of an addition to an existing
facility, for which the Company performed business development services. The
term of the Business Development Agreement is four years unless extended upon
the written agreement of the Company and Prison Realty. The business development
fees received by the Company are being deferred and amortized as reductions in
lease expense over the terms of the respective leases. For the three months
ended March 31, 2000, the Company recognized $0.1 million as a reduction in
lease expense.
3. GOING CONCERN MATTERS
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern and do not reflect
any adjustments that might result if the Company is unable to continue as a
going concern. In addition, the consolidated financial statements do not include
any adjustments relating to recoverability and classification of assets and
liabilities that might be necessary should the Company be unable to continue as
a going concern. The company incurred a net loss of $62.6 million for the three
months ended March 31, 2000, and currently has a net working capital deficiency
and a net capital deficiency. As of March 31, 2000, the Company was in violation
of certain provisions of its revolving credit facility ("New Credit Facility")
including failure to comply with a financial covenant pertaining to the
Company's net worth. The amount outstanding under the New Credit Facility at
March 31, 2000 was $6.2 million. As a result of the Company's financial and
liquidity condition at December 31, 1999, the independent public accountants of
the Company indicated in their opinion on the Company's 1999 consolidated
financial statements that there is substantial doubt about the Company's ability
to continue as a going concern.
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The Company is Prison Realty's primary lessee and Prison Realty's major
source of income. Prison Realty currently is in default under the provisions of
its senior secured bank credit facility and is in default under the provisions
of the agreements governing Prison Realty's outstanding convertible,
subordinated notes. The defaults relate to Prison Realty's failure to comply
with certain financial convenants during 1999 and 2000, the issuance of a going
concern opinion qualification with respect to Prison Realty's 1999 consolidated
financial statements, and certain transactions effected by Prison Realty without
the consent of Prison Realty's lenders, including the execution of a securities
purchase agreement with Pacific Life Insurance Company ("Pacific Life") in
connection with a series of proposed transactions ("Pacific Life
Restructuring").
Due to the Company's liquidity position, the Company has been unable to
make timely rental payments to Prison Realty under the original terms of the CCA
lease agreements. As of March 31, 2000, approximately $92.1 million of rents due
from the Company to Prison Realty under the CCA Leases were unpaid. The terms of
the CCA Leases provide that rental payments are due and payable on the 25th day
of each month for the current month. The CCA Leases provide that it shall be an
event of default if the Company fails to pay any installment of rent within 15
days after notice of nonpayment from Prison Realty. Approximately $12.0 million
in unpaid rentals related to 1999 exist as of March 31, 2000 as well as
approximately $80.2 million in unpaid rentals related to periods subsequent to
December 31, 1999. The terms of the CCA Leases provide that Prison Realty could
require the Company to relinquish the leased facilities in the event of default.
However, Prison Realty has not provided a notice of nonpayment to the Company
with respect to lease payments due and payable by the Company.
Also as a result of the Company's liquidity position, 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 the Company to
Prison Realty. Pursuant to the terms of the $137.0 million note, the Company was
required to make the payment on December 31, 1999; however, pursuant to the
terms of a subordination agreement, dated as of March 1, 1999, by and between
Prison Realty and the agent of the Company's new credit facility, the Company is
prohibited from making scheduled interest payments on the $137.0 million note
when the Company is not in compliance with certain financial covenants set forth
in the new credit facility. As a result of the events of default under the new
credit facility, notwithstanding the waiver obtained on April 27, 2000 as
discussed below, the Company is prohibited from making the scheduled interest
payment to Prison Realty. Pursuant to the terms of the subordination agreement,
Prison Realty is prohibited from accelerating payment of the principal amount of
the $137.0 million note or taking any other action to enforce its rights under
the provisions of the $137.0 million note for so long as the new credit facility
remains outstanding. However, the amount due under the $137.0 million note has
been classified as a current liability in the accompanying consolidated balance
sheet at March 31, 2000, since the Company is in default under the $137.0
million note's existing terms. At March 31, 2000, interest under the $137.0
million note totaling $20.5 million was unpaid.
On April 27, 2000, the Company obtained the consent of the requisite
percentage of the lenders under its new credit facility for a waiver of the new
credit facility's restrictions relating to:
- Prison Realty's and the Company's amendments of the original terms of the
CCA lease agreements, the amended and restated tenant incentive
agreement, the business development agreement and the amended and
restated services agreement.
- The Company's violation of a net worth covenant contained in its new
credit facility.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- The Company's execution of an agreement and plan of merger with respect
to a merger of each of CCA, PMSI and JJFMSI with and into wholly owned
subsidiaries of Prison Realty, in connection with the proposed
Fortress/Blackstone restructuring.
The terms of the waiver provided that the waiver would remain in effect
until the earlier of (i) July 31, 2000; (ii) the date the securities purchase
agreement with Pacific Life was terminated; (iii) the date the Company makes any
payments to Prison Realty other than as set forth in the amendments to the
Company's agreements with Prison Realty; or (iv) the date the lenders under
Prison Realty's bank credit facility exercise any rights with respect to any
default or event of default under Prison Realty's bank credit facility.
Continued operating losses by the Company and Prison Realty, declarations
of events of default and potential acceleration actions by the Company's and
Prison Realty's creditors, the continued inability of the Company to make
contractual payments to Prison Realty, and the Company's limited resources
currently available to meet its operating, capital expenditure and debt service
requirements will have a material adverse impact on the Company's consolidated
financial position, results of operations and cash flows. In addition, these
matters concerning the Company and Prison Realty raise substantial doubt about
the Company's ability to continue as a going concern.
In response to the significant losses experienced by the company during
1999 and by the Company and Prison Realty during the three months ended March
31, 2000 and in response to the defaults under the Company's and Prison Realty's
debt agreements, Prison Realty has entered into an agreement with respect to a
series of transactions led by Pacific Life that include the proposed combination
of the Company and Prison Realty. A complete discussion of the Pacific Life
Restructuring and recent developments affecting the Pacific Life Restructuring
is included in Note 8.
4. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company had no operations prior to January 1, 1999. The accompanying
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries. All material intercompany balances have been
eliminated in consolidation. The accompanying interim consolidated financial
statements are unaudited. The financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in conjunction with the rules and regulations of the SEC.
Accordingly, they do not include all of the disclosures required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting solely of normal recurring matters)
necessary for a fair presentation of the financial statements for this interim
period have been included. The results of operations for the interim period are
not necessarily indicative of the results to be obtained for the full fiscal
year. Reference is made to the audited financial statements of the Company
included in the Prison Realty 1999 Form 10-K with respect to other pertinent
information of the Company.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DEBT ISSUANCE COSTS
Debt issuance costs are amortized on a straight-line basis over the life of
the related debt. This amortization is charged to interest expense.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost. Betterments, renewals and
extraordinary repairs that extend the life of the asset are capitalized; other
repairs and maintenance are expensed. The cost and accumulated depreciation
applicable to assets retired are removed from the accounts and the gain or loss
on disposition is recognized in income. Depreciation is computed by the
straight-line method for financial reporting purposes and accelerated methods
for tax reporting purposes based upon the estimated useful lives of the related
assets.
INCOME TAXES
Income taxes are accounted for under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
This statement generally requires the Company to record deferred income taxes
for the differences between book and tax bases of its assets and liabilities.
MANAGEMENT CONTRACTS
In connection with the acquisition of management contracts discussed in
Note 2, the Company obtained contracts with various governmental entities to
manage their facilities for fixed per diem rates. These contracts usually
contain expiration dates with renewal options ranging from annual to multi-year
renewals. The Company expects to renew these contracts for periods consistent
with the remaining renewal options allowed by the contracts or other reasonable
extensions. Fixed per diem revenue is recorded based on the per diem rate
multiplied by the number of inmates housed during the respective period. The
Company recognizes any additional management service revenues when earned or
awarded by the respective authorities.
START-UP COSTS
In accordance with the AICPA's Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities," the Company expenses all start-up costs as
incurred in operating expenses.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of," the Company
continually evaluates the recoverability of the carrying values of its
long-lived assets when events suggest that an impairment may have occurred. In
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
these circumstances, the Company utilizes estimates of undiscounted cash flows
to determine if an impairment exists.
COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income," requires that changes in
the amounts of certain items, including gains and losses on certain securities,
be shown in the financial statements. The provisions of SFAS No. 130 had no
impact on the Company's results of operations as comprehensive loss was
equivalent to the Company's reported net loss.
SEGMENT DISCLOSURES
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," establishes standards for the way that public business enterprises
or other enterprises that are required to file financial statements with the SEC
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports. SFAS No. 131 also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. The Company operates in one industry segment and the provisions of
SFAS No. 131 have no significant effect on the Company's disclosures.
NEWLY ISSUED ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," effective, as
amended, for fiscal years beginning after June 15, 2000. SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133 requires all derivatives to be recognized in
the statement of financial position and to be measured at fair value. The
Company anticipates adopting the provisions of SFAS No. 133 effective January 1,
2001, and does not believe the adoption of SFAS No. 133 will have a material
impact on the Company's consolidated financial position or results of
operations.
5. PROMISSORY NOTE AND CREDIT FACILITY
The Promissory Note of $137.0 million is payable to Prison Realty over 10
years and bears interest at 12% per annum. Interest only is payable for the
first four years and the principal is payable over the following six years. The
chief executive officer of the company has personally guaranteed payment of 10%
of the outstanding principal amount. The original contractual maturities of the
Promissory Note for the next five years and thereafter are: 2001 -- $0;
2002 -- $0; 2003 -- $22.8 million, 2004 -- $22.8 million, 2005 -- $22.8 million
and thereafter -- $68.5 million; however, due to the existing default, these
maturities may be accelerated as discussed in Note 3.
On March 1, 1999, the Company obtained a new credit facility which provides
for borrowings up to $100.0 million and bears interest at Prime plus 2.5%. The
new credit facility replaced the $30.0 million old credit facility in place at
December 31, 1998. Prior to obtaining the new credit facility, the Company had
made no draws under the old credit facility. The deferred debt issuance costs
totaling $2.7 million related to the old credit facility were charged to
interest expense upon replacement of that credit facility. Borrowings
outstanding under the new credit facility are considered short-term obligations
as the new credit facility requires the Company to maintain a lock-box with
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the lender whereby all receipts are applied to reduce any borrowings
outstanding. At March 31, 2000, there was $6.2 million outstanding on the new
credit facility.
As of March 31, 2000, the Company was not, and, notwithstanding the waiver
of certain events of default under the new credit facility, the Company
currently is not in compliance with these financial covenants. As discussed more
fully in Note 3, on April 27, 2000, CCA obtained the consent of the requisite
percentage of the senior lenders under its bank credit facility for an initial
waiver of certain of its restrictions.
6. INCOME TAXES
During the first quarter of 1999, the Company was recording income tax
benefits relating to its losses. During the third quarter of 1999, the Company
made the decision that the income tax benefits should be fully reserved after
considering the Company's ability to generate taxable income within the net
operating loss carryforward period. Thus, no income tax benefit was recorded in
the first quarter of 2000.
7. COMMITMENTS AND CONTINGENCIES
The Company has been named as one of the defendants in a purported class
action lawsuit filed by a Prison Realty shareholder against Prison Realty, the
Company and Prison Realty's directors. The lawsuit alleges, among other things,
certain violations of the Prison Realty directors' fiduciary duties in
connection with the approval of certain payments to the Company. The Company is
continuing to investigate the allegations and an outcome is not determinable as
of May 15, 2000.
The Company has been named as one of the defendants in a purported class
action lawsuit alleging that the telephone services at prisons owned or run by
the defendants result in charges for collect calls placed by inmates that are
unconscionably high. Due to the recent filing of this purported class action
lawsuit, an outcome is not determinable as of May 15, 2000.
In February 2000, a complaint was filed in federal court in the United
States District Court for the Western District of Texas against TransCor, the
Company's wholly owned inmate transportation subsidiary. The lawsuit, captioned
Cheryl Schoenfeld v. TransCor America, Inc., et. al., names as defendants
TransCor and its directors. The lawsuit alleges that two drivers sexually
assaulted and raped the plaintiff during her transportation to a facility in
Texas. While the case is in the very early stages of discovery, the plaintiff
recently submitted a $21.0 million settlement demand. The Company and TransCor
intend to defend the action vigorously. It is expected that a portion of any
liabilities resulting from this litigation will be covered by liability
insurance.
In addition to the litigation described above, owners and operators of
privatized correctional and detention facilities are subject to a variety of
legal proceedings arising in the ordinary course of operating such facilities,
including proceedings relating to personal injury and property damage. Such
proceedings are generally brought against the operator of a correctional
facility. Accordingly, the Company expects that, in connection with the
operation of correctional and detention facilities, it will be a party to such
proceedings. The Company does not believe that such litigation, if resolved
against it, would have a material adverse effect upon its business or financial
position.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. PROPOSED MERGER
On April 16, 2000, Prison Realty entered into a definitive agreement with
Pacific Life with respect to the Pacific Life Restructuring providing for a
restructuring of Prison Realty that includes: (i) the combination ("Proposed
Merger") of Prison Realty with each of the Company, Prison Management Services,
Inc. ("PMSI") and Juvenile and Jail Facility Management Services, Inc.
("JJFMSI"); (ii) a $200.0 million equity investment in Prison Realty; 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, Prison Realty terminated its
agreement with Fortress/Blackstone. The Company's Board of Directors have
approved the Proposed Merger and related transactions pursuant to which the
Company will combine with Prison Realty with the Company merging into a wholly-
owned subsidiary of Prison Realty. The boards of directors of PMSI, JJFMSI and
Prison Realty have also approved the Proposed Merger. Following the combination,
the restructured company intends to operate under the Corrections Corporation of
America name as a taxable subchapter C corporation, rather than as a real estate
investment trust.
The completion of the transactions contemplated by the Pacific Life
Restructuring, 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 Proposed
Merger provided (i) each of the Company and Prison Realty obtain the requisite
shareholder approval, (ii) Prison Realty 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.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Corrections Corporation of America:
We have audited the accompanying consolidated balance sheets of CORRECTIONS
CORPORATION OF AMERICA (a Tennessee corporation and formerly Correctional
Management Services Corporation) AND SUBSIDIARIES as of December 31, 1999 and
1998, the related consolidated statement of operations for the year ended
December 31, 1999, and the related consolidated statements of stockholders'
equity and cash flows for the year ended December 31, 1999 and for the period
from September 11, 1998 (inception) through December 31, 1998. These
consolidated financial statements are the responsibility of Corrections
Corporation of America's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Corrections
Corporation of America and Subsidiaries as of December 31, 1999 and 1998, and
the results of their operations for the year ended December 31, 1999, and their
cash flows for the year ended December 31, 1999 and for the period from
September 11, 1998 (inception) through December 31, 1998, in conformity with
accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that
Corrections Corporation of America will continue as a going concern. As
discussed in Note 3 to the consolidated financial statements, Corrections
Corporation of America and Subsidiaries have incurred significant net losses for
the year ended December 31, 1999, are in default of their revolving credit
facility, are in default under their promissory note with Prison Realty Trust,
Inc., have not made certain required lease payments to Prison Realty Trust,
Inc., and have a net working capital deficiency and a net capital deficiency at
December 31, 1999, all of which raise substantial doubt about their ability to
continue as a going concern. Management's plans in regard to these matters,
including the Proposed Merger of Corrections Corporation of America with Prison
Realty Trust, Inc., the possibility of obtaining waivers related to their
revolving credit facility and the possibility of deferring certain payments to
Prison Realty Trust, Inc., are also described in Note 3. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should Corrections Corporation
of America be unable to continue as a going concern.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
March 29, 2000
F-114
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 10,725 $ 19,059
Accounts receivable, net of allowances...................... 66,414 64,077
Prepaid expenses............................................ 3,733 4,602
Other current assets........................................ 7,775 7,103
--------- --------
Total current assets................................... 88,647 94,841
PROPERTY AND EQUIPMENT, NET................................. 19,959 24,668
OTHER ASSETS:
Investment in contracts..................................... 67,363 67,795
Other....................................................... 8,732 8,977
--------- --------
Total assets........................................... $ 184,701 $196,281
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ $ 28,938 $ 15,766
Lease and trade name use payables to Prison Realty.......... 27,080 --
Accrued salaries and wages.................................. 5,842 4,419
Accrued property taxes...................................... 9,393 4,301
Accrued interest to Prison Realty........................... 16,440 --
Other accrued expenses...................................... 17,514 13,444
Short-term debt............................................. 16,214 --
Promissory note to Prison Realty............................ 137,000 --
--------- --------
Total current liabilities.............................. 258,421 37,930
Promissory note to Prison Realty............................ -- 137,000
Deferred lease incentives and service fees received from
Prison Realty............................................. 107,070 --
--------- --------
Total liabilities...................................... 365,491 174,930
--------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock -- Class A -- $0.01 (one cent) par value;
100,000 shares authorized, 9,349 shares issued and
outstanding............................................... 93 93
Common stock -- Class B -- $0.01 (one cent) par value;
100,000 shares authorized, 981 shares issued and
outstanding............................................... 10 10
Additional paid-in capital.................................. 25,133 25,133
Deferred compensation....................................... (3,108) (3,885)
Retained deficit............................................ (202,918) --
--------- --------
Total stockholders' equity............................. (180,790) 21,351
--------- --------
Total liabilities and stockholders' equity............. $ 184,701 $196,281
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-115
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<S> <C>
Revenues.................................................... $ 499,292
---------
Expenses:
Operating................................................... 376,724
Trade name use agreement.................................... 8,699
Lease....................................................... 261,546
General and administrative.................................. 26,166
Depreciation and amortization............................... 8,601
---------
681,736
---------
Operating loss.............................................. (182,444)
Interest expense, net....................................... 20,474
---------
Net loss.................................................. $(202,918)
=========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1999 AND FOR THE PERIOD FROM
SEPTEMBER 11, 1998 (INCEPTION) THROUGH DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------------
CLASS A CLASS B ADDITIONAL TOTAL
--------------- --------------- PAID-IN DEFERRED RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT EQUITY
------ ------ ------ ------ ---------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock............ 9,349 $93 981 $10 $24,532 $(3,885) $ -- $ 20,750
Issuance of stock warrants.......... -- -- -- -- 601 -- -- 601
----- --- --- --- ------- ------- --------- ---------
BALANCE, DECEMBER 31, 1998............ 9,349 93 981 10 25,133 (3,885) -- 21,351
Net loss............................ -- -- -- -- -- -- (202,918) (202,918)
Amortization of deferred
compensation...................... -- -- -- -- -- 777 -- 777
----- --- --- --- ------- ------- --------- ---------
BALANCE, DECEMBER 31, 1999............ 9,349 $93 981 $10 $25,133 $(3,108) $(202,918) $(180,790)
===== === === === ======= ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-117
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999 AND FOR THE PERIOD FROM
SEPTEMBER 11, 1998 (INCEPTION) THROUGH DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(202,918) $ --
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 8,601 --
Lease incentives and service fees received from Prison
Realty................................................. 109,349 --
Amortization of lease incentives and service fees received
from Prison Realty..................................... (4,427)
Other noncash items....................................... 2,861 --
Write-off of debt issuance costs.......................... 2,706 --
Gain on sale of assets.................................... (22) --
Changes in assets and liabilities, net:
Accounts receivable.................................... (654) --
Prepaid expenses....................................... 869 --
Other current assets................................... (2,062) --
Other assets........................................... 1,541 --
Accounts payable....................................... 14,375 --
Lease and trade name use payables to Prison Realty..... 27,080
Accrued salaries and wages............................. 1,423 --
Accrued property taxes................................. 5,092 --
Accrued interest to Prison Realty...................... 16,440 --
Other accrued expenses................................. 3,414 --
--------- --------
Net cash used in operating activities................ (16,332) --
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets................................ 657 --
Property and equipment additions, net....................... (2,748) --
Cash acquired in purchase of contracts and related net
assets.................................................... -- 3,059
--------- --------
Net cash provided by (used in) investing
activities.......................................... (2,091) 3,059
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on short-term debt, net............ 16,214 --
Payment of debt issuance costs.............................. (6,125) --
Proceeds from issuance of common stock...................... -- 16,000
--------- --------
Net cash provided by financing activities............ 10,089 16,000
--------- --------
Net increase (decrease) in cash and cash equivalents........ (8,334) 19,059
Cash and cash equivalents, beginning of period.............. 19,059 --
--------- --------
Cash and cash equivalents, end of period.................... $ 10,725 $ 19,059
========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.................................................. $ 1,111 $ --
========= ========
Income taxes.............................................. $ -- $ --
========= ========
</TABLE>
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<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Purchase of management contracts and related net assets
through issuance of the promissory note and common stock
to Prison Realty:
Accounts receivable, net of allowances.................... $ -- $(64,077)
Prepaid expenses.......................................... -- (4,602)
Other current assets...................................... -- (7,103)
Property and equipment.................................... -- (24,668)
Investment in contracts................................... -- (70,854)
Other assets.............................................. -- (8,376)
Accounts payable.......................................... -- 15,766
Accrued salaries and wages................................ -- 4,419
Accrued property taxes.................................... -- 4,301
Other accrued expenses.................................... -- 13,444
Promissory note to Prison Realty.......................... -- 137,000
Common stock.............................................. -- 4,750
--------- --------
$ -- $ --
========= ========
Issuance of stock warrants for financing services:
Other assets.............................................. $ -- $ 601
Additional paid-in capital................................ -- (601)
--------- --------
$ -- $ --
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-119
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
1. ORGANIZATION AND FORMATION TRANSACTIONS
Correctional Management Services Corporation, a Tennessee corporation, was
formed on September 11, 1998, and changed its name to Corrections Corporation of
America (the "Company") in 1999. The Company was formed in anticipation of the
expected merger transactions (the "1999 Merger") between Corrections Corporation
of America ("Old CCA"), CCA Prison Realty Trust ("Old Prison Realty") and Prison
Realty Trust, Inc. ("Prison Realty", formerly Prison Realty Corporation). On
September 22, 1998, the Company issued 5.0 million shares of Class A voting
common stock to certain founding shareholders at par value. Additionally, on
September 22, 1998, the Company issued 0.8 million restricted shares of Class A
voting common stock to certain wardens of Old CCA facilities at the implied fair
value of $3.9 million. Immediately prior to the acquisition of management
contracts discussed in Note 2, the Company issued 3.5 million shares of Class A
voting common stock to outside investors in consideration of cash proceeds
totaling $16.0 million. The Company operates and manages prisons and other
correctional facilities and provides prisoner transportation services for
governmental agencies. In addition, the Chief Executive Officer of the Company
is also the Chief Executive Officer of Prison Realty.
2. ACQUISITION OF MANAGEMENT CONTRACTS AND OTHER RELATIONSHIPS WITH PRISON
REALTY
Immediately after the issuance of the Class A voting common stock discussed
in Note 1, on December 31, 1998, the Company acquired all of the issued and
outstanding capital stock of certain wholly owned corporate subsidiaries of Old
CCA, certain management contracts and certain other related assets and
liabilities of Old CCA, and entered into a trade name use agreement with Old
CCA, as described below. In exchange, the Company issued an installment
promissory note in the principal amount of $137.0 million that bears interest at
12% per annum and is payable over 10 years (the "Promissory Note") and 1.0
million shares of the Company's Class B non-voting common stock, which
represents 9.5% of the Company's outstanding stock. The Class B non-voting
common stock was valued at the implied fair market value of $4.75 million.
The acquisition of the capital stock, the management contracts and related
assets and liabilities was accounted for as a purchase transaction in accordance
with Accounting Principles Board Opinion No. 16 "Business Combinations," and the
aggregate purchase price of $141.8 million was allocated to the assets and
liabilities acquired based on management's estimates of the fair value of the
assets and liabilities acquired. An amount of $67.8 million was initially
assigned to the value of the management contracts acquired and is being
amortized over a fifteen-year period, which represents the average remaining
lives of the contracts acquired plus any contractual renewal options. During
1999, the Company continued to evaluate the values assigned to the management
contracts and the assets and liabilities acquired. As a result, the Company
increased the value of the management contracts by approximately $4.4 million.
TRADE NAME USE AGREEMENT
On December 31, 1998, immediately prior to the 1999 Merger and in
connection with the transactions described above, the Company entered into a
trade name use agreement with Old CCA (the "Trade Name Use Agreement"). Under
the Trade Name Use Agreement, which has a term of ten years, the Company
obtained the right to use the name, "Corrections Corporation of America" and
derivatives thereof, subject to specified terms and conditions therein. In
consideration for such right, the Company agreed to pay a fee equal to (i) 2.75%
of the Company's gross revenues for the
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
first three years of the Trade Name Use Agreement, (ii) 3.25% of the Company's
gross revenues for the following two years of the Trade Name Use Agreement, and
(iii) 3.625% of the Company's gross revenues for the remaining term of the Trade
Name Use Agreement, provided that the amount of such fee may not exceed (a)
2.75% of the gross revenues of Prison Realty for the first three years of the
Trade Name Use Agreement, (b) 3.5% of Prison Realty's gross revenues for the
following two years of the Trade Name Use Agreement, and (c) 3.875% of Prison
Realty's gross revenues for the remaining term of the Trade Name Use Agreement.
The Company incurred $8.7 million of operating expenses under the Trade Name Use
Agreement for the year ended December 31, 1999, of which $6.5 million had been
paid as of December 31, 1999.
CCA LEASES
On January 1, 1999, the Company entered into a master lease agreement and
leases with respect to the thirty-six leased properties with Prison Realty (the
"CCA Leases"). The initial terms of the CCA Leases are 12 years and may be
extended at fair market rates for three additional five-year periods upon the
mutual agreement of the Company and Prison Realty. The Company incurred $263.5
million in gross lease expense under the CCA Leases for the year ended December
31, 1999, of which $238.6 million had been paid as of December 31, 1999.
On December 31, 1999, Prison Realty and the Company amended the terms of
the CCA Leases to change the annual base rent escalation formula with respect to
each facility leased to the Company. Previously, the annual base rent payable
with respect to each facility was subject to increase each year in an amount
equal to a percentage of the total rental payments with respect to each
facility, such percentage being the greater of (i) 4%; or (ii) 25% of the
percentage increase of gross management revenue derived from such facility. As a
result of this amendment, the annual base rent with respect to each facility is
subject to increase each year in an amount equal to the lesser of: (i) 4% of the
annualized yearly rental payments with respect to such facility; or (ii) 10% of
the excess of the Company's aggregate gross management revenues for the prior
year over a base amount of $325.0 million.
CCA RIGHT TO PURCHASE AGREEMENT
Effective January 1, 1999, the Company and Prison Realty entered into a
Right to Purchase Agreement (the "CCA Right to Purchase Agreement") pursuant to
which the Company granted to Prison Realty the right to acquire and lease back
to the Company at fair market rental rates, any correctional or detention
facility acquired or developed and owned by the Company in the future for a
period of ten years following the date inmates are first received at such
facility. The initial annual rental rate on such facilities will be the fair
market rental rate as determined by the Company and Prison Realty. Additionally,
the Company granted Prison Realty the right of first refusal to acquire any
Company-owned correctional or detention facility should the Company receive an
acceptable third party offer to acquire any such facility. The Company sold no
facilities to Prison Realty during the year ended December 31, 1999 under the
CCA Right to Purchase Agreement.
CCA SERVICES AGREEMENT
On January 1, 1999, immediately after the 1999 Merger, the Company entered
into a services agreement (the "CCA Services Agreement") with Prison Realty
pursuant to which the Company agreed to serve as a facilitator of the
construction and development of additional facilities on behalf of Prison Realty
for a term of five years from the date of the CCA Services Agreement. In such
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
capacity, the Company will perform, at the direction of Prison Realty, such
services as are customarily needed in the construction and development of
correctional and detention facilities, including services related to
construction of the facilities, project bidding, project design and governmental
relations. In consideration for the performance of such services by the Company,
Prison Realty agreed to pay a fee equal to 5% of the total capital expenditures
(excluding the incentive fee discussed below and the 5% fee herein referred to)
incurred in connection with the construction and development of a facility, plus
an amount equal to approximately $560 (five hundred sixty dollars) per bed for
facility preparation services provided by the Company prior to the date on which
inmates are first received at such facility. The Company may receive payments up
to an additional 5% of the total capital expenditures (as determined above) from
Prison Realty if additional services are requested by Prison Realty. The Company
has received a fee of 10% on a majority of the construction and development
services provided to Prison Realty. Amounts that exceed the reimbursement of
actual costs incurred by the Company on facilities the Company will lease from
Prison Realty are being deferred and amortized as reductions in lease expense
over the terms of the respective leases. The Company billed $41.6 million in
fees under the CCA Services Agreement for the year ended December 31, 1999, of
which $39.4 million had been collected as of December 31, 1999. The Company
recognized $8.1 million as revenues for services provided on projects where the
Company does not lease the facility from Prison Realty, $5.6 million as a
reduction in operating expenses, and deferred $27.9 million as deferred credits,
of which $0.1 million was amortized as a reduction in lease expense.
TENANT INCENTIVE AGREEMENT
On January 1, 1999, immediately after the 1999 Merger, the Company entered
into a tenant incentive agreement with Prison Realty pursuant to which Prison
Realty agreed to pay the Company an incentive fee to induce the Company to enter
into leases with respect to those facilities developed and facilitated by the
Company. The amount of the incentive fee was initially set at $840 (eight
hundred forty dollars) per bed for each facility leased by the Company where the
Company has served as developer and facilitator. On May 4, 1999, Prison Realty
and the Company entered into an amended and restated tenant incentive agreement
(the "Amended and Restated Tenant Incentive Agreement"), effective as of January
1, 1999, providing for (i) a tenant incentive fee of up to $4,000 (four thousand
dollars) per bed payable with respect to all future facilities developed and
facilitated by the Company, as well as certain other facilities which, although
operational on January 1, 1999, had not achieved full occupancy, and (ii) an
$840 (eight hundred forty dollars) per bed allowance for all beds in operation
at the beginning of January 1999, approximately 21,500 (twenty-one thousand five
hundred) beds, that were not subject to the tenant allowance in the first
quarter of 1999. The term of the Amended and Restated Tenant Incentive Agreement
is four years unless extended upon the written agreement of the Company and
Prison Realty. The incentive fees received by the Company are being deferred and
amortized as reductions in lease expense over the terms of the respective
leases. The Company received $68.6 million in tenant incentive fees under the
Amended and Restated Tenant Incentive Agreement for the year ended December 31,
1999. The Company amortized $4.1 million as reductions in lease expense, with
$64.5 million remaining in deferred credits at December 31, 1999.
BUSINESS DEVELOPMENT AGREEMENT
Effective January 1, 1999, the Company entered into a business development
agreement (the "Business Development Agreement") with Prison Realty which
provides that the Company will
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
perform, at the direction of Prison Realty, services designed to assist Prison
Realty in identifying and obtaining new business. Such services include, but are
not limited to, marketing and other business development services designed to
increase awareness of Prison Realty and the facility development and
construction services it offers, identifying potential facility sites and
pursuing all applicable zoning approvals related thereto, identifying potential
tenants for Prison Realty's facilities and negotiating agreements related to the
acquisition of the new facility management contract for Prison Realty's tenants.
