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As filed with the Securities and Exchange Commission on July 19, 2000
Registration No. 333- ___
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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PRISON REALTY TRUST, INC.
(Exact Name of Registrant as Specified in its Charter)
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MARYLAND 6798 62-1763875
(State or other Jurisdiction of Incorporation (Primary Standard Industrial (I.R.S. Employer
or Organization) Classification Code Number) Identification No.)
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THOMAS W. BEASLEY
10 BURTON HILLS BOULEVARD CHAIRMAN OF THE BOARD OF DIRECTORS
NASHVILLE, TENNESSEE 37215 10 BURTON HILLS BOULEVARD
(615) 263-0200 NASHVILLE, TENNESSEE 37215
(615) 263-0200
(Address of Principal Executive Offices of Registrant) (Name, Address of Agent for Service for Registrant)
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Copy To:
ELIZABETH E. MOORE, ESQ.
ALBERT J. BART, ESQ.
STOKES BARTHOLOMEW EVANS & PETREE, P.A.
SUNTRUST CENTER
424 CHURCH STREET, 28TH FLOOR
NASHVILLE, TENNESSEE 37219
(615) 259-1450/FAX (615) 259-1470
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: From time to time after this Registration Statement becomes
effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If any of the securities being registered in this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act, other than securities offered only in connection with dividend
on reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
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CALCULATION OF REGISTRATION FEE
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Proposed
Title Of Each Class Of Maximum Amount Of
Securities To Aggregate Registration
Be Registered Offering Price(1) Fee(2)
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Common Stock, $0.01 par value
per share(3).................... (5) (5)
Warrants(4)....................... (5) (5)
Total.......................... $29,600,000 $7,814.40
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(1) The aggregate offering price of all securities to be issued by the
Registrant immediately prior to and at the time of the Merger pursuant
to this Registration Statement, which is based on the total
consideration to be paid by the Registrant in connection with the
Merger, calculated in accordance with Rule 457 of the rules and
regulations under the Securities Act of 1933, as amended, is not
expected to exceed $29,600,000.
(2) Calculated pursuant to Rule 457(o) of the rules and regulations under
the Securities Act of 1933, as amended.
(3) Subject to the limitations set forth in Note (1), the shares of Common
Stock being registered are to be issued by the Registrant immediately
prior to, and at the time of, the merger of Corrections Corporation of
America with and into a wholly owned subsidiary of the Registrant (the
"Merger"), as well as subsequent to the Merger upon the exercise of the
Warrants.
(4) Subject to the limitations set forth in Note (1), the Warrants
representing rights to purchase shares of Common Stock being registered
are to be issued by the Registrant immediately prior to the Merger.
(5) Omitted pursuant to General Instruction J to Form S-4.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE.
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CORRECTIONS CORPORATION OF AMERICA
10 BURTON HILLS BOULEVARD
NASHVILLE, TENNESSEE 37215
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON __________, SEPTEMBER ___, 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 ___________, September ___, 2000, at the
Loews Vanderbilt Plaza Hotel, 2100 West End Avenue, Nashville, Tennessee, for
the following purposes:
1. To consider and vote upon a proposal to approve an Agreement
and Plan of Merger dated as 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 __________, July ___, 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.
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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) entitled to vote at the special meeting. 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.
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,
Darrell K. Massengale, Secretary
Nashville, Tennessee
_______________, 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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PRELIMINARY COPY
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.
In connection with the matters discussed in this joint proxy
statement/prospectus, Prison Realty is separately seeking the votes of its
shareholders 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.
After completion of the merger and related transactions and the
restructuring of Prison Realty, shareholders of CCA receiving shares of Prison
Realty common stock in, or immediately prior to, the merger will collectively
own approximately 5.7% of the shares of Prison Realty common stock then
outstanding, on a fully diluted basis, assuming a Prison Realty common
<PAGE> 6
stock price of $3.50 per share at the time of the merger, not including shares
of Prison Realty common stock already owned by such shareholders and not
received in connection with the merger.
The merger and related transactions cannot be completed unless you and
the other shareholders approve them.
The attached joint proxy statement/prospectus provides additional
information about the merger and related transactions, as well as information
concerning the restructuring being considered by the shareholders 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 37 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 $11,000,000 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 ____________,
2000, and it is first being mailed or delivered to shareholders of CCA on or
about ______________, 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.................................................................................9
NOTE CONCERNING FORWARD-LOOKING
STATEMENTS....................................................................................................10
SUMMARY OF THE JOINT PROXY
STATEMENT/PROSPECTUS .........................................................................................11
The companies...............................................................................................11
The transactions............................................................................................15
Selected unaudited pro forma combined financial
information...............................................................................................26
Selected historical consolidated financial
information of Prison Realty..............................................................................29
Selected historical consolidated financial
information of CCA........................................................................................32
Selected comparative per share data.........................................................................33
Comparative per share market price and
distribution/dividend information.........................................................................34
RISK FACTORS.......................................................................................................37
You cannot be assured that the merger and
related transactions will be completed....................................................................37
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..............................................................37
Prison Realty will no longer be paying 95% of
its taxable income as dividends...........................................................................39
Prison Realty will pay higher federal income
taxes after the merger and related transactions
and the Prison Realty restructuring.......................................................................39
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.....................................................................................39
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................................................................................................41
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......................................................................................................41
Prison Realty's business and operations will
be adversely affected if it cannot attract and
retain key personnel......................................................................................42
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....................................................................................42
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................................................................................43
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......................................................................................................44
THE SPECIAL MEETING................................................................................................45
Date, time and place........................................................................................45
Matters to be considered at the meeting.....................................................................45
Record date and outstanding shares..........................................................................45
Quorum......................................................................................................45
Voting method and proxies...................................................................................46
Revocability of proxy.......................................................................................46
Required vote...............................................................................................46
Solicitation of proxies.....................................................................................47
Cross conditionality of proposals...........................................................................47
Abstentions.................................................................................................47
Dissenters' rights..........................................................................................48
INFORMATION ABOUT PRISON REALTY....................................................................................49
General.......................................................................................................49
Business and operations.......................................................................................49
Share ownership...............................................................................................51
Recent developments...........................................................................................51
Litigation ...................................................................................................69
Business of Prison Realty following the
completion of the merger and related
transactions and the Prison Realty restructuring............................................................72
Qualification of Prison Realty as a REIT for 1999.............................................................83
INFORMATION ABOUT CCA..............................................................................................100
General.......................................................................................................100
Business and operations.......................................................................................100
Competition...................................................................................................100
Employees and labor matters...................................................................................101
Legal proceedings.............................................................................................101
Ownership of CCA Capital Stock................................................................................101
Distribution policy...........................................................................................103
Management's discussion and analysis of
financial condition and results of operations of
CCA.........................................................................................................103
THE MERGER AND RELATED TRANSACTIONS
AND THE PRISON REALTY
RESTRUCTURING.................................................................................................117
General.....................................................................................................117
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Background of the proposed Prison Realty
restructuring transactions................................................................................117
Prison Realty's reasons for the proposed
restructuring transactions; Recommendation of
the Prison Realty board of directors......................................................................138
CCA's reasons for the merger;
Recommendation of CCA's board of
directors.................................................................................................143
Interests of certain persons in the merger and
related transactions and the Prison Realty
restructuring.............................................................................................146
Ownership of Prison Realty common stock.....................................................................150
Regulatory filings and approvals required for the
merger and related transactions and the Prison
Realty restructuring......................................................................................153
Description of the restructuring of Prison
Realty....................................................................................................154
Distribution policies.......................................................................................160
PROPOSAL TO APPROVE THE MERGER AND
RELATED TRANSACTIONS...............................................................................................161
General ....................................................................................................161
Effective time .............................................................................................161
Terms of the merger.........................................................................................161
The agreement and plan of merger............................................................................161
Rights of dissenting shareholders of CCA....................................................................176
Stock exchange listing of Prison Realty common
stock.....................................................................................................178
Federal securities law consequences; Resale
restrictions .............................................................................................178
Accounting treatment of the merger..........................................................................179
Prison Realty capital stock.................................................................................179
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.............................................................................................180
Material federal income tax consequences
of the merger.............................................................................................191
Purchase of CCA common stock from Baron and
Sodexho...................................................................................................192
Recommendation of the CCA board.............................................................................194
ADDITIONAL INFORMATION REGARDING
PRISON REALTY.................................................................................................195
Management's discussion and analysis of
financial condition and results of operations of
Prison Realty...............................................................................................195
Business objectives and strategies............................................................................229
Leases and other contractual relationships with
CCA.........................................................................................................233
Government regulation.........................................................................................235
Insurance.....................................................................................................237
Employees.....................................................................................................237
Legal proceedings.............................................................................................237
Competition...................................................................................................238
Properties....................................................................................................243
Directors and executive officers..............................................................................246
Compensation of Prison Realty's directors.....................................................................247
Executive compensation........................................................................................253
Certain relationships and related transactions................................................................256
OTHER MATTERS......................................................................................................256
LEGAL MATTERS......................................................................................................256
EXPERTS............................................................................................................256
WHERE YOU CAN FIND MORE
INFORMATION...................................................................................................257
INDEX TO FINANCIAL STATEMENTS......................................................................................F-1
APPENDICES.........................................................................................................
Agreement and Plan of Merger Appendix A
Form of Articles of Amendment
and Restatement 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
1
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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 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 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 $8,000,000 in addition to 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 shareholders 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 the 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
2
<PAGE> 11
$13.8 million in shares issued to employee and management shareholders
and Sodexho in the merger), in addition to the warrants to purchase
$3.0 million in shares of Prison Realty common stock issued to Baron.
The shares of Prison Realty common stock received by CCA shareholders
who are wardens of the facilities operated by CCA will be subject to
forfeiture under a restricted stock plan, and shares received by CCA
shareholders who are management of CCA or Prison Realty will be subject
to certain contractual resale prohibitions. Shares received by
executive officers and significant shareholders 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.
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
stockholders 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.
In the event 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
3
<PAGE> 12
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 companies' boards of directors have
maintained that a combination of Prison Realty and CCA provides a
simplified and more stable corporate and financial structure that will
create
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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.
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.
Moreover, the restructuring 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. The restructuring also 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
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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 has begun a search for a new chief executive
officer and will begin a search for a new chief financial officer.
Several candidates have been identified and interviews have begun. The
selection process will be finalized as expeditiously as possible.
Doctor R. Crants, the current chief executive officer of Prison Realty,
will resign or be terminated once a new chief executive officer has
been appointed. The search for the new chief financial officer will be
undertaken after the selection of a new chief executive officer. Thomas
W. Beasley, the current chairman of Prison Realty's board of directors
and a founder of Prison Realty's predecessor company, will continue to
serve as chairman.
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 transaction 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 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 shareholders 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
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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 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 tax is currently estimated to be as
much as $100.0 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.
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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 __ 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 __.
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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 to which we have referred you. See "Where You Can Find More
Information" on page ___. 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 17, 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 17, 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 17, 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
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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 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. 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. In
the event 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 issue shares of its series B convertible preferred stock having a
value of approximately $150.0 million, to the holders of its common stock. 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
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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'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
___.
ADDITIONAL INFORMATION
For additional information concerning Prison Realty, see the section
entitled "Information About Prison Realty" on page ___. 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.
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 17, 2000, CCA had contracts to manage 43
correctional and detention facilities with a total design capacity of 45,243
beds, of which 41 facilities with a total design capacity of 39,553 beds were in
operation. At July 17, 2000, CCA's system-wide occupancy level was approximately
75.6%. 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 17, 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.
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ADDITIONAL INFORMATION
For additional information concerning CCA, see the section entitled
"Information About CCA" on page ___; and the section entitled "Information About
Prison Realty - Recent developments" on page ___.
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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 into a newly formed, wholly owned subsidiary of Prison Realty.
Shareholders of CCA at the time of the merger other than Prison Realty will
receive shares of Prison Realty common stock valued at approximately $10.6
million 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."
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
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$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 indicated to Sodexho that it was willing
to satisfy its previous contractual obligation 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 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.
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. 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. 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 shareholders 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 Sodexho will not be subject to any contractual
restrictions on transfer.
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 (or 7.7 million shares, equal to approximately 5.1%
of Prison Realty's common stock, on a fully diluted basis, assuming a Prison
Realty common stock price of $3.50 per share) (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), in addition to
warrants to purchase an aggregate of $3.0 million of shares of Prison Realty
common stock. 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 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) (including $8.0 million in shares issued to Baron
prior to the merger and $13.8 million in shares issued to
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employee and management shareholders and Sodexho in the merger), in addition to
warrants to purchase an aggregate of $3.0 million of shares of Prison Realty
common stock.
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 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.
Shares received by executive officers and significant shareholders of
CCA 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 ____.
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 shareholder 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 th 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;
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- 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 shareholders 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;
- 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 ____ and "Proposal to Approve the Merger and Related
Transactions-- The agreement and plan of merger" on page___.
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 ___.
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.
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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 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
19
<PAGE> 28
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 2000.
Prison Realty has begun a search for a new chief executive officer and
will begin a search for a new chief financial officer. Several candidates have
been identified and interviews have begun. The selection process will be
finalized as expeditiously as possible. Doctor R. Crants, the current chief
executive officer of Prison Realty, will resign or be terminated once a new
Prison Realty chief executive officer has been appointed. The search for the new
chief financial officer will be undertaken after the selection of a new chief
executive officer. Thomas W. Beasley, the current chairman of Prison Realty's
board of directors, will continue to serve as chairman.
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 - Operations and management of Prison Realty
after the restructuring" on page _____.
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. 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 _____.
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 in the merger
Prison Realty common stock. 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
20
<PAGE> 29
Restructuring - Material federal income tax consequences of the merger" on page
____.
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 shareholders 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;
- 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;
- 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;
- 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 __.
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:
- represents 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;
- 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 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;
21
<PAGE> 30
Recommendation of CCA's board of directors" on page __.
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 __ and the section entitled "The Merger and
Related Transactions and the Prison Realty Restructuring" on page __.
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 and the section entitled "The Merger
and Related Transactions and the Prison Realty Restructuring" on page __.
RECOMMENDATIONS OF THE CCA BOARD
The board of directors of CCA believes that the merger and related
transactions are in your best interest and
22
<PAGE> 31
recommends that you vote for approval of the merger and related transactions
described in this joint proxy statement/prospectus.
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 and warrants to purchase an
aggregate of $3.0 million of shares of its common stock immediately
prior to the completion of the merger as consideration for the purchase
of shares of CCA common stock held by Baron. 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;
- Mr. Beasley will continue to serve as the chairman of the board of
directors of Prison Realty upon completion of the restructuring;
- 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 $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
23
<PAGE> 32
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 executives of Prison Realty and 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 __.
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 __,
2000. You will have one vote for each share of CCA common stock that you owned
on July __, 2000. 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 __.
As of July __, 2000, directors and executive officers of CCA and their
affiliates, including Baron and Sodexho, held approximately 67% of the voting
power of CCA. The directors and executive 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. The vote of these
shares in favor of the merger agreement and the related transactions together
with the affirmative vote of the
24
<PAGE> 33
shares of CCA common stock held by Prison Realty, will result in the affirmative
vote of approximately 59% of the shares of CCA voting common stock entitled to
vote at the CCA special meeting, or approximately 74% of the vote needed to
approve the merger agreement and the related transactions.
This joint proxy statement/prospectus may also be used as a prospectus
for the reoffer and resale by Baron, of up to $11,000,000 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.
25
<PAGE> 34
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,
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
26
<PAGE> 35
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
(CONTINUED)
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. 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, 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.
27
<PAGE> 36
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 ....................................... (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 ................................. 1,257,834
</TABLE>
28
<PAGE> 37
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 transaction, 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 transaction, 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 transaction, 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 contained elsewhere herein.
29
<PAGE> 38
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 ............................... 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 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 (loss) income 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>
30
<PAGE> 39
<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>
31
<PAGE> 40
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 transaction, 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 transaction, 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)
========= =========
<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 ......................... 465,491 419,153
Stockholders' equity ...................... (180,790) (243,235)
</TABLE>
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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>
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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 17, 2000)............... 3.25 2.38 0.00 (expected)
</TABLE>
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<PAGE> 43
OLD PRISON REALTY
<TABLE>
<CAPTION>
Old Prison Realty Per Share Cash
Sales Prices Dividend Paid
------------------------ ---------------
High Low
<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>
OLD CCA
<TABLE>
<CAPTION>
Old CCA Per Share Cash
Sales Prices Dividend Paid
------------------------ --------------
High Low
<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 July __, 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 $______. 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
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<PAGE> 44
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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<PAGE> 45
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.
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<PAGE> 46
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 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
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<PAGE> 47
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
shareholders 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 shareholders 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."
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
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<PAGE> 48
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. Doctor
R. Crants, the current chief executive officer of Prison Realty, will resign
from this position or be terminated upon the appointment of a new chief
executive officer. Mr. Crants also currently serves as a member of the board of
directors and chief executive officer of CCA. He will resign from these
positions as well in connection with his resignation or termination as Prison
Realty's chief executive officer. 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 or termination from his positions with
Prison Realty as a result of Mr. Crants' existing 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 or 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,
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<PAGE> 49
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, including Vida H.
Carroll and J. Michael Quinlan who hold shares of CCA common stock, 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.
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
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<PAGE> 50
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 has begun a search for a
new chief executive officer. Several candidates have been identified and
interviews have begun. The selection process will be finalized as expeditiously
as possible. Doctor R. Crants, the current chief executive officer of Prison
Realty, will resign or be terminated once a new Prison Realty chief executive
officer has been appointed. 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.
Thomas W. Beasley, the current chairman of Prison Realty's board of directors,
will continue to serve as chairman. 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.
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<PAGE> 51
- 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.
- 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
43
<PAGE> 52
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.
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 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--Litigation."
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 shareholders.
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<PAGE> 53
THE SPECIAL MEETING
DATE, TIME AND PLACE
The special meeting will be held on __________, September ____, 2000
at the Loews Vanderbilt Plaza Hotel, 2100 West End Avenue, Nashville, Tennessee,
at 11:00 a.m., 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
__________, July __, 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 __________ 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.
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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 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 the
affirmative vote of the holders of 80% of all outstanding shares of CCA class A
and class B stock (plus the separate approval of Baron) at the close of
business on the record date.
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As of the record date, directors and executive officers of CCA and
their affiliates, including Baron and Sodexho, beneficially owned and were
entitled to vote approximately 6,899,064 shares of CCA voting common stock,
which represented 67% of the shares of CCA voting common stock outstanding on
the CCA 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. The vote of these shares, together with shares of CCA
common stock held by Prison Realty, in favor of the transactions will result in
the affirmative vote of approximately 59% of the shares of CCA voting common
stock entitled to vote at the CCA special meeting, or approximately 74% of the
votes needed to approve the transactions.
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 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.
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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 17, 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 17, 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 17, 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
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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 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 17, 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 17, 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 17, 2000, Prison Realty has
deferred the payment of $13.3 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
17, 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 17, 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."
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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."
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 shareholders 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
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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
shareholder 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 C corporation commencing
with its 2000 taxable year;
- raise up to $200.0 million in a common stock rights offering to
existing shareholders, 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;
- 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
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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 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
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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 shareholder 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
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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.
- 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
shareholder 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 shareholders, 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.
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- 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 (pound)45.0 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 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.
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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 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.
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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 will submit these
waivers to 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 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
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Forrest Bank facility; and (iii) the sale-leaseback of Prison Realty's
headquarters. Under the terms of the waiver and 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 shareholder
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 this proxy statement to Prison
Realty's shareholders on or before August 1, 2000.
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- 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.
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
this 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
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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; (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
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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 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 did 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
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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 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.
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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.
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$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, 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
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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 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.
- 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 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
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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.
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
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modified by the 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 begin 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
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.
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LITIGATION
SHAREHOLDER LITIGATION
On December 29, 1999, a purported class action lawsuit was filed on behalf
of the shareholders 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 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
shareholders 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
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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
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
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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 shareholders. 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 shareholder 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 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.
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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 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.
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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.
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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 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 OWNED,
CONTRACTING FACILITY MANAGED
LOCATION CITY/COUNTY FACILITY PARTIES EXPIRATION BEDS AND/OR LEASED
-------- ----------- -------- ----------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
DOMESTIC
Arizona Eloy Eloy Detention Center U.S. Department of February 28, 2002 1,500 Owned and
Justice/FBOP managed
Florence Central Arizona U.S. Marshals Service November 3, 2000 2,304 Owned and
Detention Center ("USMS") managed
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
</TABLE>
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<TABLE>
<CAPTION>
NO. OF OWNED,
CONTRACTING FACILITY MANAGED
LOCATION CITY/COUNTY FACILITY PARTIES EXPIRATION BEDS AND/OR LEASED
-------- ----------- -------- ----------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Florence Florence Correctional State of Hawaii June 30, 2001 1,600 Owned and
Facility managed
Pascua Hagui Tribe of (1)
Arizona
California California City California City California City, California October 31, 2024 2,304 Owned and
Correctional Facility managed
USMS November 15, 2000
FBOP November 9, 2003
Live Oak Leo Chesney Cornell Corrections(2) February 28, 2002 240 Owned and leased
Correctional Facility
Mendota Mendota Correctional (3) (3) 1,024 Owned and
Facility managed
San Diego San Diego Correctional Immigration and December 31, 2000 1,200 Owned, managed
Facility Naturalization Service and leased(4)
("INS")
Colorado Burlington Kit Carson Correctional Colorado Department of June 30, 2001 768 Owned and
Facility Corrections ("DOC") managed
City of Burlington October 31, 2003
USMS (5)
Las Animas Bent County Bent County, Colorado August 17, 2018 700 Owned and
Correctional Facility managed
Colorado DOC
Walsenburg Huerfano County Huerfano County October 31, 2122 752 Owned and
Correctional Correctional Facilities managed
Center Authority
Colorado DOC
Georgia Alamo Wheeler Correctional Georgia DOC June 30, 2001 1,524 Owned and
Facility managed
McRae McRae Correctional (3) (3) 1,524 Owned and
Facility managed
Millen Millen Correctional (3) (3) 1,524 Owned and
Facility managed
Nicholls Coffee Correctional Georgia DOC June 30, 2001 1,524 Owned and
Facility managed
Stewart County Stewart County (3) (3) 1,524 Owned and
Correctional Facility managed
Indiana -- Northeast Indiana (3) (3) 146 Owned and
Youth Village managed
Kansas Leavenworth Leavenworth Detention USMS December 31, 2000 483 Owned and
Center managed
Kentucky Beatyville Lee Adjustment Center Commonwealth of December 11, 2001 756 Owned and
Kentucky managed
</TABLE>
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<TABLE>
<CAPTION>
NO. OF OWNED,
CONTRACTING FACILITY MANAGED
LOCATION CITY/COUNTY FACILITY PARTIES EXPIRATION BEDS AND/OR LEASED
-------- ----------- -------- ----------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Louisville River City Correctional Jefferson County, Kentucky June 30, 2000 363 Owned and
Center managed
St. Mary Marion Adjustment Commonwealth of December 7, 2001 856 Owned and
Center Kentucky managed
Wheelwright Otter Creek Commonwealth of December 7, 2001 656 Owned and
Correctional Center Kentucky managed
Minnesota Appleton Prairie Correctional Appleton Prison Corp. July 31, 2009 1,338 Owned and
Facility managed
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 Owned and
Correctional Center Correctional Authority managed
Wisconsin DOC December 22, 2000
Montana Shelby Crossroads Correctional Montana DOC August 31, 2003 512 Owned and
Center managed
Montana DOC June 30, 2002
Nevada Las Vegas Southern Nevada State of Nevada, Nevada June 30, 2015 500 Owned, managed
Women's Correctional Dept. of Prisons and leased(6)
Facility
New Mexico Estancia Torrance County Torrance County, New October 31, 2010 910 Owned and
Detention Facility Mexico (management managed
services)
Torrance County, New October 31, 2010
Mexico
Lincoln County, New (1)
Mexico
Valencia County, New (1)
Mexico
USMS (5)
Grants New Mexico Women's New Mexico DOC June 30, 2001 596 Owned and
Correctional Facility managed
Milan Cibola County Cibola County, New April 16, 2001 1,072 Owned and
Corrections Center Mexico managed
State of Idaho July 15, 2000
</TABLE>
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<TABLE>
<CAPTION>
NO. OF OWNED,
CONTRACTING FACILITY MANAGED
LOCATION CITY/COUNTY FACILITY PARTIES EXPIRATION BEDS AND/OR LEASED
-------- ----------- -------- ----------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
State of Alaska June 30, 2001
FBOP November 9, 2003
North Carolina Bayboro Pamlico Correctional North Carolina DOC September 1, 2003(7) 528 Owned, managed
Institution and leased(6)
Spruce Pine Mountainview State of North Carolina November 30, 2003(7) 528 Owned, managed
Correctional Institution and leased(6)
Ohio Cincinnati Queensgate Hamilton County, Ohio(2) March 1, 2000 850 Owned and
Correctional Facility leased(6)
Youngstown Northeast Ohio Government of District of September 8, 2000 2,016 Owned and
Correction Center Columbia managed
Oklahoma Cushing Cimarron Correctional Oklahoma DOC June 30, 2001 960 Owned and
Facility managed
Holdenville Davis Correctional Oklahoma DOC June 30, 2001 960 Owned and
Facility managed
Sayre North Fork Correctional Wisconsin DOC December 22, 2000 1,440 Owned and
Center managed
State of Hawaii June 30, 2001
Sayre Industrial April 30, 2018
Authority
Watonga Diamondback Watonga Economic July 31, 2018 1,440 Owned and
Correctional Facility Development Authority managed
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 Owned and
Detention Center managed
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 Owned and
and Shelby County, managed
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
</TABLE>
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<TABLE>
<CAPTION>
NO. OF OWNED,
CONTRACTING FACILITY MANAGED
LOCATION CITY/COUNTY FACILITY PARTIES EXPIRATION BEDS AND/OR LEASED
-------- ----------- -------- ----------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Idaho Dept. of Juvenile November 30, 2000
Corrections
Whiteville Whiteville Correctional Wisconsin DOC December 22, 2000 1,536 Owned and
Facility managed
Texas Bridgeport Bridgeport Pre-Parole Texas Dept. of Criminal August 31, 2000 200 Owned and
Transfer Facility Justice managed
Dallas Community Education Community Education August 14, 2008 -- Owned and
Partners - Dallas Partners(2) Leased
Eden Eden Detention Center City of Eden April 13, 2011 1,225 Owned and
managed
FBOP (5)
Houston Community Education Community Education June 30, 2008 -- Owned and
Partners - Houston Partners(2) Leased
Houston Houston Processing INS September 30, 2000 411 Owned and
Center managed
Laredo Laredo Processing INS September 30, 2000 258 Owned and
Center managed
Laredo Webb County Webb County October 1, 2018 480 Owned and
Detention Facility managed
USMS February 8, 2001
Mineral Wells Mineral Wells Pre- Texas Dept. of Criminal August 31, 2000 2,103 Owned and
Parole Transfer Facility Justice managed
Taylor T. Don Hutto Williamson County, Texas January 21, 2003 480 Owned and
Correctional Center managed
TDCJ October 31, 2000
USMS (5)
District of Washington Correctional Treatment District of Columbia March 15, 2017 866 Owned, managed
Columbia Facility and leased(6)
INTERNATIONAL
United Kingdom Salford HMP Forrest Bank HMP Secretary of State for January 25, 2025 800 Owned, managed
the Home Department and and leased(6)
Agecroft Prison
Management, Ltd.
</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.
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(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 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 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.
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<PAGE> 88
<TABLE>
<CAPTION>
CONTRACTING NO. OF OWNED
----------- FACILITY MANAGED
LOCATION CITY FACILITY PARTIES EXPIRATION BEDS AND/OR 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 March 18, 2003 1,538 Managed
Center Safety and Corrections
Mississippi Greenwood Delta Correctional Delta Correctional October 25, 2001 1,016 Managed
Facility Authority
Woodville Wilkinson County Wilkinson County January 5, 2003 900 Managed
Correctional Center Industrial 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>
JJFMSI.
<TABLE>
<CAPTION>
CONTRACTING NO. OF OWNED
----------- FACILITY MANAGED
LOCATION CITY FACILITY PARTIES EXPIRATION BEDS AND/OR LEASED
-------- ---- -------- ----------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
DOMESTIC
Florida Brooksville Hernando County Jail Hernando County, Florida October 1, 2010 302 Managed
USMS (2)
Lake City Lake City Correctional State of Florida June 30, 2001 350 Managed
Center Correctional Privatization
Commission
</TABLE>
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<PAGE> 89
<TABLE>
<CAPTION>
CONTRACTING NO. OF OWNED
----------- FACILITY MANAGED
LOCATION CITY FACILITY PARTIES EXPIRATION BEDS AND/OR LEASED
-------- ---- -------- ----------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Lecanto Citrus County Citrus County, Florida September 30, 2000 400 Managed
Detention Facility
Polk County, Florida (1)
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 Village Services Corporation
State of Delaware June 30, 2001
Indianapolis Marion County Jail II Marion County, Indiana November 20, 2001 670 Managed
Madison County, Indiana (1)
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 Center Justice Authority
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, September 19, 2000 576 Managed
Tennessee
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 Metropolitan Government May 31, 2002 1,092 Managed
County Detention of 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> 90
<TABLE>
<CAPTION>
CONTRACTING NO. OF OWNED
----------- FACILITY MANAGED
LOCATION CITY FACILITY PARTIES EXPIRATION BEDS AND/OR LEASED
-------- ---- -------- ----------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Nevada Dept. of Human June 30, 2001
Resources Division of Child
and Family Services
USMS (2)
Short term contracts: (1)
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, managed
Correctional Centre Excor Investments PTY, and leased(6)
Ltd.
Wooroloo Acacia Prison State of Western Australia 5 years from opening 750 Managed
and CCAustralia PTY, Ltd. date (scheduled to be
November 1, 2000)
United Kingdom Redditch HMP Blakenhurst HMP Secretary of State for May 25, 2001 850 Managed
the Home Department and
UKDS Ltd.
</TABLE>
---------------
(1) Contract continues until either party provides the other with 30 days
written notice of termination.
(2) Contract expires when funding is no longer allocated by U.S. Congress.
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<PAGE> 91
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 regular subchapter C corporation. Because 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 are 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
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<PAGE> 92
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 shareholders 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 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
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<PAGE> 93
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 shareholders
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> 94
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.,
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<PAGE> 95
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
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
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<PAGE> 96
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.
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)
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<PAGE> 97
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.
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<PAGE> 98
Interest received under an installment contract for the 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.
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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 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 satisfied 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.
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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
shareholders 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 shareholders 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 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 will distribute approximately $150.0
million of its newly issued series B convertible preferred stock to its common
shareholders. 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 shareholders 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
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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 shareholders 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, amounting to
approximately $100.0 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 shareholders 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 shareholders 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 shareholders 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.
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
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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
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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 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.
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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 ranking on a parity with the series B convertible
preferred stock, a liquidating distribution per share, out of assets legally
available for distribution to shareholders, 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 the common stock who receive 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.
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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
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 shareholder 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 shareholder'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%.
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 shareholder 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
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return of capital, which will reduce (but not below zero) each shareholder'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 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%. 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 shareholder 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 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%. 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
shareholder by reason of the constructive ownership rules of Code Section 318
(pursuant to which a shareholder 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 shareholder 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 shareholder's basis in its shares (reduced for any
amounts treated as a non-taxed portion of extraordinary dividends or a return
of capital) 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 shareholder's basis in the
shares of Prison Realty common stock received upon conversion will be equal to
the shareholder's adjusted basis in the shares so converted, and, provided that
the shares of series B convertible preferred stock were held as a
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capital asset, the holding period for the shares of Prison Realty common stock
received will include the holding period for the shares converted. A
shareholder 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
shareholder'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 shareholder may be subject to 31% backup
withholding with respect to any reportable payments made to the shareholder
pursuant to the REIT distribution or upon any sale of Prison Realty stock or
series B convertible preferred stock. A shareholder 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 shareholder 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 owns
approximately 8.8% of the total number of outstanding shares of Prison Realty
common stock and thus will receive in the distribution Series B preferred stock
valued at approximately $13.2 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 $3.96 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 17, 2000, CCA had contracts to manage or plans to develop 43
correctional and detention facilities with a total design capacity of 45,243
beds, of which 41 facilities with a total design capacity of 39,553 beds were in
operation. At July 17, 2000, CCA's system-wide occupancy level was approximately
75.6%. 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 17, 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.
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EMPLOYEES AND LABOR MATTERS
At June 30, 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 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 17, 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
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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 10,330,454 shares of CCA common stock outstanding as of
July 17, 2000.
<TABLE>
<CAPTION>
Number of Shares of CCA
Common Stock Beneficially
Name of Beneficial Owner Owned as of July 17, 2000 Percentage of Class(1)
------------------------ ------------------------- ----------------------
<S> <C> <C>
Prison Realty Trust, Inc. 1,038,793(2) 10.0
10 Burton Hills Boulevard
Nashville, Tennessee 37215
Baron Capital Group 1,749,532 16.9
767 Fifth Avenue, 49th Floor
New York, New York 10153
Sodexho Alliance, S.A 1,749,532 16.9
31 Rue Cardinet
75017, Paris France
CFE, Inc. (GECC) and 546,729(3) 5.0
Bank of America, N.A
Lucius E. Burch, III (director) 0 0
J. Michael Quinlan (director) 200,000 1.93
Jean-Pierre Cuny (director) 1,749,532(4) 16.9
Mitch Rubin (director) 1,749,532(5) 16.9
R. Clayton McWhorter (director) 0 0
Doctor R. Crants (director) 300,000(6) 2.9
Darrell K. Massengale 200,000 1.93
Todd Mullenger 200,000 1.93
David L. Myers 200,000 1.93
W. Brent Turner 200,000 1.93
Gay E. Vick, III 200,000 1.93
All directors and executives as a group (14 persons) 6,899,064 66.8%
</TABLE>
(1) Consists of 9,349,061 shares of Class A common stock and 981,393 shares of
Class B common stock.
(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) Comprised of shares of Class A common stock purchased from D. Robert Crants,
III and Michael W. Devlin
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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."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF CCA
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 17, 2000, CCA had contracts to manage 43
correctional and detention facilities with an aggregate design capacity of
45,243 beds, of which 41 facilities with a total design capacity of 39,553 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
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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.
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.
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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 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.
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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 17, 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 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
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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
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.
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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
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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.
Lease expense. 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.
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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 but 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.
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 current 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 17, 2000, $143.8 million of lease payments were accrued but unpaid
under the original terms of the CCA leases.
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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 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.
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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, 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.
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 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.
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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 17,
2000, $143.8 million of lease payments were accrued but unpaid under the
original terms of the CCA leases.
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In addition, CCA expects that, in connection with the merger and related
transactions and the Prison Realty restructuring, the CCA leases will be
canceled.
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 17, 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 17, 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 17, 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
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merger and related transactions and the Prison Realty restructuring, this
agreement will be canceled.
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--Recent developments." 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
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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
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
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 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 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
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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 ___ of this
joint proxy statement/prospectus. The rates on the leases between CCA and Prison
Realty were set with the intention that the public shareholders 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 shareholders. 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 shareholder 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
shareholder 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.
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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 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
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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 shareholders, 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 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
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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 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 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
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Prison Realty and the 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 shareholder 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.