Pursuant to the Business Development Agreement, Prison Realty will also
reimburse the Company for expenses related to third-party entities providing
government and community relations services to the Company, in connection with
the provision of the business development services described above. In
consideration for the Company's performance of the business development
services, and in order to reimburse the Company for the third-party government
and community relations expenses described above, Prison Realty has agreed to
pay the Company a total fee equal to 4.5% of the total capital expenditures
(excluding the amount of the tenant incentive fee and the services fee discussed
above as well as the 4.5% fee referred to herein) incurred in connection with
the construction and development of each new facility, or the construction and
development of an addition to an existing facility, for which the Company
performed business development services. The term of the Business Development
Agreement is four years unless extended upon the written agreement of the
Company and Prison Realty. The business development fees received by the Company
are being deferred and amortized as reductions in lease expense over the terms
of the respective leases. The Company received $15.0 million in fees under the
Business Development Agreement for the year ended December 31, 1999. The Company
amortized $0.2 million as reductions in lease expense, with $14.8 million
remaining in deferred credits at December 31, 1999.
3. LIQUIDITY CONCERNS AND PROPOSED MERGER
The Company incurred a net loss of $202.9 million for the year ended
December 31, 1999, has negative working capital of $169.8 million at December
31, 1999 and has a net stockholders' deficit of $180.8 million at December 31,
1999.
At December 31, 1999, the Company was in violation of certain provisions of
its revolving credit facility (the "New Credit Facility"), including failure to
comply with a financial covenant pertaining to the Company's net worth. The
default could cause further borrowings under the New Credit Facility to be
limited or totally suspended and the due date of the outstanding borrowings may
be accelerated. The amount outstanding under the New Credit Facility at December
31, 1999 was $16.2 million.
Rental payments of $24.9 million due to Prison Realty from the Company
under the CCA Leases were unpaid as of December 31, 1999, while the terms of the
CCA Leases provide that rental payments were due and payable on December 25,
1999. The terms of the CCA Leases provide that it shall be an event of default
if the Company fails to pay any installment of rent within 15 days after notice
of nonpayment from Prison Realty. The terms of the CCA Leases provide that
Prison Realty has certain rights in the event of default, including the right to
require the Company to relinquish the leased facilities. As of March 29, 2000,
Prison Realty has not provided a notice of nonpayment to the Company and the
amount of unpaid rentals related to 1999 totals $12.0 million. In addition,
unpaid rentals related to periods subsequent to December 31, 1999 total
approximately $77.7 million (unaudited) at March 29, 2000.
As a result of the Company's current liquidity position, the Company has
been required to defer the first scheduled payment of accrued interest on the
$137.0 million Promissory Note payable to
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Prison Realty by the Company, which was due on December 31, 1999. Pursuant to
the terms of a subordination agreement, dated as of March 1, 1999, by and
between Prison Realty and the agent of the Company's New Credit Facility, the
Company is prohibited from making scheduled interest payments on the Promissory
Note if certain financial covenants relating to the Company's liquidity position
are not met. On December 31, 1999, the Company was not in compliance with these
financial covenants. Accordingly, the Company was prohibited from making the
scheduled interest payment. Pursuant to the terms of the subordination
agreement, Prison Realty is prohibited from accelerating the principal amount of
the Promissory Note or taking any other action to enforce its rights under the
provisions of the Promissory Note for so long as the New Credit Facility remains
outstanding. However, the amount due under the Promissory Note has been
classified as a current liability in the accompanying consolidated balance sheet
at December 31, 1999, since the Company is in default under the Promissory
Note's existing terms.
Prison Realty, the Company's lessor, is also not in compliance with certain
of its debt convenants. In order to address the liquidity and capital needs of
both the Company and Prison Realty, the boards of directors of the Company and
Prison Realty, as well as the boards of directors of two related service
companies, Prison Management Services, Inc. ("PMSI") and Juvenile and Jail
Facility Management Services, Inc. ("JJFMSI") approved the formation of a
special coordinating committee to monitor the financial situation of both Prison
Realty and the Company and to coordinate with the companies' advisors regarding
the consideration of strategic alternatives. Based on the strategic alternatives
considered, (i) the Company's Board of Directors has approved a proposed merger
with Prison Realty, (ii) the Company and Prison Realty currently intend to amend
the terms of the CCA Leases and the terms of various other agreements between
the Company and Prison Realty, and (iii) the Company is negotiating to obtain
waivers of the default under the New Credit Facility, all of which are discussed
in more detail below. In addition, Prison Realty is in separate negotiations
with one or more groups of investors to make an equity investment in Prison
Realty (the "Potential Prison Realty Equity Investment"), and currently expects
that the completion of the proposed merger will be a condition to the Potential
Prison Realty Equity Investment.
As discussed above, the Company's Board of Directors has approved a
proposed merger and related transactions pursuant to which the Company will
combine with Prison Realty, and the two related service companies, PMSI and
JJFMSI (the "Proposed Merger"). The boards of directors of Prison Realty, PMSI,
and JJFMSI have also approved the Proposed Merger, which is subject to
shareholder approval by each entity's stockholders.
The terms of the Proposed Merger specify that non-outside investor
shareholders of the Company will obtain the right to receive shares of Prison
Realty common stock valued at approximately $10.6 million in exchange for shares
of the Company that those shareholders own at the consummation of the Proposed
Merger. Immediately prior to the Proposed Merger, the outside investors holding
shares of the Company will receive approximately $16.0 million in cash from
Prison Realty for the sale of shares of the Company common stock held by those
outside investors. Additionally, the terms of the Proposed Merger specify that
the $137.0 million Promissory Note due to Prison Realty will be valued at the
carrying amount as consideration in the Proposed Merger.
Approval of the Proposed Merger requires the affirmative vote of 80% of the
outstanding shares of the Company's common stock (class A and class B voting
together as a single class). Management anticipates that a special meeting of
the shareholders of the Company will be held for the purpose of voting upon the
Proposed Merger. In addition, pursuant to the terms of an agreement between the
Company and a shareholder, Baron Capital Group, Inc, ("Baron"), the Proposed
Merger must be
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approved separately by Baron. A purported class action lawsuit has been filed
against Prison Realty seeking an injunction preventing the completion of the
Proposed Merger and the Potential Prison Realty Equity Investment.
In an effort to address the Company's liquidity needs prior to the Proposed
Merger, Prison Realty and the Company currently intend to amend the terms of the
CCA Leases. Pursuant to this proposed amendment, rent will be payable on each
June 30 and December 31, instead of monthly. In addition, the proposed amendment
provides that the Company is required to make certain scheduled monthly
installment payments to Prison Realty from January 1, 2000 through June 30,
2000. Approximately $12.9 million was paid February 14, 2000, and future
payments are anticipated to be $12.0 million due in April 2000, $4.0 million due
April 30, 2000, $6.0 million due May 31, 2000 and $8.0 million due June 30,
2000. At the time these installment payments are made, the Company will also be
required to pay interest to Prison Realty upon such payments at a rate equal to
the then current interest rate under the New Credit Facility. These installment
payments represent the Company's December 1999 lease payments and a portion of
the rent accruing from January 1, 2000 to June 30, 2000. The accrued but unpaid
rent which will have accrued at June 30, 2000, totaling $137.3 million, shall be
due and payable on June 30, 2000.
Prison Realty and the Company also currently intend to amend certain
agreements (the Business Development Agreement, the CCA Services Agreement and
the Amended and Restated Tenant Incentive Agreement) between Prison Realty and
the Company to provide for the deferral of the payment of all fees under these
agreements by Prison Realty to the Company until September 30, 2000.
The terms of the Company's New Credit Facility provide that the Company
shall not amend or modify the terms of the CCA Services Agreement, the Amended
and Restated Tenant Incentive Agreement and the Business Development Agreement
in any manner which is on terms and conditions less favorable to the Company
than are in effect immediately prior to such amendment or modification. If the
proposed amendments to these agreements are completed, these actions will be in
violation of the New Credit Facility. The terms of the New Credit Facility also
provide that the execution of the Proposed Merger agreement in December 1999
resulted in an event of default under the New Credit Facility.
The Company has initiated discussions with the agent of the New Credit
Facility, and has requested the consent of the requisite percentage of its
participating lenders for a waiver of the restrictions relating to: (i) the
amendment of Prison Realty's agreements with the Company; (ii) the execution of
the Proposed Merger, (iii) the Company's deferral of certain payments under the
CCA Leases and (iv) the financial covenants concerning the Company's net worth.
The Company has requested that the waivers remain in effect until the earlier of
July 31, 2000 or the completion of the Potential Prison Realty Equity Investment
and Proposed Merger.
There can be no assurance that the requisite participating lenders under
the New Credit Facility will consent to the proposed waivers of the New Credit
Facility or will not seek to declare an event of default prior to such date. In
the event the Company is unable to obtain the necessary waivers or to comply
with and maintain the proposed waivers, the participating lenders are entitled,
at their discretion, to exercise certain remedies, including acceleration of the
outstanding borrowings and suspension of further borrowings under the New Credit
Facility. Upon the occurrence and during the continuation of a default, the
terms of the New Credit Facility allow the lenders to increase the current
interest rate (Prime plus 2.5%) by an additional 3.0% to a default rate. As of
March 29,
F-125
<PAGE> 352
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2000, the lenders have not notified the Company of an event of default, and the
Company is not currently subject to the default rate. If the participating
lenders elect to exercise their rights to accelerate the Company's obligations
under the New Credit Facility, and/or if the participating lenders do not
consent to the proposed waivers, such events would have a material adverse
effect on the Company's liquidity and financial position. The Company does not
have sufficient working capital in the event of an acceleration of the due dates
of the New Credit Facility.
In addition to requiring the consent of the Company's lenders, the
completion of the proposed amendments described above are also subject to the
consent of Prison Realty's lenders. No assurance can be given that such consents
will be obtained or that Prison Realty's lenders will not seek to declare an
event of default prior to the effectiveness of the consents. If Prison Realty
does not obtain the proposed waivers and consents, Prison Realty's lenders could
exercise certain remedies including the acceleration of Prison Realty's
outstanding borrowings.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern and do not reflect
any adjustments that might result if the Company is unable to continue as a
going concern. The Company's outstanding amounts due to Prison Realty, recent
net losses, negative cash flows from operations, negative working capital and
net stockholders' deficit, along with existing defaults under its New Credit
Facility and the Promissory Note raise substantial doubt about the Company's
ability to continue as a going concern. The consolidated financial statements do
not include any adjustments relating to recoverability and classification of
recorded asset amounts or the amount and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
4. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company had no operations prior to January 1, 1999. As such, the
accompanying consolidated financial statements represent the Company's
consolidated financial position as of December 31, 1999 and 1998, the related
consolidated statement of operations for the year ended December 31, 1999, and
the Company's consolidated cash flows and consolidated activity in stockholders'
equity for the year ended December 31, 1999, and for the period from September
11, 1998 (inception) through December 31, 1998. All material intercompany
balances have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents.
DEBT ISSUANCE COSTS
Debt issuance costs are amortized on a straight-line basis over the life of
the related debt. This amortization is charged to interest expense.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost. Betterments, renewals and
extraordinary repairs that extend the life of the asset are capitalized; other
repairs and maintenance are expensed. The cost and accumulated depreciation
applicable to assets retired are removed from the accounts and the gain or
F-126
<PAGE> 353
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
loss on disposition is recognized in income. Depreciation is computed by the
straight-line method for financial reporting purposes and accelerated methods
for tax reporting purposes based upon the estimated useful lives of the related
assets.
INCOME TAXES
Income taxes are accounted for under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
This statement generally requires the Company to record deferred income taxes
for the differences between book and tax bases of its assets and liabilities.
MANAGEMENT CONTRACTS
In connection with the acquisition of management contracts discussed in
Note 2, the Company obtained contracts with various governmental entities to
manage their facilities for fixed per diem rates. These contracts usually
contain expiration dates with renewal options ranging from annual to multi-year
renewals. The Company expects to renew these contracts for periods consistent
with the remaining renewal options allowed by the contracts or other reasonable
extensions. Fixed per diem revenue is recorded based on the per diem rate
multiplied by the number of inmates housed during the respective period. The
Company recognizes any additional management service revenues when earned or
awarded by the respective authorities.
START-UP COSTS
In accordance with the AICPA's Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities," the Company expenses all start-up costs as
incurred in operating expenses.
FAIR VALUE OF FINANCIAL INSTRUMENTS
To meet the reporting requirements of SFAS No. 107, "Disclosures About Fair
Value of Financial Instruments," the Company calculates the fair value of
financial instruments using quoted market prices. At December 31, 1999, there
were no material differences in the book values of the Company's financial
instruments and their related fair values as compared to similar financial
instruments.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
ACCOUNTING FOR THE IMPAIRMENT OF LONG LIVED ASSETS
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of," the Company
continually evaluates the recoverability of the carrying values of its
long-lived assets when events suggest that an impairment may have occurred. In
these circumstances, the Company utilizes estimates of undiscounted cash flows
to determine if an impairment exists.
F-127
<PAGE> 354
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income," requires that changes in
the amounts of certain items, including gains and losses on certain securities,
be shown in the financial statements. The provisions of SFAS No. 130 had no
impact on the Company's results of operations as comprehensive loss was
equivalent to the Company's reported net loss for the year ended December 31,
1999.
SEGMENT DISCLOSURES
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for the way that public business enterprises
or other enterprises that are required to file financial statements with the
Securities & Exchange Commission report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. SFAS No. 131
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. The Company operates in one industry
segment and the provisions of SFAS No. 131 have no significant effect on the
Company's disclosures.
NEWLY ISSUED ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," effective, as
amended, for fiscal years beginning after June 15, 2000. SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133 requires all derivatives to be recognized in
the statement of financial position and to be measured at fair value. The
Company anticipates adopting the provisions of SFAS No. 133 effective January 1,
2001 and does not believe the adoption of SFAS No. 133 will have a material
impact on the Company's consolidated financial position or results of
operations.
RECLASSIFICATIONS
Certain reclassifications of 1998 amounts have been made to conform with
the 1999 presentation.
5. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 4,303 $ 4,303
Building improvements....................................... 6,815 10,348
Equipment................................................... 9,629 6,689
Office furniture and fixtures............................... 2,888 2,585
Construction in progress.................................... 79 743
------- -------
23,714 24,668
Less accumulated depreciation............................... (3,755) --
------- -------
$19,959 $24,668
======= =======
</TABLE>
Depreciation expense was $3.8 million for the year ended December 31, 1999.
F-128
<PAGE> 355
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1999 1998
------ ------
(IN THOUSANDS)
<S> <C> <C>
Debt issuance costs......................................... $3,442 $2,619
Prepaid rent to a government entity......................... 3,116 4,477
Other assets................................................ 2,174 1,881
------ ------
$8,732 $8,977
====== ======
</TABLE>
7. PROMISSORY NOTE AND CREDIT FACILITY
The Promissory Note of $137.0 million is payable to Prison Realty over 10
years and bears interest at 12% per annum. Interest only is payable for the
first four years and the principal is payable over the following six years. The
Chief Executive Officer of the Company has personally guaranteed payment of 10%
of the outstanding principal amount. The original contractual maturities of the
Promissory Note for the next five years and thereafter are: 2000 -- $0;
2001 -- $0; 2002 -- $0; 2003 -- $22.8 million, 2004 -- $22.8 million and
thereafter -- $91.3 million; however, due to the existing default, these
maturities may be accelerated as discussed in Note 3.
At December 31, 1998, the Company had obtained a revolving credit facility
(the "Old Credit Facility") providing for borrowings up to $30.0 million. The
Old Credit Facility's terms required interest at LIBOR plus 4.0%. The Old Credit
Facility could be used for working capital and letters of credit. The Company
had made no draws under the Old Credit Facility as of December 31, 1998.
On March 1, 1999, the Company obtained the New Credit Facility which
provides for borrowings up to $100.0 million and bears interest at Prime plus
2.50%. The New Credit Facility replaced the $30.0 million Old Credit Facility in
place at December 31, 1998. Prior to obtaining the New Credit Facility, the
Company had made no draws under the Old Credit Facility. The deferred debt
issuance costs totaling $2.7 million related to the Old Credit Facility were
charged to interest expense upon replacement of that credit facility. Borrowings
outstanding under the New Credit Facility are considered short-term obligations
as the New Credit Facility requires the Company to maintain a lock-box with the
lender whereby all receipts are applied to reduce any borrowings outstanding. At
December 31, 1999, there was $16.2 million outstanding on the New Credit
Facility. The New Credit Facility expires on June 1, 2002.
As discussed in Note 3, at December 31, 1999, the Company was in violation
of several provisions of the New Credit Facility including failure to comply
with a financial covenant which required the Company's net worth to be greater
than negative $105.0 million and the execution of the Proposed Merger agreement.
The defaults could cause repayment of the Company's outstanding borrowings to be
accelerated and could result in a higher default rate of interest, as discussed
in Note 3. The Company has initiated discussions with the agent of the New
Credit Facility, and has requested the consent of the requisite percentage of
its participating lenders for a waiver of the restrictions relating to: (i) the
amendment of Prison Realty's agreements with the Company, (ii) the execution of
the Proposed Merger, and (iii) the Company's deferral of certain payments under
the CCA Leases. The Company has also requested the consent of such lenders with
respect to a waiver of the financial covenant concerning the Company's net worth
described above. The Company has
F-129
<PAGE> 356
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
requested that the waiver remain in effect until the earlier of July 31, 2000 or
the completion of the Potential Prison Realty Equity Investment and the Proposed
Merger.
Interest expense, net, is comprised of the following for the year ended
December 31, 1999 (in thousands):
<TABLE>
<S> <C>
Interest expense............................................ $20,974
Interest income............................................. (500)
-------
$20,474
=======
</TABLE>
8. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Realization of the future
tax benefits related to deferred tax assets is dependent on many factors,
including the Company's ability to generate taxable income within the net
operating loss carryforward period. Management has considered these factors in
reaching its conclusion as to the valuation allowance for financial reporting
purposes. Significant components of the Company's deferred tax assets at
December 31, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
Current Deferred Tax Assets:
Asset reserves and liabilities not yet deductible for
tax.................................................... $ 3,059
-------
Total current deferred tax assets...................... 3,059
Less valuation allowance.................................. (3,059)
-------
Net current deferred tax assets........................ $ --
=======
Noncurrent Deferred Tax Assets:
Deferred lease incentives and service fees................ $41,757
Tax over book basis of certain assets..................... 927
Net operating loss carryforwards.......................... 32,588
-------
Total noncurrent deferred tax assets................... 75,272
Less valuation allowance.................................. (75,272)
-------
Net noncurrent deferred tax assets..................... $ --
=======
</TABLE>
Due to the Company's recent operating losses, there is significant
uncertainty about the Company's ability to generate sufficient taxable income in
the future to realize the deferred tax assets. In accordance with SFAS No. 109,
the Company has provided a valuation allowance at December 31, 1999 to fully
reserve the deferred tax assets. At December 31, 1999, the Company had net
operating loss carryforwards for income taxes totaling $83.6 million available
to offset future taxable income. The carryforward period expires in 2019.
The following summarizes the change in the valuation allowance for the year
ended December 31, 1999 (in thousands):
<TABLE>
<S> <C>
Valuation allowance at January 1, 1999...................... $ --
Valuation allowance at December 31, 1999.................... 78,331
-------
Increase in valuation allowance........................ $78,331
=======
</TABLE>
F-130
<PAGE> 357
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. ADMINISTRATIVE SERVICES AGREEMENTS
On January 1, 1999, the Company entered into administrative service
agreements with two separately owned, newly formed companies, PMSI and JJFMSI,
pursuant to which employees of the Company's administrative departments perform
administrative services (including, but not limited to operational support,
legal, finance, management information systems and government relations
services), as needed, for each of the two companies. In connection therewith,
the Company granted each of the two companies the right to use the name
"Corrections Corporation of America" in connection with the servicing of
management contracts. As consideration for the foregoing, the Company received
administrative service fees of $0.25 million per month from each company for a
total of $6.0 million for the year ended December 31, 1999. The Company has
recognized these amounts as revenues in the statement of operations.
10. STOCKHOLDERS' EQUITY
PREFERRED STOCK
During 1998, the Company authorized 50.0 million shares of $0.01 (one cent)
par value preferred stock. At December 31, 1999 and 1998, no preferred stock was
issued or outstanding.
COMMON STOCK
On September 22, 1998, the Company issued 5.0 million shares of Class A
voting common stock to certain employees of Old CCA and Prison Realty who were
also founding shareholders of the Company. Neither the Company nor Old CCA
received any proceeds from the issuance of these shares. However, Old CCA
recorded compensation expense of $22.9 million in 1998 for the implied fair
value of the 5.0 million common shares. The fair value of these common shares
was determined at the date of the 1999 Merger based upon the fair value of the
Company derived from the $16.0 million cash investments in the Company made by
outside investors at December 31, 1998, as discussed in Note 1.
Additionally, on September 22, 1998, the Company issued 0.8 million
restricted shares of Class A voting common stock to certain wardens of Old CCA
facilities. The shares held by the wardens are restricted and will vest if, and
only if, the wardens remain employees of the Company through December 31, 2003.
The Company is expensing the implied fair value (approximately $3.9 million) of
these restricted securities over the respective vesting period. The implied fair
value of these common shares was also derived from the $16.0 million cash
investments in the Company made by outside investors at December 31, 1998, as
discussed in Note 1.
As discussed in Note 1, the Company sold 3.5 million shares of Class A
voting common stock to outside investors immediately prior to the 1999 Merger.
The net proceeds of $16.0 million were used for general working capital
purposes.
STOCK WARRANTS
In connection with the Company's Old Credit Facility, on December 31, 1998,
the Company issued 0.5 million warrants to purchase Class A common shares as
part of the debt issuance costs associated with obtaining the Old Credit
Facility. The warrants were issued with an exercise price of $4.57 per warrant
and an expiration date of December 31, 2008. The warrants are exercisable from
the date of issuance. The Company determined the fair value of the warrants
issued to be approximately $0.6 million utilizing the Black-Scholes
option-pricing model and recorded the cost as
F-131
<PAGE> 358
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
debt issuance cost within other noncurrent assets on the accompanying
consolidated balance sheets. These debt issuance costs were charged to interest
expense upon replacement of the Old Credit Facility as described in Note 7. At
December 31, 1999 and 1998, all stock warrants remained outstanding.
11. RETIREMENT PLAN
On December 28, 1998, the Company adopted a 401(k) plan (the "Plan") for
all eligible employees as defined in the plan documents. The Board of Directors
has discretion in establishing the amount of the Company's contributions. The
Company's contributions become 40% vested after four years of service and 100%
vested after five years of service, and the vested portions are paid on death,
retirement or termination. The CCA Employee Stock Ownership Plan merged with the
Plan in 1999. The Company's contributions to the Plan amounted to $4.6 million
for the year ended December 31, 1999.
12. COMMITMENTS AND CONTINGENCIES
All of the Company's leases of its facilities and certain equipment from
Prison Realty are under long-term operating leases expiring through the year
2011. The contractual minimum lease commitments (excluding acceleration or
demand provisions) under existing terms for noncancelable leases are as follows
(in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ----------
<S> <C>
2000........................................................ $ 310,651
2001........................................................ 310,651
2002........................................................ 310,651
2003........................................................ 310,651
2004........................................................ 310,651
Thereafter.................................................. 1,890,193
----------
Total....................................................... $3,443,448
==========
</TABLE>
As discussed in Note 3, the terms of the CCA Leases provide that it shall
be an event of default if the Company fails to pay any installment of rent
within 15 days after notice of nonpayment from Prison Realty. Approximately
$12.0 million in unpaid rentals related to 1999 exist as of March 29, 2000 as
well as approximately $77.7 million (unaudited) in unpaid rentals related to
periods subsequent to December 31, 1999. The terms of the CCA Leases provide
that Prison Realty could require the Company to relinquish the leased facilities
in the event of default. However, as of March 29, 2000, Prison Realty has not
provided a notice of nonpayment to the Company.
The Company has been named as one of the defendants in a purported class
action lawsuit filed by a Prison Realty shareholder against Prison Realty, the
Company and Prison Realty's directors. The lawsuit alleges, among other things,
certain violations of the Prison Realty directors' fiduciary duties in
connection with the approval of certain payments to the Company. The Company is
continuing to investigate the allegations and an outcome is not determinable as
of March 29, 2000.
Subsequent to year end, the Company was named as one of the defendants in a
purported class action lawsuit alleging that the telephone services at prisons
owned or run by the defendants result in charges for collect calls placed by
inmates that are unconscionably high. Due to the recent filing of this purported
class action lawsuit, an outcome is not determinable as of March 29, 2000.
F-132
<PAGE> 359
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition to the above legal matters, the nature of the Company's
business results in claims and litigation alleging that the Company is liable
for damages arising from the conduct of its employees or others. In the opinion
of management, other than the outstanding litigation discussed above, there are
no pending legal proceedings that would have a material effect on the
consolidated financial position or results of operations of the Company for
which the Company has not established adequate reserves.
Each of the Company's management contracts and the statutes of certain
states require the maintenance of insurance. The Company maintains various
insurance policies including employee health, worker's compensation, automobile
liability and general liability insurance. These policies are fixed premium
policies with various deductible amounts that are self-funded by the Company.
Reserves are provided for estimated incurred claims within the deductible
amounts.
13. CONCENTRATION OF CREDIT RISK
Approximately 97% of the Company's revenues for the year ended December 31,
1999, relate to amounts earned from federal, state and local governmental
management and transportation contracts.
The Company had revenues of 25% from the federal government and 62% from
state governments for the year ended December 31, 1999 for management contracts.
Two federal agencies accounted for revenues of 11% and 10% and one state
government accounted for revenues of 11% for the year ended December 31, 1999
for management contracts.
Substantially all of the Company's accounts receivable are due from
federal, state and local governments at December 31, 1999 and 1998.
Salaries and related benefits represented 58% of operating expenses for the
year ended December 31, 1999.
14. QUARTERLY INFORMATION (UNAUDITED)
Selected quarterly financial information for each of the quarters in the
year ended December 31, 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
-------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
Revenues....................... $112,363 $122,985 $ 129,874 $134,070 $ 499,292
Operating loss................. (60,518) (55,923) (63,512) (2,491)(b) (182,444)
Net loss....................... (39,766) (37,262) (118,346)(a) (7,544)(b) (202,918)
</TABLE>
-------------------------
(a) The net loss in the third quarter reflects the Company's decision that
previously reported income tax benefits of $50.3 million related to its
1999 losses should be fully reserved.
(b) The operating loss and net loss in the fourth quarter were substantially
lower than the first three quarters due to changes in the terms of the CCA
Leases which allowed the Company to reverse previously recorded straight
line rent accruals of $56.9 million.
F-133
<PAGE> 360
APPENDIX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF JUNE 30, 2000,
BY AND AMONG
PRISON REALTY TRUST, INC. AND CCA ACQUISITION SUB, INC.,
AND
CORRECTIONS CORPORATION OF AMERICA.
<PAGE> 361
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
ARTICLE I -- THE MERGER..................................................... A-2
Section 1.01 The Merger.................................................. A-2
Section 1.02 Closing..................................................... A-2
Section 1.03 Effective Time.............................................. A-2
Section 1.04 Effects of the Merger....................................... A-2
Section 1.05 Constituent Documents....................................... A-2
Section 1.06 Directors................................................... A-2
Section 1.07 Officers.................................................... A-2
ARTICLE II -- EFFECT OF THE MERGER ON THE CAPITAL SHARES, INDEBTEDNESS AND
AGREEMENTS OF THE CONSTITUENT ENTITIES; EXCHANGE OF
CERTIFICATES.................................................. A-3
Section 2.01 Effect on Capital Shares, Indebtedness and Agreements....... A-3
Section 2.02 Exchange of Certificates.................................... A-4
Section 2.03 Qualified Plans............................................. A-4
Section 2.04 Restricted Stock Plans...................................... A-5
Section 2.05 Warrants to Purchase CCA Common Stock....................... A-5
Section 2.06 Fractional Shares........................................... A-5
Section 2.07 Lost Certificates........................................... A-5
ARTICLE III -- REPRESENTATIONS AND WARRANTIES............................... A-6
Section 3.01 Representations and Warranties of Prison Realty............. A-6
Section 3.02 Representations and Warranties of CCA Sub................... A-21
Section 3.03 Representations and Warranties of CCA....................... A-23
ARTICLE IV -- COVENANTS RELATING TO CONDUCT OF BUSINESS..................... A-32
Section 4.01 Covenants of Prison Realty.................................. A-32
Section 4.02 Covenants of CCA Sub........................................ A-32
Section 4.03 Covenants of CCA............................................ A-32
Section 4.04 No Solicitation by Prison Realty............................ A-34
Section 4.05 No Solicitation by CCA...................................... A-36
ARTICLE V -- ADDITIONAL AGREEMENTS.......................................... A-36
Section 5.01 Preparation of the Proxy Statement and Registration
Statement................................................... A-36
Section 5.02 Access to Information....................................... A-37
Section 5.03 Shareholders' Meetings...................................... A-37
Section 5.04 Reasonable Best Efforts..................................... A-38
Section 5.05 Benefits Matters............................................ A-38
Section 5.06 Fees and Expenses........................................... A-38
Section 5.07 Indemnification, Exculpation and Insurance.................. A-38
Section 5.08 Transfer Taxes.............................................. A-39
Section 5.09 Stock Exchange Listing...................................... A-39
Section 5.10 Tax-Free Reorganization..................................... A-39
Section 5.11 Shareholders' Agreement..................................... A-39
Section 5.12 Lock-Up Agreement........................................... A-39
Section 5.13 Equity Incentive Plan....................................... A-39
Section 5.14 Change of Corporate Name.................................... A-40
</TABLE>
A-i
<PAGE> 362
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
ARTICLE VI -- CONDITIONS PRECEDENT.......................................... A-40
Section 6.01 Conditions to Each Party's Obligation To Effect the
Merger...................................................... A-40
Section 6.02 Conditions to Obligation of Prison Realty and CCA Sub To
Effect the Merger........................................... A-40
Section 6.03 Conditions to Obligation of CCA To Effect the Merger........ A-41
Section 6.04 Frustration of Closing Conditions........................... A-41
ARTICLE VII -- TERMINATION AND AMENDMENT.................................... A-42
Section 7.01 Termination................................................. A-42
Section 7.02 Effect of Termination....................................... A-43
Section 7.03 Amendment................................................... A-43
Section 7.04 Extension; Waiver........................................... A-43
Section 7.05 Procedure for Termination, Amendment, Extension or Waiver... A-43
ARTICLE VIII -- GENERAL PROVISIONS.......................................... A-43
Section 8.01 Nonsurvival of Representations and Warranties............... A-43
Section 8.02 Notices..................................................... A-43
Section 8.03 Definitions; Interpretation................................. A-44
Section 8.04 Counterparts................................................ A-45
Section 8.05 Entire Agreement; No Third-Party Beneficiaries; Rights of
Ownership................................................... A-45
Section 8.06 Governing Law............................................... A-45
Section 8.07 Publicity................................................... A-45
Section 8.08 Assignment.................................................. A-45
Section 8.09 Enforcement................................................. A-46
</TABLE>
EXHIBITS TO MERGER AGREEMENT
<TABLE>
<S> <C> <C>
Exhibit A -- Form of Lock-Up Agreement
</TABLE>
SCHEDULES TO MERGER AGREEMENT
<TABLE>
<S> <C> <C>
Schedule 1.06 -- Directors of Surviving Company
Schedule 1.07 -- Officers of Surviving Company
Schedule 3.01 -- Prison Realty Disclosure Schedule
Schedule 3.03 -- CCA Disclosure Schedule
</TABLE>
A-ii
<PAGE> 363
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER, dated as of June 30, 2000 (the
"Agreement"), is by and among PRISON REALTY TRUST, INC., a Maryland corporation
("Prison Realty"), CCA ACQUISITION SUB, INC., a Tennessee corporation and a
wholly-owned subsidiary of Prison Realty ("CCA Sub"), and CORRECTIONS
CORPORATION OF AMERICA, a Tennessee corporation ("CCA").