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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
shareholders 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 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
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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 conversion
price of the convertible preferred stock and warrants in the event certain
payments made by Prison Realty in connection with certain shareholder 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 shareholder
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
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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 shareholders 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 shareholders 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 shareholder 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 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 shareholder 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
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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 Internal Revenue Service 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
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excess of Old CCA's actual accumulated earnings 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 shareholder vote on Prison Realty's determination not to elect REIT
status. If shareholder 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 shareholder 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 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 shareholders. 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
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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 shareholders. 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 merger and the transactions contemplated thereby and resolved to recommend
the same for approval by the shareholders 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 shareholders 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 shareholders 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
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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, 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
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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 Fortress/Blackstone securities
purchase agreement amendment.
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 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.
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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 forth 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
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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 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 shareholders, 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
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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 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 is 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 shareholder
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
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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 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
shareholder litigation
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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 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.
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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,
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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 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
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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 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 shareholders. 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.
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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 shareholders 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
shareholders.
- 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.
- 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 the Company and a better
alternative than seeking relief under the federal bankruptcy
laws.
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- 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 shareholders.
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 likely that Pacific Life would be
unwilling to 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 shareholder
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.
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- 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.
- 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.
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- 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 shareholders 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.
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
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commencing with its 2000 taxable year. The 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 shareholders.
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 shareholders 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 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.
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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
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concluded that it was not a viable alternative for CCA to
continue making payments to Prison Realty under the arrangements
as currently in effect.
- 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 connection with 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
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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 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
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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.
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
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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. 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.
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. 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
Doctor R. Crants, the current chief executive officer of Prison Realty,
will resign from this position or be terminated upon the appointment of a new
chief executive officer. Mr. Crants also currently serves as a member of the
board of directors and chief executive officer of CCA. He will resign from these
positions as well in connection with his resignation or termination as Prison
Realty's chief executive officer.
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 chairman of the Prison Realty board and, following
the appointment of a new chief executive officer, will resign or be terminated
as the chief executive officer of Prison Realty. In connection with Doctor R.
Crants' agreement to resign or be terminated, 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 will 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
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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.
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 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 and
Devlin. Prison Realty expects to pay $600,000 to Doctor R. Crants for the CCA
shares acquired by him from Messrs. Crants, III and
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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.
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 17,
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 7.6 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, 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.
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Ownership percentages in the following table were computed in compliance with
regulations under the Exchange Act and do not necessarily reflect the "fully
diluted" ownership percentages discussed elsewhere in this document.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF PRISON
REALTY COMMON STOCK
NUMBER OF SHARES OF PRISON EXPECTED TO BE BENEFICIALLY
REALTY COMMON STOCK OWNED UPON CONSUMMATION
BENEFICIALLY OWNED AS OF OF RESTRUCTURING
JULY 17, 2000(1) 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 12,791,404(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
Doctor R. Crants........................ 1,460,708(9) 1.2 1,460,708(9) 1.1
J. Michael Quinlan...................... 427,745(10) * 537,745(10) *
C. Ray Bell............................. 168,281(11) * 168,281(11) *
Jean-Pierre Cuny........................ 26,250(12) * 26,250(12) *
Ted Feldman............................. 33,614(13) * 33,614(13) *
Joseph V. Russell....................... 154,771(14) * 154,771(14) *
Charles W. Thomas....................... 80,017(13) * 80,017(13) *
All executive officers and directors as
a group............................... 4,906,024(15) 4.1 5,126,024(15) 4.0
</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 19, 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. As a result, the ownership
percentages do not necessarily reflect the "fully diluted" ownership percentages
discussed elsewhere in this document. Based on 126,061,663 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 7.6 million shares of Prison Realty common stock in the merger
transactions. Does not include an aggregate of approximately 860,000 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 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
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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.
(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 375,000 shares of Prison Realty common stock issuable upon the
exercise of vested options and 43,163 shares of Prison Realty common stock held
in a 401(k) plan.
(10) 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.
(11) 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.
(12) 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.
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(13) Includes 20,000 shares of Prison Realty common stock issuable upon the
exercise of vested options.
(14) 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.
(15) Includes an aggregate of 548,126 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;
- 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.
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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 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 22.8 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 20.0 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.
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
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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 $7.6 million in 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. 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 shareholders, 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.
Non-shareholder constituencies. The proposed amended and restated
charter of Prison Realty contains a provision authorizing, but not requiring,
the Prison Realty board of directors, when considering the effect of a potential
acquisition of control of Prison Realty, to consider the effect of such action
upon constituencies in addition to Prison Realty's shareholders. The current
Prison Realty charter contains no such provision.
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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 seven 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 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
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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 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.
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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 2000.
Prison Realty has begun a search for a new chief executive officer, as
well as a new chief financial officer. Several candidates have been identified
and interviews have begun. The selection process will be finalized as
expeditiously as possible. Doctor R. Crants, the current chief executive officer
of Prison Realty, will resign or be terminated once a new Prison Realty chief
executive officer has been appointed. The search for the new chief financial
officer will be undertaken after the selection of a new chief executive officer.
Thomas W. Beasley, the current chairman of Prison Realty's board of directors,
will continue to serve as chairman.
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 shareholders 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 shareholders in the foreseeable future, except for distributions that
may be required for Prison Realty to qualify as a REIT for 1999.
Termination of Prison Realty's status 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.
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Termination of Prison Realty's status 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 shareholders. 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 an ordinary subchapter C corporation.
As a result, distributions to the shareholders of Prison Realty will not be
deductible for purposes of computing Prison Realty's taxable income, and Prison
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 shareholders. 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
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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 approximately $100.0 million in federal income tax, interest and
penalties for its 1999 taxable year if REIT status is not elected. On the other
hand, distributions paid by Prison Realty to a corporate shareholder 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.
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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 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 number of shares of CCA
common stock outstanding common stock
prior to effective time, / Prison Realty / outstanding prior to
$20.0 million x excluding shares owned by Closing Price effective time, excluding
parties to the merger shares owned by parties
------------------------- to the merger
number of shares of CCA
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,
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immediately prior to the effective time, and assuming the Prison Realty Closing
Price was $3.50, the formula would be as follows:
$20.0 million x 52.76% / $3.50 / 5,449,997 = .55 shares of Prison
Realty common stock
Therefore, in this example, for each CCA share held immediately prior to the
effective time, a CCA shareholder would receive approximately .55 shares of
Prison Realty common stock.
If, however, the Prison Realty Closing Price was $2.00, the formula
would be as follows:
$20.0 million x 52.76% / $2.00 / 5,449,997 = .97 shares of Prison
Realty common stock
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
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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.
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
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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) the receipt of an opinion of such party's financial
advisor with respect to the merger; and (aa) 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 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
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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;
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- 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;
- 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.
CONDUCT OF BUSINESS PENDING THE MERGER; 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
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- 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 Hart-Scott-Rodino Antitrust Improvements Act of 1976
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;
- 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:
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- the required approvals of shareholders of Prison Realty and 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
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of the mergers, except as otherwise contemplated by the merger
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 shareholders 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.
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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 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 shareholders 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
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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 (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.
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.
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
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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 shareholders
of Prison Realty or any adjournment thereof, the approval of the
merger agreement by such shareholders is not obtained;
- 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
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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.
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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 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.
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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.
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.
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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 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 __.
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<PAGE> 186
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 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 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.
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<PAGE> 187
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 shareholders 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 articles of amendment and restatement to the Prison Realty charter
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.
COMMON STOCK
The holders of shares of Prison Realty common stock are entitled to one
vote per share on all matters voted on by holder of Prison Realty common stock,
including the election of directors,
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<PAGE> 188
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 and
Prison Realty series A preferred 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 articles of amendment and restatement to the Prison Realty charter
attached hereto as Appendix B.
COMPARISON OF THE RIGHTS OF SHAREHOLDERS 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
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<PAGE> 189
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 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. We
also encourage you to read the current charter and bylaws of Prison Realty. Each
of these documents may be obtained, without charge, by contacting Prison Realty
as described herein under "Where You Can Find More Information." You may also
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>
PRISON REALTY
(MARYLAND
CORPORATION)
(AFTER THE AMENDMENT AND RESTATEMENT OF THE CCA
PRISON REALTY CHARTER) (TENNESSEE CORPORATION)
<S> <C> <C>
Common stock The Prison Realty charter authorizes for The CCA charter authorizes for issuance
issuance 400.0 million shares of common 200.0 million shares of common stock. Two
stock. One class of common stock is issued classes of common stock, class A common
and outstanding. Holders are entitled to stock and class B common stock, are issued
one vote per 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.
Preferred stock The Prison Realty charter authorizes for The CCA charter authorizes for issuance 50.0
issuance 50.0 million shares of preferred million shares of preferred stock. The
stock. Prison Realty has 4.3 million shares board of directors may issue shares of
of preferred stock designated as series A, preferred stock in one or more series and
and will designate 8.0 million shares of may fix and determine the relative rights
preferred stock as series B. The terms of and preferences of the shares of any series
the series B convertible preferred stock so established.
are described in the section entitled
"Information About Prison Realty --
Qualification as a REIT for 1999."
Shareholder rights plan Under Maryland law, the board of directors Tennessee law does not contain a provision
of a corporation may set the terms and regarding shareholder rights plans, and CCA
conditions of rights, options or warrants has not adopted a shareholder rights plan.
under a 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
</TABLE>
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<PAGE> 190
<TABLE>
<CAPTION>
PRISON REALTY
(MARYLAND
CORPORATION)
(AFTER THE AMENDMENT AND RESTATEMENT OF THE CCA
PRISON REALTY CHARTER) (TENNESSEE CORPORATION)
<S> <C> <C>
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 contain The CCA charter does not contain provisions
provisions requiring specific actions based requiring specific actions based on its
on its status as a corporation. status as a corporation.
Distributions The Prison Realty charter does not require The CCA charter does not require the board
the board of directors to make distributions of directors to make distributions to its
to its shareholders. shareholders. 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.
Special meeting of Under Maryland law, a special meeting of Under Tennessee law, a special meeting of
shareholders shareholders may be called by the president, the shareholders may be called by the board
the board of directors or any other person of directors or any person authorized to do
specified in the charter or the bylaws. In so by the charter or bylaws.
addition, Maryland law provides that a
special meeting of shareholders may also be CCA's bylaws allow the board of directors,
called on the written request of the holders the chairman of the board or the president
of at least 25% of the votes entitled to be to call a special meeting of shareholders.
cast at the meeting, or such greater or CCA's bylaws also allow the holders of at
lesser percentages as the charter or bylaws least 20% of all the votes entitled to be
provide, of all the votes entitled to be cast at the meeting to call a special
cast at the meeting. meeting of shareholders.
Prison Realty's bylaws allow the president, CCA's bylaws provide that the board of
chairman of the board, a majority of the directors may fix a future date as the
board of directors or a committee of the record date for determining shareholders
board of directors which has been duly entitled to request a special meeting of
designated by the board of directors and shareholders and for determining
whose powers and authority, as provided in a shareholders entitled to notice of and to
resolution of the board of directors or the vote at a special meeting, provided that the
bylaws, include such power, to call a record date shall not be more than 70 days
special meeting of the shareholders. Prison before the meeting or action by the
Realty's bylaws also require the secretary shareholders. If no record date is fixed by
of the corporation to call a special meeting the board of directors, the record date
on the written request of the holders of at shall be at the close of business on the
least a majority of all the votes entitled next day preceding the day on which notice
to be cast at the meeting. is given, and the record date for the
determination of shareholders for any other
Maryland law provides that the board of purpose shall be at the close of business on
directors has the sole power to fix the the date on which the board of directors
record date for determining shareholders adopts the resolution relating thereto.
entitled to request a special meeting of
shareholders and for determining Neither Tennessee law, nor the CCA charter
shareholders entitled to notice of and to or bylaws, contain provisions regarding the
vote at the special meeting and to fix the determination of the date and time of a
date, time and place of the special meeting. special meeting of shareholders. The CCA
bylaws provide that a special meeting of
shareholders
</TABLE>
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<TABLE>
<CAPTION>
PRISON REALTY
(MARYLAND
CORPORATION)
(AFTER THE AMENDMENT AND RESTATEMENT OF THE CCA
PRISON REALTY CHARTER) (TENNESSEE CORPORATION)
<S> <C> <C>
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.
Action by written consent in Under Maryland law, shareholders may take Under Tennessee law, shareholders may take
lieu of shareholders meeting action by written consent in lieu of voting action by written consent in lieu of voting
at a shareholders meeting if an unanimous at a shareholders meeting. If all
written consent that sets forth the action shareholders entitled to vote on the action
is signed by each shareholder entitled to consent to taking the action without a
vote on the matter. 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 holders Tennessee law requires that holders of
of preferred stock, including the holders of outstanding shares of a class of stock are
the Prison Realty series B preferred stock entitled to vote as a separate voting group
issued in satisfaction of Prison Realty's on certain amendments to the charter that
remaining 1999 REIT distribution, to vote affect the standing of shares of that class.
separately on 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.
Advance notice provisions for The Prison Realty bylaws require that The CCA bylaws do not contain advance notice
director nominations and nominations of persons for election to the provisions.
other proposals -- annual board of directors and the proposal of
meeting business to be considered at an annual
meeting of shareholders must be made by the
board of directors or by a shareholder 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 shareholders,
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 provisions for The Prison Realty bylaws provide that the The CCA bylaws do not contain advance notice
director nominations and only business that can be conducted at provisions.
other special meetings of shareholders will be the
business set forth in the
</TABLE>
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<PAGE> 192
<TABLE>
<CAPTION>
PRISON REALTY
(MARYLAND
CORPORATION)
(AFTER THE AMENDMENT AND RESTATEMENT OF THE CCA
PRISON REALTY CHARTER) (TENNESSEE CORPORATION)
<S> <C> <C>
proposals -- special notice of the special meeting. The Prison
meetings 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 shareholder, 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.
Inspection of books and Under Maryland law, a shareholder may Under Tennessee law, a shareholder may
records inspect and copy, during usual hours of inspect and copy, during usual hours of
business, the corporation's bylaws, minutes business, the minutes of shareholders
of shareholders meetings, annual statements meetings, the charter, bylaws, annual report
of affairs and voting trust agreements on and certain other corporate records if the
file with the corporation and may view a shareholder submits a written request at
statement showing all securities issued by least five business days in advance. In
the corporation in the previous 12 months if addition, a shareholder who makes a demand
the shareholder submits a timely written in good faith and for a proper purpose, and
request. In addition, Maryland law allows who describes his or her purpose and the
persons who have been shareholders of the records he or she desires to inspect, may,
corporation for more than six months and who if the records are directly connected with
also own at least 5% of the outstanding that purpose, inspect and copy accounting
stock of any class of the corporation, if records, excerpts from the minutes of board
the shareholder submits a timely written meetings, records of certain actions taken
request, to inspect and copy the by committees and actions taken by the
corporation's books of account and stock shareholders or the board without a meeting.
ledger, obtain a written statement of the
corporation's affairs and obtain a list of
the corporation's shareholders.
Classified board of directors Maryland law provides that a corporation's Tennessee law provides that a corporation's
charter may divide its directors into board of directors may be divided into
classes with specified terms of office. The various classes with staggered terms of
Prison Realty charter does not provide for a office. The CCA charter does not provide
classified board of directors. for staggered terms of office.
Number of directors The Prison Realty charter provides that the The CCA bylaws provide that the number of
board of directors shall consist of the directors shall be fixed from time to time
number of directors determined by resolution by the board of directors, provided,
of the board of directors in accordance with however, that at no time shall the number be
the Prison Realty bylaws, except as less than three nor more than seven.
otherwise provided by the charter, provided Currently, there are six members of the CCA
that the number of directors shall never be board of directors.
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
</TABLE>
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<TABLE>
<CAPTION>
PRISON REALTY
(MARYLAND
CORPORATION)
(AFTER THE AMENDMENT AND RESTATEMENT OF THE CCA
PRISON REALTY CHARTER) (TENNESSEE CORPORATION)
<S> <C> <C>
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 that there The CCA bylaws do not require specific
be an independent committee composed solely committees. Currently, CCA has not
of independent directors, an Audit designated any committees of the board of
Committee, and a Compensation Committee. directors.
Special meetings of the board The Prison Realty bylaws provide that the The CCA bylaws provide that the chairman of
of directors chairman of the board, the chief executive the board, the president or any two
officer, the president or a majority of the directors may call a special meeting of the
directors then in office may call a special directors. Notice of such a meeting must be
meeting of the directors. Notice of such a delivered at least two days prior to the
meeting must be delivered by telephone at meeting.
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.
Action by the board of Under Maryland law, a majority of the board Under Tennessee law, a majority of the
directors of directors constitutes a quorum, and, if a number of prescribed directors constitutes a
quorum is present when a vote is taken, the quorum. Under Tennessee law, if a quorum
affirmative vote of a majority of the is present when a vote is taken, the
directors present is the act of the board. affirmative vote of a majority of the
Notwithstanding the foregoing, two-thirds of directors present is the act of the board.
the directors then in office shall be
necessary to constitute a quorum to approve The CCA bylaws specify that at no time shall
certain actions set forth in the bylaws, and a quorum consist of fewer than one-third of
such actions shall not be effective unless the number of directors then prescribed.
approved by two-thirds of the directors then
in office.
Standard of conduct for Under Maryland law, a director must perform Under Tennessee law, a director shall
directors his duties as a director in good faith, in a discharge his duties as a director in good
manner he reasonably believes to be in the faith, in a manner he reasonably believes to
best interest of the corporation and with be in the best interests of the corporation
the care that an ordinarily prudent person and with the care that an ordinarily prudent
in a like position would use under similar person in a like position would exercise
circumstances. An act of a director is under similar circumstances.
presumed to satisfy these standards.
Under Maryland law, an act of a director
relating to or affecting an acquisition of
control of the corporation may not be
subject to a higher duty or greater scrutiny
than is applied to any other act of a
director. The duty of directors to a
corporation does not require them to:
- 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
</TABLE>
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<PAGE> 194
<TABLE>
<CAPTION>
PRISON REALTY CCA
(MARYLAND (TENNESSEE CORPORATION)
CORPORATION)
(AFTER THE AMENDMENT AND
RESTATEMENT OF THE PRISON REALTY
CHARTER)
<S> <C> <C>
- 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.