WITNESSETH:
WHEREAS, the Boards of Directors of CCA, CCA Sub and Prison Realty have
approved the merger of CCA with and into CCA Sub (the "Merger") upon the terms
and subject to the conditions set forth in this Agreement;
WHEREAS, the Merger requires the approval by the affirmative vote of the
holders of eighty percent (80%) of the Class A common stock, $0.01 par value per
share (the "CCA Class A Common Stock"), and the Class B common stock, $0.01 par
value per share (the "CCA Class B Common Stock" and, together with the CCA Class
A Common Stock, the "CCA Common Stock"), of CCA, voting together as a single
class, as well as the separate consent of Baron Asset Fund ("Baron"), a
Massachusetts business trust and holder of approximately sixteen and nine-tenths
percent (16.9%) of the CCA Class A Common Stock (collectively, the "CCA
Shareholder Approval");
WHEREAS, in connection with the Merger, Prison Realty intends to amend and
restate its charter and intends to alter its operating structure such that
Prison Realty will not qualify as a real estate investment trust (a "REIT") as
defined by the Internal Revenue Code of 1986, as amended (the "Code"),
commencing with its taxable year ending December 31, 2000, which actions require
approval by the affirmative vote of the holders of two-thirds (2/3) of the
outstanding shares of common stock, $0.01 par value per share, of Prison Realty
(the "Prison Realty Common Stock") (the "Prison Realty Stockholder Approval");
WHEREAS, Prison Realty, CCA Sub and CCA desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and also to prescribe various conditions to the Merger; and
WHEREAS, for federal income tax purposes, it is intended that the Merger
qualify as a reorganization within the meaning of Section 368(a) of the Code,
and this Agreement is intended to be and is adopted as a plan of reorganization
with respect to the Merger.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
parties hereto agree as follows:
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Article I
THE MERGER
Section 1.01 The Merger. At the Effective Time (as defined in Section 1.03
herein) and subject to and upon the terms and conditions of this Agreement, and
in accordance with the Tennessee Business Corporation Act (the "TBCA"), CCA
shall be merged with and into CCA Sub, whereupon the separate corporate
existence of CCA shall cease and CCA Sub shall continue as the surviving
company. Following the Merger, CCA Sub (the "Surviving Company") shall succeed
to and assume all the rights and obligations of CCA in accordance with the TBCA.
Section 1.02 Closing. Unless this Agreement shall have been terminated and
the transactions contemplated herein abandoned pursuant to Section 7.01, and
subject to the satisfaction or waiver of the conditions set forth in Article VI,
the closing of the Merger (the "Closing") will take place at 10:00 a.m., local
time, on a date to be specified by the parties, which shall be no later than the
fifth business day following the satisfaction or waiver of all the conditions
set forth in Article VI herein which by their terms are capable of being
satisfied prior to the Closing (the "Closing Date"), at the offices of Stokes &
Bartholomew, P.A. in Nashville, Tennessee, unless another time, date or place is
agreed to by the parties hereto.
Section 1.03 Effective Time. Subject to the provisions of this Agreement,
as promptly as practicable on the Closing Date, articles of merger and all other
appropriate documents (in any such case, the "Articles of Merger") shall be duly
prepared, executed, acknowledged and filed by the parties in accordance with the
relevant provisions of the TBCA with the Secretary of State of the State of
Tennessee (the "Tennessee Secretary of State"). The Merger shall become
effective on the Closing Date at the time of day specified in the Articles of
Merger filed with the Tennessee Secretary of State (the "Effective Time").
Section 1.04 Effects of the Merger. At the Effective Time, the Merger
shall have the effects set forth in Section 48-21-108 of the TBCA. Without
limiting the foregoing, and subject thereto, at the Effective Time all the
property, rights, privileges, powers and franchises of CCA and CCA Sub shall
vest in the Surviving Company, and all debts, liabilities and duties of CCA and
CCA Sub shall become the debts, liabilities and duties of the Surviving Company.
Section 1.05 Constituent Documents.
(a) Charter. The charter of CCA Sub as in effect immediately prior to
the Effective Time shall continue to be the charter of the Surviving
Company (with such amendments as may be set forth in the Articles of Merger
in accordance with this Agreement) until thereafter changed or amended as
provided therein or by applicable law.
(b) Bylaws. The bylaws of CCA Sub as in effect immediately prior to
the Effective Time shall continue to be the bylaws of the Surviving Company
until thereafter changed or amended as provided therein or by applicable
law.
Section 1.06 Directors. The persons named in Schedule 1.06 attached hereto
shall be the directors of the Surviving Company, until the earlier of their
resignation or removal or until their respective successors are duly elected and
qualified, as the case may be.
Section 1.07 Officers. The persons named in Schedule 1.07 attached hereto
shall be the officers of the Surviving Company, serving in such capacity as is
set forth on Schedule 1.07 until the earlier of their resignation or removal or
until their respective successors are duly elected and qualified, as the case
may be.
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Article II
EFFECT OF THE MERGER ON THE CAPITAL SHARES, INDEBTEDNESS AND
AGREEMENTS OF THE CONSTITUENT ENTITIES; EXCHANGE OF CERTIFICATES
Section 2.01 Effect on Capital Shares, Indebtedness and Agreements. By
virtue of the Merger and without any action on the part of Prison Realty, CCA
Sub, CCA or the holders of the Constituent Capital Stock (as defined herein):
(a) Cancellation of Certain Shares, Indebtedness and Agreements. As
of the Effective Time: (i) each share of Constituent Capital Stock that is
owned by any of the parties hereto or their Subsidiaries (as defined in
Section 8.03 herein) (except for any shares of Prison Realty Stock (as
defined in Section 3.01(c) herein) owned by CCA Sub which are to be
delivered as the CCA Merger Consideration) shall automatically be canceled
and retired and shall cease to exist, and no consideration shall be
delivered in exchange therefor; (ii) any indebtedness between any of the
parties hereto shall be canceled and shall cease to exist and no
consideration shall be delivered therefor; and (iii) all agreements between
any of the parties hereto shall be canceled and shall cease to exist. For
purposes hereof, the term "Constituent Capital Stock" means collectively
the Prison Realty Stock and the CCA Common Stock.
(b) Conversion of CCA Common Stock. As of the Effective Time, each
issued and outstanding share of CCA Common Stock (other than shares
canceled pursuant to subparagraph (a) above) shall be converted into the
right to receive that number of shares of Prison Realty Common Stock
(collectively, the "CCA Merger Consideration") determined by: (i)
multiplying $20,000,000 by a fraction, the numerator of which shall be the
total number of shares of CCA Common Stock outstanding immediately prior to
the Effective Time which are not to be canceled pursuant to subparagraph
(a) above, and the denominator of which shall be the total number of shares
of CCA Common Stock outstanding immediately prior to the Effective Time,
inclusive of shares which are to be canceled pursuant to subparagraph (a)
above; (ii) dividing the amount determined under clause (i) by the Prison
Realty Closing Price (as herein defined); and (iii) dividing the amount
determined under clause (ii) by the total number of shares of CCA Common
Stock outstanding immediately prior to the Effective Time which are not to
be canceled pursuant to subparagraph (a) above. All computations made in
accordance with the preceding sentence shall be rounded to two decimal
places. As of the Effective Time, each issued and outstanding share of CCA
Common Stock converted into Prison Realty Common Stock in accordance
herewith shall no longer be outstanding and shall automatically be canceled
and retired and shall cease to exist, and each holder of a certificate
representing any such shares of CCA Common Stock shall cease to have any
rights with respect thereto except the right to receive the CCA Merger
Consideration, without interest thereon. Shares of Prison Realty Common
Stock that are issued in exchange for shares of CCA Common Stock which are
subject to forfeiture under the CCA Restricted Stock Plan (as defined in
Section 2.04 herein) shall become subject to the terms and restrictions of
the Prison Realty Restricted Stock Plan (as defined in Section 2.04 herein)
in accordance with Section 2.04. All remaining shares of Prison Realty
Common Stock issued in the CCA Merger shall be subject to the terms and
conditions of a Lock-Up Agreement (as defined in Section 5.12 herein). For
purposes hereof, the term "Prison Realty Closing Price" means the average
closing price of Prison Realty Common Stock over the five trading days
ending two trading days prior to the Closing Date.
Section 2.02 Exchange of Certificates.
(a) Exchange. Immediately after the Effective Time, Prison Realty
shall exchange certificates representing CCA Common Stock (each, a "CCA
Certificate" and, collectively, the
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"CCA Certificates") for the CCA Merger Consideration. Promptly after the
Effective Time, Prison Realty shall send to each holder of shares of CCA
Common Stock (other than Prison Realty or any of its Subsidiaries) at the
Effective Time a letter of transmittal for use in such exchange (which
shall specify that the delivery shall be effected, and risk of loss and
title shall pass, only upon proper delivery of the CCA Certificates to
Prison Realty) and instructions for use in effecting the surrender of the
CCA Certificates for payment therefor.
(b) Exchange of Certificates. Each holder of shares of CCA Common
Stock that have been converted into the right to receive the CCA Merger
Consideration will be entitled to receive, upon surrender to Prison Realty
of a CCA Certificate, together with a properly completed letter of
transmittal, the CCA Merger Consideration in respect of each share of CCA
Common Stock represented by such CCA Certificate. Until so surrendered,
each such CCA Certificate shall, after the Effective Time, represent for
all purposes only the right to receive such CCA Merger Consideration.
(c) Form of Certain Transfers. If any portion of the CCA Merger
Consideration is to be paid to a person (as defined in Section 8.03 herein)
other than the person in whose name a CCA Certificate is registered, it
shall be a condition to such payment that the CCA Certificate so
surrendered shall be properly endorsed or otherwise be in proper form for
transfer and that the person requesting such payment shall pay to Prison
Realty any transfer or other taxes required as a result of such payment to
a person other than the registered holder of such CCA Certificate or
establish to the satisfaction of Prison Realty that such tax has been paid
or is not payable.
(d) Transfers After the Effective Time. After the Effective Time,
there shall be no further registration of transfers of shares of CCA Common
Stock. If, after the Effective Time, CCA Certificates are presented to
Prison Realty or the Surviving Company, they shall be canceled and promptly
exchanged for the consideration provided for, in accordance with the
procedures set forth in this Article.
(e) Unclaimed Shares. Neither Prison Realty nor the Surviving Company
shall be liable to any holder of CCA Common Stock for any amount paid to a
public official pursuant to applicable abandoned property laws.
(f) Dividends. No dividends, interest or other distributions with
respect to securities of Prison Realty constituting part of the CCA Merger
Consideration shall be paid to the holder of any unsurrendered CCA
Certificates until such CCA Certificates are surrendered as provided in
this Section. Upon such surrender, there shall be paid, without interest,
to the person in whose name the securities of Prison Realty have been
registered, all dividends, interest and other distributions payable in
respect of such securities on a date subsequent to, and in respect of a
record date after, the Effective Time.
Section 2.03 Qualified Plans. As of the Effective Time, Prison Realty
shall adopt the Corrections Corporation of America 401(k) Savings and Retirement
Plan (the "CCA 401(k) Plan"), and shall cause benefits under the Prison Realty
401(k) Savings and Retirement Plan (the "Prison Realty 401(k) Plan") to cease to
accrue. After the Effective Time, the Prison Realty 401(k) Plan and the CCA
Prison Realty Trust Employee Savings and Stock Ownership Plan (the "Prison
Realty ESOP") (the benefits under which ceased to accrue as of December 31,
1998) may, at the discretion of Prison Realty, be maintained as frozen plans in
compliance with applicable law. Prior to the Effective Time, Prison Realty and
CCA shall take all actions (including, if appropriate, amending the terms of the
CCA 401(k) Plan, the Prison Realty 401(k) Plan and the Prison Realty ESOP) that
are necessary to give effect to the transactions contemplated by this Section.
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Section 2.04 Restricted Stock Plans. As of the Effective Time, the
Correctional Management Services Corporation 1998 Restricted Stock Plan (the
"CCA Restricted Stock Plan") shall be merged into a new restricted stock plan
(the "Prison Realty Restricted Stock Plan") with terms and conditions similar to
those of the CCA Restricted Stock Plans, except that any shares forfeited under
the Prison Realty Restricted Stock Plan shall be forfeited to all plan
participants. Prison Realty, CCA Sub and CCA shall take all actions that are
necessary to give effect to the transactions contemplated by this Section.
Section 2.05 Warrants to Purchase CCA Common Stock. At the Effective Time,
each warrant to purchase shares of CCA Common Stock (the "CCA Warrants"),
whether or not exercisable, shall be deemed to constitute a warrant to acquire,
on substantially the same terms and conditions as were applicable to the
original warrant to which it relates (a "Substitute Warrant"), the same number
of shares of Prison Realty Common Stock as the holder of such warrant would have
been entitled to receive pursuant to the Merger had such holder exercised such
CCA Warrant in full immediately prior to the Effective Time, at a price per
share of Prison Realty Common Stock computed in compliance with the terms of
such CCA Warrant; provided, however, that the number of shares of Prison Realty
Common Stock that may be purchased upon exercise of such Substitute Warrant
shall not include any fractional share. Prior to the Effective Time, CCA will
use its best efforts to obtain such consents, if any, as may be necessary to
give effect to the transactions contemplated by this Section. In addition, prior
to the Effective Time, CCA will use its best efforts to make any amendments to
the terms of the CCA Warrants that are necessary to give effect to the
transactions contemplated by this Section. Except as contemplated by this
Section, CCA will not, after the date hereof, without the written consent of
Prison Realty, amend any outstanding CCA Warrants. Prison Realty, CCA Sub and
CCA shall take all actions that are necessary to give effect to the transactions
contemplated by this Section, including without limitation such actions, if any,
as are described in the CCA Warrants.
Section 2.06 Fractional Shares. No fractional shares of Prison Realty
Common Stock shall be issued to shareholders of CCA in connection with the
Merger, but in lieu thereof each holder of shares of CCA Common Stock otherwise
entitled to receive as a result of the Merger a fractional share of Prison
Realty Common Stock shall be entitled to receive a cash payment (without
interest), rounded to the nearest cent, representing such holder's proportionate
interest in the net proceeds resulting from the sale (after deduction of all
expenses resulting from such sale) on the New York Stock Exchange ("NYSE")
through one or more of its member firms of the fractional shares of Prison
Realty Common Stock all holders of shares of CCA Common Stock would otherwise be
entitled to receive as a result of the Merger.
Section 2.07 Lost Certificates. If any CCA Certificate shall have been
lost, stolen or destroyed, upon the making of an affidavit of that fact by the
person claiming such CCA Certificate to be lost, stolen or destroyed and, if
required by the Surviving Company, the posting by such person of a bond, in such
reasonable amount as the Surviving Company may direct, as indemnity against any
claim that may be made against it with respect to such CCA Certificate, Prison
Realty (or its duly appointed transfer agent) will issue in exchange for such
lost, stolen or destroyed CCA Certificate the CCA Merger Consideration to be
paid in respect of the shares represented by such CCA Certificates as
contemplated by this Article.
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Article III
REPRESENTATIONS AND WARRANTIES
Section 3.01 Representations and Warranties of Prison Realty. Except as
set forth in Prison Realty SEC Documents (as defined in Section 3.01(e) herein)
filed with the Securities and Exchange Commission (the "SEC") and publicly
available prior to the date hereof (the "Prison Realty Filed SEC Documents") or
on the Disclosure Schedule delivered by Prison Realty to CCA prior to the
execution of this Agreement (the "Prison Realty Disclosure Schedule"), which
Prison Realty Disclosure Schedule constitutes a part hereof and is true and
correct in all material respects, Prison Realty hereby represents and warrants
to CCA as follows:
(a) Organization and Authority. Prison Realty is a corporation duly
incorporated and validly existing and in good standing under the laws of
the State of Maryland with full corporate power and authority to own its
properties and conduct its business as now conducted and is duly qualified
or authorized to do business and is in good standing in all jurisdictions
where the failure to so qualify could have a material adverse effect (as
defined in Section 8.03 herein). Prison Realty has all requisite corporate
power and authority, and has been duly authorized by all necessary
consents, approvals, authorizations, orders, registrations, qualifications,
licenses and permits of and from all public, regulatory or governmental
agencies and bodies, to own, lease and operate its assets and properties
and to conduct its business as it is now being conducted and is duly
qualified or licensed to do business and is in good standing in each
jurisdiction in which the failure to do so could have a material adverse
effect upon the conduct of its business or the ownership or leasing of
property by it in such jurisdiction.
(b) Subsidiaries.
(i) Except for CCA Sub, the only direct or indirect Subsidiaries of
Prison Realty are those listed in Section 3.01(b) of the Prison Realty
Disclosure Schedule. Except for Prison Realty's ownership of all of the
issued and outstanding common stock of CCA Sub and except for the
ownership interests set forth in Section 3.01(b) of the Prison Realty
Disclosure Schedule, Prison Realty does not own or control, directly or
indirectly, a 50% or greater capital stock interest in a corporation, a
general partnership interest or a 50% or greater limited partnership
interest in a partnership, or a managing membership interest or a 50% or
greater membership interest in a limited liability company, association
or other entity or project.
(ii) Except for CCA Sub or the entities listed in Section 3.01(b)
of the Prison Realty Disclosure Schedule, Prison Realty does not hold,
directly or indirectly, any equity interest or equity investment in any
corporation, partnership, association or other entity.
(iii) Except as set forth in Section 3.01(b) of the Prison Realty
Disclosure Schedule, all of the issued and outstanding shares of capital
stock of, or other equity interests in, each Subsidiary of Prison Realty
have been validly issued, are fully paid and nonassessable and are
owned, directly or indirectly, by Prison Realty free and clear of any
Liens (as hereinafter defined) and there are no outstanding
subscriptions, options, calls, contracts, voting trusts, proxies or
other commitments, understandings, restrictions, arrangements, rights or
warrants, including any right of conversion or exchange under any
outstanding security, instrument or other agreement, obligating any
Subsidiary of Prison Realty to issue, deliver or sell, or cause to be
issued, delivered or sold, additional shares of its capital stock or
obligating it to grant, extend or enter into any such agreement or
commitment.
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(c) Capital Structure of Prison Realty. The authorized stock of
Prison Realty consists of 300,000,000 shares of Prison Realty Common Stock
and 20,000,000 shares of preferred stock, $0.01 par value per share, of
Prison Realty, of which 4,300,000 shares have been designated Series A
Preferred Stock (the "Prison Realty Series A Preferred Stock" and,
collectively with the Prison Realty Common Stock, the "Prison Realty
Stock"). At the close of business on June 22, 2000, (A) 118,409,619 shares
of Prison Realty Common Stock were outstanding, (B) 4,300,000 shares of
Prison Realty Series A Preferred Stock were outstanding, (C) options
("Prison Realty Options") to acquire 2,396,734 shares of Prison Realty
Common Stock from Prison Realty pursuant to Prison Realty's equity
incentive plans ("Prison Realty Stock Plans") listed on the Prison Realty
Disclosure Schedule were outstanding, (D) 294,897 deferred share awards
("Prison Realty Deferred Share Awards") granted pursuant to Prison Realty
Stock Plans were outstanding, (E) subordinated notes ("Prison Realty
Notes") convertible into 2,962,336 shares of Prison Realty Common Stock
were outstanding, and (F) options to purchase 70,000 shares of Prison
Realty Common Stock not granted under any equity incentive plan to Joseph
F. Johnson, Jr. (the "Johnson Option"), as set forth in Section 3.01(c) of
the Prison Realty Disclosure Schedule, were outstanding. Other than as set
forth above, at the close of business on June 22, 2000, there were
outstanding no shares of Prison Realty Stock or any other class or series
of stock of Prison Realty or options, warrants or other rights to acquire
Prison Realty Stock or any other class or series of stock of Prison Realty
from Prison Realty. No bonds, debentures, notes or other indebtedness
having the right to vote (or convertible into or exchangeable for
securities having the right to vote) on any matters on which stockholders
of Prison Realty may vote are issued or outstanding, except the Prison
Realty Notes.
All outstanding shares of Prison Realty Stock are, and any shares of
Prison Realty Common Stock which may be issued upon the exercise of Prison
Realty Options, the vesting of the Prison Realty Deferred Share Awards, the
conversion of the Prison Realty Notes or the exercise of the Johnson Option
when issued will be, duly authorized, validly issued, fully paid and
nonassessable, and will be delivered free and clear of all claims,
mortgages, deeds of trust, charges, liens, encumbrances, pledges or
security interests of any kind or nature whatsoever (collectively, "Liens")
and are not now in violation of or subject to any preemptive rights or
other rights to subscribe for or purchase securities and conform to the
description thereof in the Prison Realty Filed SEC Documents. Other than as
set forth above, and except for this Agreement, the Prison Realty Stock
Plans, the Prison Realty Options, the Prison Realty Deferred Share Awards,
the Prison Realty Notes and the Johnson Option, there are no outstanding
securities, options, warrants, calls, rights, commitments, agreements or
undertakings of any kind to which Prison Realty or any of its Subsidiaries
is a party or by which Prison Realty or any of its Subsidiaries is bound
obligating Prison Realty or any of its Subsidiaries to issue, deliver or
sell, or cause to be issued, delivered or sold, additional shares of
capital stock or other equity or voting securities of Prison Realty or of
any Subsidiary of Prison Realty or obligating Prison Realty or any of its
Subsidiaries to issue, grant, extend or enter into any such security,
option, warrant, call, right, commitment, agreement or undertaking. There
are no outstanding obligations of Prison Realty or any of its Subsidiaries
to repurchase, redeem or otherwise acquire any shares of capital stock of
Prison Realty or any of its Subsidiaries and, to the knowledge of the
executive officers of Prison Realty, as of the date hereof, no irrevocable
proxies have been granted with respect to shares of Prison Realty Common
Stock or equity of Subsidiaries of Prison Realty.
(d) Authorization. Prison Realty has all requisite corporate power
and authority to enter into this Agreement and, subject to obtaining the
Prison Realty Stockholder Approval, to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Prison Realty,
subject to obtaining the
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Prison Realty Stockholder Approval. This Agreement has been duly executed
and delivered by Prison Realty and constitutes a valid and binding
obligation of Prison Realty, enforceable against Prison Realty in
accordance with its terms, subject to applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance, fraudulent transfer and
other similar laws from time to time in effect. The execution and delivery
of this Agreement does not, and the consummation of the transactions
contemplated hereby will not, conflict with, or result in any breach or
violation of, or default (with or without notice or lapse of time or both)
under, or result in the termination of, or accelerate the performance
required by, or give rise to a right of termination, cancellation or
acceleration of any obligation under, or the creation of a Lien pursuant
to, (i) any provision of the charter (or similar organizational documents)
or bylaws of Prison Realty or any of its Subsidiaries or (ii) subject to
obtaining or making the consents, approvals, orders, authorizations,
registrations, declarations and filings referred to in the following
sentence, any loan or credit agreement, note, mortgage, indenture, lease,
Prison Realty Stock Plan or other agreement, obligation, instrument,
permit, concession, franchise, license, judgment, order, decree, statute,
law, ordinance, rule or regulation applicable to Prison Realty or any of
its Subsidiaries or their respective properties or assets, in any case
under this clause (ii) which would, individually or in the aggregate, have
a material adverse effect on Prison Realty. No consent, approval, order or
authorization of, or registration, declaration or filing with, any court,
administrative agency or commission or other governmental authority or
instrumentality (a "Governmental Entity") is required by or with respect to
Prison Realty or any of its Subsidiaries in connection with the execution
and delivery of this Agreement by Prison Realty or the consummation by
Prison Realty of the transactions contemplated hereby, the failure of which
to be obtained or made would, individually or in the aggregate, have a
material adverse effect on Prison Realty or would prevent or materially
delay the consummation of the transactions contemplated hereby, except for
(A) the filing with the SEC of: (i) a proxy statement relating to the
consideration of the transaction contemplated by this Agreement at a
meeting of the stockholders of Prison Realty (the "Prison Realty
Stockholders' Meeting") duly called and convened to consider the approval
of such transaction, as amended or supplemented from time to time (the
"Proxy Statement"); (ii) a registration statement relating to the issuance
of shares of Prison Realty Stock in the Merger, which shall also contain a
proxy statement-prospectus relating to the consideration of the transaction
contemplated by this Agreement at a meeting of the shareholders of CCA (the
"CCA Shareholders' Meeting") duly called and convened to consider the
approval of such transaction, as amended and supplemented from time to time
(the "Registration Statement"); and (iii) such reports under the Securities
Exchange Act of 1934, as amended, and the rules and regulations promulgated
thereunder (the "Exchange Act"), as may be required in connection with this
Agreement and the transaction contemplated hereby, (B) the filing of the
Articles of Merger with the Tennessee Secretary of State and appropriate
documents with the relevant authorities of oth er states in which Prison
Realty is qualified to do business, (C) filings required pursuant to the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the
rules and regulations promulgated thereunder (the "HSR Act"), (D) filings
necessary to satisfy the applicable requirements of state securities or
"blue sky" laws, (E) filings required under the rules and regulations of
the New York Stock Exchange (the "NYSE") and (F) filings required pursuant
to Prison Realty's leases and related agreements with Governmental
Entities, which are set forth on the Prison Realty Disclosure Schedule
(collectively, the "Required Filings").
(e) SEC Documents; Financial Statements. Prison Realty has timely
filed all forms, reports, schedules, registration statements, definitive
proxy statements and other documents required to be filed by Prison Realty
with the SEC since January 1, 1999 (the "Prison Realty SEC Documents"). As
of their respective dates, the Prison Realty SEC Documents complied in all
material respects with the requirements of the Securities Act of 1933, as
amended, and the
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rules and regulations promulgated thereunder (the "Securities Act") and the
Exchange Act, as the case may be, applicable to such Prison Realty SEC
Documents. None of the Prison Realty SEC Documents when filed contained any
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Prison Realty and its Subsidiaries are not parties to or
otherwise subject to any contracts or other agreements that were or are
required to be filed as exhibits to, or otherwise disclosed in, the Prison
Realty Filed SEC Documents and have not been so filed or disclosed. The
financial statements of Prison Realty included in the Prison Realty SEC
Documents (the "Prison Realty Financial Statements") comply as to form in
all material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with generally accepted accounting principles
applied on a consistent basis ("GAAP") during the periods involved and
fairly present in all material respects the consolidated financial position
of Prison Realty and its consolidated Subsidiaries as at the dates thereof
and the consolidated results of their operations and cash flows for the
periods then ended. Except as set forth in the Prison Realty Filed SEC
Documents (including any item accounted for in the financial statements
contained in the Prison Realty Filed SEC Documents or set forth in the
notes thereto) and except for the effect of the contemplated transactions
under this Agreement and related agreements, since March 31, 2000, (i)
neither Prison Realty nor any of its Subsidiaries has incurred any claims,
liabilities or obligations of any nature (whether accrued, absolute,
contingent or otherwise) which, individually or in the aggregate, would
have a material adverse effect on Prison Realty (other than claims,
liabilities or obligations contemplated by this Agreement or expressly
permitted to be incurred pursuant to this Agreement), and (ii) Prison
Realty and each of its Subsidiaries have conducted their respective
businesses only in the ordinary course consistent with past practice.
(f) Information Supplied. None of (i) the information supplied or to
be supplied by Prison Realty specifically for inclusion or incorporation by
reference in the Proxy Statement, at the date it is first mailed to
stockholders of Prison Realty or at the time of the Prison Realty
Stockholders' Meeting, and (ii) the information supplied or to be supplied
by Prison Realty specifically for inclusion or incorporation by reference
in the Registration Statement, at the date the proxy statement-prospectus
comprising a portion of the Registration Statement is first mailed to
shareholders of CCA or at the time of the CCA Shareholders' Meeting, will
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading, except that in each case no representation or
warranty is made by Prison Realty with respect to statements made or
incorporated by reference therein based on information supplied by CCA,
Prison Management Services, Inc., a Tennessee corporation ("PMSI"), or
Juvenile and Jail Facility Management Services, Inc., a Tennessee
corporation ("JJFMSI"), specifically for inclusion or incorporation by
reference therein. The Proxy Statement and the Registration Statement will
comply as to form in all material respects with the requirements of the
Exchange Act and the Securities Act, except that in each case no
representation or warranty is made by Prison Realty with respect to
statements made or incorporated by reference therein based on information
supplied by CCA, PMSI or JJFMSI for inclusion or incorporation by reference
therein. If at any time prior to the date of the Prison Realty
Stockholders' Meeting or the CCA Shareholders' Meeting, any event with
respect to Prison Realty, or with respect to information supplied by Prison
Realty specifically for inclusion in the Proxy Statement or the
Registration Statement, shall occur which is required to be described in an
amendment of, or supplement to, the Proxy Statement or the Registration
Statement, such event shall be so described by Prison Realty.
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(g) Proxy Statement and Registration Statement. The Proxy Statement
and Registration Statement to be filed with the SEC with respect to the
Merger and the offering of Prison Realty Stock in connection with the
Merger, and any amendments or supplements thereto, will, when filed, comply
as to form in all material respects with the applicable requirements of the
Securities Act and Exchange Act. At the time the Proxy Statement, or any
amendment or supplement thereto, is cleared by the SEC and at the time the
Registration Statement, or any amendment or supplement thereto, becomes
effective, and at the Effective Time, the Proxy Statement and the
Registration Statement, each as amended or supplemented, if applicable,
shall not contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary in order to make
the statements contained therein not misleading. The foregoing
representations and warranties will not apply to statements or omissions
included in the Proxy Statement or the Registration Statement or any
amendment or supplement thereto based upon information furnished by CCA for
use therein.
(h) Absence of Certain Changes or Events. Except for the effect of
the contemplated transaction under this Agreement and related agreements,
subsequent to March 31, 2000, neither Prison Realty nor any Subsidiary has
sustained any material loss or interference with its business or properties
from fire, flood, hurricane, accident or other calamity, whether or not
covered by insurance, or from any labor dispute or court or governmental
action, order or decree, which is not disclosed in the Prison Realty
Disclosure Schedule; and subsequent to the respective dates as of which
information is given in the Prison Realty Filed SEC Documents, (i) neither
Prison Realty nor any Subsidiary has incurred any material liabilities or
obligations, direct or contingent, or entered into any transactions not in
the ordinary course of business consistent with past practice, and (ii)
there has not been any issuance of options, warrants or rights to purchase
Prison Realty Stock or any interests therein, or any adverse change, in the
general affairs, management, business, prospects, financial position, net
worth or results of operations of Prison Realty or any Subsidiary.
(i) Compliance with Laws; Litigation. Except as described in the
Prison Realty Disclosure Schedule or the Prison Realty Filed SEC Documents,
there are no claims, actions, suits, arbitration, grievances, proceedings
or investigations pending or, to Prison Realty's knowledge, threatened,
against Prison Realty or any Subsidiary, or any properties or rights of
Prison Realty or any Subsidiary, or any officers or directors of Prison
Realty or any Subsidiary in their capacity as such, by or before any
Governmental Entity which, individually or in the aggregate, is reasonably
likely to have a material adverse effect on Prison Realty or prevent,
materially delay or intentionally delay the ability of Prison Realty to
consummate the transactions contemplated hereby. Neither Prison Realty nor
its Subsidiaries is subject to any judgment, order or decree which could
reasonably be expected to result in a material adverse effect.
Prison Realty and its Subsidiaries have at all times operated and
currently operate their business in conformity in all material respects
with all applicable statutes, common laws, ordinances, decrees, orders,
rules and regulations of Governmental Entities. Prison Realty and each of
its Subsidiaries has all licenses, approvals or consents to operate its
businesses in all locations in which such businesses are currently being
operated, and to its knowledge is not aware of any existing or imminent
matter which may materially adversely impact its operations or business
prospects other than as specifically disclosed in the Prison Realty Filed
SEC Documents or the Prison Realty Disclosure Schedule. None of Prison
Realty or its Subsidiaries have failed to file with the applicable
regulatory authorities any material statements, reports, information or
forms required by all applicable laws, regulations or orders; all such
filings or submissions were in material compliance with applicable laws
when filed, and no material deficiencies have been asserted by any
regulatory commission, agency or authority with respect to
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such filings or submissions. None of Prison Realty or its Subsidiaries have
failed to maintain in full force and effect any material licenses,
registrations or permits necessary or proper for the conduct of its
business, or received any notification that any revocation or limitation
thereof is threatened or pending, and there is not to the knowledge of
Prison Realty pending any change under any law, regulation, license or
permit which would materially adversely affect the business, operations,
property or business prospects of Prison Realty. None of Prison Realty or
its Subsidiaries have received any notice of violation of or been
threatened with a charge of violating or are under investigation with
respect to a possible violation of any provision of any law, regulation or
order. Neither Prison Realty nor any of its Subsidiaries has at any time
(i) made any unlawful contribution to any candidate for domestic or foreign
office or failed to disclose fully any contribution in violation of law or
(ii) made any payment to any federal or state governmental officer or
official, or other person charged with similar public or quasi-public
duties, other than payments required or permitted by the laws of the United
States or any jurisdiction thereof.
(j) Taxes.
(i) Prison Realty has timely filed (or there have been filed on its
behalf) all Tax Returns required to be filed by it under applicable law,
and all such Tax Returns were and are true, complete and correct in all
material respects. Except to the extent adequately reserved for in
accordance with GAAP and reflected on the most recent balance sheets of
Prison Realty contained in the Prison Realty Filed SEC Documents, all
Taxes due and payable by Prison Realty have been timely paid in full.
(ii) There are no Tax liens upon the assets of Prison Realty except
liens for Taxes not yet due.
(iii) Prison Realty has complied with the provisions of the Code
relating to the withholding of Taxes, as well as similar provisions
under any other laws, and has, within the time and in the manner
prescribed by law, withheld, collected and paid over to the proper
governmental authorities all amounts required.
(iv) No audits or other administrative proceedings or court
proceedings are presently pending or, to the knowledge of Prison Realty,
asserted with regard to any Taxes or Tax Returns of Prison Realty.
(v) Prison Realty has not received a written ruling of a taxing
authority relating to Taxes or entered into a written and legally
binding agreement with a taxing authority relating to Taxes with any
taxing authority.
(vi) Except with respect to Prison Realty's election to be taxed as
a REIT with respect to its taxable year ended December 31, 1999, Prison
Realty has not requested any extension of time within which to file any
Tax Return, which Tax Return has not since been filed.
(vii) Prison Realty has not agreed to and is not required to make
any adjustment pursuant to Section 481(a) of the Code (or any
predecessor provision) by reason of any change in any accounting method
of Prison Realty, and there is no application pending with any taxing
authority requesting permission for any changes in any accounting method
of Prison Realty. To the knowledge of Prison Realty, the Internal
Revenue Service (the "IRS") has not proposed any such adjustment or
change in accounting method.
(viii) Prison Realty has not joined in the filing of a consolidated
return for federal income tax purposes. Prison Realty is not and has
never been subject to the provisions of Section 1503(f) of the Code.
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(ix) Prison Realty is not a party to any agreement providing for
the allocation or sharing of Taxes or indemnification by Prison Realty
of any other person in respect of Taxes.
(x) Prison Realty is not a party to any agreement, contract, or
arrangement that would result, individually or in the aggregate, in the
payment of any "excess parachute payments" within the meaning of Section
280G of the Code.
(xi) To the knowledge of Prison Realty, Prison Realty does not
have, nor has it ever had, any income which is includable in computing
the taxable income of a United States person (as determined under
Section 7701 of the Code) under Section 951 of the Code. To the
knowledge of Prison Realty, none of the Subsidiaries of Prison Realty is
or has ever been a "passive foreign investment company" within the
meaning of Section 1297 of the Code. To the knowledge of Prison Realty,
Prison Realty is not and never has been a "personal holding company"
within the meaning of Section 542 of the Code. To the knowledge of
Prison Realty, there are no gain recognition agreements, within the
meaning of Treasury Regulation 1.367(a)-8 or any predecessor provision,
between Prison Realty, on one hand, and a stockholder of Prison Realty,
on the other. There is no pending or, to the knowledge of Prison Realty,
threatened, action, proceeding or investigation by any taxing authority
for assessment or collection of Taxes with respect to Prison Realty in
any jurisdiction where Prison Realty has not filed a Tax Return. All
dealings and arrangements between and among Prison Realty and its
Subsidiaries are at arm's length and consistent with arm's length
dealings and arrangements between or among unrelated, uncontrolled
taxpayers.
(xii) Each Subsidiary which is a partnership, joint venture or
limited liability company has been treated since its formation, and
continues to be treated for federal income tax purposes, as a
partnership or as a disregarded entity, and not as a corporation or as
an association taxable as a corporation.
(xiii) For purposes of this Section 3.01(j), other than Section
3.01(j)(xii), all representations and warranties with respect to Prison
Realty are deemed to include and to apply to each of its Subsidiaries
and predecessors (and the Subsidiaries of such predecessors). For
purposes of this Section 3.01(j), the term "predecessors" shall include,
without limitation, Corrections Corporation of America, a Tennessee
corporation ("Old CCA"), and CCA Prison Realty Trust, a Maryland real
estate investment trust ("Old Prison Realty"), which entities merged
with and into Prison Realty on December 31, 1998 and January 1, 1999,
respectively.
(xiv) For each of its taxable years, Old Prison Realty was
organized, operated and duly qualified as a REIT under Section 856 of
the Code.
(xv) As used in this Agreement, (A) the term "Taxes" means any
federal, state, county, local or foreign taxes, charges, fees, levies or
other assessments, including all net income, gross income, sales and
use, ad valorem, transfer, gains, profits, excise, franchise, real and
personal property, gross receipt, capital stock, production, business
and occupation, disability, employment, payroll, license, estimated,
stamp, custom duties, severance or withholding taxes or charges imposed
by any governmental entity, and includes any interest and penalties
(civil or criminal) on or additions to any such taxes, and (B) the term
"Tax Return" means a report, return or other information required to be
supplied to a governmental entity with respect to Taxes including, where
permitted or required, combined or consolidated returns.
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(k) No Defaults. Except for violations or defaults which,
individually or in the aggregate, would not have a material adverse effect,
or for which valid waivers have been obtained by Prison Realty or its
Subsidiaries, neither Prison Realty nor any of its Subsidiaries is in
violation or default under any provision of its charter, by-laws,
partnership agreements or other governing or organizational documents, or
is in breach of or default with respect to any provision of any note, bond,
agreement, judgment, decree, order, mortgage, deed of trust, lease,
franchise, license, indenture, permit or other instrument to which it is a
party or by which it or any of its properties are bound; and there does not
exist any state of facts which would constitute an event of default on the
part of any of Prison Realty or its Subsidiaries as defined in such
documents which, with notice or lapse of time or both, would constitute a
default. Neither Prison Realty nor any of its Subsidiaries is a party to
any contract (other than leases) containing any covenant restricting its
ability to conduct its business as currently conducted except for any such
covenants that would not, individually or in the aggregate, have a material
adverse effect on Prison Realty.
(l) Properties.
(i) Prison Realty Real Property. For purposes of this Agreement,
"Prison Realty Permitted Liens" means (a) mechanics', carriers',
workers', repairers', materialmen's, warehousemen's and other similar
Liens arising or incurred in the ordinary course of business for sums
not yet due and payable and such Liens as are being contested by Prison
Realty in good faith, (b) Liens for current Taxes not yet due or
payable, (c) any covenants, conditions, restrictions, reservations,
rights, Liens, easements, encumbrances, encroachments and other matters
affecting title which are shown as exceptions on Prison Realty's title
insurance policies and/or title commitments or reports which have been
made available to CCA and (d) any other covenants, conditions,
restrictions, reservations, rights, non-monetary Liens, easements,
encumbrances, encroachments and other matters affecting title which
would not individually or in the aggregate, be reasonably expected to
have a material adverse effect. "Prison Realty Leases" means the real
property leases, subleases, licenses and use or occupancy agreements
pursuant to which Prison Realty or any of its Subsidiaries is the
lessee, sublessee, licensee, user or occupant of real property other
than the Prison Realty Owned Real Property, or interests therein
necessary for the conduct of, or otherwise material to, the business of
Prison Realty and its Subsidiaries as it is currently conducted. "Prison
Realty Leased Real Property" means all interests in real property
pursuant to the Prison Realty Leases. "Prison Realty Owned Real
Property" means the real property owned in fee by Prison Realty and its
Subsidiaries necessary for the conduct of, or otherwise material to, the
business of Prison Realty and its Subsidiaries as it is currently
conducted. "Prison Realty Real Property" means, collectively, the Prison
Realty Owned Real Property and the Prison Realty Leased Real Property.
The Prison Realty Filed SEC Documents describe all material Prison
Realty Real Property. Except as disclosed therein, or in the title
insurance policies relating to the Prison Realty Real Property or in the
Prison Realty Disclosure Schedule, each of Prison Realty and its
Subsidiaries has good, valid and marketable title to the Prison Realty
Real Property free of all Liens, in each case except Prison Realty
Permitted Liens. Except as set forth in Section 3.01(l)(i) of the Prison
Realty Disclosure Schedule, there are no outstanding contracts for the
sale of any of the Prison Realty Real Property, except those contracts
relating to Prison Realty Real Property the value in respect of which
does not exceed $5,000,000 individually or $15,000,000 in the aggregate.
Except for such exceptions as would not, in the aggregate, have a
material adverse effect, (a) each Prison Realty Lease is valid and
binding upon Prison Realty and its Subsidiaries and in full force and
effect and grants the lessee under the Prison Realty Lease the exclusive
right to use and occupy the premises, and (b) either Prison Realty or
its Subsidiaries has good and valid title to the leasehold estate or
other interest created under
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the Prison Realty Leases. No non-monetary defaults exist under the
Prison Realty Leases which, individually or in the aggregate, would have
a material adverse effect. The use and operation of the Prison Realty
Real Property in the conduct of the business of Prison Realty and its
Subsidiaries does not violate any instrument of record or agreement
affecting the Prison Realty Real Property, except for such violations
that, individually or in the aggregate, would not reasonably be expected
to have a material adverse effect. Valid policies of title insurance
have been issued insuring Prison Realty's or, if applicable, its
Subsidiary's, fee simple title to the Prison Realty Owned Real Property
owned by it, subject only to Prison Realty Permitted Liens, except where
the failure of such policies to be in full force and effect would not
reas onably be expected, in the aggregate, to have a material adverse
effect. To the best knowledge of Prison Realty, such policies are, at
the date hereof, in full force and effect, except where the failure to
have such valid policies of title insurance would not reasonably be
expected, in the aggregate, to have a material adverse effect. To the
best knowledge of Prison Realty, no material claim has been made against
any such policy. Except as provided in Schedule 3.01(l) of the Prison
Realty Disclosure Schedule, Prison Realty and its Subsidiaries have no
knowledge (a) that any certificate, permit or license from any
Governmental Entity having jurisdiction over any of the Prison Realty
Real Property or any agreement, easement or other right which is
necessary to permit the lawful use and operation of the buildings and
improvements on any of the Prison Realty Real Property or which is
necessary to permit the lawful use and operation of all driveways, roads
and other means of egress and ingress to and from any of the Prison
Realty Real Property has not been obtained and is not in full force and
effect, or of any pending threat of modification or cancellation of any
of the same which would have a material adverse effect, (b) of any
written notice of any violation of any federal, state or municipal law,
ordinance, order, regulation or requirement issued by any Governmental
Entity having a material adverse effect, (c) of any structural defects
relating to any Prison Realty Real Property which would have a material
adverse effect, (d) of any Prison Realty Real Property whose building
systems are not in working order so as to have a material adverse
effect, or (e) of any physical damage to any Prison Realty Real Property
which would have a material adverse effect for which there is no
insurance in effect covering the cost of the restoration. "Prison Realty
Space Lease" means each lease or other right of occupancy affecting or
relating to a property in which Prison Realty or its Subsidiaries (or an
entity in which it directly or indirectly has an interest) is the
landlord, either pursuant to the terms of a lease agreement or as
successor to any prior landlord. No default exists under any Prison
Realty Space Lease, except for such defaults as would, individually or
in the aggregate, not reasonably be expected to have a material adverse
effect.
(ii) Improvements Under Construction. With respect to those
Improvements (as defined herein) being constructed or under development
and located on any Prison Realty Real Property as set forth in the
Prison Realty Disclosure Schedule, to the knowledge of Prison Realty:
(a) the budget for the construction of the Improvements fairly and
accurately reflects Prison Realty's good faith estimate of the costs and
expenses shown thereon reasonably necessary to develop and construct the
Improvements in accordance with the plans and specifications therefor,
and Prison Realty has strictly adhered to said budget in all material
respects and has permitted no material deviations from said budget or
the plans and specifications for the Improvements; (b) the plans and
specifications for the Improvements have been approved by all applicable
Governmental Entities having jurisdiction over the Prison Realty Real
Property, the development and construction of the Improvements and the
use and occupancy thereof for its intended purposes, and/or any utility
services to the Prison Realty Real Property; (c) all utility services
necessary for the development and construction of the Improvements and
the use and occupancy thereof for
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its intended purposes are available through public or private easements
or rights-of-way at the boundaries of the Prison Realty Real Property,
including, without limitation, sanitary sewer, electricity, gas, water,
telephone, and storm water drainage; (d) all roads necessary for ingress
and egress to the Prison Realty Real Property, and for the full
utilization of the Prison Realty Real Property for its intended
purposes, have either been completed pursuant to public or private
easements, or the necessary rights-of-way therefor have been dedicated
to public use and accepted by the appropriate Governmental Entity; (e)
all building permits, curb cuts, sewer and water taps, and other
permits, licenses, approvals, authorizations and consents required for
the development and construction of the Improvements have been obtained;
(f) the plans and specifications for the Improvements, the development
and construction of the Improvements pursuant thereto, and the use and
occupancy of the Improvements for their respective intended purposes
comply and will comply with all applicable zoning ordinances, building
regulations, restrictive covenants and governmental laws, rules,
regulations and ordinances, and comply and will comply with all
applicable requirements, standards and regulations of appropriate
supervising boards of fire underwriters and similar agencies,
authorities or boards; (g) Prison Realty has: (A) diligently pursued the
development, construction and installation of the Improvements; and (B)
performed such duties as may be necessary to complete the development,
construction and installation of the Improvements in accordance with the
plans and specifications and without Liens, claims or assessments,
actual or contingent, asserted against Prison Realty Real Property for
any material, labor or other items furnished in connection therewith,
and all in full compliance with all construction, use, building, zoning
and other similar laws, ordinances, rules, regulations, codes and
restrictions of any applicable Governmental Entities or authorities or
otherwise applicable thereto; (h) Prison Realty has complied with all
laws, ordinances, rules, regulations, judgments, orders, injunctions,
writs and decrees of any government or political subdivision or agency
thereof, or any court or similar entity established by any of them,
applicable to the construction of the Improvements, and has paid when
due all taxes and assessments upon the Improvements or Prison Realty
Real Property, and all claims for labor or materials, rents, and other
obligations that, if unpaid, will or might become a Lien against the
Improvements or the Prison Realty Real Property; (i) Prison Realty has
maintained, in sufficient amount, and in satisfactory for m and sub
stance, and with satisfactory insurers: (A) builder's risk insurance,
all-risk nonreporting completed value form, insuring the Improvements
against fire, theft, extended coverage, vandalism, and such other
hazards in full force and effect at all times until the completion of
construction of all of the Improvements; and (B) such other insurance,
in such amounts and for such terms, as may from time to time be
reasonably required insuring against such other casualties or losses
which at the time are commonly insured against in the case of premises
similarly situated; and (j) the Improvements have been constructed in
accordance with the plans and specifications therefor, and in compliance
with all laws, ordinances, rules and regulations applicable thereto, and
in a good and workmanlike manner. For the purposes of this Agreement
"Improvements" shall mean all buildings, improvements, structures and
fixtures now or on the Closing Date located on the Prison Realty Real
Property, including, without limitation, landscaping, parking lots and
structures, roads, drainage and all above ground and underground utility
structures, equipment systems and other so-called "infrastructure"
improvements.
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(m) Environmental Matters.
(i) To the knowledge of Prison Realty, the Prison Realty Real
Property and the Improvements thereon (the "Prison Realty Facilities")
are presently operated in compliance in all material respects with all
Environmental Laws (as defined below).
(ii) There are no Environmental Laws requiring any material
remediation, clean up, repairs, constructions or capital expenditures
(other than normal maintenance) with respect to the Prison Realty
Facilities.
(iii) There are no (A) notices of any violation or alleged
violation of any Environmental Laws relating to the Prison Realty
Facilities or their uses that have been received by Prison Realty, or
(B) writs, injunctions, decrees, orders or judgments outstanding, or any
actions, suits, claims, proceedings or investigations pending, or, to
the knowledge of Prison Realty, threatened, relating to the ownership,
use, maintenance or operation of the Prison Realty Facilities.
(iv) To the knowledge of Prison Realty, there are no past, present
or anticipated future events, conditions, circumstances, activities,
practices, incidents, actions, or plans relating to Prison Realty and
its Subsidiaries that may interfere with or prevent compliance or
continued compliance with applicable Environmental Laws or which may
give rise to any liability under the Environmental Laws.
(v) All material permits and licenses required under any
Environmental Laws in respect of the operations of the Prison Realty
Facilities have been obtained, and the Prison Realty Facilities and
Prison Realty are in compliance, in all material respects, with the
terms and conditions of such permits and licenses.
(vi) For purposes of this Agreement, "Environmental Laws" mean all
applicable statutes, regulations, rules, ordinances, codes, licenses,
permits, orders, demands, approvals, authorizations and similar items of
all governmental agencies, departments, commissions, boards, bureaus or
instrumentalities of the United States, states and political
subdivisions thereof and all applicable judicial, administrative and
regulatory decrees, judgments and orders relating to the protection of
human health, the environment, or worker or public health and safety as
in effect as of the date hereof, including but not limited to those
pertaining to reporting, licensing, permitting, investigation and
remediation of emissions, discharges, releases or threatened releases of
Hazardous Materials (as defined herein), substances, pollutants,
contaminants or hazardous or toxic substances, materials or wastes,
whether solid, liquid or gaseous in nature, into the air, surface water,
ground water or land, or relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling
of substances, pollutants, contaminants or hazardous or toxic
substances, materials or wastes, whether solid, liquid or gaseous in
nature, including by way of illustration and not by way of limitation,
(A) the Comprehensive Environmental Response, Compensation and Liability
Act (42 U.S.C. sec.sec. 960111 et seq.), the Resource Conservation and
Recovery Act (42 U.S.C. sec.sec. 69011 et seq.), the Clean Air Act (42
U.S.C. sec.sec. 7401 et seq.), the Federal Water Pollution Control Act
(33 U.S.C. sec.sec. 1251), the Safe Drinking Water Act (42 U.S.C.
sec.sec. 300f et seq.), the Toxic Substances Control Act (15 U.S.C.
sec.sec. 2601 et seq.), the Endangered Species Act (16 U.S.C. sec.sec.
1531 et seq.), the Emergency Planning and Community Right-to-Know Act of
1986 (42 U.S.C. sec.sec. 11001 et seq.) and (B) analogous state and
local provisions.
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(vii) For purposes of this Agreement, "Hazardous Material" means
any chemical substance:
(A) the presence of which requires investigation or remediation
under any federal, state or local statute, regulation, ordinance,
order, action or policy, administrative request or civil complaint
under any of the foregoing or under common law; or
(B) which is defined as a "hazardous waste" or "hazardous
substance" under any federal, state or local statute, regulation or
ordinance or amendments thereto as in effect as of the date hereof,
or as hereafter amended, including, without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act
(42 U.S.C. sec.sec. 9601 et seq.) and/or the Resource Conservation
and Recovery Act (42 U.S.C. sec.sec. 6901 et seq.); or
(C) which is toxic, explosive, corrosive, flammable, infectious,
radioactive, carcinogenic, mutagenic or otherwise hazardous and is
regulated by any governmental authority, agency, department,
commission, board, agency or instrumentality of the United States, or
any state or any political subdivision thereof having or asserting
jurisdiction over any of the Prison Realty Facilities; or
(D) the presence of which on any of the Prison Realty Facilities
causes a nuisance upon such facilities or to adjacent properties or
poses a hazard to the health or safety of persons on or about any of
the Prison Realty Facilities; or
(E) the presence of which on adjacent properties constitutes a
trespass by any owner or operator of the Prison Realty Facilities; or
(F) which contains gasoline, diesel fuel or other petroleum
hydrocarbons, polychlorinated biphenyls (PCBs) or asbestos or
asbestos-containing materials or urea formaldehyde foam insulation,
or lead-based paint, solder or other building materials; or
(G) radon gas.
(n) Benefit Plans.
(i) All "employee benefit plans" (as defined in Section 3(3) of
ERISA) and all other compensation, bonus, pension, profit sharing,
deferred compensation, stock ownership, stock purchase, stock option,
phantom stock, retirement, employment, change-in-control, welfare,
collective bargaining, severance, disability, death benefit,
hospitalization and medical plans, agreements, arrangements or
understandings that are maintained or contributed to (or previously
contributed to) for the benefit of any current or former employee,
officer or director of Prison Realty or any of its Subsidiaries and with
respect to which Prison Realty or any of its Subsidiaries would
reasonably be expected to have direct or contingent liability are
defined as the "Prison Realty Benefit Plans." Prison Realty has
heretofore delivered or made available to CCA true and complete copies
of all Prison Realty Benefit Plans and, with respect to each Prison
Realty Benefit Plan, true and complete copies of the following
documents: the most recent actuarial report, if any; the most recent
annual report, if any; any related trust agreement, annuity contract or
other funding instrument, if any; the most recent determination letter,
if any; and the most recent summary plan description, if any.
(ii) Except as disclosed in Section 3.01(n) of the Prison Realty
Disclosure Schedule: (A) none of the Prison Realty Benefit Plans is a
"multiemployer plan" within the meaning of Section 3(37) of ERISA or is
otherwise subject to Title IV of ERISA; (B) none of the Prison Realty
Benefit Plans promises or provides retiree medical or life insurance
benefits to
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any person; (C) neither Prison Realty nor any of its Subsidiaries has
any obligation to adopt or has taken any corporate action to adopt, any
new Prison Realty Benefit Plan or, except as required by law, to amend
any existing Prison Realty Benefit Plan; (D) Prison Realty and its
Subsidiaries are in compliance in all material respects with and each
Prison Realty Benefit Plan is and has been administered in all material
respects in compliance with its terms and the applicable provisions of
ERISA, the Code and all other applicable laws, rules and regulations
except for any failures to so administer any Prison Realty Benefit Plan
as would not have a material adverse effect on Prison Realty; (E) each
Prison Realty Benefit Plan that is intended to be qualified within the
meaning of Section 401(a) of the Code, to Prison Realty's knowledge, has
been determined by the IRS to be so qualified, and no circumstances
exist that could reasonably be expected to result in the revocation of
any such determination; (F) each Prison Realty Benefit Plan intended to
provide for the deferral of income, the reduction of salary or other
compensation, or to afford other income tax benefits, complies with the
requirements of the applicable provisions of the Code or other laws,
rules and regulations required to provide such income tax benefits; (G)
no prohibited transactions (as defined in Section 406 or 407 of ERISA or
Section 4975 of the Code) have occurred for which a statutory exemption
is not available with respect to any Prison Realty Benefit Plan, and
which could give rise to liability on the part of Prison Realty, any of
its Subsidiaries, any Prison Realty Benefit Plan, or any fiduciary,
party in interest or disqualified person with respect thereto that would
be material to Prison Realty or would be material to Prison Realty if it
were its liability; (H) neither Prison Realty nor any entity required to
be treated as a single employer with Prison Realty under Section 414 of
the Code has any unsatisfied liability under Title IV of ERISA that
would have a material adverse effect on Prison Realty; (I) other than
funding obligations and benefits claims payable in the ordinary course,
to Prison Realty's knowledge, no event has occurred and no circumstance
exists with respect to any Prison Realty Benefit Plan that could give
rise to any material liability arising under the Code, ERISA or any
other applicable law, or under any indemnity agreement to which Prison
Realty or any of its Subsidiaries is a party, excluding liability
relating to benefit claims and funding obligations payable in the
ordinary course, whether directly or by reason of its affiliation with
any entity required to be treated as a single employer with Prison
Realty under Section 414 of the Code; (J) as of the date hereof there
are no pending or, to the knowledge of the executive officers of Prison
Realty, threatened investigations, claims or lawsuits in respect of any
Prison Realty Benefit Plan that would have a material adverse effect on
Prison Realty; (K) other than continuation coverage required to be
provided under Section 4980B of the Code or Part 6 of Title I of ERISA
or otherwise as provided by state law, none of the Prison Realty Benefit
Plans that are "welfare plans," within the meaning of Section 3(1) of
ERISA, provides for any benefits with respect to current or former
employees for periods extending beyond their retirement or other
termination of service; (L) no amount payable pursuant to a Prison
Realty Benefit Plan or any other plan, contract or arrangement of Prison
Realty would be c onsidered an "excess parachute payment" under Section
280G of the Code; and (M) no Prison Realty Benefit Plan exists that
could result in the payment to any current or former employee, officer
or director of Prison Realty any money or other property or accelerate
or provide any other rights or benefits as a result of the transactions
contemplated by this Agreement which would constitute an excess
parachute payment within the meaning of Section 280G of the Code.
(o) Material Contracts. There are no contracts or other documents
required by the Securities Act to be described in or to be filed as
exhibits to the Prison Realty Filed SEC Documents which have not been
described or filed as required. All such contracts to which Prison Realty
or any of its Subsidiaries is a party have been duly authorized, executed
and
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delivered by Prison Realty or such Subsidiary, constitute valid and binding
agreements of Prison Realty or such Subsidiary and are enforceable against
Prison Realty or such Subsidiary in accordance with the terms thereof. Each
of Prison Realty and its Subsidiaries has performed all material
obligations required to be performed by it, and is neither in default in
any material respect nor has it received notice of any default or dispute
under, any such contract or other material instrument to which it is a
party or by which its property is bound or affected. To the best knowledge
of Prison Realty, no other party under any such contract or other material
instrument to which it or any of its Subsidiaries is a party is in default
in any material respect thereunder.
(p) No Undisclosed Liabilities. Except (a) as set forth in the Prison
Realty Filed SEC Documents, (b) as set forth in Section 3.01(p) of the
Prison Realty Disclosure Schedule, (c) as incurred in the ordinary course
of the business of Prison Realty subsequent to March 31, 2000 which would,
individually or in the aggregate, not have, or be reasonably expected not
to have, a material adverse effect, (d) for any expenses incurred in
connection with transactions contemplated by this Agreement or for
liabilities or obligations relating to contractual obligations,
indebtedness, litigation or other matters which are covered by other
representations and warranties in this Agreement or otherwise identified in
the Prison Realty Disclosure Schedule, neither Prison Realty nor any of its
Subsidiaries has any liabilities or obligations (direct or indirect,
contingent or fixed, known or unknown, matured or unmatured accrued or
unaccrued), whether arising out of contract, tort, statute or otherwise,
and whether or not required by GAAP to be reflected on or in footnotes to
the Prison Realty Financial Statements.
(q) Investment Company Act. Neither Prison Realty nor any of the
Subsidiaries is (i) an "investment company" or a company "controlled" by an
investment company within the meaning of the Investment Company Act of
1940, as amended, (ii) a "holding company" or a "subsidiary company" of a
holding company or an "affiliate" thereof within the meaning of the Public
Utility Holding Company Act of 1935, as amended, or (iii) subject to
regulation under the Federal Power Act or the Interstate Commerce Act.
(r) Reporting. Prison Realty is subject to Section 13 of the Exchange
Act and is in compliance in all material respects with the provisions of
such section.
(s) Labor Matters. Except as set forth in Section 3.01(s) of the
Prison Realty Disclosure Schedule: (i) neither Prison Realty nor its
Subsidiaries is a party to, or bound by, any collective bargaining
agreement, contract or other agreement or understanding with a labor union
or labor organization; (ii) to the knowledge of Prison Realty, no union
claims to represent the employees of Prison Realty and its Subsidiaries
currently exist; (iii) none of the employees of Prison Realty or its
Subsidiaries is represented by any labor organization and Prison Realty has
no knowledge of any current union organizing activities among the employees
of Prison Realty or its Subsidiaries, nor does any question concerning
representation exist concerning such employees; neither Prison Realty nor
its Subsidiaries is the subject of any proceeding asserting that it has
committed an unfair labor practice or seeking to compel it to bargain with
any labor organization as to wages or conditions of employment; (iv) there
is no strike, work stoppage, lockout or other labor dispute involving
Prison Realty or its Subsidiaries pending or threatened; (v) no action,
suit, complaint, charge, arbitration, inquiry, proceeding or investigation
by or before any Governmental Entity brought by or on behalf of any
employee, prospective employee, former employee, retiree, labor
organization or other representative of its employees is pending or, to the
knowledge of Prison Realty, threatened, against Prison Realty or its
Subsidiaries; (vi) to the knowledge of Prison Realty, no grievance is
threatened against Prison Realty or its Subsidiaries; (vii) neither Prison
Realty nor its Subsidiaries is a party to, or otherwise bound by, any
consent decree with, or citation by, any Governmental Entity relating to
employees or employment
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practices; (viii) there are no written personnel policies, rules or
procedures applicable to employees of Prison Realty or its Subsidiaries,
other than those set forth in Section 3.01(s) of the Prison Realty
Disclosure Schedule, true and correct copies of which have heretofore been
delivered or made available to CCA; (ix) Prison Realty and its Subsidiaries
are, and have at all times been, in material compliance with all applicable
laws respecting employment and employment practices, terms and conditions
of employment, wages, hours of work and occupational safety and health, and
are not engaged in any unfair labor practices as defined in the National
Labor Relations Act or other applicable law, ordinance or regulation; (x)
since the enactment of the Worker Adjustment and Retraining Notification
Act (the "WARN Act"), neither Prison Realty nor its Subsidiaries has
effectuated (A) a "plant closing" (as defined in the WARN Act) affecting
any site of employment or one or more facilities or operating units within
any site of employment or facility of any of Prison Realty or its
Subsidiaries; or (B) a "mass layoff" (as defined in the WARN Act) affecting
any site of employment or facility of any of Prison Realty or its
Subsidiaries, in either case, other than in substantial compliance with the
WARN Act; nor has Prison Realty or its Subsidiaries been affected by any
transaction or engaged in layoffs or employment terminations sufficient in
number to trigger application of any similar state, local or foreign law or
regulation; and (xi) neither Prison Realty nor any of its Subsidiaries is
aware that it has any liability or potential liability under the
Multi-Employer Pension Plan Act.