Removal of directors Unless the charter provides otherwise, under Under Tennessee law, the shareholders may
Maryland law, if the shareholders of any remove directors with or without cause and,
class are entitled to separately elect one if so provided by the charter, directors may
or more directors, a director so elected may be removed for cause by a vote of a majority
not be removed without cause except by the of the entire board of directors. The CCA
affirmative vote of a majority of the shares bylaws allow the shareholders to remove
of that class. The Prison Realty charter directors with or without cause and allow a
provides that the shareholders may, at any majority of the number of directors then
time, remove a director, with or without prescribed to remove directors for cause.
cause, by an affirmative vote of majority of
shareholders entitled to vote in the
election of that director.
Director vacancies Under Maryland law, vacancies which result Under Tennessee law, vacancies may be filled
from the removal of a director may be filled by the shareholders, the board of directors
by the shareholders or by a majority of the or a majority of the remaining directors.
remaining directors, provided that if the
vacancy results from the removal of a
director elected by a particular class, only
the shareholders of that particular class or
a majority of the remaining directors
elected by that particular class may fill
the vacancy.
Indemnification The Prison Realty bylaws specifically The CCA bylaws provide that the corporation
require indemnification of directors and shall indemnify and advance expenses to each
officers who have been successful on the director and officer to the fullest extent
merits or otherwise in the defense of a permitted by Tennessee law.
proceeding, and the Prison Realty bylaws
provide that directors and officers shall be The CCA bylaws also provide that the
indemnified to the fullest extent permitted corporation may indemnify and advance
by Maryland law against any claim or expenses to any employee or agent of the
liability to which they become subject corporation, if the board of directors
because of their status unless it is determines that doing so is in the best
established that his or her act or omission interests of the corporation.
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
</TABLE>
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<TABLE>
<CAPTION>
PRISON REALTY CCA
(MARYLAND (TENNESSEE CORPORATION)
CORPORATION)
(AFTER THE AMENDMENT AND
RESTATEMENT OF THE PRISON REALTY
CHARTER)
<S> <C> <C>
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.
Limitation of liability Under Maryland law, director monetary Under Tennessee law, director liability may
liability to the corporation or its not be limited or eliminated for any breach
shareholders may not be limited or of the director's duty of loyalty to the
eliminated to the extent that it is proved corporation or its shareholders, for acts or
that the director or officer actually omissions not in good faith or which involve
received an improper benefit or profit in intentional misconduct or a knowing
money, property or services for the amount violation of law or for unlawful
of the benefit or profit in money, property distributions.
or services actually received or to the
extent that a judgment or other final The CCA charter provides that, to the
adjudication adverse to the director or fullest extent permitted by Tennessee law, a
officer is entered in a proceeding based on director of the corporation shall not be
a finding in the proceeding that the liable to the corporation or its
director's or officer's action, or failure shareholders for monetary damages for breach
to act, was the result of active and of 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
shareholders for money damages.
Amendments to the charter Under Maryland law, the charter of the Under Tennessee law, the charter of the
corporation may be amended if the board of corporation may be amended if the board of
directors adopts a resolution setting forth directors recommends the amendment to the
the proposed amendment, declares it shareholders and if the shareholders approve
advisable and directs the proposed amendment the amendment by a majority of the votes
be submitted to the shareholders entitled to entitled to be cast on the amendment by any
vote on the matter and the shareholders voting group with respect to which the
approve the amendment by the affirmative amendment would create dissenters' rights
vote of two-thirds of all the votes entitled and by a majority of the votes cast by all
to be cast on the matter. shareholders entitled to vote on the
amendment.
In addition, Maryland law allows the board
of directors of a corporation with a class The CCA charter reserves for the
of equity securities registered under the corporation the right to amend, alter,
Exchange Act which elects to be subject to change or repeal any provision contained in
certain provisions of the MGCL and which has the charter in the manner prescribed by
at least three independent directors, Tennessee law.
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;
</TABLE>
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<TABLE>
<CAPTION>
PRISON REALTY CCA
(MARYLAND (TENNESSEE CORPORATION)
CORPORATION)
(AFTER THE AMENDMENT AND
RESTATEMENT OF THE PRISON REALTY
CHARTER)
<S> <C> <C>
-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
shareholders 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.
Amendments to the bylaws The Prison Realty bylaws provide that the Under Tennessee law, the bylaws may be
board of directors shall have the exclusive amended or repealed, and new bylaws may be
power to adopt, alter or repeal any adopted, by the board of directors or the
provision of the bylaws and to make new shareholders of the corporation.
bylaws.
Consolidation; merger; share Under Maryland law, the corporation may be Under Tennessee law, the corporation may be
exchange or transfer of assets consolidated or merged, its shares may be merged or its shares may be exchanged if the
exchanged or its assets may be transferred board of directors adopts the plan of merger
if the board of directors adopts a or exchange and recommends that the
resolution which declares that the proposed shareholders approve the plan and if the
transaction is advisable and directs the shareholders approve the plan by a majority
matter be submitted to the shareholders of all the votes entitled to be cast on the
entitled to vote on the matter and the plan of merger or exchange.
shareholders approve the transaction by the
affirmative vote of two-thirds of all the CCA's charter provides that CCA shall not be
votes entitled to be cast on the matter. 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.
Dissenters' rights Under Maryland law, a shareholder may demand Under Tennessee law, a shareholder may
and receive payment of the fair value of the dissent from, and obtain payment of the fair
shareholder's shares if: value of the shareholder's shares in the
- the corporation consolidates or merges event of, the following corporate actions:
with another corporation; - the consummation of a plan of merger or
- the shareholder's stock is to be acquired share exchange;
in a stock exchange; - a sale of all or substantially all of the
- the corporation transfers all or assets of the corporation;
substantially all of its assets; - an amendment to the corporation's charter
- the corporation amends its charter in a that materially affects the shareholder's
way that substantially adversely affects the rights; or
shareholder's rights; or - any other action taken by the corporation,
- the corporation enters into certain to the extent the charter, bylaws or a
transactions resolution of the board of directors of the
corporation provides
</TABLE>
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<PAGE> 197
<TABLE>
<CAPTION>
PRISON REALTY CCA
(MARYLAND (TENNESSEE CORPORATION)
CORPORATION)
(AFTER THE AMENDMENT AND
RESTATEMENT OF THE PRISON REALTY
CHARTER)
<S> <C> <C>
governed by the business combination that shareholders are entitled to dissent
provisions of Maryland law. and obtain payment for their shares.
Under Maryland law, unless the transaction
is governed by the business combination
provisions of Maryland law, such rights are Under Tennessee law, no shareholder may
not available if: dissent as to shares of any security which
- the stock is listed on a national is listed on an exchange registered under
securities exchange or designated as a Section 6 of the Exchange Act or which is a
national market system security on an "national market system security," as
interdealer quotation system by the National defined in rules promulgated pursuant to the
Association of Securities Dealers or Exchange Act.
designated for trading on the NASDAQ Small
Cap 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.
Business combinations Under Maryland law, unless exempt, "business Under Tennessee law, "business combinations"
combinations" with "interested shareholders" with "interested shareholders" are subject
are subject to a moratorium of five years to a moratorium of five years unless
unless specified conditions are met. After specified conditions are met. After this
this five year period, any business five year period, any business combination
combination with an interested shareholder with an interested shareholder must be
must be approved by 80% of all voting stock approved by two-thirds of the disinterested
and two-thirds of the disinterested voting voting stock or must meet certain financial
stock. These provisions of Maryland law do conditions. Unless its charter provides
not apply to business combinations with otherwise, a corporation is exempt from
interested shareholders that have been these restrictions if it does not have a
exempted by resolution of the board of class of voting stock registered or traded
directors prior to the determination date. on a national securities 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.
Non-shareholder constituencies Under Maryland law, a corporation's charter Under Tennessee law, if the charter of the
may include a provision that allows the corporation allows, directors and officers
board of directors, in considering a are exempt from liability if they fail to
potential acquisition of control of the approve a proposed business combination if
corporation, to consider the effect of the they acted in good faith belief that the
potential acquisition on shareholders, proposed business combination would
employees, suppliers, customers and adversely affect the corporation's
creditors of the corporation and communities employees, customers, suppliers or the
in which offices or other establishments of communities in which the corporation
the corporation are located. The Prison operates. The CCA charter does not include
Realty charter includes such a provision. such a provision.
Control share acquisitions Under Maryland law, shares of the Under Tennessee law, shares of the
corporation acquired in a "control share corporation acquired in a "control share
acquisition" (as defined by Maryland law) acquisition" (as defined by Tennessee law)
will have no voting rights except to the have no voting rights except to the extent
extent approved by a vote of two-thirds of authorized by a vote at a special meeting of
all disinterested shareholders at a special a majority of the disinterested shareholders.
meeting of shareholders. This provision This provision does not apply to
applies to the
</TABLE>
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<PAGE> 198
<TABLE>
<CAPTION>
PRISON REALTY CCA
(MARYLAND (TENNESSEE CORPORATION)
CORPORATION)
(AFTER THE AMENDMENT AND
RESTATEMENT OF THE PRISON REALTY
CHARTER)
<S> <C> <C>
corporation unless it "opts out" of the the corporation unless it "opts into" the
provisions in its charter or bylaws. Prison provisions in its charter or bylaws. CCA
Realty has "opted out" of these provisions has not "opted into" these provisions in its
in its bylaws. charter or bylaws.
Investor protection Maryland law does not contain a provision Under Tennessee law, persons making tender
regarding investor protection. offers for purchases of CCA 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> 199
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
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<PAGE> 200
stock exchanged 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).
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<PAGE> 201
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.
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
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<PAGE> 202
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
credit 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. 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. 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.
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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<PAGE> 203
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 OF PRISON REALTY
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 shareholders of Prison Realty and CCA, Prison Realty will be
required to be taxed as a
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<PAGE> 204
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 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
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<PAGE> 205
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.
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 shareholders 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
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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 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 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.
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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
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other contractual arrangements between Prison Realty and CCA. See "Information
About Prison Realty--Recent developments." As of July 17, 2000, the waivers and
amendments remained in effect, and, as a result, Prison Realty was not in
default under the terms of its credit facility 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 "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
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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. 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 17, 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
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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 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
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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
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expense is reported net of capitalized interest on construction in progress of
$5.2 million and $7.1 million for the three months ended March 31, 2000 and
1999, respectively. The increase in interest expense resulted from increased
borrowings of $406.7 million from March 31, 1999 to March 31, 2000, increased
interest rates due to rising market rates, the 2.0% default rate on 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 17, 2000 with respect to 2000. 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
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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.
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 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 17,
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 17, 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.
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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.
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
shareholder 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
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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.
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
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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 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
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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.
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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.
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
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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 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 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 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
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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 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
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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 changes,
the interest rate applicable to outstanding amounts under the Prison Realty bank
credit facility was increased by .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
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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 Prison Realty bank credit facility.
These events of default are more fully described in "Information About Prison
Realty--Recent developments."
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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 is
entitled to borrow up to $55.0 million under the bank credit facility at various
times during 2000. However, the 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
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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.
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 17, 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.
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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 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.
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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 0.5%
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 17, 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
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.
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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 17, 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
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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 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>
220
<PAGE> 229
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 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 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
221
<PAGE> 230
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)
Years Ending December 31:
<S> <C>
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 17, 2000, $143.8 million of lease payments were accrued but unpaid under
the original terms of the CCA leases.
222
<PAGE> 231
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 17, 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 17, 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 17, 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.
CCA operating losses. CCA has utilized cash from borrowings under its
revolving credit facility and payments from Prison Realty for tenant incentive
arrangements and
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<PAGE> 232
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
224
<PAGE> 233
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 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.
225
<PAGE> 234
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 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
226
<PAGE> 235
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 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:
227
<PAGE> 236
<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>
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
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<PAGE> 237
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 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.
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
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facilities - and Prison Realty's operation so as to preserve its ability to
qualify as a REIT. The following discussion also outlines 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.
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
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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, 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.
GROWTH OPPORTUNITIES
Prison Realty believes it has a competitive advantage in the
development, construction, and acquisition of new private correctional and
detention facilities due to, among other things, Prison Realty's ability to
finance and build facilities in significantly less time than government
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entities. Prison Realty's operation as a subchapter C corporation commencing
with its 2000 taxable year will allow it to reinvest its after-tax revenues in
Prison Realty's business. In the event Prison Realty does not complete the
restructuring, or cannot otherwise raise the capital required to develop and
construct additional facilities or expand existing facilities, Prison Realty
will not be able to capitalize on its perceived advantages and grow its
business.
In the event Prison Realty does have access to capital, Prison Realty
believes that its competitive advantage will enable it to capitalize on the
following opportunities:
Government managed facilities. Attractive opportunities exist to
develop correctional and detention facilities on behalf of various
government entities. Historically, government entities have used
various methods of construction financing to develop new correctional
and detention facilities, including but not limited to the following:
(i) one-time general revenue appropriations by the government agency
for the cost of the new facility; (ii) general obligation bonds that
are secured by either a limited or unlimited tax levied by the issuing
government entity; or (iii) lease revenue bonds secured by an annual
lease payment that is subject to annual or bi-annual legislative
appropriation of funds. Many jurisdictions are operating their
correctional and detention facilities at well above their rated
capacities, and as a result are under federal court orders to alleviate
prison overcrowding within a certain time period. These jurisdictions
are often not in a position to appropriate funds or obtain financing to
construct a correctional and detention facility because of other fiscal
demands or requirements for public approval. Accordingly, Prison Realty
believes that, in an attempt to address fiscal pressures of matching
revenue collections with projected expenses, many such government
entities have been and will be forced to consider private ownership
with respect to the development of new correctional and detention
facilities and sale-leaseback transactions or other financing
alternatives with respect to existing correctional and detention
facilities. Prison Realty further believes that by privatizing the
development and construction of a facility, a government entity can
avoid large capital appropriations and voter referendum issues, freeing
itself to direct its resources to other competing infrastructure needs,
and accordingly, privatization will become even more attractive.
Expansion opportunities. Prison Realty's growth objectives also focus
on the selective expansion of its existing correctional and detention
facilities to increase cash flows and property values. Prison Realty is
currently developing approximately 1,150 beds through the expansion of
three of its currently operating facilities.
Prison Realty's ability to acquire or develop new facilities or to
expand its existing facilities depends on its access to financing. There can be
no assurance that Prison Realty will be able to acquire or develop correctional
facilities that meet its investment criteria. Moreover, acquisitions and
expansions entail risks that acquired or expanded facilities will fail to
perform in accordance with expectations.
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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 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
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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.
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
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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 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
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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.
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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 (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
At July 17, 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.
Neither CCA, PMSI nor JJFMSI has experienced a strike or work stoppage
at any of its facilities. In January 1996, Old CCA reached an agreement with a
union to represent 38 non-security personnel at its Shelby Training Center.
This agreement was renewed in April 1998. In September 1997, Old CCA entered
into an agreement with a union to represent approximately 60 correctional
officers at the Shelby Training Center. In March 1997, Old CCA assumed
management of the D.C. Correctional Treatment Facility in Washington, D.C., and
Old CCA agreed to recognize organized labor in representing certain employees at
this facility. In December 1998, Old CCA finalized an agreement with the union
to represent approximately 120 correctional officers and other support services
staff. In the opinion of the management of each of CCA, overall employee
relations are generally considered good.
LEGAL PROCEEDINGS
Owners and operators of privatized correctional and detention
facilities are subject to a variety of legal proceedings arising in the ordinary
course of operating such facilities, including proceedings relating to personal
injury and property damage. Such proceedings are generally
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brought against the operator of a correctional facility, but may also be brought
against the owner. Prison Realty's lessees, including CCA, as the operators of
correctional and detention facilities, are currently parties to such
proceedings, and, upon completion of the merger and related transactions and
Prison Realty restructuring, Prison Realty and its subsidiary also expect to
become parties to such proceedings. Prison Realty does not believe that such
litigation, if resolved against its lessees, or Prison Realty and its
subsidiaries, would have a material adverse effect upon its business or
financial position.
Prison Realty's existing leases with its lessees, including the CCA
leases, generally provide that lessees are responsible for claims based on
personal injury and property damage at such facilities and that Prison Realty's
lessees maintain insurance for such claims. Upon completion of the merger and
related transactions and Prison Realty restructuring, however, the CCA leases
will be canceled and will be of no further force and effect. For further
discussion of actual and potential legal proceedings affecting Prison Realty and
its lessees, see the information contained under the heading "Information About
Prison Realty--Litigation" and "Information About CCA--Litigation" herein. For a
discussion of specific claims to which Prison Realty and CCA are a party,
including certain shareholder litigation commenced against Prison Realty.