(t) Insurance. Prison Realty and its Subsidiaries maintain primary,
excess and umbrella insurance of types and amounts customary for their
business against general liability, fire, workers' compensation, products
liability, theft, damage, destruction, acts of vandalism and all other
risks customarily insured against, all of which insurance is in full force
and effect and with respect to property insurance for assets for which it
is customary to have replacement cost coverage or there are coinsurance
provisions, the amount of such insurance is sufficient to provide for such
coverage or to prevent the application of the coinsurance provision.
Section 3.01(t) of the Prison Realty Disclosure Schedule sets forth a
complete list of the insurance policies maintained by Prison Realty and its
Subsidiaries.
(u) Affiliate Transactions. Except as set forth in Section 3.01(u) of
the Prison Realty Disclosure Schedule, there is no transaction and no
transaction is now proposed, to which Prison Realty or its Subsidiaries is
or is to be a party in which any current stockholder (holding in excess of
5% of the Prison Realty Common Stock or any securities convertible into or
exchangeable for Prison Realty Common Stock), general partner, limited
partner (holding in excess of 5% of the limited partnership interests),
director or executive officer of Prison Realty or its Subsidiaries has a
direct or indirect interest.
(v) Internal Accounting Controls. Prison Realty's system of internal
accounting controls is sufficient to meet the broad objectives of internal
accounting controls insofar as those objectives pertain to the prevention
or detection of errors or irregularities in amounts that would be material
in relation to Prison Realty's financial statements.
(w) Board Recommendation. Prior to the date hereof with respect to
this Agreement, the Board of Directors of Prison Realty, at a meeting duly
called and held, by the majority vote of the directors present at such
meeting and voting, (i) determined that such Agreement and the Merger and
the other transactions contemplated hereby or thereby are fair to and in
the best interests of the shareholders of Prison Realty, (ii) adopted such
Agreement and approved the Merger and (iii) approved the delivery of the
CCA Merger Consideration to the holders of CCA Certificates pursuant to the
terms and conditions of this Agreement.
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(x) Maryland Law on Business Combinations and Control Shares. None of
the parties to the Merger is an interested stockholder (as defined in
Section 3-601 of the Maryland General Corporation Law (the "MGCL")) of
Prison Realty or an affiliate (as defined in Section 3-601 of the MGCL) of
an interested stockholder who was not exempted from the provisions of
Section 3-602 of the MGCL prior to the most recent date on which such
person became an interested stockholder. None of the shares of Prison
Realty Stock issued in the Merger constitute "control shares" as such term
is defined in Section 3-701 of the MGCL. The approval of the Merger, and
the issuance of the Prison Realty Stock in connection therewith, by the
Board of Directors of Prison Realty referred to in Section 3.01(w)
constitutes approval of the Merger and the issuance of the Prison Realty
Stock and related transactions for purposes of Sections 3-602 and 3-702 of
the MGCL.
(y) Brokers. No broker, investment banker, financial advisor or other
person, other than Merrill Lynch & Co. ("Merrill Lynch") and Wasserstein
Perella & Co., Inc. ("Wasserstein Perella"), the fees and expenses of which
will be paid by Prison Realty, is entitled to any broker's, finder's,
financial advisor's or other similar fee or commission in connection with
the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of Prison Realty. Prison Realty's arrangements with
Merrill Lynch and Wasserstein Perella have been disclosed to CCA prior to
the date hereof.
(z) Share Ownership. Prison Realty owns 981,393 shares of the issued
and outstanding Class B Common Stock of CCA. All of such shares shall be
canceled in connection with the Merger as set forth in Section 2.01 (a)
hereof.
Section 3.02 Representations and Warranties of CCA Sub. CCA Sub hereby
represents and warrants, severally and not jointly and with respect to itself
only, to CCA as follows:
(a) Organization and Authority. CCA Sub is a corporation duly
incorporated and validly existing in good standing under the laws of the
State of Tennessee with full corporate power and authority to own its
properties and conduct its business as now conducted and is duly qualified
or authorized to do business and is in good standing in all jurisdictions
where the failure to so qualify could have a material adverse effect. CCA
Sub does not have a direct or indirect ownership interest in any subsidiary
corporation, joint venture, partnership or other entity. CCA Sub has made
available to CCA complete and correct copies of its charter and bylaws, in
each case as amended to the date of this Agreement. CCA Sub is a
newly-formed entity and, except for activities incident to the Merger and
the transactions contemplated hereby, CCA Sub has not engaged in any
business activity of any type or kind whatsoever prior to the date hereof.
(b) Capital Structure. The authorized capital stock of CCA Sub
consists of 10,000 shares of common stock, no par value per share, of which
1,000 shares are issued and outstanding.
(c) Authorization. CCA Sub has all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of CCA Sub. This
Agreement has been duly executed and delivered by CCA Sub and constitutes a
valid and binding obligation of CCA Sub, enforceable against CCA Sub in
accordance with its terms, subject to applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance, fraudulent transfer and
other similar laws from time to time in effect. The execution and delivery
of this Agreement does not, and the consummation of the transactions
contemplated hereby will not, conflict with, or result in any breach or
violation of, or default (with or without notice or lapse of time or both)
under, or result in the termination of, or accelerate the performance
required by, or give
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rise to a right of termination, cancellation or acceleration of any
obligation under, or the creation of a Lien pursuant to, (i) any provision
of the charter (or similar organizational documents) or bylaws of CCA Sub
or (ii) subject to obtaining or making the consents, approvals, orders,
authorizations, registrations, declarations and filings referred to in the
following sentence, any loan or credit agreement, note, mortgage,
indenture, lease, or other agreement, obligation, instrument, permit,
concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to CCA Sub or its respective
properties or assets, in any case under this clause (ii) which would,
individually or in the aggregate, have a material adverse effect on CCA
Sub. No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required by or with
respect to CCA Sub in connection with the execution and delivery of this
Agreement by CCA Sub or the consummation by CCA Sub of the transactions
contemplated hereby, the failure of which to be obtained or made would,
individually or in the aggregate, have a material adverse effect on CCA Sub
or would prevent or materially delay the consummation of the transactions
contemplated hereby, except for (A) the filing of the Articles of Merger
with the Tennessee Secretary of State and appropriate documents with the
relevant authorities of other states in which CCA Sub is qualified to do
business, (B) filings required pursuant to the HSR Act, and (C) filings
necessary to satisfy the applicable requirements of state securities or
"blue sky" laws.
(d) Information Supplied. None of (i) the information supplied or to
be supplied by CCA Sub specifically for inclusion or incorporation by
reference in the Proxy Statement, at the date it is first mailed to
stockholders of Prison Realty or at the time of the Prison Realty
Stockholders' Meeting, and (ii) the information supplied or to be supplied
by CCA Sub specifically for inclusion or incorporation by reference in the
Registration Statement, at the date the proxy statement-prospectus
comprising a portion of the Registration Statement is first mailed to
shareholders of CCA or at the time of the CCA Shareholders' Meeting, will
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading, except that in each case no representation or
warranty is made by CCA Sub with respect to statements made or incorporated
by reference therein based on information supplied by CCA, PMSI or JJFMSI
specifically for inclusion or incorporation by reference therein. If at any
time prior to the date of the Prison Realty Stockholders' Meeting or the
CCA Shareholders' Meeting, any event with respect to CCA Sub, or with
respect to information supplied by CCA Sub specifically for inclusion in
the Proxy Statement or the Registration Statement, shall occur which is
required to be described in an amendment of, or supplement to, the Proxy
Statement or the Registration Statement, such event shall be so described
by CCA Sub.
(e) Certain Agreements. CCA Sub is not in default under any material
agreement, commitment, lease or other instrument to which it or any of its
properties is subject, and there has not occurred any event that, with the
giving of notice or the lapse of time or both, would constitute such a
default by CCA Sub or, to the knowledge of the executive officers of CCA
Sub, a default thereunder by any other party thereto, except in all cases
where such defaults, individually or in the aggregate, would not have a
material adverse effect on CCA Sub. CCA Sub is not in breach in any
material respect under its charter, bylaws or other organizational
documents.
(f) Board Recommendation. Prior to the date hereof with respect to
this Agreement, the Board of Directors of CCA Sub, at a meeting duly called
and held, by the majority vote of the directors present at such meeting and
voting, (i) determined that such Agreement and the Merger and the other
transactions contemplated hereby or thereby are fair to and in the best
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interests of the shareholders of CCA Sub, (ii) adopted such Agreement and
approved the Merger and (iii) resolved to recommend that its shareholder
approve the Agreement and the Merger.
(g) Tennessee Business Combination Act. The approval of the Merger by
the Board of Directors of CCA Sub referred to in Section 3.02(f)
constitutes approval of the Merger for purposes of the TBCA and represents
all the actions necessary to ensure that Sections 48-103-201, et seq., of
the TBCA do not apply to the Merger.
Section 3.03 Representations and Warranties of CCA. Except as set forth in
the Prison Realty Filed SEC Documents or on the Disclosure Schedule delivered by
CCA to Prison Realty prior to the execution of this Agreement (the "CCA
Disclosure Schedule"), which CCA Disclosure Schedule constitutes a part hereof
and is true and correct in all material respects, CCA represents and warrants to
Prison Realty and CCA Sub as follows:
(a) Organization and Authority. CCA is duly formed and validly
existing and in good standing under the laws of the State of Tennessee with
full power and authority to own its properties and conduct its business as
now conducted and is duly qualified or authorized to do business and is in
good standing in all jurisdictions where the failure to so qualify could
have a material adverse effect on CCA. CCA has all requisite corporate
power and authority, and has been duly authorized by all necessary
consents, approvals, authorizations, orders, registrations, qualifications,
licenses and permits of and from all public, regulatory or governmental
agencies and bodies, to own, lease and operate its assets and properties
and to conduct its business as it is now being conducted and is duly
qualified or licensed to do business in each jurisdiction in which the
failure to do so could have a material adverse effect upon the conduct of
its business or the ownership or leasing of property by it in such
jurisdiction.
(b) Subsidiaries.
(i) The only direct or indirect Subsidiaries of CCA are those
listed in Section 3.03(b) of the CCA Disclosure Schedule. Except for the
ownership interests set forth in Section 3.03(b) of the CCA Disclosure
Schedule, CCA does not own or control, directly or indirectly, a 50% or
greater capital stock interest in a corporation, a general partnership
interest or a 50% or greater limited partnership interest in a
partnership, or a managing membership interest or a 50% or greater
membership interest in a limited liability company, association or other
entity or project.
(ii) Except for the entities listed in Section 3.03(b) of the CCA
Disclosure Schedule, CCA does not hold, directly or indirectly, any
equity interest or equity investment in any corporation, partnership,
association or other entity.
(iii) Except as set forth in Section 3.03(b) of the CCA Disclosure
Schedule, all of the issued and outstanding shares of capital stock of,
or other equity interests in, each Subsidiary of CCA have been validly
issued, are fully paid and nonassessable and are owned, directly or
indirectly, by CCA free and clear of any Liens and there are no
outstanding subscriptions, options, calls, contracts, voting trusts,
proxies or other commitments, understandings, restrictions,
arrangements, rights or warrants, including any right of conversion or
exchange under any outstanding security, instrument or other agreement,
obligating any Subsidiary of CCA to issue, deliver or sell, or cause to
be issued, delivered or sold, additional shares of its capital stock or
obligating it to grant, extend or enter into any such agreement or
commitment.
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(iv) CCA's Subsidiaries do not own or operate or possess any
material assets, licenses, management contracts, or franchises or other
rights nor are such Subsidiaries liable with respect to any material
indebtedness, obligations, liabilities, or claims. For purposes of this
section, "material" means with respect to assets, licenses, management
contracts, franchises or rights of the Subsidiaries that the aggregate
value of such items for the Subsidiaries taken as a whole does not
exceed 5.0% of the aggregate value of such items for CCA and its
Subsidiaries taken as a whole; and with respect to indebtedness,
obligations, liabilities, and claims of the Subsidiaries, that the
aggregate amount of such items for the Subsidiaries taken as a whole
does not exceed 5.0% of the aggregate amount of such items for CCA and
its Subsidiaries taken as a whole.
(c) Capital Structure. The authorized capital stock of CCA consists
of 100,000,000 shares of CCA Class A Common Stock, 100,000,000 shares of
CCA Class B Common Stock and 50,000,000 shares of preferred stock, $0.01
par value per share. At the close of business on June 22, 2000, (A)
9,349,061 shares of CCA Class A Common Stock were outstanding, (B) 981,393
shares of CCA Class B Common Stock were outstanding, (C) no shares of
preferred stock were outstanding and (D) warrants to acquire 546,729 shares
of CCA Class A Common Stock were outstanding. Other than as set forth
above, at the close of business on June 22, 2000, there were outstanding no
shares of CCA Common Stock or any other class or series of stock of CCA or
options, warrants or other rights to acquire shares of CCA Common Stock or
any other class or series of stock of CCA from CCA. No bonds, debentures,
notes or other indebtedness having the right to vote (or convertible into
or exchangeable for securities having the right to vote) on any matters on
which shareholders of CCA may vote are issued or outstanding.
All outstanding shares of CCA Common Stock are duly authorized,
validly issued, fully paid and nonassessable, and will be delivered free
and clear of Liens and will not be in violation of or subject to any
preemptive rights or other rights to subscribe for or purchase securities.
Other than as set forth above, and except for this Agreement and for
certain contractual preemptive rights granted to each of Prison Realty,
Sodexho (as defined herein) and Baron, there are no outstanding securities,
options, warrants, calls, rights, commitments, agreements or undertakings
of any kind to which CCA or any Subsidiary of CCA is a party or by which
CCA or any Subsidiary of CCA is bound obligating CCA or any Subsidiary of
CCA to issue, deliver or sell, or cause to be issued, delivered or sold,
additional shares of CCA Common Stock or other equity or voting securities
of CCA or of any Subsidiary of CCA or obligating CCA or any Subsidiary of
CCA to issue, grant, extend or enter into any such security, option,
warrant, call, right, commitment, agreement or undertaking. There are no
outstanding obligations of CCA or any of its Subsidiaries to repurchase,
redeem or otherwise acquire any shares of CCA Common Stock or any of its
Subsidiaries and, to the knowledge of the executive officers of CCA, as of
the date hereof, no irrevocable proxies have been granted with respect to
shares of CCA Common Stock or equity of Subsidiaries of CCA.
(d) Authorization. CCA has all requisite power and authority to enter
into this Agreement and, subject to obtaining the CCA Shareholder Approval
with respect to the Merger, to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby have been duly authorized by all
necessary action on the part of CCA, subject to obtaining CCA Shareholder
Approval with respect to the Merger. This Agreement has been duly executed
and delivered by CCA and constitutes a valid and binding obligation of CCA,
enforceable against CCA in accordance with its terms, subject to applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance,
fraudulent transfer and other similar laws from time to time
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in effect. The execution and delivery of this Agreement does not, and the
consummation of the transactions contemplated hereby will not, conflict
with, or result in any breach or violation of, or default (with or without
notice or lapse of time or both) under, or result in the termination of, or
accelerate the performance required by, or give rise to a right of
termination, cancellation or acceleration of any obligation under, or the
creation of a Lien pursuant to, (i) any provision of the charter (or
similar organizational documents) or bylaws of CCA or any Subsidiary of CCA
or (ii) subject to obtaining or making the consents, approvals, orders,
authorizations, registrations, declarations and filings referred to in the
following sentence, any loan or credit agreement, note, mortgage,
indenture, lease, or other agreement, obligation, instrument, permit,
concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to CCA or any Subsidiary of CCA or
their respective properties or assets, in any case under this clause (ii)
which would, individually or in the aggregate, have a material adverse
effect on CCA. No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity is
required by or with respect to CCA or any Subsidiary of CCA in connection
with the execution and delivery of this Agreement by CCA or the
consummation by CCA of the transactions contemplated hereby, the failure of
which to be obtained or made would, individually or in the aggregate, have
a material adverse effect on CCA or would prevent or materially delay the
consummation of the transactions contemplated hereby, except for (A) the
filing of the Articles of Merger with the Tennessee Secretary of State and
appropriate documents with the relevant authorities of other states in
which CCA is qualified to do business, (B) filings required pursuant to the
HSR Act, (C) filings necessary to satisfy the applicable requirements of
state securities or "blue sky" laws, and those required pursuant to CCA's
agreements or management contracts with Governmental Entities.
(e) Information Supplied. None of (i) the information supplied or to
be supplied by CCA specifically for inclusion or incorporation by reference
in the Proxy Statement, at the date it is first mailed to stockholders of
Prison Realty or at the time of the Prison Realty Stockholders' Meeting,
and (ii) the information supplied or to be supplied by CCA specifically for
inclusion or incorporation by reference in the Registration Statement, at
the date the proxy statement-prospectus comprising a portion of the
Registration Statement is first mailed to shareholders of CCA or at the
time of the CCA Shareholders' Meeting, will contain any untrue statement of
a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading, except that
in each case no representation or warranty is made by CCA with respect to
statements made or incorporated by reference therein based on information
supplied by Prison Realty, CCA Sub, PMSI or JJFMSI specifically for
inclusion or incorporation by reference therein. The Proxy Statement and
the Registration Statement will comply as to form in all material respects
with the requirements of the Exchange Act and the Securities Act, except
that in each case no representation or warranty is made by CCA with respect
to statements made or incorporated by reference therein based on
information supplied by Prison Realty, CCA Sub, PMSI or JJFMSI for
inclusion or incorporation by reference therein. If at any time prior to
the date of the Prison Realty Stockholders' Meeting or the CCA
Shareholders' Meeting, any event with respect to CCA, or with respect to
information supplied by CCA specifically for inclusion in the Proxy
Statement or the Registration Statement, shall occur which is required to
be described in an amendment of, or supplement to, the Proxy Statement or
the Registration Statement, such event shall be so described by CCA.
(f) Absence of Certain Changes or Events. Subsequent to March 31,
2000, neither CCA nor any Subsidiary has sustained any material loss or
interference with its business or properties from fire, flood, hurricane,
accident or other calamity, whether or not covered by insurance, or from
any labor dispute or court or governmental action, order or decree, which
is not disclosed;
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and subsequent to March 31, 2000 (i) neither CCA nor any Subsidiary has
incurred any material liabilities or obligations, direct or contingent, or
entered into any transactions not in the ordinary course of business
consistent with past practice, and (ii) there has not been any issuance of
options, warrants or rights to purchase CCA Common Stock, or any interests
therein, or any adverse change, or any development involving a prospective
adverse change, in the general affairs, management, business, prospects,
financial position, net worth or results of operations of CCA or any
Subsidiary.
(g) Compliance with Laws; Litigation. Except as described in the CCA
Disclosure Schedule or in the Prison Realty Filed SEC Documents, there are
no claims, actions, suits, arbitration, grievances, proceedings or
investigations pending or, to CCA's knowledge, threatened, against CCA or
any Subsidiary, or any properties or rights of CCA or any Subsidiary, or
any officers or directors of CCA or any Subsidiary in their capacity as
such, by or before any Governmental Entity which, individually or in the
aggregate, is reasonably likely to have a material adverse effect on CCA or
prevent, materially delay or intentionally delay the ability of CCA to
consummate the transactions contemplated hereby. Neither CCA nor its
Subsidiaries is subject to any judgment, order or decree which could
reasonably be expected to result in a material adverse effect.
Each of CCA and its Subsidiaries has at all times operated and
currently operates its business in conformity in all material respects with
all applicable statutes, common laws, ordinances, decrees, orders, rules
and regulations of Governmental Entities. Each of CCA and its Subsidiaries
has all licenses, approvals or consents to operate its businesses in all
locations in which such businesses are currently being operated, and to its
knowledge is not aware of any existing or imminent matter which may
materially adversely impact its operations or business prospects other than
as specifically disclosed in the CCA Disclosure Schedule. CCA and each
Subsidiary have not failed to file with the applicable regulatory
authorities any material statements, reports, information or forms required
by all applicable laws, regulations or orders, all such filings or
submissions were in material compliance with applicable laws when filed,
and no material deficiencies have been asserted by any regulatory
commission, agency or authority with respect to such filings or
submissions. CCA and each Subsidiary have not failed to maintain in full
force and effect any material licenses, registrations or permits necessary
or proper for the conduct of its or their business, or received any
notification that any revocation or limitation thereof is threatened or
pending, and there is not to the knowledge of CCA pending any change under
any law, regulation, license or permit which would materially adversely
affect the business, operations, property or business prospects of CCA. CCA
and each Subsidiary have not received any notice of violation of or been
threatened with a charge of violating and are not under investigation with
respect to a possible violation of any provision of any law, regulation or
order. Neither CCA nor any of its Subsidiaries has at any time (i) made any
unlawful contribution to any candidate for domestic or foreign office or
failed to disclose fully any contribution in violation of law or (ii) made
any payment to any federal or state governmental officer or official, or
other person charged with similar public or quasi-public duties, other than
payments required or permitted by the laws of the United States or any
jurisdiction thereof.
(h) Taxes.
(i) CCA has timely filed (or there have been filed on its behalf)
all Tax Returns required to be filed by it under applicable law, and all
such Tax Returns were and are true, complete and correct in all material
respects. Except to the extent adequately reserved for in accordance
with GAAP and reflected on the most recent balance sheets of CCA, all
Taxes due and payable by CCA have been timely paid in full.
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(ii) There are no Tax liens upon the assets of CCA except liens for
Taxes not yet due.
(iii) CCA has complied with the provisions of the Code relating to
the withholding of Taxes, as well as similar provisions under any other
laws, and has, within the time and in the manner prescribed by law,
withheld, collected and paid over to the proper governmental authorities
all amounts required.
(iv) No audits or other administrative proceedings or court
proceedings are presently pending or, to the knowledge of CCA, asserted
with regard to any Taxes or Tax Returns of CCA.
(v) CCA has not received a written ruling of a taxing authority
relating to Taxes or entered into a written and legally binding
agreement with a taxing authority relating to Taxes with any taxing
authority.
(vi) Except as described on the CCA Disclosure Schedule, CCA has
not requested any extension of time within which to file any Tax Return,
which Tax Return has not since been filed.
(vii) CCA has not agreed to and is not required to make any
adjustment pursuant to Section 481(a) of the Code (or any predecessor
provision) by reason of any change in any accounting method of CCA, and
there is no application pending with any taxing authority requesting
permission for any changes in any accounting method of CCA. To the
knowledge of CCA, the IRS has not proposed any such adjustment or change
in accounting method.
(viii) CCA has not joined in the filing of a consolidated return
for federal income tax purposes. CCA is not and has never been subject
to the provisions of Section 1503(f) of the Code.
(ix) CCA is not a party to any agreement providing for the
allocation or sharing of Taxes or indemnification by CCA of any other
person in respect of Taxes.
(x) CCA is not a party to any agreement, contract, or arrangement
that would result, individually or in the aggregate, in the payment of
any "excess parachute payments" within the meaning of Section 280G of
the Code.
(xi) To the knowledge of CCA, CCA does not have, nor has it ever
had, any income which is includable in computing the taxable income of a
United States person (as determined under Section 7701 of the Code)
under Section 951 of the Code. To the knowledge of CCA, none of the
Subsidiaries of CCA is or has ever been a "passive foreign investment
company" within the meaning of Section 1297 of the Code. To the
knowledge of CCA, CCA is not and never has been a "personal holding
company" within the meaning of Section 542 of the Code. To the knowledge
of CCA, there are no gain recognition agreements, within the meaning of
Treasury Regulation 1.367(a)-8 or any predecessor provision, between
CCA, on one hand, and a stockholder of the CCA, on the other. There is
no pending or, to the knowledge of CCA, threatened, action, proceeding
or investigation by any taxing authority for assessment or collection of
Taxes with respect to CCA in any jurisdiction where CCA has not filed a
Tax Return. All dealings and arrangements between and among CCA and its
Subsidiaries are at arm's length and consistent with arm's length
dealings and arrangements between or among unrelated, uncontrolled
taxpayers.
(xii) For purposes of this Section 3.03(h), all representations and
warranties with respect to CCA are deemed to include and to apply to
each of its Subsidiaries and predecessors.
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(i) No Defaults. Except for violations or defaults which,
individually or in the aggregate, would not have a material adverse effect,
or for which valid waivers have been obtained by CCA or its Subsidiaries,
neither CCA nor any of its Subsidiaries is in violation or default under
any provision of its charter, by-laws, partnership agreements or other
organizational documents, or is in breach of or default with respect to any
provision of any note, bond, agreement, judgment, decree, order, mortgage,
deed of trust, lease, franchise, license, indenture, permit or other
instrument to which it is a party or by which it or any of its properties
are bound; and there does not exist any state of facts which would
constitute an event of default on the part of any of CCA or its
Subsidiaries as defined in such documents which, with notice of lapse of
time or both, would constitute a default. Neither CCA nor any of its
Subsidiaries is a party to any contract (other than leases) containing any
covenant restricting its ability to conduct its business as currently
conducted except for any such covenants that would not, individually or in
the aggregate, have a material adverse effect on CCA.
(j) Environmental Matters.
(i) To the knowledge of CCA, the correctional and detention
facilities operated or managed by CCA (the "CCA Facilities") are
presently operated in compliance in all material respects with all
Environmental Laws.
(ii) There are no Environmental Laws requiring any material
remediation, clean up, repairs, constructions or capital expenditures
(other than normal maintenance) with respect to the CCA Facilities.
(iii) There are no (A) notices of any violation or alleged
violation of any Environmental Laws relating to the CCA Facilities or
their uses that have been received by CCA, or (B) writs, injunctions,
decrees, orders or judgments outstanding, or any actions, suits, claims,
proceedings or investigations pending, or, to the knowledge of CCA,
threatened, relating to the ownership, use, maintenance or operation of
the CCA Facilities.
(iv) To the knowledge of CCA, there are no past, present or
anticipated future events, conditions, circumstances, activities,
practices, incidents, actions, or plans relating to CCA and its
Subsidiaries that may interfere with or prevent compliance or continued
compliance with applicable Environmental Laws or which may give rise to
any liability under the Environmental Laws.
(v) All material permits and licenses required under any
Environmental Laws in respect of the operations of the CCA Facilities
have been obtained, and the CCA Facilities and CCA are in compliance, in
all material respects, with the terms and conditions of such permits and
licenses.
(k) Benefit Plans.
(i) All "employee benefit plans" (as defined in Section 3(3) of
ERISA) and all other compensation, bonus, pension, profit sharing,
deferred compensation, stock ownership, stock purchase, stock option,
phantom stock, retirement, employment, change-in-control, welfare,
collective bargaining, severance, disability, death benefit,
hospitalization and medical plans, agreements, arrangements or
understandings that are maintained or contributed to (or previously
contributed to) for the benefit of any current or former employee,
officer or director of CCA or any of its Subsidiaries and with respect
to which CCA or any of its Subsidiaries would reasonably be expected to
have direct or contingent liability are defined as the "CCA Benefit
Plans." CCA has heretofore delivered or made available to Prison Realty
true and complete copies of all CCA Benefit Plans and, with respect to
each CCA
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Benefit Plan, true and complete copies of the following documents: the
most recent actuarial report, if any; the most recent annual report, if
any; any related trust agreement, annuity contract or other funding
instrument, if any; the most recent determination letter, if any; and
the most recent summary plan description, if any.
(ii) Except as disclosed in Section 3.03(k) of the CCA Disclosure
Schedule: (A) none of the CCA Benefit Plans is a "multiemployer plan"
within the meaning of Section 3(37) of ERISA or is otherwise subject to
Title IV of ERISA; (B) none of the CCA Benefit Plans promises or
provides retiree medical or life insurance benefits to any person; (C)
neither CCA nor any of its Subsidiaries has any obligation to adopt or
has taken any corporate action to adopt, any new CCA Benefit Plan or,
except as required by law, to amend any existing CCA Benefit Plan; (D)
CCA and its Subsidiaries are in compliance in all material respects with
and each CCA Benefit Plan is and has been administered in all material
respects in compliance with its terms and the applicable provisions of
ERISA, the Code and all other applicable laws, rules and regulations
except for any failures to so administer any CCA Benefit Plan as would
not have a material adverse effect on CCA; (E) each CCA Benefit Plan
that is intended to be qualified within the meaning of Section 401(a) of
the Code, to CCA's knowledge, has been determined by the IRS to be so
qualified, and no circumstances exist that could reasonably be expected
to result in the revocation of any such determination; (F) each CCA
Benefit Plan intended to provide for the deferral of income, the
reduction of salary or other compensation, or to afford other income tax
benefits, complies with the requirements of the applicable provisions of
the Code or other laws, rules and regulations required to provide such
income tax benefits; (G) no prohibited transactions (as defined in
Section 406 or 407 of ERISA or Section 4975 of the Code) have occurred
for which a statutory exemption is not available with respect to any CCA
Benefit Plan, and which could give rise to liability on the part of CCA,
any of its Subsidiaries, any CCA Benefit Plan, or any fiduciary, party
in interest or disqualified person with respect thereto that would be
material to CCA or would be material to CCA if it were its liability;
(H) neither CCA nor any entity required to be treated as a single
employer with CCA under Section 414 of the Code has any unsatisfied
liability under Title IV of ERISA that would have a material adverse
effect on CCA; (I) other than funding obligations and benefits claims
payable in the ordinary course, to CCA's knowledge, no event has
occurred and no circumstance exists with respect to any CCA Benefit Plan
that could give rise to any liability arising under the Code, ERISA or
any other applicable law, or under any indemnity agreement to which CCA
or any of its Subsidiaries is a party, excluding liability relating to
benefit claims and funding obligations payable in the ordinary course,
whether directly or by reason of its affiliation with any entity
required to be treated as a single employer with CCA under Section 414
of the Code; (J) as of the date hereof there are no pending or, to the
knowledge of the executive officers of CCA, threatened investigations,
claims or lawsuits in respect of any CCA Benefit Plan that would have a
material adverse effect on CCA; (K) other than continuation coverage
required to be provided under Section 4980B of the Code or Part 6 of
Title I of ERISA or otherwise as provided by state law, none of the CCA
Benefit Plans that are "welfare plans," within the meaning of Section
3(1) of ERISA, provides for any benefits with respect to current or
former employees for periods extending beyond their retirement or other
termination of service; (L) no amount payable pursuant to a CCA Benefit
Plan or any other plan, contract or arrangement of CCA would be
considered an "excess parachute payment" under Section 280G of the Code;
and (M) no CCA Benefit Plan exists that could result in the payment to
any current or former employee, officer or director of CCA any money or
other property or accelerate or provide any other rights or benefits as
a result of the transactions
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contemplated by this Agreement which would constitute an excess
parachute payment within the meaning of Section 280G of the Code.
(l) Material Contracts. All contracts to which CCA or any Subsidiary
is a party have been duly authorized, executed and delivered by CCA or any
Subsidiary, constitute valid and binding agreements of CCA or any
Subsidiary and are enforceable against CCA or any Subsidiary in accordance
with the terms thereof. Each of CCA and each Subsidiary has performed all
material obligations required to be performed by it, and is neither in
default in any material respect nor has it received notice of any default
or dispute under, any such contract or other material instrument to which
it is a party or by which its property is bound or affected. To the best
knowledge of CCA, no other party under any such contract or other material
instrument to which it is a party is in default in any material respect
thereunder.
(m) No Undisclosed Liabilities. Except (a) as set forth in the Prison
Realty Filed SEC Documents, (b) as set forth in Section 3.03(m) of the CCA
Disclosure Schedule, (c) as incurred in the ordinary course of the business
of CCA subsequent to March 31, 2000 which would, individually or in the
aggregate, not have, or be reasonably expected not to have, a material
adverse effect, (d) for any expenses incurred in connection with
transactions contemplated by this Agreement or for liabilities or
obligations relating to contractual obligations, indebtedness, litigation
or other matters which are covered by other representations and warranties
in this Agreement or otherwise identified in the CCA Disclosure Schedule,
neither CCA nor any of its Subsidiaries has any liabilities or obligations
(direct or indirect, contingent or fixed, known or unknown, matured or
unmatured accrued or unaccrued), whether arising out of contract, tort,
statute or otherwise, and whether or not required by GAAP to be reflected
on or in footnotes to the financial statements of CCA.
(n) Labor Matters. Except as set forth in Section 3.03(n) of the CCA
Disclosure Schedule: (i) neither CCA nor its Subsidiaries is a party to, or
bound by, any collective bargaining agreement, contract or other agreement
or understanding with a labor union or labor organization; (ii) to the
knowledge of CCA, no union claims to represent the employees of CCA and its
Subsidiaries; (iii) none of the employees of CCA or its Subsidiaries is
represented by any labor organization and CCA has no knowledge of any
current union organizing activities among the employees of CCA or its
Subsidiaries, nor does any question concerning representation exist
concerning such employees; neither CCA nor its Subsidiaries is the subject
of any proceeding asserting that it has committed an unfair labor practice
or seeking to compel it to bargain with any labor organization as to wages
or conditions of employment; (iv) there is no strike, work stoppage,
lockout or other labor dispute involving CCA or its Subsidiaries pending or
threatened; (v) no action, suit, complaint, charge, arbitration, inquiry,
proceeding or investigation by or before any Governmental Entity brought by
or on behalf of any employee, prospective employee, former employee,
retiree, labor organization or other representative of its employees is
pending or, to the knowledge of CCA, threatened against CCA or its
Subsidiaries; (vi) to the knowledge of CCA, no grievance is threatened
against CCA or its Subsidiaries; (vii) neither CCA nor its Subsidiaries is
a party to, or otherwise bound by, any consent decree with, or citation by,
any Governmental Entity relating to employees or employment practices;
(viii) there are no written personnel policies, rules or procedures
applicable to employees of CCA or its Subsidiaries, other than those set
forth in Section 3.03(n) of the CCA Disclosure Schedule, true and correct
copies of which have heretofore been delivered or made available to Prison
Realty, PMSI and JJFMSI; (ix) CCA and its Subsidiaries are, and have at all
times been, in material compliance with all applicable laws respecting
employment and employment practices, terms and conditions of employment,
wages, hours of work and occupational safety and health, and are not
engaged in any unfair labor practices as defined in the National Labor
Relations Act or other applicable law,
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ordinance or regulation; (x) since the enactment of the WARN Act, neither
CCA nor its Subsidiaries has effectuated (A) a "plant closing" (as defined
in the WARN Act) affecting any site of employment or one or more facilities
or operating units within any site of employment or facility of any of CCA
or its Subsidiaries; or (B) a "mass layoff" (as defined in the WARN Act)
affecting any site of employment or facility of any of CCA or its
Subsidiaries, in either case, other than in substantial compliance with the
WARN Act; nor has CCA or its Subsidiaries been affected by any transaction
or engaged in layoffs or employment terminations sufficient in number to
trigger application of any similar state, local or foreign law or
regulation; and (xi) neither CCA nor any of its Subsidiaries is aware that
it has any liability or potential liability under the Multi-Employer
Pension Plan Act.
(o) Insurance. CCA and its Subsidiaries maintain primary, excess and
umbrella insurance of types and amounts customary for their business
against general liability, fire, workers' compensation, products liability,
theft, damage, destruction, acts of vandalism and all other risks
customarily insured against, all of which insurance is in full force and
effect and with respect to property insurance for assets for which it is
customary to have replacement cost coverage or there are coinsurance
provisions, the amount of such insurance is sufficient to provide for such
coverage or to prevent the application of the coinsurance provision.
Section 3.03(o) of the CCA Disclosure Schedule sets forth a complete list
of the insurance policies maintained by CCA and its Subsidiaries.
(p) Affiliate Transactions. Except as set forth in Section 3.03(p) of
the CCA Disclosure Schedule, there is no transaction and no transaction is
now proposed, to which CCA or its Subsidiaries is or is to be a party in
which any current stockholder (holding in excess of 5% of the CCA's Common
Stock or any securities convertible into or exchangeable for Common Stock),
general partner, limited partner (holding in excess of 5% of the limited
partnership interests), director or executive officer of CCA or its
Subsidiaries has a direct or indirect interest.
(q) Internal Accounting Controls. CCA's system of internal accounting
controls is sufficient to meet the broad objectives of internal accounting
controls insofar as those objectives pertain to the prevention or detection
of errors or irregularities in amounts that would be material in relation
to CCA's financial statements.
(r) Vote Required. The CCA Shareholder Approval is the only vote of
the holders of any class or series of CCA's securities necessary to approve
this Agreement and the transactions contemplated hereby.
(s) Board Recommendation. On the date hereof with respect to this
Agreement, the Board of Directors of CCA, at a meeting duly called and
held, by the majority vote of the directors present at such meeting, (i)
determined that such Agreement and the Merger and the other transactions
contemplated hereby and thereby are fair to and in the best interests of
the shareholders of CCA, (ii) adopted such Agreement and approved the
Merger and (iii) resolved to recommend that the holders of CCA Common Stock
approve such Agreement and the Merger.
(t) Tennessee Business Combination Act. CCA has received the opinion
of Sherrard & Roe, PLC, counsel to CCA, that the approval of the Merger by
the Board of Directors of CCA referred to in Section 3.03(s) constitutes
approval of the Merger for purposes of the TBCA and represents all the
actions necessary to ensure that Sections 48-103-201, et seq., of the TBCA
do not apply to the Merger.
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(u) Brokers. No broker, investment banker, financial advisor or other
person, other than Merrill Lynch, the fees and expenses of which will be
paid by Prison Realty, is entitled to any broker's, finder's, financial
advisor's or other similar fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by
or on behalf of CCA.
(v) Stock Ownership. CCA does not, directly or indirectly, own any
shares of Prison Realty Stock other than shares, if any, held in CCA
Benefit Plans.
Article IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
Section 4.01 Covenants of Prison Realty. Except as set forth in Section
4.01 of the Prison Realty Disclosure Schedule or as otherwise contemplated by
this Agreement and the transactions related thereto, during the period from the
date of this Agreement until the Effective Time, Prison Realty agrees that:
(a) Ordinary Course. Prison Realty and its Subsidiaries shall carry
on their respective businesses only in the usual, regular and ordinary
course consistent with past practice in all material respects and use their
reasonable best efforts to preserve intact their present business
organizations, maintain their rights and franchises and preserve their
relationships with customers, suppliers and others having business dealings
with them to the end that their goodwill and ongoing businesses shall not
be impaired at the Effective Time.
(b) REIT Qualification. Prison Realty shall conduct its operations in
a manner so as to continue to qualify as a REIT under the Code.
(c) Other Actions. Prison Realty shall not take any action that would
result in any of its representations and warranties set forth in this
Agreement that are qualified as to materiality being untrue, any of such
representations and warranties that are not so qualified being untrue in
any material respect or any of the conditions to the Merger set forth in
Article VI not being satisfied.
(d) Structure of Transactions. Prison Realty shall advise CCA from
time to time of the proposed structure of Prison Realty and its
Subsidiaries and affiliated entities at and after the Effective Time for
purposes of CCA's evaluation of the Merger.
(e) Advice of Changes; Filings. Prison Realty shall advise CCA of any
change or event which would cause or constitute a material breach of any of
its representations or warranties contained herein. Prison Realty shall
file all reports required to be filed by it with the SEC or the NYSE
between the date of this Agreement and the Effective Time and shall deliver
to CCA copies of all such reports promptly after the same are filed.
Section 4.02 Covenants of CCA Sub. During the period from the date of this
Agreement until the Effective Time, CCA Sub agrees that it shall not take any
action that would result in any of its representations and warranties set forth
in this Agreement that are qualified as to materiality being untrue, any of such
representations and warranties that are not so qualified being untrue in any
material respect or any of the conditions to the Merger set forth in Article VI
herein not being satisfied.
Section 4.03 Covenants of CCA. Except as set forth in Section 4.03 of the
CCA Disclosure Schedule or as otherwise contemplated by this Agreement and the
transactions related thereto, during
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the period from the date of this Agreement through and including the Effective
Time, CCA shall, and shall cause its Subsidiaries to, carry on their respective
businesses in the ordinary course consistent with past practice and in
compliance in all material respects with all applicable laws and regulations
and, to the extent consistent therewith, shall use reasonable efforts to
preserve intact their current business organizations and use reasonable efforts
to preserve their relationships with those persons having business dealings with
them. Without limiting the generality of the foregoing, except as set forth in
Section 4.03 of the CCA Disclosure Schedule or as otherwise contemplated by this
Agreement, during the period from the date of this Agreement through the
Effective Time, CCA shall not, and shall not permit any of its Subsidiaries to:
(a) Dividends; Changes in Stock. Other than dividends and
distributions by a direct or indirect wholly owned Subsidiary to CCA or one
of their wholly owned Subsidiaries, (i) declare, set aside or pay any
dividends (payable in cash, stock, property or otherwise) on, make any
other distributions in respect of, or enter into any agreement with respect
to the voting of, any of its capital stock, (ii) split, combine or
reclassify any of its capital stock or issue or authorize the issuance of
any other securities in respect of, in lieu of or in substitution for
shares of its capital stock, or (iii) purchase, redeem or otherwise acquire
any capital stock of CCA or any of its Subsidiaries or any other securities
thereof or any rights, warrants or options to acquire any such shares or
other securities;
(b) Issuance of Securities. Issue, deliver, sell, pledge or otherwise
encumber or subject to any Lien any of its shares of capital stock or any
other voting securities or any securities convertible into, exercisable for
or exchangeable with, or any rights, warrants or options to acquire, any
such shares, voting securities or convertible securities;
(c) Governing Documents. Amend its charter, bylaws or other
comparable organizational documents;
(d) No Acquisitions. Acquire any business (whether by merger,
consolidation, purchase of assets or otherwise) or acquire any equity
interest in any person not an affiliate (whether through a purchase of
stock, establishment of a joint venture or otherwise);
(e) No Dispositions. Other than the obligations for capital
commitments set forth in Section 4.03 of the CCA Disclosure Schedule, (A)
sell, lease, exchange, license, mortgage or otherwise encumber or subject
to any Lien or otherwise dispose of any of its real properties or other
assets, (B) enter into any new joint ventures or similar projects, or (C)
enter into any new development projects;
(f) Accounting Methods. Change its methods of accounting (or
underlying assumptions) in effect at December 31, 1999, except as required
by changes (i) in generally accepted accounting principles ("GAAP"), (ii)
in law or regulation, or (iii) due to events subsequent to March 31, 2000
related or consequential to the execution of this Agreement or consummation
of the Merger and related transactions (including, but not limited to, the
effects of any changes required by the SEC as part of its review of the
Prison Realty Filed SEC Documents, the Proxy Statement or the Registration
Statement); or change any of its methods of reporting income and deductions
for federal income tax purposes from those employed in the preparation of
the federal income tax returns of CCA for the taxable years ended December
31, 1999, except as required by changes in law or regulation;
(g) No Settlements. Effect any settlement or compromise of any
pending or threatened proceeding in respect of which CCA is or could have
been a party, unless such settlement (i) includes an unconditional written
release of CCA, in form and substance reasonably satisfactory to CCA, from
all liability on claims that are the subject matter of such proceeding,
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(ii) does not include any statement as to any admission of fault,
culpability or failure to act by or on behalf of CCA and (iii) is less than
$100,000;
(h) No Cancellation. Other than the obligations for capital
commitments set forth in Section 4.03 of the CCA Disclosure Schedule,
create, renew, amend, terminate or cancel, or take any other action that
could reasonably be expected to result in the creation, renewal, amendment,
termination or cancellation of any agreement or instrument that is material
to CCA and its respective Subsidiaries, taken as a whole;
(i) Indebtedness. Other than the obligations for capital commitments
set forth in Section 4.03 of the CCA Disclosure Schedule and any
indebtedness incurred by CCA in connection with this Agreement and the
transactions related thereto, and except for an increase in amounts
outstanding under its revolving credit agreement and/or the renewal or
refinancing of its existing revolving credit facility, incur any
indebtedness for borrowed money;
(j) No Commitments. Other than the obligations for capital
commitments set forth in Section 4.03 of the CCA Disclosure Schedule, enter
into any new capital or take out commitments or increase any existing
capital or take out commitments;
(k) Compensation. Except pursuant to agreements or arrangements in
effect on the date hereof, (A) grant to any current or former director,
executive officer or other key employee of CCA or any Subsidiary any
increase in compensation, bonus or other benefits (other than increases in
base salary in the ordinary course of business consistent with past
practice or arising due to a promotion or other change in status and
consistent with generally applicable compensation practices), (B) grant to
any such current or former director, executive officer or other employee
any increase in severance or termination pay, (C) amend or adopt any
employment, deferred compensation, consulting, severance, termination or
indemnification agreement with any such current or former director,
executive officer or employee, or (D) amend, adopt or terminate any CCA
Benefit Plan, except as may be required to retain qualification of any such
plan under Section 401(a) of the Code;
(l) Related Party Transactions. Except pursuant to agreements or
arrangements in effect on the date hereof or as otherwise contemplated by
this Agreement which have been disclosed in Section 4.03 of the CCA
Disclosure Schedule, pay, loan or advance any amount to, or sell, transfer
or lease any properties or assets (real, personal or mixed, tangible or
intangible) to, or purchase any properties or assets, or enter into any
agreement or arrangement with, any of its officers or directors or any
affiliate or the immediate family members or associates of any of its
officers or directors, other than payment of compensation at current
salary, incentive compensation and bonuses and other than properly
authorized business expenses in the ordinary course of business, in each
case consistent with past practice;
(m) Insurance. Permit any material insurance policy naming CCA or any
Subsidiary as a beneficiary or a loss payable payee to be canceled or
terminated;
(n) Advise of Changes. Neglect or fail to advise Prison Realty of any
change or event which would cause or constitute a material breach of any of
the representations or warranties of CCA contained herein; or
(o) Other Actions. Authorize, or commit or agree to take, any of the
foregoing actions.
Section 4.04 No Solicitation by Prison Realty.
(a) Prison Realty shall not, nor shall it permit any of its
Subsidiaries to, nor shall it authorize or permit any officer, director or
employee of, or any investment banker, attorney or
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other advisor or representative of, Prison Realty or any of its
Subsidiaries to, directly or indirectly, (i) solicit, initiate, encourage
or knowingly facilitate the submission of any alternative proposal or (ii)
enter into or participate in any discussions or negotiations regarding, or
furnish to any person any information with respect to, any alternative
proposal; provided, however, that prior to the receipt of the Prison Realty
Stockholder Approval, Prison Realty may, in response to a bona fide
alternative proposal that constitutes a superior proposal (as defined in
Section 4.04(b) herein) and that was made after the date hereof (and not
solicited by Prison Realty after the date hereof) by any person, and
subject to compliance with Section 4.04(c) herein, (A) furnish information
with respect to Prison Realty and its Subsidiaries to such person and its
representatives pursuant to a customary confidentiality agreement and
discuss such information with such person and its representatives and (B)
participate in negotiations regarding such alternative proposal. For
purposes of this Section 4.04, the term "alternative proposal" means any
inquiry, proposal or offer from any person relating to any direct or
indirect acquisition or purchase of 10% or more of the assets (based on the
fair market value thereof) of Prison Realty and its Subsidiaries, taken as
a whole, other than the transactions contemplated by this Agreement, or of
10% or more of any class of equity securities of Prison Realty or any of
its Subsidiaries or any tender offer or exchange offer (including by Prison
Realty or any of its Subsidiaries) that if consummated would result in any
person beneficially owning 10% or more of any class of equity securities of
Prison Realty or any of its Subsidiaries, or any merger, consolidation,
business combination, sale of substantially all assets, recapitalization,
liquidation, dissolution or similar transaction involving Prison Realty or
any of its Subsidiaries other than the transactions contemplated by this
Agreement.
(b) Except as set forth in this Section 4.04, the Board of Directors
of Prison Realty shall not (i) withdraw or modify, or publicly propose to
withdraw or modify, in a manner adverse to CCA, the approval or
recommendation by such Board of Directors of the Merger or this Agreement,
(ii) approve or recommend, or propose publicly to approve or recommend, any
alternative proposal or (iii) cause or agree to cause Prison Realty to
enter into any letter of intent, agreement in principle, acquisition
agreement or similar agreement related to any alternative proposal.
Notwithstanding the foregoing, if the Board of Directors of Prison Realty
receives a superior proposal, such Board of Directors may, prior to the
receipt of the Prison Realty Stockholder Approval, withdraw or modify its
approval or recommendation of the Merger and this Agreement, approve or
recommend a superior proposal or terminate this Agreement, but in each case
only at a time that is at least five business days after receipt by CCA of
written notice advising CCA that the Board of Directors of Prison Realty
has resolved to accept a superior proposal if it continues to be a superior
proposal at the end of such five business day period. For purposes of this
Section 4.04, the term "superior proposal" means any bona fide alternative
proposal (which, for purposes of Section 4.04(a) only, may be subject to a
due diligence condition), which proposal was not solicited by Prison Realty
after the date of execution of this Agreement, made by a third party to
acquire, directly or indirectly, for consideration consisting of cash
and/or securities, more than 10% of the shares of capital stock of Prison
Realty then outstanding or all or substantially all the assets of Prison
Realty and its Subsidiaries and otherwise on terms which the Board of
Directors of Prison Realty determines in good faith (after consultation
with its financial advisor) to be more favorable to Prison Realty's
stockholders than the Merger and the issuance of securities pursuant to the
Securities Purchase Agreement and for which financing, to the extent
required, is then committed or which, in the good faith judgment of such
Board of Directors, is reasonably capable of being financed by such third
party.
(c) In addition to the obligations of Prison Realty set forth in
paragraphs (a) and (b) above, Prison Realty promptly shall advise CCA
orally and in writing of any request for
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information or of any alternative proposal, the material terms and
conditions of such request or alternative proposal and the identity of the
person making any such request or alternative proposal and any
determination by the Board of Directors of Prison Realty that a alternative
proposal is or may be a superior proposal. Prison Realty will keep CCA
informed as to the status and material details (including amendments or
proposed amendments) of any such request or alternative proposal.
Section 4.05 No Solicitation by CCA. Without the prior written consent of
Prison Realty, (a) CCA shall not, nor shall it permit any of its Subsidiaries
to, nor shall it authorize or permit any officer, director or employee of, or
any investment banker, attorney or other advisor or representative of, CCA or
any of its Subsidiaries to, directly or indirectly, (i) solicit, initiate,
encourage or knowingly facilitate the submission of any alternative proposal or
(ii) enter into or participate in any discussions or negotiations regarding, or
furnish to any person any information with respect to, any alternative proposal.
For purposes of this Section 4.05, the term "alternative proposal" means any
inquiry, proposal or offer from any person relating to any direct or indirect
acquisition or purchase of 10% or more of the assets (based on the fair market
value thereof) of CCA and its Subsidiaries, taken as a whole, other than the
transactions contemplated by this Agreement, or of 10% or more of any class of
equity securities of CCA or any of its Subsidiaries or any tender offer or
exchange offer (including by CCA or any of its Subsidiaries) that if consummated
would result in any person beneficially owning 10% or more of any class of
equity securities of CCA or any of its Subsidiaries, or any merger,
consolidation, business combination, sale of substantially all assets,
recapitalization, liquidation, dissolution or similar transaction involving CCA
or any of its Subsidiaries other than the transactions contemplated by this
Agreement.
(b) Except as set forth in this Section 4.05, the Board of Directors of CCA
shall not (i) withdraw or modify, or publicly propose to withdraw or modify, in
a manner adverse to Prison Realty, the approval or recommendation by such Board
of Directors of the Merger or this Agreement, (ii) approve or recommend, or
propose publicly to approve or recommend, any alternative proposal or (iii)
cause or agree to cause CCA to enter into any letter of intent, agreement in
principle, acquisition agreement or similar agreement related to any alternative
proposal.
(c) In addition to the obligations of CCA set forth in paragraphs (a) and
(b) above, CCA promptly shall advise Prison Realty orally and in writing of any
request for information or of any alternative proposal, the material terms and
conditions of such request or alternative proposal and the identity of the
person making any such request or alternative proposal and any determination by
the Board of Directors of CCA that an alternative proposal is or may be a
superior proposal. CCA will keep Prison Realty informed as to the status and
material details (including amendments or proposed amendments) of any such
request or alternative proposal.
Article V
ADDITIONAL AGREEMENTS
Section 5.01 Preparation of the Proxy Statement and Registration
Statement. As promptly as practicable following the date of this Agreement,
Prison Realty, CCA Sub and CCA shall prepare and file with the SEC the Proxy
Statement and the Registration Statement. Each party hereto will cooperate with
the other party in connection with the preparation of the Proxy Statement and
the Registration Statement, including, but not limited to, furnishing all
information as may be required to be disclosed therein. The Proxy Statement
shall contain the recommendation of the Board of Directors of Prison Realty that
the stockholders of Prison Realty approve this Agreement and the transaction
contemplated hereby. The proxy statement-prospectus which constitutes a portion
of the
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Registration Statement shall contain the recommendation of the Board of
Directors of CCA that the shareholders of CCA approve this Agreement and the
transaction contemplated hereby. Each of Prison Realty, CCA Sub and CCA shall
use its reasonable best efforts to have the Proxy Statement cleared by the SEC
and to have the proxy statement-prospectus which constitutes a portion of the
Registration Statement declared effective by the SEC as promptly as practicable
after such filing. Each party hereto will use its reasonable best efforts to
cause the Proxy Statement and the proxy statement-prospectus which constitutes a
portion of the Registration Statement to be mailed to its shareholders as
promptly as practicable after the clearance of the Proxy Statement by the SEC
and the declaration of the effectiveness of the Registration Statement by the
SEC under the Securities Act. No filing of, or amendment or supplement to the
Proxy Statement or the Registration Statement will be made by any party hereto
without providing the other parties and their Boards of Directors the
opportunity to review and comment thereon and to approve the same, provided that
such approvals shall not be unreasonably withheld. Each party hereto will advise
the other parties, promptly after it receives notice thereof, of any request by
the SEC for amendment of the Proxy Statement or the Registration Statement or
comments thereon and responses thereto or requests by the SEC for additional
information. If at any time prior to the Effective Time any information relating
to any of the parties hereto or any of their respective affiliates, officers or
directors, should be discovered by a party hereto which should be set forth in
an amendment or supplement to the Proxy Statement or Registration Statement, so
that the Proxy Statement or the Registration Statement would not include any
misstatement of a material fact or omit to state any material fact necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, the party which discovers such information shall promptly
notify the other parties hereto and an appropriate amendment or supplement
describing such information shall be promptly filed with the SEC and, to the
extent required by law, such amended or supplemented Proxy Statement or the
proxy statement-prospectus which constitutes a portion of such amended or
supplemented Registration Statement, as applicable, disseminated to the
shareholders of Prison Realty and CCA.
Section 5.02 Access to Information. Each party shall, and shall cause each
of its Subsidiaries to, afford to the other party hereto and to its officers,
employees, accountants, counsel and other representatives (including
environmental consultants), reasonable access, during normal business hours
during the period prior to the Effective Time, to their respective properties,
books, records and personnel and, during such period, each party hereto shall,
and shall cause each of its Subsidiaries to, furnish promptly to the other party
hereto (a) a copy of each report, schedule, registration statement and other
document filed or received by it during such period pursuant to the requirements
of Federal or state securities laws and (b) such other information concerning
its business, properties and personnel as the other party may reasonably
request. With respect to matters disclosed in the Prison Realty Disclosure
Schedule or the CCA Disclosure Schedule, respectively, each party agrees to
supplement from time to time the information set forth therein.
Section 5.03 Shareholders' Meetings. Prison Realty shall, as promptly as
practicable after the date hereof, (a) duly call, give notice of, convene and
hold a Stockholders' Meeting for the purpose of obtaining the Prison Realty
Stockholder Approval, and (b) subject in the case of Prison Realty to Section
4.04, through its respective Board of Directors, recommend to its stockholders
that they grant the Prison Realty Stockholder Approval. Prison Realty shall use
all reasonable efforts to solicit from its stockholders proxies in favor of
Prison Realty Stockholder Approval and shall take all other action necessary or,
in the reasonable opinion of such party, advisable to secure Prison Realty
Stockholder Approval. CCA shall vote, or cause to be voted, in favor of the
transactions for which Prison Realty is seeking Prison Realty Stockholder
Approval, all shares of Prison Realty Common Stock directly or indirectly
beneficially owned by it.
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CCA shall, as promptly as practicable after the date hereof, (a) duly call,
give notice of, convene and hold a Shareholders' Meeting for the purpose of
obtaining the CCA Shareholder Approval, and (b) through its respective Board of
Directors, recommend to its shareholders that they grant the CCA Shareholder
Approval. CCA shall use all reasonable efforts to solicit from its shareholders
proxies in favor of CCA Shareholder Approval and shall take all other action
necessary or, in the reasonable opinion of such party, advisable to secure CCA
Shareholder Approval. Prison Realty shall vote, or cause to be voted, in favor
of the transactions for which CCA is seeking CCA Shareholder Approval, all
shares of CCA Common Stock directly or indirectly beneficially owned by it.
Section 5.04 Reasonable Best Efforts. Subject to the terms and conditions
of this Agreement, each party hereto shall, and shall cause its Subsidiaries to,
use all reasonable best efforts to take, or cause to be taken, all actions, and
to do, or cause to be done, and to assist and cooperate with the other parties
in doing, all things necessary, proper or advisable to consummate and make
effective, in the most expeditious manner practicable, the Merger and the other
transactions contemplated by this Agreement, including (i) the obtaining of any
necessary consent, authorization, order or approval of, or any exemption by, any
Governmental Entity and/or any other public or private third party which is
required to be obtained by such party or any of its Subsidiaries in connection
with the Merger and the other transactions contemplated by this Agreement
(provided that no party to this Agreement shall pay or agree to pay any material
amount to obtain a consent without the prior approval of the remaining parties,
which approval shall not be unreasonably withheld or delayed), and the making or
obtaining of all necessary filings and registrations with respect thereto, (ii)
the defending of any lawsuits or other legal proceedings challenging this
Agreement, and (iii) the execution and delivery of any additional instruments
necessary to consummate the transactions contemplated by, and to fully carry out
the purposes of, this Agreement.
Section 5.05 Benefits Matters. Except as otherwise provided herein,
following the Effective Time, Prison Realty shall honor, or cause to be honored,
all obligations under employment agreements, Prison Realty Benefit Plans and all
other employee benefit plans, programs, policies and arrangements of any of the
parties hereto in accordance with the terms thereof. Nothing herein shall be
construed to prohibit Prison Realty from amending or terminating such
agreements, programs, policies and arrangements in accordance with the terms
thereof and with applicable law.
Section 5.06 Fees and Expenses. Whether or not the Merger is consummated,
all costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such costs
or expenses.
Section 5.07 Indemnification, Exculpation and Insurance.
(a) From and after the Effective Time, Prison Realty shall indemnify,
defend and hold harmless to the fullest extent permitted by applicable
federal and state law each person who is on the date hereof, or has been at
any time prior to the date hereof or who becomes prior to the Effective
Time, a director or officer of CCA or was serving at the request of CCA as
a director or officer of any domestic or foreign corporation, joint
venture, trust, employee benefit plan or other enterprise (collectively,
the "Indemnities") arising out of CCA's Charter or Bylaws in effect at the
Effective Time against any and all losses in connection with or arising out
of any claim which is based upon, arises out of or in any way relates to
any actual or alleged act or omission occurring at or prior to the
Effective Time in the Indemnitee's capacity as a director or officer
(whether elected or appointed), of CCA.
(b) In the event Prison Realty or any of its successors or assigns:
(i) consolidates with or merges into any other corporation or entity and
shall not be the continuing or surviving
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corporation or entity of such consolidation or merger; or (ii) transfers or
conveys all or substantially all of its properties and assets to any person
or entity, then, and in each case, to the extent necessary, proper
provisions shall be made so that the successors and assigns of Prison
Realty assume the obligations set forth in this Section 5.07.
(c) Prison Realty shall maintain in effect for not less than two (2)
years from the Effective Time the policies of directors' and officers'
liability insurance most recently maintained by CCA; provided, however,
that Prison Realty may substitute therefor policies with reputable and
financially sound carriers for substantially similar coverage containing
terms and conditions which are no less advantageous for so long as such
substitution does not result in gaps or lapses in coverage with respect to
claims arising from or relating to matters occurring prior to the Effective
Time. Prison Realty shall pay all expenses, including attorneys' fees, that
may be incurred by any Indemnitee in enforcing the indemnity and other
obligations provided for in this Section 5.07.
(d) The provisions of this Section 5.07 are intended to be for the
benefit of, and shall be enforceable by, each Indemnitee and their
respective heirs and representatives.
Section 5.08 Transfer Taxes. All state, local, foreign or provincial
sales, use, real property transfer, stock transfer or similar taxes (including
any interest or penalties with respect thereto, but not including any
shareholder-level taxes based upon net income) attributable to the Merger shall
be timely paid by Prison Realty.
Section 5.09 Stock Exchange Listing. The Surviving Company and Prison
Realty shall each use their reasonable best efforts to cause the Prison Realty
Stock to be issued in connection with the Merger to be listed on the NYSE,
subject to official notice of issuance, if applicable.
Section 5.10 Tax-Free Reorganization. Prior to the Effective Time, each
party shall use its reasonable best efforts to cause the Merger to qualify as a
reorganization qualifying under the provisions of Section 368(a) of the Code.
Section 5.11 Shareholders' Agreement. As of the Effective Time, the
Shareholders' Agreement, dated September 22, 1998, among certain shareholders of
CCA shall each be terminated and shall no longer have any force or effect.
Section 5.12 Lock-Up Agreement. As of the Effective Time, each of the
holders of shares of CCA Common Stock whose shares are not subject to forfeiture
under the CCA Restricted Stock Plan shall enter into a lock-up agreement with
Prison Realty (the "Lock-Up Agreement"), a form of which is attached hereto as
Exhibit A, pursuant to which each such holder shall agree not to sell, assign or
otherwise transfer (collectively, a "Transfer") any shares of Prison Realty
Common Stock received in connection with the Merger (the "Shares"), nor enter
into any agreement regarding the same, for a period of one hundred eighty (180)
days (the "180-Day Period") following the date of closing of the Merger, and
further agrees not to Transfer such Shares thereafter except as follows: (i)
after expiration of the 180-Day Period, a holder may Transfer up to twenty-five
percent (25%) of the aggregate amount of the Shares; (ii) after December 31,
2001, a holder may Transfer up to fifty percent (50%) of the aggregate amount of
the Shares; (iii) after December 31, 2002, a holder may Transfer up to
seventy-five percent (75%) of the aggregate amount of the Shares; and (iv) after
December 31, 2003, a holder may Transfer up to one hundred percent (100%) of the
aggregate amount of the Shares.