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 17, 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 17,
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
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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
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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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 17, 2000 is set forth
below, grouped by state:
<TABLE>
<CAPTION>
DESIGN SECURITY LEASE
FACILITIES LOCATION CAPACITY (1) LEVEL TENANT TERM
---------- -------- --------- ----- ------ ----
DOMESTIC
<S> <C> <C> <C> <C> <C>
Eloy Detention Center Eloy, Arizona 1,500 medium CCA 12
Central Arizona Detention Center Florence, Arizona 2,304 multi CCA 12
Florence Correctional Facility Florence, Arizona 1,600 medium CCA 12
California Correctional Facility California City, 2,304 medium CCA 12
California
Leo Chesney Correctional Center Live Oak, California 240 minimum Cornell Corrections 5
San Diego Correctional Facility San Diego, California 1,200 medium CCA 12
Kit Carson Correctional Center Burlington, Colorado 768 medium CCA 12
Bent County Correctional Facility Las Animas, Colorado 700 medium CCA 12
Huerfano County Correctional Center (2) Walsenburg, Colorado 752 medium CCA 12
D.C. Correctional
Treatment Facility (3) Washington, D. C. 866 medium District of Columbia 20
Coffee Correctional Facility (4) Nicholls, Georgia 1,524 medium CCA 12
McRae Correctional Facility McRae, Georgia 1,524 medium CCA 12
Millen Correctional Facility Millen, Georgia 1,524 medium CCA 12
Wheeler Correctional Facility (4) Alamo, Georgia 1,524 medium CCA 12
Leavenworth Detention Center Leavenworth, Kansas 327 (5) maximum CCA 12
Lee Adjustment Center Beattyville, Kentucky 756 medium CCA 12
River City Correctional Center Louisville, Kentucky 363 medium CCA 12
Marion Adjustment Center St. Mary, Kentucky 856 minimum CCA 12
Otter Creek Correctional Center Wheelwright, 656 medium CCA 12
Kentucky
Crossroads Correctional Center (6) Shelby, Montana 512 medium CCA 12
Prairie Correctional Facility Appleton, Minnesota 1,338 medium CCA 12
Tallahatchie County Correctional Center Tallahatchie, 1,104 medium CCA 12
Mississippi
Southern Nevada Women's
Correctional Facility Las Vegas, Nevada 500 medium State of Nevada(7) 18
</TABLE>
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<TABLE>
<CAPTION>
DESIGN SECURITY LEASE
FACILITIES LOCATION CAPACITY (1) LEVEL TENANT TERM
---------- -------- --------- ----- ------ ----
<S> <C> <C> <C> <C> <C>
New Mexico Women's Grants, New Mexico 322 (5) medium CCA 12
Correctional Facility
Cibola County Corrections Center Milan, New Mexico 1,012 medium CCA 12
Torrance County Detention Facility Estancia, New Mexico 910 multi CCA 12
Pamlico Correctional Facility (8) Bayboro, North 528 medium State of 12
Carolina North Carolina(9)
Mountain View Correctional Facility(8) Spruce Pine, 528 medium State of 12
North Carolina North Carolina(9)
Queensgate Correctional Facility Cincinnati, Ohio 850 medium Hamilton County, Ohio 5
Northeast Ohio Correctional Center Youngstown, Ohio 2,016 medium CCA 12
North Fork Correctional Facility Sayre, Oklahoma 1,440 medium CCA 12
Diamondback Correctional Facility Watonga, Oklahoma 1,440 (5) medium CCA 12
Cimarron Correctional Facility (10) Cushing, Oklahoma 960 medium CCA 12
Davis Correctional Facility(10) Holdenville, 960 medium CCA 12
Oklahoma
Shelby Training Center (11) Memphis, Tennessee 200 medium CCA 12
West Tennessee Detention Facility Mason, Tennessee 600 multi CCA 12
Whiteville Correctional Facility Whiteville, Tennessee 1,536 medium CCA 12
Bridgeport PPT Facility Bridgeport, Texas 200 minimum CCA 12
Eden Detention Center Eden, Texas 1,225 medium CCA 12
Community Education Partners - Dallas Dallas, Texas (12) juvenile/ CEP 12
County School for Accelerated Learning minimum
Community Education Partners - Houston, Texas (12) juvenile/ CEP 12
Southeast Houston School for minimum
Accelerated Learning
Houston Processing Center Houston, Texas 411 medium CCA 12
Laredo Processing Center Laredo, Texas 258 medium CCA 12
Webb County Detention Facility Laredo, Texas 480 maximum CCA 12
Mineral Wells PPT Facility Mineral Wells, Texas 2,103 minimum CCA 12
T. Don Hutto Correctional Center Taylor, Texas 480 medium CCA 12
INTERNATIONAL
HMP Forrest Bank Salford, England 800 medium U.K. Detention Services 25
Limited
</TABLE>
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<PAGE> 250
(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) 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.
(3) Ownership of the facility automatically reverts to the District of Columbia
upon expiration of the lease term.
(4) 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.
(5) The facility is currently being expanded by Prison Realty.
(6) 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.
(7) The State of Nevada has contracted with CCA to manage and operate the
facility.
(8) 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.
(9) The State of North Carolina has contracted with CCA to manage and operate
the facility.
(10) 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.
(11) 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.
(12) 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 annual report 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.
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.
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<PAGE> 251
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 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 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, 46, 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 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.
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<PAGE> 252
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, 58, 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, 45, 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
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<PAGE> 253
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.
INFORMATION REGARDING EXECUTIVE OFFICERS OF PRISON REALTY WHO ARE NOT DIRECTORS
Prison Realty has begun a search for a new chief executive officer and
for a new chief financial officer. Several candidates have been identified and
interviews have begun. The selection process will be finalized as expeditiously
as possible. Doctor R. Crants, the current chief executive officer of Prison
Realty, will resign or be terminated once a new chief executive officer has been
appointed. The search for the new chief financial officer will be undertaken
after the selection of a new chief executive officer. Thomas W. Beasley, the
current chairman of Prison Realty's board of directors and a founder of Prison
Realty's predecessor company, will continue to serve as chairman.
DOCTOR R. CRANTS, 55, currently serves as the chief executive officer
of Prison Realty. It is expected that Mr. Crants will resign or be terminated as
Prison Realty's chief executive officer once a new chief executive officer is
appointed. Mr. Crants served as a member of the board of directors of Prison
Realty from its inception to July 5, 2000. Mr. Crants also served as its
chairman from its inception to December 1999. Mr. Crants also serves as chief
executive officer and a director of CCA, and as a director of PMSI and JJFMSI.
Prior to the 1999 Merger, Mr. Crants served as chairman, chief executive officer
and president of Old CCA, which he co-founded in 1983, as well as chairman of
the board of trustees of Old Prison Realty. Mr. Crants also currently serves on
the board of directors of Sodexho Marriott Services, Inc., the largest food
service and facility management company in North America. Mr. Crants graduated
from the United States Military Academy at West Point in 1966 and received a
joint Masters in Business Administration and Juris Doctor degree from the
Harvard Business School and Harvard Law School, respectively, in 1974.
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
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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 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, and Mr. Russell received a retainer fee of $75,000 for his
services to Prison Realty. Mr. Russell will also receive $50,000 in shares of
Prison Realty common stock for his services. 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 $100,000 (collectively, the "Named
Executive Officers"), for the fiscal years ended December 31, 1997, 1998 and
1999. As discussed more fully in "The Merger and Related Transactions and the
Prison Realty Restructuring-Interests of directors, officers, affiliates and
shareholders in the merger and related transactions and the Prison Realty
restructuring," each of Mr. Crants, III and Mr. Devlin resigned from their
positions with Prison Realty, effective as of December 31, 1999. In addition,
Vida H. Carroll has resigned effective September 15, 2000 and Doctor R. Crants
will resign or be terminated as chief executive officer upon the appointment of
a new chief executive officer.
<TABLE>
<CAPTION>
Annual Compensation
-------------------
Name and Other Annual
--------- ------------
Principal Position Year Salary ($) Bonus ($) Compensation($)
------------------ ---- ---------- --------- ------------
<S> <C> <C> <C> <C>
Doctor R. Crants....... 1999 $ 175,000(1) $ 34,488(2) --
Chief Executive 1998 385,933(5) -- --
Officer 1997 359,423(8) -- --
J. Michael Quinlan .... 1999 79,583(11) -- --
President 1998 155,625 -- --
1997 -- --
150,000(14)
Vida H. Carroll........ 1999 141,667 81,387(16) --
Chief Financial 1998 88,813 -- --
Officer 1997 75,000(14) -- --
Secretary and
Treasurer
D. Robert Crants, III... 1999 155,000 113,320(21) --
President 1998 103,750 -- --
1997 100,000(14) (25) --
Michael W. Devlin ...... 1999 155,000 113,320(21) --
Chief Operating 1998 103,750 -- --
Officer 1997 100,000(14) (25) --
<CAPTION>
Long-Term Compensation
----------------------
Awards Payouts
------ -------
Name and Securities
--------- Restricted Underlying LTIP All Other
Principal Position Stock Award($) Options(#) Payouts($) Compensation ($)
------------------ ----------- ------- ------- ------------
<S> <C> <C> <C> <C>
Doctor R. Crants .... $103,465(3) 113,750(4) -- --
Chief Executive -- 17,500(6) -- $ 7,450(7)
Officer -- 113,125(9) -- 7,450(10)
J. Michael Quinlan .. -- 10,000(12) -- --
President -- -- -- 5,000(13)
-- 375,000(15) -- --
Vida H. Carroll ..... 19,160(17) 26,250(18) -- 42,500(19)
Chief Financial -- -- -- 3,000(13)
Officer -- 65,000(20) -- --
Secretary and
Treasurer
D. Robert Crants, III 114,961(22) 52,500(23) -- 238,750(24)
President -- -- -- 5,000(13)
-- 225,000(26) -- --
Michael W. Devlin ... 114,961(22) 52,500(23) -- 238,750(24)
Chief Operating -- -- -- 5,000(13)
Officer -- 225,000(26) -- --
</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, but currently continues to
serve as chief executive officer of Prison Realty.
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<PAGE> 256
(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
the Company 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 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. 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 $25,619.
(4) 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.
(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.
(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.
(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.
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<PAGE> 257
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 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.
(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.
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(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.
(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.
(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) This individual was awarded 5,625 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 the individual, such restricted
shares were to 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 $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. 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 such individual to $28,463. 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) Pursuant to Prison Realty's 1997 Employee Share Incentive Plan, these
options to purchase shares of Prison Realty's Common Stock vested in
25% increments over a three-year period, with the first such increment
having vested on March 4, 1999, and were exercisable at a price of
$19.94 per share, the closing marked price on the NYSE of Prison
Realty's Common Stock on March 4, 1999, the date of grant of these
options. 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 $5,000 to
the Prison Realty Trust, Inc. 401(k) Savings and Retirement Plan on the
individual's behalf during the fiscal year ended December 31, 1999.
(25) This individual was awarded 150,000 common shares of Old Prison Realty
issued as a development fee and as reimbursement for actual costs
incurred with the promotion and formation of Old Prison Realty, the
consummation of Old Prison Realty's initial public offering
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of common shares and Old Prison Realty's purchase of nine correctional
and detention facilities from Old CCA.
(26) All but 25,000 of the options initially vested in 25% increments over a
three-year period with the first increment having vested on July 15,
1997. The balance of the options initially vested in 25% increments
over a three-year period with the first increment having vested on
December 2, 1997. All of these options were granted under Old Prison
Realty's 1997 Employee Share Incentive Plan. In connection with the
1999 Merger, Prison Realty assumed all of the options outstanding under
Old Prison Realty's 1997 Employee Share Incentive Plan, with all of
such options being converted into options exercisable for shares of
Prison Realty's common stock, based on the exchange ratio in the 1999
Merger. All of these options were forfeited upon the individual's
resignation from all positions with Prison Realty on December 31, 1999.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth the options granted with respect to the
year ended December 31, 1999 to the chief executive officer and each of Prison
Realty's Named Executive Officers.
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Rates of Stock Price
Individual Grants Appreciation for Option Term(1)
----------------- -------------------------------
Number of
Securities Percentage of Total
Underlying Options Granted to
Options Employees in Fiscal Exercise Expiration
Name Granted(#) Year(2) Price(3) Date 5%($) 10%($)
---- ---------- ------- -------- ---- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Doctor R. Crants...... 113,750(4) 35.8% $ 19.94 03/04/09 $1,428,950 $3,606,398
J. Michael Quinlan.... 10,000(5) 3.1% $ 19.94 03/04/09 125,622 317,046
Vida H. Carroll....... 26,250(4) 8.3% $ 19.94 03/04/09 329,758 832,245
D. Robert Crants, III. 52,500(6) 16.5% $ 19.94 03/04/09 0(7) 0(7)
Michael W. Devlin..... 52,500(6) 16.5% $ 19.94 03/04/09 0(7) 0(7)
</TABLE>
(1) The dollar amounts under these columns are the result of calculations
at the 5% and 10% rates set by the Commission 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 Prison Realty's 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.
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<PAGE> 260
(4) 25% of the options vested on March 4, 1999, the date of grant, and the
remainder of the options will vest in equal 25% installments on each of
the first three anniversaries of the date of grant.
(5) 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.
(6) 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.
(7) 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
Name Shares Acquired Value Options Held at Value of Unexercised In-the-Money
---- on Exercise (#) Realized(1) December 31, 1999 Options at December 31, 1999(2)
--------------- ----------- ----------------- -------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Doctor R. Crants 52,500 $435,908 296,563 135,313 0 0
J. Michael Quinlan(3) -- -- 393,750 0 0 0
Vida H. Carroll -- -- 55,312 35,938 0 0
D. Robert Crants, III(4) -- -- 0 0 0 0
Michael W. Devlin(5) -- -- 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) 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.
(4) 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.
(5) 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> 261
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prison Realty commenced operations on January 1, 1999 following the
1999 Merger. CCA commenced operations on December 31, 1998 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. Ten percent of the outstanding principal amount of the
CCA Note is personally guaranteed by Prison Realty's chief executive officer,
Doctor R. Crants, who also serves as the chief executive officer and a member of
the board of directors of CCA. 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
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<PAGE> 262
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
outstanding capital stock. Prison Realty is currently negotiating with Sodexho
with respect to the shares of CCA common stock held by them. 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 Prison Realty common stock valued at $3.0 million.
Doctor R. Crants currently serves as the chief executive officer of
Prison Realty. Mr. Crants resigned as a member of the Prison Realty board of
directors on July 5, 2000 and will resign or be terminated as Prison Realty's
chief operating officer upon the appointment of a new chief executive officer of
Prison Realty. Mr. Crants also serves as a member of the board of directors and
chief executive officer of CCA and serves 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.
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<PAGE> 263
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. Legal fees paid to Stokes & Bartholomew,
P.A., the predecessor firm to Stokes Bartholomew Evans & Petree, P.A., related
to Old CCA's mergers and acquisitions amounted to $3.0 million and $1.1 million
in 1998 and 1997, respectively. During 1999, Prison Realty paid $5.8 million 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 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
shareholders 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."
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<PAGE> 264
In connection with Doctor R. Crants' resignation as a member of Prison
Realty's board of directors and his agreement to resign or be terminated 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 June 30, 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,
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.
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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:
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
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.
If you would like to request documents from CCA or Prison Realty,
please do so by August __, 2000 to receive them before the CCA special meeting.
If you request any documents, they will be mailed to you by first class mail, or
another equally prompt means, within one business day after your request is
received.
You should rely only on the information contained in or incorporated by
reference 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
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statement/prospectus is dated _____________, 2000. You should not assume that
the information contained in this document is accurate as of any date other than
that 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 SHAREHOLDERS
After the merger 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 as of July 19, 2000.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
PRO FORMA FINANCIAL INFORMATION OF PRISON REALTY TRUST, INC.
<S> <C>
Pro Forma Combined Balance Sheet (Unaudited) as of March 31, 2000 ......................... F-5
Notes to Pro Forma Combined Balance Sheet (Unaudited) 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 (Unaudited) 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 (Unaudited) for
the Year Ended December 31, 1999 ................................................. 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-24
Condensed Consolidated Statements of Cash Flows (Unaudited)
for three months ended March 31, 2000 and 1999 ................................... F-25
Notes to Condensed Consolidated Financial Statements (Unaudited) .......................... F-27
CONSOLIDATED FINANCIAL STATEMENTS OF PRISON REALTY TRUST, INC.
Report of Independent Public Accountants .................................................. F-52
Consolidated Balance Sheets as of December 31, 1999 and 1998 .............................. F-53
Consolidated Statements of Operations for the years ended December 31, 1999, 1998
and 1997 ......................................................................... F-55
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997 ........................................... F-57
Consolidated Statements of Cash Flows for the years
December 31, 1999, 1998 and 1997 ................................................. F-59
Notes to the Consolidated Financial Statements ............................................ F-63
CONSOLIDATED FINANCIAL STATEMENTS OF CORRECTIONS CORPORATION OF AMERICA
Condensed Consolidated Balance Sheets (Unaudited) as of March 31, 2000
and December 31, 1999 ............................................................ F-108
Condensed Consolidated Statements of Operations (Unaudited) for
the three months ended March 31, 2000 and 1999 ................................... F-109
Condensed Consolidated Statements of Cash Flows (Unaudited)
for three months ended March 31, 2000 and 1999 ................................... F-110
Notes to Condensed Consolidated Financial Statements (Unaudited) .......................... F-111
</TABLE>
F-1
<PAGE> 268
<TABLE>
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF CORRECTIONS CORPORATION OF AMERICA
Report of Independent Public Accountants .................................................... F-123
Consolidated Balance Sheets as of December 31, 1999 and 1998 ................................ F-124
Consolidated Statement of Operations for the year ended December 31, 1999 ................... F-125
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-126
Consolidated Statements of Cash Flows for the year December 31, 1999 and for
the period from September 11, 1998 through December 31, 1998 ....................... F-127
Notes to Consolidated Financial Statements .................................................. F-129
</TABLE>
F-2
<PAGE> 269
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 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 transaction, 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 transaction, 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
F-3
<PAGE> 270
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 transaction, 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> 271
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> 272
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> 273
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> 274
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> 275
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.
F-9
<PAGE> 276
NOTES TO PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 2000 -- (CONTINUED)
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.
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
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 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;
F-10
<PAGE> 277
NOTES TO PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 2000 -- (CONTINUED)
(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.
F-11
<PAGE> 278
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> 279
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.
F-13
<PAGE> 280
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 -- (CONTINUED)
HH To remove the historical depreciation expense recognized by Prison
Realty related to capitalized fees paid by Prison Realty to CCA during
2000.
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 C
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;
F-14
<PAGE> 281
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 -- (CONTINUED)
(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 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.
F-15
<PAGE> 282
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 -- (CONTINUED)
As indicated in Note QQ, the effects of the potential dilution have
not been reflected in the pro forma financial statements.
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> 283
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> 284
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.
F-18
<PAGE> 285
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999 -- (CONTINUED)
II To remove the historical depreciation expense recognized by Prison
Realty related to capitalized fees paid by Prison Realty to CCA during
1999.