Section 5.13 Equity Incentive Plan. Following the consummation of the
Merger and the related transactions, Prison Realty shall adopt a new equity
incentive plan pursuant to which it will have the authority to grant options to
purchase shares of Prison Realty Common Stock and other types of
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equity-based incentive compensation, on such terms and conditions as are
approved by the Board of Directors of Prison Realty following the consummation
of the Merger.
Section 5.14 Change of Corporate Name. In connection with the Merger and
the related transactions, Prison Realty shall amend its charter, bylaws and
organizational documents to change the name of the corporation to "Corrections
Corporation of America" and the business and affairs of Prison Realty following
the consummation of the Merger and the related transactions shall be conducted
using the name "Corrections Corporation of America."
Article VI
CONDITIONS PRECEDENT
Section 6.01 Conditions to Each Party's Obligation To Effect the
Merger. The respective obligations of each party to effect the Merger shall be
subject to the satisfaction or waiver at or prior to the Effective Time of the
following conditions:
(a) HSR Act. The waiting period applicable to the consummation of the
Merger under the HSR Act shall have expired or been terminated.
(b) No Injunctions or Restraints; Illegality. No statute, rule,
regulation, judgment, writ, decree, order, temporary restraining order,
preliminary or permanent injunction shall have been promulgated, enacted,
entered or enforced, and no other action shall have been taken, by any
Governmental Entity of competent jurisdiction enjoining or otherwise
preventing the consummation of the Merger shall be in effect; provided,
however, that each of the parties shall use its reasonable best efforts to
prevent the entry of any such injunction or other order or decree and to
cause any such injunction or other order or decree that may be entered to
be vacated or otherwise rendered of no effect.
(c) Listing of Merger Consideration. The Prison Realty Stock to be
issued in the Merger shall have been approved for listing on the NYSE,
subject to official notice of issuance, if applicable.
(d) Proxy Statement and Registration Statement. The Proxy Statement
and Registration Statement shall be satisfactory in all material respects
to Prison Realty and CCA, the Proxy Statement shall have been cleared by
the SEC, and the Registration Statement shall have been declared effective
by the SEC under the Securities Act, and no stop order suspending the use
of the Proxy Statement or the effectiveness of the Registration Statement
shall be in effect and no proceedings for such purpose shall be pending
before or threatened by the SEC.
(e) Tax-Free Reorganization. The receipt by each of Prison Realty and
CCA of an opinion of its respective tax counsel to the effect that the
Merger qualifies as a reorganization within the meaning of Section 368(a)
of the Code.
Section 6.02 Conditions to Obligation of Prison Realty and CCA Sub To
Effect the Merger. The obligation of Prison Realty and CCA Sub to effect the
Merger is subject to the satisfaction of the following conditions unless waived
by Prison Realty and CCA Sub:
(a) Shareholder Approval. The Prison Realty Stockholder Approval and
the CCA Shareholder Approval shall have been obtained.
(b) Representations and Warranties. The representations and
warranties of CCA set forth in this Agreement shall be true and correct,
except that this condition shall be deemed satisfied
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so long as any failures of such representations and warranties to be true
and correct do not individually or in the aggregate have a material adverse
effect on CCA as of the date of this Agreement and as of the Closing Date,
except as otherwise contemplated by this Agreement, and Prison Realty and
the CCA Sub shall have received a certificate to such effect signed on the
Closing Date on behalf of CCA by the Chief Executive Officer and Secretary.
(c) Performance of Obligations of Other Parties. CCA shall have
performed in all material respects all material obligations required to be
performed by them under this Agreement at or prior to the Closing Date, and
Prison Realty shall have received a certificate to such effect signed on
behalf of each party by its Chief Executive Officer or Chief Financial
Officer.
(d) Consents, etc. Prison Realty shall have received evidence, in
form and substance reasonably satisfactory to it, that such consents,
approvals, authorizations, qualifications and orders of Governmental
Entities and other third parties as are necessary in connection with the
transactions contemplated hereby have been obtained, other than those the
failure of which to be obtained, individually or in the aggregate, would
not have a material adverse effect on Prison Realty or CCA.
(e) Consents to Assignment of Management Contracts. To the extent
required by applicable law and the provisions of the contracts, CCA shall
have obtained all necessary written consents of governmental authorities to
the performance of their respective facility management contracts by Prison
Realty and/or CCA Sub after the Merger.
(f) Purchase of CCA Common Stock Held by Baron. Prison Realty shall
have purchased the CCA Common Stock held by Baron pursuant to the terms and
conditions reasonably acceptable to Prison Realty.
(g) Execution of Lock-Up Agreements. The Lock-Up Agreements shall
have been executed and delivered in accordance with Section 5.12.
Section 6.03 Conditions to Obligation of CCA To Effect the Merger. The
obligation of CCA to effect the Merger is subject to the satisfaction of the
following conditions unless waived by CCA:
(a) Representations and Warranties. The representations and
warranties of Prison Realty set forth in this Agreement shall be true and
correct, except that this condition shall be deemed satisfied so long as
any failures of such representations and warranties to be true and correct
do not individually or in the aggregate have a material adverse effect on
Prison Realty as of the date of this Agreement and as of the Closing Date,
except as otherwise contemplated by this Agreement, and CCA shall have
received a certificate to such effect signed on the Closing Date on behalf
of Prison Realty by its Chief Executive Officer and Secretary.
(b) Performance of Obligations of Prison Realty. Prison Realty shall
have performed in all material respects all material obligations required
to be performed by it under this Agreement at or prior to the Closing Date,
and CCA shall have received a certificate to such effect signed on behalf
of Prison Realty by its Chief Executive Officer or Chief Financial Officer.
(c) Shareholder Approval. The Prison Realty Stockholder Approval and
the CCA Shareholder Approval shall have been obtained.
Section 6.04 Frustration of Closing Conditions. No party to this Agreement
may rely on the failure of any condition set forth in Sections 6.01 through
6.03, as the case may be, to be satisfied if such failure was caused by such
party's failure to use all reasonable best efforts to consummate the Merger and
the other transactions contemplated by this Agreement.
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Article VII
TERMINATION AND AMENDMENT
Section 7.01 Termination. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after the Prison Realty
Stockholder Approval and the CCA Shareholder Approval are received:
(a) by mutual written consent of the parties hereto;
(b) by Prison Realty or CCA upon written notice to the other parties:
(i) if any Governmental Entity of competent jurisdiction shall have
issued a permanent injunction or other order or decree enjoining or
otherwise preventing the consummation of the Merger and such injunction
or other order or decree shall have become final and nonappealable;
provided that the party seeking to terminate this Agreement pursuant to
this clause (i) shall have used its reasonable best efforts to prevent
or contest the imposition of, or seek the lifting or stay of, such
injunction, order or decree;
(ii) if the Merger shall not have been consummated on or before
October 31, 2000, unless the failure to consummate the Merger is the
result of a material breach of this Agreement by the party seeking to
terminate this Agreement;
(iii) if, upon a vote at a duly held Prison Realty Stockholders'
Meeting or any adjournment thereof, the Prison Realty Stockholder
Approval shall not have been obtained;
(c) by Prison Realty upon written notice to CCA if, upon a vote at a
duly held CCA Shareholders' Meeting or any adjournment thereof, the CCA
Shareholder Approval shall not have been obtained;
(d) by Prison Realty upon written notice to CCA, if the Board of
Directors of CCA or any committee thereof shall have withdrawn or modified
in a manner adverse to Prison Realty its approval or recommendation of the
Merger or this Agreement or resolved to do so;
(e) by CCA upon written notice to Prison Realty, if the Board of
Directors of Prison Realty or any committee thereof shall have withdrawn or
modified in a manner adverse to such terminating party its approval or
recommendation of the Merger or this Agreement or resolved to do so;
(f) unless CCA is in material breach of its obligations hereunder, by
CCA upon written notice to Prison Realty if Prison Realty breaches or fails
to perform any of its representations, warranties, covenants or other
agreements hereunder, which breach or failure to perform (A) would give
rise to the failure of a condition set forth in Section 6.03 hereof and (B)
is incapable of being cured by Prison Realty or is not cured within thirty
(30) days after CCA gives written notice of such breach to Prison Realty
and such a cure is not effected during such period; or
(g) unless Prison Realty is in material breach of its obligations
hereunder, by Prison Realty upon written notice to CCA if CCA breaches or
fails to perform any of its representations, warranties, covenants or other
agreements hereunder, which breach or failure to perform (A) would give
rise to the failure of a condition set forth in Section 6.02 hereof and (B)
is incapable of being cured by CCA or is not cured within thirty (30) days
after Prison Realty gives written notice of such breach to the breaching
party and such a cure is not effected during such period.
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Section 7.02 Effect of Termination. In the event of termination of this
Agreement by Prison Realty or CCA as provided in Section 7.01 herein, this
Agreement shall forthwith become void and have no effect and, except to the
extent that such termination results from the wilful and material breach by a
party of any of its representations, warranties, covenants or agreements set
forth in this Agreement, there shall be no liability or obligation on the part
of Prison Realty or CCA except with respect to Section 5.06, this Section 7.02
and Article VIII hereof, which provisions shall survive such termination.
Section 7.03 Amendment. This Agreement may be amended by the parties
hereto at any time before or after the Prison Realty Stockholder Approval and
the CCA Shareholder Approval is received, provided that after receipt of the
Prison Realty Stockholder Approval or the CCA Shareholder Approval, no amendment
shall be made which by law requires further approval by such shareholders
without such further approval. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
Section 7.04 Extension; Waiver. At any time prior to the Effective Time,
the parties hereto may, to the extent legally allowed, (a) extend the time for
the performance of any of the obligations or other acts of the other party
hereto, (b) waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant hereto and (c) subject to
the proviso of Section 7.03, waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in a written
instrument signed on behalf of such party. The failure of any party to this
Agreement to assert any of its rights under this Agreement or otherwise shall
not constitute a waiver of those rights.
Section 7.05 Procedure for Termination, Amendment, Extension or Waiver. A
termination of this Agreement pursuant to Section 7.01, an amendment of this
Agreement pursuant to Section 7.03 or an extension or waiver pursuant to Section
7.04 shall, in order to be effective, require action by the Board of Directors,
or the duly authorized committee of such Board to the extent permitted by law,
of the party authorizing such action.
Article VIII
GENERAL PROVISIONS
Section 8.01 Nonsurvival of Representations and Warranties. None of the
representations and warranties in this Agreement shall survive the Effective
Time. This Section 8.01 shall not limit any covenant or agreement of the parties
which by its terms contemplates performance after the Effective Time.
Section 8.02 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally, telecopied
(with confirmation) or sent by overnight or same-day courier (providing proof of
delivery) to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice):
if to Prison Realty, to:
Prison Realty Trust, Inc.
10 Burton Hills Boulevard, Suite 100
Nashville, Tennessee 37215
Attention: Thomas W. Beasley, Chairman
of the
Board of Directors
Facsimile: (615) 263-0234
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with a copy to:
Stokes & Bartholomew, P.A.
424 Church Street, Suite 2800
Nashville, Tennessee 37219-2323
Attention: Elizabeth E. Moore, Esq.
Facsimile: (615) 259-1470
if to CCA, to:
Corrections Corporation of America
10 Burton Hills Boulevard
Nashville, Tennessee 37215
Attention: J. Michael Quinlan,
President and
Chief Operating Officer
Facsimile: (615) 263-3010
with a copy to:
Sherrard & Roe, PLC
424 Church Street, Suite 2000
Nashville, Tennessee 37219
Attention: John R. Voigt, Esq.
Facsimile: (615) 742-4239
Section 8.03 Definitions; Interpretation.
(a) As used in this Agreement:
(i) unless otherwise expressly provided herein, an "affiliate" of any
person means another person that directly or indirectly, through one or
more intermediaries, controls, is controlled by, or is under common control
with, such first person, where "control" means the possession, directly or
indirectly, of the power to direct or cause the direction of the management
policies of a person, whether through the ownership of voting securities,
by contract or otherwise;
(ii) "business day" means any day on which banks are not required or
authorized to close in the City of New York;
(iii) "material adverse effect" means any change, effect, event,
occurrence or development that is, or is reasonably likely to be,
materially adverse to the business, results of operations or financial
condition of a party hereto or its Subsidiaries, taken as a whole, other
than any change, effect, event or occurrence relating to or arising out of
(A) the economy or securities markets in general, (B) this Agreement or the
transactions contemplated hereby or the announcement thereof, including,
but not limited to, changes in methods of accounting with respect to the
financial statements of a party hereto or its Subsidiaries as precipitated
by this Agreement or the transactions contemplated hereby or by the review
of the SEC of the Prison Realty Filed SEC Documents, the Proxy Statement or
the Registration Statement, or (C) private corrections industry in general,
and not specifically relating to the parties hereto or their Subsidiaries;
(iv) "person" means an individual, corporation, partnership, limited
liability company, joint venture, association, trust, unincorporated
organization or other entity; and
(v) "Subsidiary" of any person means another person, an amount of the
voting securities, other voting ownership or voting partnership interests
of which is sufficient to elect at least a majority of its Board of
Directors or other governing body (or, if there are not such voting
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interests, more than 50% of the equity interests of which) is owned
directly or indirectly by such first person.
(b) When a reference is made in this Agreement to Articles, Sections,
Exhibits or Schedules, such reference shall be to an Article, Section of or
Exhibit or Schedule to this Agreement unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include", "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation". The words "hereof", "herein" and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not to any particular provision of this Agreement. The term "or" when used in
this Agreement is not exclusive. All terms defined in this Agreement shall have
the defined meanings when used in any certificate or other document made or
delivered pursuant hereto unless otherwise defined therein. The definitions
contained in this Agreement are applicable to the singular as well as the plural
forms of such terms. Any agreement, instrument or statute defined or referred to
herein or in any agreement or instrument that is referred to herein means such
agreement, instrument or statute as from time to time amended, modified or
supplemented, including (in the case of agreements or instruments) by waiver or
consent and (in the case of statutes) by succession of comparable successor
statutes and references to all attachments thereto and instruments incorporated
therein. References to a person are also to its permitted successors and
assigns.
Section 8.04 Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each of
the parties and delivered to the other party.
Section 8.05 Entire Agreement; No Third-Party Beneficiaries; Rights of
Ownership. This Agreement (a) constitutes the entire agreement and supersedes
all prior agreements and understandings, both written and oral, among the
parties with respect to the subject matter hereof, and (b) other than Section
5.07 of this Agreement, is not intended to confer upon any person other than the
parties hereto any rights or remedies hereunder.
Section 8.06 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Tennessee, without regard
to any principles of conflicts of law of such State.
Section 8.07 Publicity. Except as otherwise permitted by this Agreement or
required by law or the rules of the NYSE, so long as this Agreement is in
effect, no party to this Agreement shall, or shall permit any of its affiliates
to, issue or cause the publication of any press release or other public
announcement or statement with respect to this Agreement or the transactions
contemplated hereby without first obtaining the consent of the other parties
hereto. The parties agree that the initial press release to be issued with
respect to the transactions contemplated by this Agreement shall be in the form
heretofore agreed to by the parties.
Section 8.08 Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned, in whole or in part, by
any of the parties hereto (whether by operation of law or otherwise) without the
prior written consent of the other parties, and any such assignment that is not
so consented to shall be null and void; provided that, if necessary or advisable
under applicable provisions of corporate or tax law, Prison Realty may assign
its rights hereunder to any of its Subsidiaries or affiliates to cause CCA to
merge with a Subsidiary or affiliate of Prison Realty, but no such assignment
shall relieve Prison Realty of its obligations hereunder including the
obligations to deliver the CCA Merger Consideration. Subject to the preceding
sentence, this Agreement will be
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binding upon, inure to the benefit of and be enforceable by the parties and
their respective successors and assigns.
Section 8.09 Enforcement. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any Federal court located in the
State of Tennessee or in any Tennessee state court, this being in addition to
any other remedy to which they are entitled at law or in equity. In addition,
each of the parties hereto (a) consents to submit itself to the personal
jurisdiction of any Federal court located in the State of Tennessee or any
Tennessee state court in the event any dispute arises out of this Agreement or
any of the transactions contemplated by this Agreement and (b) agrees that it
will not attempt to deny or defeat such personal jurisdiction by motion or other
request for leave from any such court.
[SIGNATURE PAGES TO FOLLOW]
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Accepted and agreed to this 30th day of June, 2000.
PRISON REALTY TRUST, INC.
By: /s/ Thomas W. Beasley
--------------------------------------
Name: Thomas W. Beasley
Title: Chairman of the Board of
Directors
CCA ACQUISITION SUB, INC.
By: /s/ Darrell K. Massengale
--------------------------------------
Name: Darrell K. Massengale
Title: Chief Executive Officer and
President
CORRECTIONS CORPORATION OF AMERICA
By: /s/ Darrell K. Massengale
--------------------------------------
Name: Darrell K. Massengale
Title: Chief Financial Officer and
Secretary
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<PAGE> 410
EXHIBIT A
FORM OF LOCK-UP AGREEMENT
, 2000
Prison Realty Trust, Inc.
10 Burton Hills Boulevard, Suite 100
Nashville, Tennessee 37215
Re: Shares of Common Stock to be Issued by Prison Realty Trust, Inc. in
Connection with the Merger of Corrections Corporation of America with and
into Prison Realty Trust, Inc.
Ladies and Gentlemen:
The undersigned understands that as a result of the merger (the "Merger")
of Corrections Corporation of America, a Tennessee corporation formerly known as
Correctional Management Services Corporation ("CCA"), with and into CCA
Acquisition Sub, Inc., a Tennessee corporation and wholly-owned subsidiary of
Prison Realty Trust, Inc. (the "Company"), shares of capital stock held by the
undersigned in CCA will be exchanged or converted into shares of common stock
(the "Common Stock") of the Company. In consideration of the foregoing and in
connection with the Merger, the undersigned hereby agrees that the undersigned
will not, without the prior written approval of the Board of Directors of the
Company, offer for sale, sell, transfer, assign, pledge, hypothecate or
otherwise dispose of, directly or indirectly (collectively, a "Transfer"), any
shares of Common Stock received in connection with the Merger (the "Shares"),
nor enter into any agreement regarding the same, for a period of one hundred
eighty (180) days (the "180-Day Period") following the date of closing of the
Merger, and further agrees not to Transfer such Shares thereafter except as
follows: (i) after expiration of the 180-Day Period, a holder may Transfer up to
twenty-five percent (25%) of the aggregate amount of the Shares; (ii) after
December 31, 2001, a holder may Transfer up to fifty percent (50%) of the
aggregate amount of the Shares; (iii) after December 31, 2002, a holder may
Transfer up to seventy-five percent (75%) of the aggregate amount of the Shares;
and (iv) after December 31, 2003, a holder may Transfer up to one hundred
percent (100%) of the aggregate amount of the Shares.
The foregoing agreements shall be binding on the undersigned and the
undersigned's respective heirs, personal representatives, successors and
assigns.
It is understood that if the Merger is not consummated this agreement shall
terminate.
Sincerely,
Signature:
--------------------------------------
Name:
--------------------------------------
<PAGE> 411
APPENDIX B
PRISON REALTY TRUST, INC.
ARTICLES OF AMENDMENT AND RESTATEMENT
This is to certify that:
FIRST: Prison Realty Trust, Inc., a Maryland corporation (the
"Corporation"), desires to amend and restate its Charter as currently in effect
and as hereinafter amended.
SECOND: The following provisions are all the provisions of the Charter of
the Corporation currently in effect and as hereinafter amended:
Article I
NAME
The name of this corporation shall be Corrections Corporation of America
(the "Corporation").
Article II
PURPOSE
The purpose for which this Corporation is formed is to engage in any lawful
act or activity for which corporations may be organized under the Maryland
General Corporation Law as now or hereinafter in force. The Corporation also
shall have all the general powers granted by law to Maryland corporations and
all other powers not inconsistent with law that are appropriate to promote and
attain its purpose.
Article III
PRINCIPAL OFFICE AND RESIDENT AGENT
The address of the principal office of the Corporation is c/o The
Corporation Trust Incorporated, 300 East Lombard Street, Baltimore, Maryland
21202. The name of the resident agent of the Corporation in the State of
Maryland is The Corporation Trust Incorporated, and the address of the resident
agent is 300 East Lombard Street, Baltimore, Maryland 21202.
Article IV
DIRECTORS
A. General Powers. The business and affairs of the Corporation shall be
managed by its Board of Directors and, except as otherwise expressly provided by
law, the Bylaws of the Corporation or this Charter, all of the powers of the
Corporation shall be vested in the Board of Directors. This Charter shall be
construed with the presumption in favor of the grant of power and authority to
the directors.
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B. Number of Directors. The Board of Directors shall consist of such
number of directors as shall be determined from time to time by resolution of
the Board of Directors in accordance with the Bylaws of the Corporation, except
as otherwise required by the Charter; provided that the number of directors
shall never be less than the minimum number required by the Maryland General
Corporation Law. The Board of Directors shall initially consist of six (6)
directors, at least two (2) of which must be Independent Directors. An
Independent Director is defined to be an individual who qualifies as a director
under the Bylaws of the Corporation but who: (i) is not an officer or employee
of the Corporation; (ii) is not the beneficial owner of five percent (5%) or
more of any class of equity securities of the Corporation, or any officer,
employee or "affiliate" (as defined in Rule 12b-2 promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) of any such
stockholder of the Corporation; or (iii) does not have any economic relationship
requiring disclosure under the Exchange Act with the Corporation. The names of
the directors of the Corporation are Thomas W. Beasley, C. Ray Bell, Jean-Pierre
Cuny, Ted Feldman, Joseph V. Russell and Charles W. Thomas, PhD. A director need
not be a stockholder of the Corporation.
C. Effect of Increase or Decrease in Directors. In the event of any
increase or decrease in the number of directors pursuant to the first sentence
of Paragraph B above, each director then serving shall nevertheless continue as
a director until the expiration of his term and until his successor is duly
elected and qualified or his prior death, retirement, resignation or removal.
D. Service of Directors. Notwithstanding the provisions of this Article
IV, each director shall serve until his successor is elected and qualified or
until his death, retirement, resignation or removal.
E. Removal of Directors. Subject to the rights, if any, of any class or
series of stock to elect directors and to remove any director whom the holders
of any such stock have the right to elect, any director (including persons
elected by directors to fill vacancies in the Board of Directors) may be removed
from office, with or without cause, only by the affirmative vote of the holders
of at least a majority of the votes represented by the shares then entitled to
vote in the election of such director. At least thirty (30) days prior to any
meeting of stockholders at which it is proposed that any director be removed
from office, written notice of such proposed removal shall be sent to the
director whose removal will be considered at the meeting.
F. Directors Elected by Holders of Preferred Stock. During any period when
the holders of any series of Preferred Stock (as defined in Article V hereof)
have the right to elect additional directors, as provided for or fixed pursuant
to the provisions of Article V hereof, then upon commencement and for the
duration of the period during which such right continues (i) the then otherwise
total and authorized number of directors of the Corporation shall automatically
be increased by the number of such additional directors, and such holders of
Preferred Stock shall be entitled to elect the additional directors so provided
for or fixed pursuant to said provisions, and (ii) each such additional director
shall serve until such director's successor shall have been duly elected and
qualified, or until such director's right to hold such office terminates
pursuant to said provisions, whichever occurs earlier, subject to his earlier
death, disqualification, resignation or removal.
Article V
CAPITAL STOCK
The total number of shares of stock which the Corporation shall have
authority to issue is four hundred fifty million (450,000,000), of which four
hundred million (400,000,000) shares are of a class denominated common stock,
$0.01 par value per share (the "Common Stock") and fifty million (50,000,000)
shares are of a class denominated preferred stock, $0.01 par value per share
(the
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"Preferred Stock"). The aggregate par value of all shares of all classes is
$4,500,000. Four million three hundred thousand (4,300,000) shares of the
Preferred Stock shall be designated as "8.0% Series A Cumulative Preferred
Stock" (the "Series A Preferred Stock").
The Board of Directors may authorize the issuance by the Corporation from
time to time of shares of any class of stock of the Corporation or securities
convertible or exercisable into shares of stock of any class or classes for such
consideration as the Board of Directors determines, or, if issued as a result of
a stock dividend or stock split, without any consideration, and all stock so
issued will be fully paid and non-assessable by the Corporation. The Board of
Directors may create and issue rights entitling the holders thereof to purchase
from the Corporation shares of stock or other securities or property. The Board
of Directors may classify or reclassify any unissued stock from time to time by
setting or changing the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, or terms or
conditions of redemption of such stock.
The Corporation reserves the right to make any amendment to the Charter of
the Corporation, now or hereafter authorized by law, including any amendment
which alters the contract rights, as expressly set forth in the Charter of the
Corporation, of any outstanding shares of stock.
Notwithstanding any provision of law permitting or requiring any action to
be taken or approved by the affirmative vote of the holders of shares entitled
to cast a greater number of votes, any such action shall be effective and valid
if taken or approved by the affirmative vote of holders of shares entitled to
cast a majority of all the votes entitled to be cast on the matter.
The following is a description of each of the classes of stock of the
Corporation and a statement of the powers, preferences and rights of such stock,
and the qualifications, limitations and restrictions thereof:
A. Common Stock.
1. Voting Rights. Each holder of Common Stock shall be entitled to
one vote per share of Common Stock on all matters to be voted on by the
stockholders of the Corporation. Notwithstanding the foregoing, (i) holders
of Common Stock shall not be entitled to vote on any proposal to amend
provisions of the Charter of the Corporation setting forth the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualification, or terms or conditions of redemption of a class
or series of Preferred Stock if the proposed amendment would not alter the
contract rights of the Common Stock, and (ii) holders of Common Stock shall
not be entitled to notice of any meeting of stockholders at which the only
matters to be considered are those as to which such holders have no vote by
virtue of this Article V, Section A.1.
2. Dividends and Rights Upon Liquidation. After the provisions with
respect to preferential dividends of any series of Preferred Stock, if any,
shall have been satisfied, and subject to any other conditions that may be
fixed in accordance with the provisions of this Article V, then, and not
otherwise, all Common Stock will participate equally in dividends payable
to holders of shares of Common Stock when and as declared by the Board of
Directors at their discretion out of funds legally available therefor. In
the event of voluntary or involuntary dissolution or liquidation of the
Corporation, after distribution in full of the preferential amounts, if
any, to be distributed to the holders of Preferred Stock, the holders of
Common Stock shall, subject to the additional rights, if any, of the
holders of Preferred Stock fixed in accordance with the provisions of this
Article V, be entitled to receive all of the remaining assets of the
Corporation, tangible and intangible, of whatever kind available for
distribution to stockholders ratably in proportion to the number of shares
of Common Stock held by them respectively.
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B. Preferred Stock.
1. Authorization and Issuance. The Preferred Stock may be issued from
time to time upon authorization by the Board of Directors of the
Corporation, in such series and with such preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications or other provisions as may be fixed by the Board of
Directors, except as otherwise set forth in the Charter.
2. Voting Rights. The holders of Preferred Stock shall have no voting
rights and shall have no rights to receive notice of any meetings, except
as required by law, as expressly provided for in the Charter, or as
expressly provided in the resolution establishing any series thereof.
C. Series A Preferred Stock.
1. Designation and Amount; Fractional Stock; Par Value. There shall
be a class of Preferred Stock of the Corporation designated as "8.0% Series
A Cumulative Preferred Stock," and the number of shares of stock
constituting such series shall be 4,300,000. The Series A Preferred Stock
is issuable solely in whole stock and shall entitle the holder thereof to
exercise the voting rights, to participate in the distributions and
dividends and to have the same benefits as all other holders of Series A
Preferred Stock as set forth in this Charter. The par value of each share
of Series A Preferred Stock shall be $0.01.
2. Maturity. The Series A Preferred Stock has no stated maturity and
will not be subject to any sinking fund or mandatory redemption.
3. Rank. The Series A Preferred Stock will, with respect to dividend
rights and rights upon liquidation, dissolution or winding-up of the
Corporation, rank: (i) senior to all classes or series of Common Stock of
the Corporation and to all equity securities ranking junior to the Series A
Preferred Stock; (ii) on a parity with all equity securities issued by the
Corporation, the terms of which specifically provide that such equity
securities rank on a parity with the Series A Preferred Stock with respect
to dividend rights or rights upon liquidation, dissolution or winding-up of
the Corporation; and (iii) junior to all existing and future indebtedness
of the Corporation. The term "equity securities" does not include
convertible debt and securities which rank senior to the Series A Preferred
Stock prior to conversion.
4. Dividends. Holders of the Series A Preferred Stock shall be
entitled to receive, when and as authorized and declared by the Board of
Directors, out of funds legally available for the payment of dividends,
cumulative preferential cash dividends at the rate of eight percent (8.0%)
per annum of the Liquidation Preference, as hereinafter defined. Such
dividends shall be cumulative from the date of original issuance and shall
be payable quarterly in arrears on the fifteenth day of January, April,
July and October of each year (each, a "Dividend Payment Date"), or, if not
a business day, the next succeeding business day. Dividends will accrue
from the date of original issuance to the first Dividend Payment Date and
thereafter from each Dividend Payment Date to the subsequent Dividend
Payment Date. A dividend payable on the Series A Preferred Stock for any
partial dividend period will be computed on the basis of a 360-day year
consisting of twelve 30-day months. Dividends will be payable to holders of
record as they appear in the stock records of the Corporation at the close
of business on the applicable record date, which shall be the last business
day of March, June, September and December, respectively, or on such other
date designated by the Board of Directors of the Corporation for the
payment of dividends that is not more than 30 nor less than 10 days prior
to the applicable Dividend Payment Date (each, a "Dividend Record Date").
The Series A Preferred Stock will rank senior to the Corporation's Common
Stock with respect to the payment of dividends.
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No dividends on Series A Preferred Stock shall be declared by the Board of
Directors of the Corporation or paid or set apart for payment by the Corporation
at such time as the terms and provisions of any agreement to which the
Corporation is a party, including any agreement relating to its indebtedness,
prohibits such declaration, payment or setting apart for payment or provides
that such declaration, payment or setting apart for payment would constitute a
breach thereof or a default thereunder, or if such declaration or payment shall
be restricted or prohibited by law.
Notwithstanding the foregoing, dividends on the Series A Preferred Stock
will accrue whether or not the Corporation has earnings, whether or not there
are funds legally available for payment of such dividends and whether or not
such dividends are declared. The accrued but unpaid dividends on the Series A
Preferred Stock will not bear interest, and holders of shares of Series A
Preferred Stock will not be entitled to any distributions in excess of full
cumulative distributions described above.