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 C
convertible preferred shares into common shares during the conversion
periods.
F-19
<PAGE> 286
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999 -- (CONTINUED)
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 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 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> 287
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 effect of the potential dilution have
not been reflected 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> 288
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
Real estate properties:
Correctional and detention facilities $ 2,216,662 $ 2,258,281
Less accumulated depreciation (62,709) (49,785)
----------- -----------
Net real estate properties 2,153,953 2,208,496
Cash and cash equivalents 12,753 84,493
Restricted cash 24,722 24,409
Note receivable from CCA 137,000 137,000
Investments in affiliates 120,974 118,232
Investments in direct financing leases 162,254 74,059
Receivable from CCA 25,839 28,608
Other assets 61,116 60,625
----------- -----------
Total assets $ 2,698,611 $ 2,735,922
=========== ===========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
(Continued)
F-22
<PAGE> 289
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED AND AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(CONTINUED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Distributions payable $ 2,150 $ 2,150
Bank credit facility 926,734 928,234
Senior notes payable 100,000 100,000
Convertible subordinated notes and other debt 70,737 70,757
Accounts payable and accrued expenses 67,207 70,911
Income taxes payable 5,917 5,476
Deferred gains on sales of contracts 103,376 106,045
Other liabilities 32,000 32,000
----------- -----------
Total liabilities 1,308,121 1,315,573
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 (one cent) par value; 20,000 shares
authorized; 4,300 issued and outstanding; stated at
liquidation preference of $25 (twenty-five dollars)
per share 107,500 107,500
Common stock, $.01 (one cent) par value; 300,000
shares authorized; 118,406 shares issued;
118,394 shares outstanding, respectively 1,184 1,184
Treasury stock, 12 shares, at cost (242) (242)
Additional paid-in capital 1,347,318 1,347,227
Cumulative net income 2,024 29,824
Accumulated distributions (67,294) (65,144)
----------- -----------
Total stockholders' equity 1,390,490 1,420,349
----------- -----------
Total liabilities and stockholders' equity $ 2,698,611 $ 2,735,922
=========== ===========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
F-23
<PAGE> 290
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-24
<PAGE> 291
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (27,800) $ (22,605)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 12,924 9,917
Amortization of debt issuance costs 3,321 962
Provision for change in tax status -- 83,200
Equity in earnings of unconsolidated entities and amortization of
deferred gain (6,113) (7,681)
Write-off of amounts under lease arrangements 4,000 --
Other noncash items 90 --
Changes in assets and liabilities, net
Receivable from CCA 2,769 663
Other assets (2,682) (9,129)
Accounts payable and accrued expenses (7,704) 1,963
Income taxes payable 441 (6,769)
--------- ---------
Net cash provided by (used in) operating activities (20,754) 50,521
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment (47,799) (169,958)
Increase in restricted cash and investments (313) (74,393)
Cash acquired in purchase of CCA Prison Realty Trust -- 21,894
Increase in other assets (1,127) (3,937)
Distributions from investments in PMSI and JJFMSI 702 --
Payments received on direct financing leases and notes receivable 1,223 1,165
--------- ---------
Net cash used in investing activities (47,314) (225,229)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt -- 40,000
Payments on debt (20) (53)
Proceeds from (payments on) bank credit facility, net (1,500) 118,400
Payment of debt issuance costs (2) (8,328)
Proceeds from issuance of common stock -- 74,840
Distributions paid on common shares -- (67,818)
Distributions paid on preferred shares (2,150) (2,150)
--------- ---------
Net cash provided by (used in) financing activities (3,672) 154,891
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (71,740) (19,817)
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD 84,493 31,141
--------- ---------
CASH AND CASH EQUIVALENTS, END OF THE PERIOD $ 12,753 $ 11,324
========= =========
</TABLE>
(CONTINUED)
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
F-25
<PAGE> 292
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-26
<PAGE> 293
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE INDICATED)
1. ORGANIZATION AND OPERATIONS
BACKGROUND AND FORMATION TRANSACTIONS
Prison Realty Trust, Inc., formerly Prison Realty Corporation, a Maryland
corporation (the "Company"), was formed in September 1998. Corrections
Corporation of America, a Tennessee corporation ("Old CCA"), and CCA Prison
Realty Trust, a Maryland real estate investment trust ("Old Prison Realty"),
merged with and into the Company on December 31, 1998 and January 1, 1999,
respectively (collectively, the "1999 Merger"), pursuant to an Amended and
Restated Agreement and Plan of Merger by and among Old CCA, Old Prison Realty
and the Company, dated as of September 29, 1998.
The 1999 Merger has been accounted for as a reverse acquisition of the Company
by Old CCA and as an acquisition of Old Prison Realty by the Company. As such,
Old CCA's assets and liabilities have been carried forward at historical cost,
and the provisions of reverse acquisition accounting prescribe that Old CCA's
historical financial statements be presented as the Company's historical
financial statements prior to January 1, 1999. The historical equity section of
the financial statements and earnings per share have been retroactively restated
to reflect the Company's equity structure, including the exchange ratio and the
effects of the differences in par values of the respective companies' common
stock. Old Prison Realty's assets and liabilities have been recorded at fair
market value, as required by Accounting Principles Board Opinion No. 16,
"Business Combinations" ("APB 16").
OPERATIONS
Since the 1999 Merger, the Company has specialized in acquiring, developing and
owning correctional and detention facilities. Corrections Corporation of America
("CCA") is a private prison management company that operates and manages the
substantial majority of facilities owned by the Company. As a result of the 1999
Merger and certain contractual relationships existing between the Company and
CCA, the Company is dependent on its significant sources of income from CCA. In
addition, the Company pays CCA for services rendered to the Company in
development of its correctional and detention facilities. See the information
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999, as filed with the Commission on March 30, 2000 (the
"Company's Form 10-K") and Note 11 herein for a description of the contractual
relationships between the Company and CCA. As a result of liquidity issues
facing CCA and the Company, the parties intend to amend the contractual
agreements between the Company and CCA. For a fuller description of the proposed
amendments, see Note 11.
As required by its governing instruments and as contemplated by the Pacific Life
Restructuring (as defined in Note 2 and more fully described in Note 13 hereof),
the Company currently intends to be taxed as a real estate investment trust, or
REIT, for federal income tax purposes for the year ended December 31, 1999. In
the event the Company completes the Pacific Life Restructuring under its
existing terms, following required shareholder approval in 2000, the Company
expects to be taxed as a C corporation for the taxable year ending December 31,
2000 and thereafter. See Note 8 for information on the Company's contingent tax
liabilities. In the event the Pacific Life Restructuring is not completed, the
Company expects that, following required shareholder approval, the Company will
nevertheless be taxed as a C corporation with respect to its taxable year ended
December 31, 2000 and thereafter.
F-27
<PAGE> 294
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
2. GOING CONCERN MATTERS
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company currently is in
default under the provisions of its senior secured bank credit facility
(outstanding balance of $926.7 million at March 31, 2000) and is in default
under the provisions of the agreements governing the Company's outstanding
convertible, subordinated notes (outstanding balance of $70.0 million at March
31, 2000). The defaults relate to the Company's failure to comply with certain
financial covenants during 1999 and 2000, the issuance of a going concern
opinion qualification with respect to the Company's 1999 consolidated financial
statements, and certain transactions effected by the Company without the consent
of the Company's lenders, including the execution of a securities purchase
agreement in connection with a series of proposed transactions led by Pacific
Life Insurance Company ("Pacific Life"). See Note 6 for a detailed description
of each existing event of default under the provisions of the Company's
indebtedness. The Company's noncompliance with the provisions of its outstanding
obligations could result in the Company's creditors demanding immediate
repayment of these obligations. The existing events of default under the
provisions of the Company's bank credit facility and an aggregate of $40.0
million of the Company's convertible, subordinated notes have been formally
declared, but no acceleration actions have been taken by the creditors with
respect to this indebtedness. The Company has not obtained waivers of these
existing events of default. See Note 6 for a description of the Company's
attempts to obtain waivers of these existing events of default. Also, the
Company has limited resources currently available to meet its operating, capital
expenditure and debt service requirements during 2000. In addition, as discussed
in Note 8, the Company has significant outstanding shareholder and other
litigation matters.
The Company's primary lessee, CCA, on which the Company is dependent for its
major sources of income, incurred a net loss of $62.6 million for the three
months ended March 31, 2000, and has a net working capital deficiency and a net
capital deficiency at March 31, 2000. In connection with the 1999 Merger, the
Company and CCA entered into lease agreements with CCA with respect to the
correctional and detention facilities owned by the Company and operated by CCA,
as well as a series of additional agreements relating to the payment of certain
fees by the Company to CCA. As of March 31, 2000, approximately $92.2 million of
rents due from CCA to the Company under the master lease agreement and leases
with respect to each leased property between CCA and the Company (the "CCA
Leases") were unpaid. The terms of the CCA Leases provide that rental payments
are due and payable on the 25th day of each month for the current month. The CCA
Leases provide that it shall be an event of default if CCA fails to pay any
installment of rent within 15 days after notice of nonpayment from the Company.
The Company, however, has not provided a notice of nonpayment to CCA with
respect to lease payments due and payable by CCA. Subsequent to March 31, 2000,
CCA has paid $11.9 million of lease payments related to 1999 and $4.0 million
related to 2000.
CCA recently obtained a waiver of existing events of default under its revolving
credit facility. These events of default related to CCA's execution of an
agreement and plan of merger with respect to a proposed merger of CCA with and
into a wholly-owned subsidiary of the Company in connection with the Pacific
Life Restructuring (as defined in Note 2 and more fully described in Note 13
hereof), the deferral of certain of CCA's lease payments and the payment of fees
to CCA by the Company, and a financial covenant relating to CCA's net worth.
This waiver, however, will terminate upon the occurrence of certain events, and
the
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
term of the waiver will expire on July 31, 2000. See Note 11 for a description
of these events of default and the waiver of such events of default.
As a result of CCA's current liquidity position, CCA has been required to defer
the first scheduled payment of accrued interest, totaling approximately $16.4
million, on the $137.0 million promissory note payable by CCA to the Company
(the "CCA Note"). Pursuant to the terms of the CCA Note, CCA was required to
make the payment on December 31, 1999; however, pursuant to the terms of a
subordination agreement, dated as of March 1, 1999, by and between the Company
and the agent of CCA's revolving credit facility (the "Subordination
Agreement"), CCA is prohibited from making the scheduled interest payments on
the CCA Note when CCA is not in compliance with certain financial covenants. As
of December 31, 1999, CCA was not, and, notwithstanding the waiver discussed
above, CCA currently is not, in compliance with these financial covenants.
Consequently, CCA is prohibited from making the scheduled interest payment to
the Company. Pursuant to the terms of the Subordination Agreement, the Company
is prohibited from accelerating payment of the principal amount of the CCA Note
or taking any other action to enforce its rights under the provisions of the CCA
Note for so long as CCA's revolving credit facility remains outstanding. Also as
a result of CCA's current liquidity position, the independent public accountants
of CCA have indicated in their opinion on CCA's 1999 consolidated financial
statements that there is substantial doubt about CCA's ability to continue as a
going concern.
Continued operating losses by Prison Realty and CCA, declarations of events of
default and potential acceleration actions by the Company's and CCA's creditors,
the continued inability of CCA to make contractual payments to the Company, and
the Company's limited resources currently available to meet its operating,
capital expenditure and debt service requirements will have a material adverse
impact on the Company's consolidated financial position, results of operations
and cash flows. In addition, these matters concerning the Company and CCA raise
substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements do not include any adjustments relating to
the recoverability of asset carrying amounts or the amounts of liabilities that
might result should the Company be unable to continue as a going concern.
In response to the significant losses experienced by CCA during 1999 and by the
Company and CCA during the three months ended March 31, 2000 and in response to
the defaults under the Company's debt agreements, the Company has entered into
an agreement with respect to a series of transactions led by Pacific Life
intended to provide the Company with additional capital and a restructuring of
its indebtedness, as well as a simplification of its corporate structure and a
new management team (the "Pacific Life Restructuring"). A complete discussion of
the Pacific Life Restructuring and recent developments affecting the Pacific
Life Restructuring is included in Note 13.
3. 1999 MERGER TRANSACTIONS
For a complete description of the 1999 Merger Transactions, please see the
information contained in the Company's Form 10-K.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
4. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. Investments in majority-owned affiliates where
control does not exist, including the Company's investments in Prison Management
Services, Inc., a Tennessee corporation ("PMSI"), and Juvenile and Jail Facility
Management Services, Inc., a Tennessee corporation ("JJFMSI"), are accounted for
under the equity method. Investments in entities of less than 20% of an entity's
outstanding stock and where no significant influence exists, including the
Company's investment in CCA, are accounted for under the cost method. All
material intercompany transactions and balances have been eliminated in
consolidation.
The accompanying interim consolidated financial statements are unaudited. The
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and in conjunction with
the rules and regulations of the Commission. Accordingly, they do not include
all of the disclosures required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting solely of normal recurring matters) necessary for a fair
presentation of the financial statements for this interim period have been
included. The results of operations for the interim period are not necessarily
indicative of the results to be obtained for the full fiscal year. Reference is
made to the audited financial statements of the Company included in the Form
10-K with respect to certain significant accounting and financial reporting
policies as well as other pertinent information of the Company.
5. REAL ESTATE PROPERTIES
At March 31, 2000, the Company owned or was in the process of developing 52 real
estate properties, including 50 correctional and detention facilities and two
corporate office buildings, of which 46 properties were operating, three were
under construction or expansion and three were in the planning stages, with a
total aggregate cost of $2.2 billion. At March 31, 2000, CCA leased 37
properties from the Company, governmental agencies leased six facilities from
the Company, and private operators leased three facilities from the Company. In
the event the Pacific Life Restructuring is not completed and/or Prison Realty
and CCA do not combine, the Company expects to lease all of the facilities under
construction or development to CCA. In the event the Pacific Life Restructuring
is completed and/or Prison Realty and CCA combine, all existing leases between
Prison Realty and CCA will be cancelled and will be of no further force and
effect. See Note 13 for a discussion of the Pacific Life Restructuring.
Eight of the facilities owned by the Company are subject to options that allow
various governmental agencies to purchase these facilities. In addition, two of
the facilities are constructed on land that the Company leases to governmental
agencies under ground leases. Under the terms of those ground leases, the
facilities become the property of the governmental agencies upon expiration of
the ground leases. The Company depreciates these two properties over the term of
the ground lease.
During January 2000, the Company completed construction at a cost of
approximately $89.4 million of an 800-bed medium-security prison in Salford,
England and entered into a 25-year lease with Agecroft Prison Management, Inc.
("APM"). The Company is accounting for the lease as a direct financing lease.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
APM, a joint venture owned 50% by JJFMSI and 50% by Sodexho Alliance S.A.
("Sodexho"), is managing the operation of the prison for the U.K. government.
6. DEBT
THE CREDIT FACILITY AND AMENDED CREDIT FACILITY
TERMS AND CONDITIONS. On January 1, 1999, in connection with the completion of
the 1999 Merger, the Company obtained a $650.0 million secured credit facility
(the "Credit Facility") from NationsBank, N.A., as Administrative Agent, and
several U.S. and non-U.S. banks. The Credit Facility included up to a maximum of
$250.0 million in tranche B term loans and $400.0 million in revolving loans,
including a $150.0 million subfacility for letters of credit. The term loan
required quarterly principal payments of $625 throughout the term of the loan
with the remaining balance maturing on January 1, 2003. The revolving loans
were to mature on January 1, 2002. Interest rates, unused commitment fees and
letter of credit fees on the Credit Facility were subject to change based on the
Company's senior debt rating. The Credit Facility was secured by mortgages on
the Company's real property.
On August 4, 1999, the Company completed an amendment and restatement of the
Credit Facility (the "Amended Credit Facility") increasing amounts available to
the Company under the original Credit Facility to $1.0 billion through the
addition of a $350.0 million tranche C term loan. The tranche C term loan is
payable in equal quarterly installments in the amount of $875 through the
calendar quarter ending September 30, 2002, with the balance to be paid in full
on December 31, 2002. The maturity of the term loan under the Credit Facility
was changed to December 31, 2002, with the maturity of the revolving loan under
the Credit Facility remaining January 1, 2002. Lehman Commercial Paper Inc.
replaced NationsBank, N.A. as Administrative Agent of the Amended Credit
Facility.
The Amended Credit Facility, similar to the Credit Facility, provides for
interest rates, unused commitment fees and letter of credit fees to change based
on the Company's senior debt rating. Similar to the Credit Facility, the Amended
Credit Facility bears interest at variable rates of interest based on a spread
over the base rate or LIBOR (as elected by the Company), which spread is
determined by reference to the Company's credit rating. The spread ranges from
0.50% to 2.25% for base rate loans and from 2.00% to 3.75% for LIBOR rate loans.
These ranges replaced the original spread ranges of 0.25% to 1.25% for base rate
loans and 1.375% to 2.75% for LIBOR rate loans. The term loan portions of the
Amended Credit Facility bear interest at a variable rate equal to 3.75% to 4.00%
in excess of LIBOR or 2.25% to 2.50% in excess of a base rate. This rate
replaced the variable rate equal to 3.25% in excess of LIBOR or 1.75% in excess
of a base rate in the Credit Facility.
The rating on the Company's bank loan debt was lowered from Ba3 to Ba1 during
the first quarter of 2000. The rating on the senior unsecured debt was lowered
from B1 to B2, and the rating on the Series A Preferred Stock was lowered from
Ba3 to B3. As a result of these rating changes, the interest rate applicable to
outstanding amounts under the Amended Credit Facility was increased by .50%
Upon the lenders' determination that the Company is in default under the terms
of the Amended Credit Facility, the Company is required to pay a default rate of
interest equal to the rate of interest as determined based on the terms
described above, plus 2.00%. As discussed below, the Company is currently in
default under the Amended Credit Facility and, consequently, has been subject to
and has been accruing and paying the default rate of interest since January 25,
2000.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
The Company incurred costs of $59.2 million in consummating the Credit Facility
and the Amended Credit Facility transactions, including $41.2 million related to
the amendment and restatement. The Company wrote off $9.0 million of expenses
related to the Credit Facility upon completion of the amendment and restatement.
In accordance with the terms of the Amended Credit Facility, the Company entered
into certain swap arrangements guaranteeing that it will not pay an index rate
greater than 6.51% on outstanding balances of at least (a) $325.0 million
through December 31, 2001 and (b) $200.0 million through December 31, 2002. The
effect of these arrangements is recognized in interest expense.
The Amended Credit Facility, similar to the Credit Facility, is secured by
mortgages on the Company's real property. Borrowings are limited based on a
borrowing base formula that considers, among other things, eligible real estate.
The Amended Credit Facility contains certain financial covenants, primarily (a)
maintenance of leverage, interest coverage, debt service coverage and total
indebtedness ratios and (b) restrictions on the incurrence of additional
indebtedness.
The Amended Credit Facility also restricted the Company's ability to make the
1999 cash payment of a special dividend representing the accumulated earnings
and profits of Old CCA unless (a) the Company had liquidity of at least $75.0
million at the dividend declaration date after giving effect to the payment of
the special dividend, (b) the Company received at least $100.0 million in cash
proceeds for the issuance of equity or similar securities from a new investor
receiving representation on the Company's Board of Directors and (c) CCA
received at least $25.0 million in cash proceeds from the issuance of any
combination of equity securities and subordinated debt. The Amended Credit
Facility also restricts the cash payment of the special dividend in 2000.
SOLICITATION OF CONSENTS FOR WAIVERS OF EVENTS OF DEFAULT UNDER, AND AMENDMENTS
TO, PROVISIONS OF THE COMPANY'S AMENDED CREDIT FACILITY. As a result of: (i) the
current financial condition of the Company and CCA as described in Note 2; (ii)
the transactions undertaken by the Company and CCA, as described in Note 11, in
an attempt to resolve the current liquidity issues of the Company and CCA; and
(iii) the transactions contemplated by the proposed Pacific Life Restructuring,
as described in Note 13, certain existing or potential events of default have
arisen under the provisions of the Amended Credit Facility. Specifically, the
Company is subject to the following existing or potential events of default
under the Amended Credit Facility:
- For the fiscal quarters ending December 31, 1999 and March 31, 2000, the
Company was not in compliance with certain financial covenants, each as
defined in the Amended Credit Facility.
- As a result of the existence of explanatory paragraphs in the reports of
each of the Company's and CCA's reports of independent public accountants
relating to the Company's and CCA's 1999 consolidated financial statements
as to the ability of each of the Company and CCA to continue as a going
concern, the Company is in violation of the provisions of the Amended
Credit Facility.
- As more fully described below, the Company is in default under the
provisions of the note purchase agreement relating to the Company's 9.5%
Convertible Notes (as hereinafter defined). Due to the provisions of the
Amended Credit Facility, this default under the terms of these
subordinated,
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
notes has resulted in an event of default under the Amended Credit Facility
since January 25, 2000.
- The declaration and payment of a quarterly dividend on the Company's Series
A Preferred Stock for the quarter ended March 31, 2000 constituted an event
of default under the Amended Credit Facility.
- The Amended Credit Facility contains restrictions upon the ability of the
Company to amend the terms of its agreements with CCA without the consent
of the Company's senior lenders, which would be violated upon execution of
the proposed amendments to the Company's existing agreements with CCA
described in Note 11.
- The Amended Credit Facility contains restrictions upon the ability of the
Company to enter into any agreement constituting a "change of control"
provision, as defined in the Amended Credit Facility. The appointment of a
new Chairman of the Board of Directors and President of the Company in
December 1999 constituted a "change of control" of the Company under the
terms of the Amended Credit Facility upon the expiration of an applicable
period. In addition, the execution and performance of certain conditions
contained in the securities purchase agreement with Pacific Life
constituted a "change of control" of the Company under the terms of the
Amended Credit Facility.
- The Amended Credit Facility provides that any non-compliance by CCA with
the provisions of CCA's revolving credit facility would constitute an event
of default under the Amended Credit Facility. Although CCA has obtained a
waiver of all events of default under its revolving credit facility, as
more fully described in Note 11, CCA's non-compliance with the provisions
of its revolving credit facility would also constitute an event of default
under the Amended Credit Facility.
- As more fully described below, the Company is in violation of certain
financial covenants contained in the note purchase agreement relating to
the Company's 7.5% Convertible Notes (as defined below). However, the
Company is currently not in default under the provisions of this note
purchase agreement because the holder of the 7.5% Convertible Notes has not
provided the Company with written notice declaring such an event of
default. As a result, no event of default currently exists under the
provisions of the Amended Credit Facility with respect to the Company's
violation of these financial covenants. If, however, the holder of the 7.5%
Convertible Notes did provide a notice of default to the Company, upon the
expiration of an applicable period, the Company would be in default under
the provisions of the note purchase agreement, which would also give rise
to an event of default under the Amended Credit Facility.
PROPOSED WAIVERS OF EVENTS OF DEFAULT UNDER, AND AMENDMENTS TO, THE COMPANY'S
AMENDED CREDIT FACILITY. The Company, through Lehman Commercial Paper Inc., the
Administrative Agent of the Amended Credit Facility, has initiated the process
of soliciting the consent of the requisite percentage of the senior lenders
under the Amended Credit Facility for a waiver of the existing events of default
under the Amended Bank Credit Facility. Specifically, the Company has requested
a waiver of the following events of default under the Amended Credit Facility:
- The Company's failure to comply with certain of the financial covenants
contained in the Amended Credit Facility for the fiscal quarter ended
December 31, 1999, for the fiscal quarter ended March 31, 2000 and for the
fiscal quarter ending June 30, 2000.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
- The Company's declaration and payment of its regular quarterly dividend on
shares of its Series A Preferred Stock for the fiscal quarter ended March
31, 2000.
- The failure of the Company to deliver annual financial statements of the
Company and CCA unqualified as to the ability of each of the Company and
CCA to continue as a going concern.
- The existence of certain defaults, as described below, by the Company under
the terms of the note purchase agreement relating to the Company's 9.5%
Convertible Notes (as defined herein).
The Company plans to request the consent of the requisite percentage of its
senior lenders under Amended Credit Facility for a waiver of the Amended Credit
Facility's restrictions relating to the proposed amendments of the CCA Leases,
the Amended and Restated Tenant Incentive Agreement, the Amended and Restated
Service Agreement and the Business Development Agreement (as each are
hereinafter defined) providing for the deferral of certain payments with respect
to each of these agreements. The Company plans to request the consent of such
lenders with respect to an amendment to the Amended Credit Facility changing the
definition of the Company's borrowing base under the credit facility to
alleviate the adverse effects of the deferred rental payments on the Company's
borrowing base. Additionally, the Company plans to request the consent of the
requisite percentage of its senior lenders under the Amended Credit Facility to
the appointment of a new Chairman of the Board of Directors and President of the
Company. The Company plans to request a waiver of the Amended Credit Facility's
restrictions upon a "change of control" arising from the execution and
performance of certain conditions under the securities purchase agreement with
Pacific Life. The Company anticipates that these waivers of the provisions of
the Amended Credit Facility would be conditional upon: (i) the completion of the
Pacific Life Restructuring; (ii) the termination of the securities purchase
agreement with Pacific Life; or (iii) as-yet-undetermined requirements.
The Company currently is also in discussions with Lehman Commercial Paper Inc.,
the Administrative Agent, to restructure the terms of the Amended Credit
Facility to provide that the Amended Credit Facility will continue to remain
outstanding following completion of the Pacific Life Restructuring. The Company
anticipates that Lehman Commercial Paper Inc. will solicit the consent of the
requisite percentage of the senior lenders under the Amended Credit Facility to
amend the Amended Credit Facility to provide for the restructuring and
"roll-over" of the Amended Credit Facility simultaneously with the solicitation
of the proposed waivers of the provisions of the credit facility described
above. The Company and Lehman Commercial Paper, Inc. are currently in
discussions with respect to certain terms of the restructuring of the Amended
Credit Facility, including the applicable rates of interest under the facility
and fees to be incurred by the Company in the restructuring, additional
covenants, and conditions of default that may be required. It is also
anticipated that the terms of the waiver will restrict the Company's ability to
declare and pay quarterly cash dividends on the Company's Series A Preferred
Stock until the completion of the Pacific Life Restructing.
Management of the Company expects the conditions to the effectiveness of all of
the proposed waivers of events of default under, and amendments to, the
provisions of the Amended Credit Facility will include, among other conditions:
(i) CCA maintaining in effect a waiver of certain events of default under the
provisions of its revolving credit facility; (ii) the Company having delivered
to the trustee of the Company's $100.0 million Senior Notes (as defined herein)
an opinion as to the fairness, from a financial point of view, to the Company of
the amendments to the terms of the CCA Leases and the amendments to the Amended
and Restated Tenant Incentive Agreement, the Amended and Restated Services
Agreement, and the Business Development Agreement issued by an accounting,
appraisal, consulting or investment banking firm of
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
national standing; (iii) the completion of the Pacific Life Restructuring; and
(iv) the settlement of outstanding securities litigation for an amount not to
exceed the Company's insurance coverage.
The Company has limited resources currently available to it to meet its
operating, capital expenditure and debt service requirements. As a result, the
Company currently is, and will continue to be, dependant on its ability to
borrow funds under the terms of the Amended Credit Facility to meet these
requirements. Due to the Company's non-compliance with certain provisions of the
Amended Credit Facility, the Company is currently unable to borrow additional
amounts under the Amended Credit Facility until a waiver of the existing events
of default is obtained. Accordingly, there can be no assurance that the Company
will be able to meet its operating, capital expenditure and debt service
requirements in the future.
There can also be no assurance that the lenders under the Amended Credit
Facility will consent to any proposed waivers of events of default under, and
amendments to, the Amended Credit Facility, or will not seek to declare an event
of default prior to the execution of any proposed waiver and amendments.
Moreover, the effectiveness of the proposed waivers of events of default under,
and amendments to, the Amended Credit Facility is subject to the satisfaction of
the conditions described above. In the event the Company is unable to obtain the
necessary waivers of events of default under, or amendments to, the Amended
Credit Facility, or to comply with and maintain the proposed waivers and
amendments, or if the Company defaults under the terms of any of its other
indebtedness, and such indebtedness is accelerated, the senior lenders under the
Amended Credit Facility are entitled, at their discretion, to exercise certain
remedies, including acceleration of the outstanding borrowings under the Amended
Credit Facility.
In addition, the Company's $100.0 million Senior Notes (as defined herein), the
Company's 9.5% Convertible Notes (as defined herein) and the Company's 7.5%
Convertible Notes (as defined herein) contain provisions which allow the holders
of these notes to accelerate this debt and seek remedies if the Company has a
payment default under the Amended Credit Facility or if the obligations under
the Amended Credit Facility have been accelerated. If the senior lenders under
the Amended Credit Facility elect to exercise their rights to accelerate the
Company's obligations under the Amended Credit Facility, and/or if the senior
lenders do not consent to the proposed waivers and amendments (or acceptable
alternative waivers and amendments), such events could result in the
acceleration of all or a portion of the outstanding principal amount of the
Company's Senior Notes or its convertible, subordinated notes, which would have
a material adverse effect on the Company's liquidity and financial position. The
Company does not have sufficient working capital to satisfy its debt obligations
in the event of an acceleration of all of the Company's outstanding
indebtedness.
As of March 31, 2000, the Company has made all required principal and interest
payments under the Amended and Restated Credit Facility.
SENIOR NOTES
On June 11, 1999, the Company completed its offering of $100.0 million aggregate
principal amount of 12% Senior Notes due 2006 (the "Senior Notes"). Interest on
the Senior Notes is paid semi-annually in arrears, and the Senior Notes have a
seven year non-callable term due June 1, 2006. Net proceeds from the offering
were approximately $95.0 million after deducting expenses payable by the Company
in connection with the offering. The Company used the net proceeds from the sale
of the Senior Notes for
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
general corporate purposes and to repay revolving bank borrowings under its
Credit Facility.
The Company currently is not in default under the terms of the Senior Notes.
However, in connection with the proposed amendments to the CCA Leases, the
Amended and Restated Tenant Incentive Agreement, the Amended and Restated
Services Agreement and the Business Development Agreement providing for the
deferral of certain payments with respect to each of these agreements, the terms
of the indenture governing the Senior Notes provide that the Company may not
effect such amendments without the prior delivery of an opinion as to the
fairness, from a financial point of view, to the Company of such amendments
issued by an accounting, appraisal, consulting, or investment banking firm of
national standing, to the trustee of the Senior Notes. The Company anticipates
that it will be able to deliver such an opinion to the trustee under the
indenture. In addition, the indenture governing the Senior Notes contains a
provision which allows the holders thereof to accelerate the outstanding
principal amount of the Senior Notes and to seek additional remedies if the
Company has a payment default under the Amended Credit Facility or if the
Company's obligations under the Amended Credit Facility have been accelerated.
9.5% CONVERTIBLE, SUBORDINATED NOTES
On January 29, 1999, the Company issued $20.0 million of convertible,
subordinated notes due in December 2008, with interest payable semi-annually at
9.5%, to MDP Ventures IV and affiliated purchasers. This issuance constituted
the second tranche of a commitment by the Company to issue an aggregate of $40.0
million of convertible, subordinated notes (the "9.5% Convertible Notes"), with
the first $20.0 million tranche issued in December 1998 under substantially
similar terms. The 9.5% Convertible Notes require that the Company revise the
conversion price as a result of the payment of a dividend or the issuance of
stock or convertible securities below market price. As of March 31, 2000, the
conversion price for the 9.5% Convertible Notes was $23.63 per share as compared
to $28.00 per share at issuance.
The provisions of the note purchase agreement relating to the 9.5% Convertible
Notes provide that the execution of the securities purchase agreement by the
Company in connection with the Pacific Life Restructuring constitutes a "change
of control" of the Company. This "change of control" gave rise to a right of the
holders of such notes to require the Company to repurchase the notes at a price
of 105% of the aggregate principal amount of such notes within 45 days after the
provision of written notice by such holders to the Company. To date, the holders
of the 9.5% Convertible Notes have not provided notice to the Company that the
Company will be required to purchase all or a portion of the notes. In addition,
as of February 5, 2000, the Company was no longer in compliance with a financial
covenant contained in the note purchase agreement. As a result of the violation
of this covenant, the Company is in default under the provisions of the note
purchase agreement, and the holders of such notes may, at their option,
accelerate all or a portion of the outstanding principal amount of this
indebtedness. Moreover, during any period in which the Company is in default
under the provisions of the note purchase agreement, the holders of the notes
may require the Company to pay an applicable default rate of interest of 20%. In
addition to the default rate of interest, as a result of the default, the
Company is obligated, under the terms of the 9.5% Convertible Notes, to pay the
holders of the notes contingent interest sufficient to permit the holders to
receive a 15% rate of return on the $40.0 million principal amount, unless the
holders of the notes elect to convert the notes into the Company's common stock
under the terms of the note agreement. Such contingent interest is retroactive
to the date of issuance of the 9.5%
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
Convertible Notes. Lehman Commercial Paper Inc. has notified the holders of the
9.5% Convertible Notes that, under the terms of the Amended Credit Facility, the
payment of principal and interest on the notes is subordinated in right of
payment to the prior payment in full of amounts due under the Amended Credit
Facility and that, as such, the holders of the notes are prohibited from
receiving any payment of principal or interest under the terms of the notes
until the Company is in compliance with the terms of the Amended Credit
Facility.
The Company expects to initiate discussions with the holders of these notes to
waive the occurrence of a "change of control" arising from the Company's
execution of the securities purchase agreement with Pacific Life, thereby
extinguishing the Company's obligation to repurchase the notes at a premium. In
addition, the Company has previously requested that the provisions of the note
purchase agreement be amended to: (i) remove the financial covenant set forth in
the note purchase agreement; (ii) although the Company believes it currently is
in compliance with such covenant, remove a covenant requiring the Company to use
its best efforts to qualify as a REIT for federal income tax purposes; and (iii)
although the Company believes it currently is in compliance with such covenant,
remove a covenant restricting the Company's ability to conduct business other
than the financing, ownership and development of prisons and other correctional
facilities.
There can be no assurance that the holders of the 9.5% Convertible Notes will
consent to any proposed waiver of events of default under, and amendments to,
the note purchase agreement, or will not seek to declare an event of default
prior to the execution of any proposed waiver and amendments. If the holders of
these notes do not consent to the proposed waiver of events of default under,
and amendments to, the note purchase agreement, the Company may be required to
repurchase or redeem the outstanding principal amount of the notes.
7.5% CONVERTIBLE, SUBORDINATED NOTES
The Company's $30.0 million 7.5% convertible, subordinated notes issued to PMI
Mezzanine Fund, L.P. (the "7.5% Convertible Notes") require that the Company
revise the conversion price as a result of the payment of a dividend or the
issuance of stock or convertible securities below market price. As of March 31,
2000, the conversion price for the 7.5% Convertible Notes was $23.63 per share
as compared to $27.42 per share at issuance.
The provisions of the note purchase agreement relating to the 7.5% Convertible
Notes contain certain financial covenants. As of March 31, 2000, the Company was
not in compliance with certain of these financial covenants. However, the
Company is currently not in default under the provisions of this note purchase
agreement because the holder of the 7.5% Convertible Notes has not provided the
Company with written notice declaring such an event of default. As a result, no
event of default currently exists under the provisions of the Amended Credit
Facility with respect to the Company's violation of these financial covenants.
If, however, the holder of the 7.5% Convertible Notes did provide a notice of
default to the Company, upon the expiration of an applicable period, the Company
would be in default under the provisions of the note purchase agreement, which
would also give rise to an event of default under the Amended Credit Facility.