Except as set forth in the next sentence, no dividends will be declared or
paid or set apart for payment on any capital stock of the Corporation or any
other series of Preferred Stock ranking, as to dividends, on a parity with or
junior to the Series A Preferred Stock (other than a distribution in stock of
the Corporation's Common Stock or on stock of any other class of stock ranking
junior to the Series A Preferred Stock as to dividends and upon liquidation) for
any period unless full cumulative dividends have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof is
set apart for such payment on the Series A Preferred Stock for all past dividend
periods and the then current dividend period. When dividends are not paid in
full (or a sum sufficient for such full payment is not so set apart) upon the
Series A Preferred Stock and the shares of any other series of Preferred Stock
ranking on a parity as to dividends with the Series A Preferred Stock, all
dividends declared upon the Series A Preferred Stock and any other series of
Preferred Stock ranking on a parity as to dividends with the Series A Preferred
Stock shall be declared pro rata so that the amount of dividends authorized per
share of Series A Preferred Stock and such other series of Preferred Stock shall
in all cases bear to each other the same ratio that accrued dividends per share
on the Series A Preferred Stock and such other series of Preferred Stock (which
shall not include any accrual in respect of unpaid dividends for prior dividend
periods if such series of Preferred Stock does not have a cumulative dividend)
bear to each other. No interest, or sum of money in lieu of interest, shall be
payable in respect of any dividend payment or payments on the Series A Preferred
Stock which may be in arrears.
Except as provided in the immediately preceding paragraph, unless full
cumulative dividends on the Series A Preferred Stock have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof is set apart for payment for all past dividend periods and the
then current dividend period, no dividends (other than in Common Stock or other
stock of the Corporation ranking junior to the Series A Preferred Stock as to
dividends and upon liquidation) shall be declared or paid or set aside for
payment nor shall any other distribution be declared or made upon the Common
Stock, or stock of the Corporation ranking junior to or on a parity with the
Series A Preferred Stock as to dividends or upon liquidation, nor shall any
Common Stock, or any other stock of the Corporation ranking junior to or on a
parity with the Series A Preferred Stock as to dividends or upon liquidation, be
redeemed, purchased or otherwise acquired for any consideration (or any monies
be paid to or made available for a sinking fund for the redemption of any such
stock) by the Corporation (except by conversion into or exchange for other stock
of the Corporation ranking junior to the Series A Preferred Stock as to
dividends and upon liquidation). Holders of shares of Series A Preferred Stock
shall not be entitled to any dividend, whether payable in cash, property or
stock, in excess of full cumulative dividends on the Series A Preferred Stock as
provided above. Any dividend payment made on shares of the Series A Preferred
Stock shall first be credited against the earliest accrued but unpaid dividend
due with respect to such stock which remains payable.
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5. Liquidation Preference. Upon any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation, the holders of
Series A Preferred Stock are entitled to be paid out of the assets of the
Corporation legally available for distribution to its stockholders, a
liquidation preference of $25 per share (the "Liquidation Preference"), plus an
amount equal to any accrued and unpaid dividends to the date of payment but
without interest, before any distribution of assets is made to holders of Common
Stock or any other class or series of stock of the Corporation that ranks junior
to the Series A Preferred Stock as to liquidation rights. In the event that,
upon any such voluntary or involuntary liquidation, dissolution or winding up,
the available assets of the Corporation are insufficient to pay the amount of
the liquidating distributions on all outstanding shares of Series A Preferred
Stock and the corresponding amounts payable on all stock of other classes or
series of Preferred Stock of the Corporation ranking on a parity with the Series
A Preferred Stock in the distribution of assets, then the holders of shares of
the Series A Preferred Stock and all other such classes or series of Preferred
Stock shall share ratably in any such distribution of assets in proportion to
the full liquidating distributions to which they would otherwise be respectively
entitled.
Holders of shares of Series A Preferred Stock will be entitled to written
notice of any such liquidation. After payment of the full amount of the
liquidating distributions to which they are entitled, the holders of shares of
Series A Preferred Stock will have no right or claim to any of the remaining
assets of the Corporation. The consolidation or merger of the Corporation with
or into any other trust, corporation or entity or of any other corporation with
or into the Corporation, or the sale, lease or conveyance of all or
substantially all of the property or business of the Corporation, shall not be
deemed to constitute a liquidation, dissolution or winding up of the
Corporation.
6. Redemption. Shares of the Series A Preferred Stock are not redeemable
prior to January 30, 2003. On and after January 30, 2003, the Corporation, at
its option upon not less than thirty (30) nor more than sixty (60) days' written
notice, may redeem the Series A Preferred Stock, in whole or in part, at any
time or from time to time, for cash at a redemption price of $25 per share, plus
all accrued and unpaid dividends thereon to the date fixed for redemption
(except as provided below), without interest. Holders of shares of Series A
Preferred Stock to be redeemed shall surrender any certificates representing
such shares of Series A Preferred Stock at the place designated in such notice
and shall be entitled to the redemption price and any accrued and unpaid
dividends payable upon such redemption following such surrender. If notice of
redemption of any shares of Series A Preferred Stock has been given and if the
funds necessary for such redemption have been set aside by the Corporation in
trust for the benefit of the holders of any shares of Series A Preferred Stock
so called for redemption, then from and after the redemption date dividends will
cease to accrue on such shares of Series A Preferred Stock, such shares of
Series A Preferred Stock shall no longer be deemed outstanding and all rights of
the holders of such stock will terminate, except the right to receive the
redemption price. If less than all of the outstanding shares of Series A
Preferred Stock are to be redeemed, the shares of Series A Preferred Stock to be
redeemed shall be selected pro rata (as nearly as may be practicable without
creating fractional stock) or by any other equitable method determined by the
Corporation.
Unless full cumulative dividends on all shares of Series A Preferred Stock
shall have been or contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof set apart for payment for all past dividend
periods and the then current dividend period, no shares of Series A Preferred
Stock shall be redeemed unless all outstanding shares of Series A Preferred
Stock are simultaneously redeemed and the Corporation shall not purchase or
otherwise acquire directly or indirectly any shares of Series A Preferred Stock
(except by exchange for capital stock of the Corporation ranking junior to the
Series A Preferred Stock as to dividends and upon liquidation); provided,
however, that the foregoing shall not prevent the purchase or acquisition of
shares of Series A Preferred Stock pursuant to a purchase or exchange offer made
on the same terms to
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holders of all outstanding shares of Series A Preferred Stock. So long as no
dividends are in arrears, the Corporation shall be entitled at any time and from
time to time to repurchase shares of Series A Preferred Stock in open-market
transactions duly authorized by the Board of Directors and effected in
compliance with applicable laws.
Notice of redemption will be given by publication in a newspaper of general
circulation in the City of New York, such publication to be made once a week for
two (2) successive weeks commencing not less than thirty (30) nor more than
sixty (60) days prior to the redemption date. A similar notice will be mailed by
the Corporation, postage prepaid, not less than thirty (30) nor more than sixty
(60) days prior to the redemption date, addressed to the respective holders of
record of the Series A Preferred Stock to be redeemed at their respective
addresses as they appear on the stock transfer records of the Corporation. No
failure to give such notice or any defect thereto or in the mailing thereof
shall affect the validity of the proceedings for the redemption of any shares of
Series A Preferred Stock except as to the holder to whom notice was defective or
not given. Each notice shall state: (i) the redemption date; (ii) the redemption
price; (iii) the number of shares of Series A Preferred Stock to be redeemed;
(iv) the place or places where the certificates representing the shares of
Series A Preferred Stock are to be surrendered for payment of the redemption
price; and (v) that dividends on the stock to be redeemed will cease to accrue
on such redemption date. If less than all of the shares of Series A Preferred
Stock held by any holder are to be redeemed, the notice mailed to such holder
shall also specify the number of shares of Series A Preferred Stock held by such
holder to be redeemed.
Immediately prior to any redemption of shares of Series A Preferred Stock,
the Corporation shall pay, in cash, any accumulated and unpaid dividends through
the redemption date. Except as provided above, the Corporation will make no
payment or allowance for unpaid dividends, whether or not in arrears, on shares
of Series A Preferred Stock which are redeemed.
7. Voting Rights. Holders of the shares of Series A Preferred Stock will
not have any voting rights, except as set forth below.
Whenever dividends on any shares of Series A Preferred Stock shall be in
arrears for four or more quarterly periods (a "Preferred Dividend Default"), the
holders of such Series A Preferred Stock (voting together as a class with all
other series of Preferred Stock ranking on a parity with the Series A Preferred
Stock as to dividends or upon liquidation ("Parity Preferred") upon which like
voting rights have been conferred and are exercisable) will be entitled to vote
for the election of a total of two additional directors of the Corporation (the
"Preferred Stock Directors") at a special meeting called by the holders of
record of at least twenty percent (20%) of the shares of Series A Preferred
Stock and the holders of record of at least twenty percent (20%) of the shares
of any series of Parity Preferred so in arrears (unless such request is received
less than ninety (90) days before the date fixed for the next annual or special
meeting of the stockholders) or at the next annual meeting of stockholders, and
at such subsequent annual meeting until all dividends accumulated on such shares
of Series A Preferred Stock for the past dividend periods and the dividend for
the then current dividend period shall have been fully paid or declared and a
sum sufficient for the payment thereof set aside for payment. A quorum for any
such meeting shall exist if at least a majority of the outstanding shares of
Series A Preferred Stock and shares of Parity Preferred upon which like voting
rights have been conferred and are exercisable are represented in person or by
proxy at such meeting. Such Preferred Stock Directors shall be elected upon
affirmative vote of a plurality of the shares of Series A Preferred Stock and
such Parity Preferred present and voting in person or by proxy at a duly called
and held meeting at which a quorum is present. If and when all accumulated
dividends and the dividend for the then current dividend period on the shares of
Series A Preferred Stock shall have been paid in full or set aside for payment
in full, the holders thereof shall be divested of the foregoing voting rights
(subject to revesting in the event of each and every Preferred Dividend Default)
and, if
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all accumulated dividends and the dividend for the then current dividend period
have been paid in full or set aside for payment in full on all series of Parity
Preferred upon which like voting rights have been conferred and are exercisable,
the term of office of each Preferred Stock Director so elected shall immediately
terminate. Any Preferred Stock Director may be removed at any time with or
without cause by, and shall not be removed otherwise than by the vote of, the
holders of record of a majority of the outstanding shares of Series A Preferred
Stock and all series of Parity Preferred upon which like voting rights have been
conferred and are exercisable (voting together as a class). So long as a
Preferred Dividend Default shall continue, any vacancy in the office of a
Preferred Stock Director may be filled by written consent of the Preferred Stock
Directors remaining in office, or if none remains in office, by a vote of the
holders of record of a majority of the outstanding shares of Series A Preferred
Stock when they have the voting rights described above (voting together as a
class with all series of Parity Preferred upon which like voting rights have
been conferred and are exercisable). The Preferred Stock Directors shall each be
entitled to one vote per director on any matter.
So long as any shares of Series A Preferred Stock remain outstanding, the
Corporation will not, without the affirmative vote or consent of the holders of
at least two-thirds of the shares of Series A Preferred Stock outstanding at the
time, given in person or by proxy, either in writing or at a meeting (voting
separately as a class), (a) authorize or create, or increase the authorized or
issued amount of, any class or series of shares of stock ranking prior to the
Series A Preferred Stock with respect to payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up or reclassify
any authorized shares of stock of the Corporation into such shares, or create,
authorize or issue any obligation or security convertible into or evidencing the
right to purchase any such shares of stock, or (b) amend, alter or repeal the
provisions of the Charter, whether by merger, consolidation or otherwise (an
"Event"), so as to materially and adversely affect any right, preference,
privilege or voting power of the shares of Series A Preferred Stock or the
holders thereof; provided, however, with respect to the occurrence of any Event
set forth in (b) above, so long as the shares of Series A Preferred Stock remain
outstanding with the terms thereof materially unchanged, the occurrence of any
such Event shall not be deemed to materially and adversely affect such rights,
preferences, privileges or voting power of holders of the shares of Series A
Preferred Stock and provided further that (i) any increase in the amount of the
authorized Preferred Stock or the creation or issuance of any other series of
Preferred Stock, or (ii) any increase in the amount of authorized shares of such
series, in each case ranking on a parity with or junior to the Series A
Preferred Stock with respect to payment of dividends or the distribution of
assets upon liquidation, dissolution or winding up, shall not be deemed to
materially and adversely affect such rights, preferences, privileges or voting
powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of Series A Preferred Stock shall have been
redeemed or called for redemption upon proper notice and sufficient funds shall
have been deposited in trust to effect such redemption.
8. Conversion. Shares of the Series A Preferred Stock are not convertible
into or exchangeable for any other property or securities of the Corporation.
9. Definitions. Terms defined in this Article V, Paragraph C shall apply
only in respect of the Series A Preferred Stock.
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Article VI
LIMITATION ON PERSONAL LIABILITY AND INDEMNIFICATION
OF DIRECTORS AND OFFICERS
To the maximum extent that Maryland law in effect from time to time permits
limitation of liability of directors or officers of corporations, no person who
at any time was or is a director or officer of the Corporation shall be
personally liable to the Corporation or its stockholders for money damages.
Neither the amendment nor repeal of this provision, nor the adoption or
amendment of any other provision of the charter or the Bylaws of the Corporation
inconsistent with this provision, shall limit or eliminate in any respect the
applicability of the preceding sentence with respect to any act or failure to
act which occurred prior to such amendment, repeal or adoption.
THIRD: The amendment to and restatement of the charter of the Corporation
as hereinabove set forth has been duly advised by the Board of Directors of the
Corporation, has been approved by a majority of the entire Board of Directors
and has been approved by the stockholders of the Corporation.
FOURTH: The current address of the principal office of the Corporation is
as set forth in Article III of the foregoing amendment and restatement of the
charter.
FIFTH: The name and address of the Corporation's current resident agent is
as set forth in Article III of the foregoing amendment and restatement of the
charter.
SIXTH: The number of directors of the Corporation and the names of those
currently in office are as set forth in Article IV, Section B of the foregoing
amendment and restatement of the charter.
SEVENTH: Immediately before the amendments to the charter of the
Corporation as hereinabove set forth, the total number of shares of stock of all
classes that the Corporation had authority to issue was three hundred twenty
million (320,000,000), of which three hundred million (300,000,000) were common
stock, $0.01 par value per share, and twenty million (20,000,000) were preferred
stock, $0.01 par value per share. The aggregate par value of all shares of all
classes was $3,200,000. After the amendments to the charter, the total number of
shares of stock of all classes that the Corporation has authority to issue is
four hundred fifty million (450,000,000), of which four hundred million
(400,000,000) shares are common stock, $.01 par value per share, and fifty
million (50,000,000) are preferred stock, $0.01 par value per share. The
aggregate par value of all shares of all classes is $4,500,000. The preferences,
conversion and other rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemptions of each class
were not changed by the amendments.
EIGHTH: The undersigned President acknowledges these Articles of Amendment
and Restatement to be the corporate act of the Corporation, and, as to all
matters or facts required to be verified under oath, the undersigned President
acknowledges that to the best of his knowledge, information and belief, these
matters and facts are true in all material respects and that this statement is
made under the penalties for perjury.
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IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment
and Restatement to be signed in its name and on its behalf by its President and
attested to by its Secretary on this day of
, 2000.
<TABLE>
<S> <C>
ATTEST: PRISON REALTY TRUST, INC.
By: By:
------------------------------------------ ---------------------------------------- (seal)
Title: Secretary
</TABLE>
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APPENDIX C
Chapter 23 of the Tennessee Business Corporation Act
Dissenters' Rights
Tennessee Code Annotated
Title 48. Corporations and Associations
Chapter 23. Business Corporations -- Dissenters' Rights
PART 1 -- RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
Section 48-23-101. Definitions.
As used in this chapter, unless the context otherwise requires:
(1) "Beneficial shareholder" means the person who is a beneficial
owner of shares held by a nominee as the record shareholder;
(2) "Corporation" means the issuer of the shares held by a
dissenter before the corporate action, or the surviving or acquiring
corporation by merger or share exchange of that issuer;
(3) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under Section 48-23-102 and who exercises that right
when and in the manner required by part 2 of this chapter;
(4) "Fair value", with respect to a dissenter's shares, means the
value of the shares immediately before the effectuation of the corporate
action to which the dissenter objects, excluding any appreciation or
depreciation in anticipation of the corporate action;
(5) "Interest" means interest from the effective date of the
corporate action that gave rise to the shareholder's right to dissent
until the date of payment, at the average auction rate paid on United
States treasury bills with a maturity of six (6) months (or the closest
maturity thereto) as of the auction date for such treasury bills closest
to such effective date;
(6) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of
shares to the extent of the rights granted by a nominee certificate on
file with a corporation; and
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
Section 48-23-102. Right to Dissent.
(a) A shareholder is entitled to dissent from, and obtain payment of
the fair value of the shareholder's shares in the event of, any of the
following corporate actions:
(1) Consummation of a plan of merger to which the corporation is a
party:
(A) If shareholder approval is required for the merger by
Section 48-21-104 or the charter and the shareholder is entitled to
vote on the merger; or
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(B) If the corporation is a subsidiary that is merged with its
parent under Section 48-21-105;
(2) Consummation of a plan of share exchange to which the
corporation is a party as the corporation whose shares will be acquired,
if the shareholder is entitled to vote on the plan;
(3) Consummation of a sale or exchange of all, or substantially
all, of the property of the corporation other than in the usual and
regular course of business, if the shareholder is entitled to vote on
the sale or exchange, including a sale in dissolution, but not including
a sale pursuant to court order or a sale for cash pursuant to a plan by
which all or substantially all of the net proceeds of the sale will be
distributed to the shareholders within one (1) year after the date of
sale;
(4) An amendment of the charter that materially and adversely
affects rights in respect of a dissenter's shares because it:
(A) Alters or abolishes a preferential right of the shares;
(B) Creates, alters, or abolishes a right in respect of
redemption, including a provision respecting a sinking fund for the
redemption or repurchase, of the shares;
(C) Alters or abolishes a preemptive right of the holder of the
shares to acquire shares or other securities;
(D) Excludes or limits the right of the shares to vote on any
matter, or to cumulate votes, other than a limitation by dilution
through issuance of shares or other securities with similar voting
rights; or
(E) Reduces the number of shares owned by the shareholder to a
fraction of a share, if the fractional share is to be acquired for
cash under Section 48-16-104; or
(5) Any corporate action taken pursuant to a shareholder vote to
the extent the charter, bylaws, or a resolution of the board of
directors provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.
(b) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this chapter may not challenge the corporate
action creating the shareholder's entitlement unless the action is unlawful
or fraudulent with respect to the shareholder or the corporation.
(c) Notwithstanding the provisions of subsection (a), no shareholder
may dissent as to any shares of a security which, as of the date of the
effectuation of the transaction which would otherwise give rise to
dissenters' rights, is listed on an exchange registered under Section 6 of
the Securities Exchange Act of 1934, as amended, or is a "national market
system security," as defined in rules promulgated pursuant to the
Securities Exchange Act of 1934, as amended.
Section 48-23-103. Dissent by Nominees and Beneficial Owners.
(a) A record shareholder may assert dissenters' rights as to fewer
than all the shares registered in the record shareholder's name only if the
record shareholder dissents with respect to all shares beneficially owned
by any one (1) person and notifies the corporation in writing of the name
and address of each person on whose behalf the record shareholder asserts
dissenters' rights. The rights of a partial dissenter under this subsection
are determined as if the shares as to which the partial dissenter dissents
and the partial dissenter's other shares were registered in the names of
different shareholders.
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(b) A beneficial shareholder may assert dissenters' rights as to
shares of any one (1) or more classes held on the beneficial shareholder's
behalf only if the beneficial shareholder:
(1) Submits to the corporation the record shareholder's written
consent to the dissent not later than the time the beneficial
shareholder asserts dissenters' rights; and
(2) Does so with respect to all shares of the same class of which
the person is the beneficial shareholder or over which the person has
power to direct the vote.
Section 48-23-201. Notice of Dissenters' Rights.
(a) If proposed corporate action creating dissenters' rights under
Section 48-23-102 is submitted to a vote at a shareholders' meeting, the
meeting notice must state that shareholders are or may be entitled to
assert dissenters' rights under this chapter and be accompanied by a copy
of this chapter.
(b) If corporate action creating dissenters' rights under Section
48-23-102 is taken without a vote of shareholders, the corporation shall
notify in writing all shareholders entitled to assert dissenters' rights
that the action was taken and send them the dissenters' notice described in
Section 48-23-203.
(c) A corporation's failure to give notice pursuant to this section
will not invalidate the corporate action.
Section 48-23-202. Notice of Intent to Demand Payment.
(a) If proposed corporate action creating dissenters' rights under
Section 48-23-102 is submitted to a vote at a shareholders' meeting, a
shareholder who wishes to assert dissenters' rights must:
(1) Deliver to the corporation, before the vote is taken, written
notice of the shareholder's intent to demand payment for the
shareholder's shares if the proposed action is effectuated; and
(2) Not vote the shareholder's shares in favor of the proposed
action. No such written notice of intent to demand payment is required
of any shareholder to whom the corporation failed to provide the notice
required by Section 48-23201.
(b) A shareholder who does not satisfy the requirements of subsection
(a) is not entitled to payment for the shareholder's shares under this
chapter.
Section 48-23-203. Dissenters' Notice.
(a) If proposed corporate action creating dissenters' rights under
Section 48-23-102 is authorized at a shareholders' meeting, the corporation
shall deliver a written dissenters' notice to all shareholders who
satisfied the requirements of Section 48-23-202.
(b) The dissenters' notice must be sent no later than ten (10) days
after the corporate action was authorized by the shareholders or
effectuated, whichever is the first to occur, and must:
(1) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent transfer
of the shares will be restricted after the payment demand is received;
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(3) Supply a form for demanding payment that includes the date of
the first announcement to news media or to shareholders of the principal
terms of the proposed corporate action and requires that the person
asserting dissenters' rights certify whether or not the person asserting
dissenters' rights acquired beneficial ownership of the shares before
that date;
(4) Set a date by which the corporation must receive the payment
demand, which date may not be fewer than one (1) nor more than two (2)
months after the date the subsection (a) notice is delivered; and
(5) Be accompanied by a copy of this chapter if the corporation has
not previously sent a copy of this chapter to the shareholder pursuant
to Section 48-23-201.
Section 48-23-204. Duty to Demand Payment.
(a) A shareholder sent a dissenters' notice described in Section
48-23-203 must demand payment, certify whether the shareholder acquired
beneficial ownership of the shares before the date required to be set forth
in the dissenters' notice pursuant to Section 48-23-203(b)(3), and deposit
the shareholder's certificates in accordance with the terms of the notice.
(b) The shareholder who demands payment and deposits the shareholder's
share certificates under subsection (a) retains all other rights of a
shareholder until these rights are canceled or modified by the effectuation
of the proposed corporate action.
(c) A shareholder who does not demand payment or deposit the
shareholder's share certificates where required, each by the date set in
the dissenters' notice, is not entitled to payment for the shareholder's
shares under this chapter.
(d) A demand for payment filed by a shareholder may not be withdrawn
unless the corporation with which it was filed, or the surviving
corporation, consents thereto.
Section 48-23-205. Share Restrictions.
(a) The corporation may restrict the transfer of uncertificated shares
from the date the demand for their payment is received until the proposed
corporate action is effectuated or the restrictions released under Section
48-23-207.
(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are canceled or modified by the effectuation of the proposed
corporate action.
Section 48-23-206. Payment.
(a) Except as provided in Section 48-23-208, as soon as the proposed
corporate action is effectuated, or upon receipt of a payment demand,
whichever is later, the corporation shall pay each dissenter who complied
with Section 48-23-204 the amount the corporation estimates to be the fair
value of each dissenter's shares, plus accrued interest.
(b) The payment must be accompanied by:
(1) The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen (16) months before the date of payment, an
income statement for that year, a statement of changes in shareholders'
equity for that year, and the latest available interim financial
statements, if any;
(2) A statement of the corporation's estimate of the fair value of
the shares;
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(3) An explanation of how the interest was calculated;
(4) A statement of the dissenter's right to demand payment under
Section 48-23-209; and
(5) A copy of this chapter if the corporation has not previously
sent a copy of this chapter to the shareholder pursuant to Section
48-23-201 or Section 48-23-203.
Section 48-23-207. Failure to Take Action.
(a) If the corporation does not effectuate the proposed action that
gave rise to the dissenters' rights within two (2) months after the date
set for demanding payment and depositing share certificates, the
corporation shall return the deposited certificates and release the
transfer restrictions imposed on uncertificated shares.
(b) If, after returning deposited certificates and releasing transfer
restrictions, the corporation effectuates the proposed action, it must send
a new dissenters' notice under Section 48-23-203 and repeat the payment
demand procedure.
Section 48-23-208. After-Acquired Shares.
(a) A corporation may elect to withhold payment required by Section
48-23-206 from a dissenter unless the dissenter was the beneficial owner of
the shares before the date set forth in the dissenters' notice as the date
of the first announcement to news media or to shareholders of the principal
terms of the proposed corporate action.
(b) To the extent the corporation elects to withhold payment under
subsection (a), after effectuating the proposed corporate action, it shall
estimate the fair value of the shares, plus accrued interest, and shall pay
this amount to each dissenter who agrees to accept it in full satisfaction
of the dissenter's demand. The corporation shall send with its offer a
statement of its estimate of the fair value of the shares, an explanation
of how the interest was calculated, and a statement of the dissenter's
right to demand payment under Section 48-23-209.
Section 48-23-209. Procedure if Shareholder Dissatisfied with Payment or
Offer.
(a) A dissenter may notify the corporation in writing of the
dissenter's own estimate of the fair value of the dissenter's shares and
amount of interest due, and demand payment of the dissenter's estimate
(less any payment under Section 48-23-206 or reject the corporation's offer
under Section 48-23-208 and demand payment of the fair value of the
dissenter's shares and interest due, if;
(1) The dissenter believes that the amount paid under Section
48-23-206 or offered under Section 48-23-208 is less than the fair value
of the dissenter's shares or that the interest due is incorrectly
calculated;
(2) The corporation fails to make payment under Section 48-23-206
within two (2) months after the date set for demanding payment; or
(3) The corporation, having failed to effectuate the proposed
action, does not return the deposited certificates or release the
transfer restrictions imposed on uncertificated shares within two (2)
months after the date set for demanding payment.
(b) A dissenter waives the dissenter's right to demand payment under
this section unless the dissenter notifies the corporation of the
dissenter's demand in writing under subsection
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(a) within one (1) month after the corporation made or offered payment for
the dissenter's shares.
Section 48-23-301. Court Action.
(a) If a demand for payment under Section 48-23-209 remains unsettled,
the corporation shall commence a proceeding within two (2) months after
receiving the payment demand and petition the court to determine the fair
value of the shares and accrued interest. If the corporation does not
commence the proceeding within the two-month period, it shall pay each
dissenter whose demand remains unsettled the amount demanded.
(b) The corporation shall commence the proceeding in a court of record
having equity jurisdiction in the county where the corporation's principal
office (or, if none in this state, its registered office) is located. If
the corporation is a foreign corporation without a registered office in
this state, it shall commence the proceeding in the county in this state
where the registered office of the domestic corporation merged with or
whose shares were acquired by the foreign corporation was located.
(c) The corporation shall make all dissenters (whether or not
residents of this state) whose demands remain unsettled, parties to the
proceeding as in an action against their shares and all parties must be
served with a copy of the petition. Nonresidents may be served by
registered or certified mail or by publication as provided by law.
(d) The jurisdiction of the court in which the proceeding is commenced
under subsection (b) is plenary and exclusive. The court may appoint one
(1) or more persons as appraisers to receive evidence and recommend
decision on the question of fair value. The appraisers have the powers
described in the order appointing them, or in any amendment to it. The
dissenters are entitled to the same discovery rights as parties in other
civil proceedings.
(e) Each dissenter made a party to the proceeding is entitled to
judgment:
(1) For the amount, if any, by which the court finds the fair value
of the dissenter's shares, plus accrued interest, exceeds the amount
paid by the corporation; or
(2) For the fair value, plus accrued interest, of the dissenter's
after-acquired shares for which the corporation elected to withhold
payment under Section 48-23-208.
Section 48-23-302. Court Costs and Counsel Fees.
(a) The court in an appraisal proceeding commenced under Section
48-23-301 shall determine all costs of the proceeding, including the
reasonable compensation and expenses of appraisers appointed by the court.
The court shall assess the costs against the corporation, except that the
court may assess costs against all or some of the dissenters, in amounts
the court finds equitable, to the extent the court finds the dissenters
acted arbitrarily, vexatiously, or not in good faith in demanding payment
under Section 48-23-209.
(b) The court may also assess the fees and expenses of counsel and
experts for the respective parties, in amounts the court finds equitable
against:
(1) The corporation and in favor of any or all dissenters if the
court finds the corporation did not substantially comply with the
requirements of part 2 of this chapter; or
(2) Either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good
faith with respect to the rights provided by this chapter.
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(c) If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated, and
that the fees for those services should not be assessed against the
corporation, the court may award to these counsel reasonable fees to be
paid out of the amounts awarded to the dissenters who were benefitted.
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PROXY CORRECTIONS CORPORATION OF AMERICA
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints J. Michael Quinlan and Darrell K.
Massengale, and each of them, with full power of substitution and revocation, as
proxies of the undersigned, and hereby authorizes them to represent and to vote,
as designated, all of the common stock of Corrections Corporation of America, a
Tennessee corporation ("CCA"), held by the undersigned on July 28, 2000, at the
Special Meeting of Shareholders to be held at the Union Station Hotel, 1001
Broadway, Nashville, Tennessee, on Tuesday, September 12, 2000, at 12:00 noon,
local time, and any adjournment(s) or postponement(s) thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE FOLLOWING PROPOSALS.
1. To approve and adopt an Agreement and Plan of Merger dated as of June 30,
2000 by and among CCA, Prison Realty Trust, Inc., a Maryland corporation
("Prison Realty"), and a wholly owned subsidiary of Prison Realty, pursuant
to which CCA will combine with Prison Realty through the merger of CCA with
and into Prison Realty's wholly owned subsidiary. As part of the merger, each
share of CCA common stock outstanding at the time of the merger (other than
shares owned by Prison Realty) will be converted into the right to receive a
certain number of shares of Prison Realty common stock, as described in the
Agreement and Plan of Merger. Immediately prior to the merger, shares of CCA
common stock held by the Baron Asset Fund will be purchased by Prison Realty
for non-cash consideration consisting of shares of Prison Realty common
stock. Immediately prior to the merger, Prison Realty may also purchase
shares of CCA common stock held by Sodexho Alliance, S.A. for non-cash
consideration consisting of shares of Prison Realty common stock. In
addition, Prison Realty will issue warrants to purchase shares of its common
stock to Baron as consideration for its consent to the merger. Prison Realty
will also purchase shares of CCA common stock held by former executive
officers of Prison Realty for cash pursuant to the terms of certain severance
agreements with such officers.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. In their discretion, the proxies are authorized to vote upon such business as
may properly come before the meeting or any adjournments or postponements
thereof.
PLEASE FULLY COMPLETE, DATE, PROPERLY SIGN, AND RETURN THIS PROXY PROMPTLY.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER(S). IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED FOR EACH OF THE PROPOSALS.
Dated: , 2000
-------------------------
Please sign exactly as name appears on
your share certificate(s). Each joint
owner must sign. When signing as
attorney, executor, administrator,
trustee or guardian, please give full
title as such. If a corporation,
please sign in full corporate name as
authorized. If a partnership, please
sign in partnership name by authorized
person.
Signature:
---------------------------
Signature if Held Jointly:
------------
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY.