Lehman Commercial Paper Inc. has notified the holder of the 7.5% Convertible
Notes that, under the terms of the Amended Credit Facility, the payment of
principal and interest on the notes is subordinated in right of payment to the
prior payment in full of amounts due under the Amended Credit Facility and that,
as such, the holder of the notes is prohibited from receiving any
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MARCH 31, 2000
(CONTINUED)
payment of principal or interest under the terms of the notes until the Company
is in compliance with the terms of the Amended Credit Facility.
The Company has initiated discussions with PMI Mezzanine Fund, L.P., the holder
of the 7.5% Convertible Notes, to obtain a waiver of events of default under, or
amendments to, the financial covenants contained in the note purchase agreement
violated by the Company. In addition, although the Company is currently in
compliance with such covenant, the Company has requested that the provisions of
the note purchase agreement be amended to remove a covenant requiring the
Company to elect to be taxed as a REIT for federal income tax purposes.
PMI Mezzanine Fund, L.P. has indicated that, subject to the completion of the
Pacific Life Restructuring, it will consent to the proposed waivers of events of
default under, and amendments to, the note purchase agreement and will not seek
to declare an event of default prior to the execution of the proposed waiver and
amendments. If, however, the Pacific Life Restructuring is not completed, there
can be no assurance that the holder of the 7.5% Convertible Notes will consent
to the proposed waivers of events of default under, or amendments to, the note
purchase agreement or that the holder of such notes will not seek to declare an
event of default and require the Company to redeem the outstanding principal
amount of the notes.
As of March 31, 2000, the Company has made all required interest payments under
the 7.5% Convertible Notes.
7. DISTRIBUTIONS TO STOCKHOLDERS
On March 22, 2000, the Board of Directors declared a quarterly dividend on the
Company's 8.0% Series A Cumulative Preferred Stock of $0.50 per share to
preferred stockholders of record on March 31, 2000. These dividends were paid on
April 17, 2000 and have been accrued in the accompanying consolidated balance
sheet as of March 31, 2000.
The Company, as a REIT, cannot complete any taxable year with accumulated
earnings and profits from a taxable corporation. Accordingly, the Company was
required to distribute Old CCA's earnings and profits to which it succeeded in
the 1999 Merger (the "Accumulated Earnings and Profits"). During the year ended
December 31, 1999, the Company made $217.7 million of distributions related to
its common stock and 8.0% Series A Cumulative Preferred Stock. The Company met
the above described distribution requirements by designating $152.5 million of
the total distributions in 1999 as distributions of the Accumulated Earnings and
Profits.
In addition to distributing the Accumulated Earnings and Profits, the Company,
in order to qualify for taxation as a REIT with respect to its 1999 taxable
year, is required to distribute 95% of its taxable income for 1999. Although
dividends sufficient to distribute 95% of the Company's taxable income for 1999
have not been declared as of March 31, 2000, the Company currently intends to
pay sufficient dividends in securities to satisfy its remaining distribution
requirements for qualification as a REIT for 1999 and currently estimates that
approximately $150.0 million in securities will be distributed in 2000 to meet
this requirement. The Company is currently considering the exact timing and
method of the payment of these required distributions. See Note 13 for a
discussion of the Company's distribution of securities under the terms of the
Pacific Life Restructuring in satisfaction of these required distributions. The
Company may partially satisfy these requirements through the payment of a
one-time special dividend (the "Special Dividend"); however, certain provisions
of the Amended Credit Facility restrict the Company's ability to pay these
required distributions in cash. In January 2000, $2.2 million of distributions
relating to the 8.0% Series A Cumulative Preferred Shares, which are eligible to
reduce the
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(CONTINUED)
distribution requirement for the taxable year ended December 31, 1999, have
been paid. The remaining $147.8 million of distributions that must be paid to
shareholders in 2000 in order for the Company to maintain its status as a REIT
for the taxable year ended December 31, 1999 have not been declared by the
Board of Directors and, accordingly, have not been accrued in the accompanying
consolidated balance sheets as of March 31, 2000. Currently, the Company's
governing instruments require that it operate as a REIT. However, if the Company
completes the Pacific Life Restructuring following shareholder in 2000 approval
to modify its governing instruments, the Company intends to be taxed as a C
corporation commencing with its taxable year ending December 31, 2000. In the
event that the Pacific Life Restructuring is not completed, the Company expects
that, following required shareholder approval, the Company will nevertheless
elect to be taxed as a C corporation with respect to its taxable year ending
December 31, 2000 and thereafter.
8. CONTINGENCIES
LITIGATION
On December 29, 1999, a purported class action lawsuit was filed on behalf of
the shareholders of the Company in the Chancery Court for Davidson County,
Tennessee. The lawsuit, captioned Bernstein v. Prison Realty Trust, et al.,
names as defendants the Company and its directors, as well certain affiliates of
the investor under the Fortress/Blackstone Restructuring (as defined in Note
13). The lawsuit alleges that the directors breached their fiduciary duties to
the Company's shareholders by "effectively selling control" of the Company for
inadequate consideration and without having adequately considered or explored
all other alternatives to the Fortress/Blackstone Restructuring or having taken
steps to maximize stockholder value. The plaintiffs seek an injunction
preventing the completion of Fortress/Blackstone Restructuring, declaratory
relief, and costs and fees. On each of January 4, 2000 and January 12, 2000,
nearly identical purported class action lawsuits were filed in the same court on
behalf of different purported class representatives. The lawsuits, captioned
Hardee v. Prison Realty Trust, et al. and Holle v. Prison Realty Trust, et al.,
name as defendants the Company and its directors, as well as
Fortress/Blackstone. These actions were consolidated on February 18, 2000. See
Note 13 with respect to the Company's agreement to complete the Pacific Life
Restructuring and its termination of the agreement providing for the
Fortress/Blackstone Restructuring.
On December 30, 1999, a purported class action lawsuit was filed in federal
court in the United States District Court for the Middle District of Tennessee,
on behalf of the stockholders of the Company. The lawsuit, captioned Neiger v.
Doctor Crants, et al., names as defendants the Company, Doctor R. Crants and D.
Robert Crants, III. The lawsuit alleges violations of federal securities laws
based on the allegation that the defendants knew or should have known that the
Company would not make any further dividend payments on its common stock,
including the Special Dividend, prior to the date on which it was disclosed to
the public that the Company had entered into an agreement with respect to the
Fortress/Blackstone Restructuring and proposed not to elect to be taxed as a
REIT beginning with its 1999 taxable year and, therefore, certain statements
made by them prior to that time were false and misleading. The plaintiffs seek
an unspecified amount of monetary damages and costs and fees. On February 4,
2000, a nearly identical purported class action lawsuit was filed in the same
court on behalf of different purported class representatives. The lawsuit,
captioned Anderson v. Doctor Crants, et al., names as defendants the Company,
Doctor R. Crants and D. Robert Crants, III. On February 24, 2000, a nearly
identical complaint was filed in the same court on behalf of one plaintiff. The
lawsuit, captioned Brody, et al. v. Prison Realty Trust, Inc. et al., names as
defendants the Company, Doctor R. Crants, D. Robert Crants, III and Darrell K.
Massengale. These three actions were consolidated on March 13, 2000.
Additionally, on March 3, 2000, a similar lawsuit was filed on behalf of two
plaintiffs in
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
the Chancery Court for the State of Tennessee, Twentieth Judicial District. The
lawsuit, captioned Buchanan v. Prison Realty Trust, Inc., et al., names as
defendants the Company, Doctor R. Crants, D. Robert Crants, III and Darrell K.
Massengale and alleges violations of state securities laws based on claims
substantially identical to those enumerated above. See Notes 1 and 13 with
respect to the Company's expectation that it will elect to be taxed and qualify
as a REIT for its 1999 taxable year, and see Notes 7 and 13 with respect to the
Company's satisfaction of its remaining 1999 REIT distribution requirements.
The Company is also currently subject to two separate class actions filed in
federal court in the United States District Court for the Middle District of
Tennessee, alleging securities fraud in connection with the agreements entered
into by the Company and CCA in May 1999 to increase payments made by the Company
to CCA under the terms of certain agreements. The plaintiffs' class in In re:
Old CCA Securities Litigation consists of former shareholders of Old CCA who
acquired shares of the Company as the result of the 1999 Merger. The plaintiffs'
class in In re: Prison Realty Securities Litigation consists of former
shareholders of Old Prison Realty who acquired shares of the Company as the
result of the 1999 Merger and all persons who acquired shares of the Company in
the open market prior to May 17, 1999. Each of these actions alleges violations
of federal securities laws based on the allegations that the Company and the
individual defendants in the actions knew or should have known of the increased
payments to CCA prior to the date that they were disclosed to the public, and
therefore certain public filings and representations made by the Company and
certain of the defendants were false and misleading. These two actions represent
the consolidation of sixteen complaints filed in May and June 1999. On March 24,
2000, a purported class action nearly identical to In re: Prison Realty
Securities Litigation was filed in the United States District Court for the
Middle District of Tennessee. It is anticipated that the lawsuit, captioned
Milkovits v. Prison Realty Trust, et. al., will be consolidated with In re:
Prison Realty Securities Litigation. In addition, a purported stockholders'
derivative complaint has been filed in the Chancery Court for Davidson County,
Tennessee in Nashville, captioned Wanstrath v. Crants, et al., against the
Company, CCA and persons who were directors at the time the Company entered into
the agreements regarding the increased payments to CCA. The derivative action
alleges, among other things, that the directors of the Company violated their
fiduciary duties in approving the increased payments to CCA. The plaintiffs in
this action have also moved for a preliminary injunction to prevent the payment
of certain fees in connection with the Fortress/Blackstone Restructuring the
payments to certain parties in connection with the Pacific Life Restructuring.
The Company also is subject to a complaint filed in August 1998 in the Chancery
Court for Davidson County, Tennessee, inherited from Old CCA in the 1999 Merger.
The lawsuit, captioned Dasburg, S.A. v. Corrections Corporation of America, et
al., claims that Old CCA and the individual named defendants violated state law
by making false and misleading statements in order to keep Old CCA's stock price
at an artificially high level during the period from April 1997 through April
1998, so that the individual named defendants could sell shares of Old CCA stock
at inflated prices.
The Company was the subject of a purported class action complaint filed in the
Circuit Court for Davidson County, Tennessee, on January 28, 2000. The lawsuit,
captioned White v. Prison Realty Trust, Inc., et al., alleged that the
defendants engaged in unfair and deceptive practice of permitting telephone
service providers exclusive service rights in return for illegal payments and
kickbacks, which exclusive agreements allow and require the providers to charge
unconscionable fees for phone services. This complaint was subsequently
dismissed by the Circuit Court on February 23, 2000. A similar complaint,
captioned Hunt v. Prison Realty Trust, Inc., was filed on February 23, 2000 in
the Circuit Court for Davidson County, Tennessee, naming as defendants the
Company, CCA, JJFMSI and PMSI. Plaintiffs are asking for unspecified treble
damages pursuant to the Tennessee Consumer Protection Act plus restitution of
the amounts collected by the defendants under such arrangements, as well as a
permanent
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
injunction restraining the defendants from engaging in such conduct, in addition
to unspecified damages.
The Company is defending vigorously its actions in each of the various
shareholder or class action lawsuits. It is possible additional lawsuits will be
filed, or that the existing complaints filed in connection with the
Fortress/Blackstone Restructuring will be amended, in connection with the
Pacific Life Restructuring. It is also possible that the Company's liability in
regard to the shareholder or class action lawsuits will exceed the Company's
insurance coverage limits and will have a material adverse impact on the
Company's consolidated financial position, results of operations and cash flows.
INCOME TAX CONTINGENCIES
As required by its governing instruments, the Company currently intends to elect
to be taxed as a REIT for the year ended December 31, 1999. In the event that
the Company completes the Pacific Life Restructuring under its existing terms,
following required shareholder approval in 2000, the Company expects to be taxed
as a C corporation for the taxable year ending December 31, 2000. In the event
the Pacific Life Restructuring is not completed, the Company expects that,
following required shareholder approval, the Company will nevertheless be taxed
as a C corporation with respect to its taxable year ending December 31, 2000 and
thereafter. As discussed in Note 7, in order to qualify as a REIT for the
taxable year ending December 31, 1999, the Company is required to distribute 95%
of its taxable income for 1999. Although dividends sufficient to distribute 95%
of the Company's taxable income for 1999 have not been declared as of March 31,
2000, the Company intends to pay sufficient dividends to satisfy all
distribution requirements for qualification as a REIT for 1999 and estimates
that approximately $150.0 million in securities will be distributed in 2000 to
meet this requirement. The Company is currently considering the exact timing and
method of the payment of these required distributions. See Note 13 for a
discussion of the Company's distribution of securities under the terms of the
Pacific Life Restructuring in satisfaction of these required distributions. In
January 2000, $2.2 million of distributions relating to the 8.0% Series A
Cumulative Preferred Shares, which are eligible to reduce the distribution
requirement for the taxable year ending December 31, 1999, have been paid. The
remaining $147.8 million of distributions that must be paid to shareholders in
2000 in order for the Company to maintain its status as a REIT for the taxable
year ending December 31, 1999 have not been declared by the Board of Directors
and, accordingly, have not been accrued in the accompanying consolidated balance
sheets as of March 31, 2000. It is likely that the consent of the Company's debt
holders would be required for the Company to make these distributions. The
Company's failure to distribute 95% of its taxable income for 1999 or the
failure of the Company to comply with other requirements for REIT qualification
under the Internal Revenue Code of 1986, as amended, would have a material
adverse impact on the Company's consolidated financial position, results of
operations and cash flows.
The Company's election of REIT status for the taxable year ended December 31,
1999 will be subject to review by the Internal Revenue Service for a period of
three years from the date of filing of its 1999 tax return. Should the IRS
review the Company's election to be taxed as a REIT for the 1999 taxable year
and reach a conclusion requiring the Company to be treated as a taxable
corporation for the 1999 taxable year, the Company would be subject to income
taxes and interest on its 1999 taxable income and possibly subject to fines
and/or penalties. Income taxes, excluding any interest, fines and/or penalties
for the year ended December 31, 1999 could exceed $83.5 million, which would
have a material adverse impact on the Company's consolidated financial position,
results of operations and cash flows.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
In connection with the 1999 Merger, the Company assumed all tax obligations of
Old CCA resulting from disputes with federal and state taxing authorities
related to tax returns filed by Old CCA in 1998 and prior taxable years. The IRS
is currently conducting an audit of Old CCA's federal tax return for the taxable
year ending December 31, 1997. The Company currently is unable to predict the
ultimate outcome of the IRS's audit of Old CCA's 1997 federal tax return or the
ultimate outcome of audits of other tax returns of the Company or Old CCA by the
IRS or by other taxing authorities; however, it is possible that such audits
will result in claims against the Company in excess of the reserves currently
recorded by the Company. In addition, to the extent that IRS audit adjustments
increase the Accumulated Earnings and Profits of Old CCA, the Company would be
required to make timely distribution of the Accumulated Earnings and Profits of
Old CCA to the Company's shareholders. Such results would have a material
adverse impact on the Company's financial position, results of operations and
cash flows.
9. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the year. Diluted earnings
per share is computed by dividing net income (as adjusted) by the weighted
average number of common shares after considering the additional dilution
related to convertible preferred stock, convertible subordinated notes, options
and warrants.
For the three months ended March 31, 2000, the Company's stock options and
warrants and convertible subordinated notes were convertible into an additional
3.0 million shares. These incremental shares were excluded from the computation
of diluted earnings per share for the three months ended March 31, 2000 as the
effect of their inclusion would have been anti-dilutive.
10. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standard requiring that
every derivative instrument be recorded in the balance sheet as either an asset
or liability measured at its fair value. SFAS 133 requires that changes in a
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS 133, as amended by Statement of
Financial Accounting Standards No 137, "Deferral of the Effective Date of SFAS
133", is effective for fiscal quarters beginning after June 15, 2000. The
Company does not believe that the impact of adoption of SFAS 133 will have a
material impact on the Company's consolidated financial position, results of
operations or cash flows.
11. RELATIONSHIP WITH CORRECTIONS CORPORATION OF AMERICA
CCA is a private prison management company that operates and manages the
substantial majority of facilities owned by the Company. As a result of the 1999
Merger and certain contractual relationships existing between the Company and
CCA, the Company is dependent on its significant sources of income from CCA. In
addition, the Company pays CCA tenant incentive fees and fees for services
rendered to the Company in the development of its correctional and detention
facilities. As of March 31, 2000, CCA leased 37 of the 46 operating properties
owned by the Company. See the Company's Form 10-K for detailed information with
respect to the contractual relationships between the Company and CCA. The
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
following information under this Note 11 updates the activity or the specific
transaction and contractual relationships.
CCA NOTE
Pursuant to the terms of the CCA Note, CCA was required to make the first
scheduled payment of interest, totaling approximately $16.4 million, on December
31, 1999; however, pursuant to the terms of the Subordination Agreement, CCA is
prohibited from making the scheduled interest payments on the CCA Note when CCA
is not in compliance with certain financial covenants. As of December 31, 1999,
CCA was not and, notwithstanding the waiver obtained, CCA currently is not, in
compliance with these financial covenants. Consequently, CCA is prohibited from
making the scheduled interest payments to the Company. Pursuant to the terms of
the Subordination Agreement, the Company is prohibited from accelerating payment
of the principal amount of the CCA Note or taking any other action to enforce
its rights under the provisions of the CCA Note for so long as CCA's revolving
credit facility remains outstanding. During the three months ended March 31,
1999, the Company recorded $4.1 million interest accrued under the terms of the
CCA Note. During December 1999, the Company fully reserved the $16.4 million of
interest accrued under the terms of the CCA Note during 1999. The Company has
also reserved the $4.1 million of interest accrued during the three months ended
March 31, 2000.
INVESTMENT IN CCA
For the three months ended March 31, 2000 and March 31, 1999, the Company
recognized no income or loss related to its stock ownership investment in CCA.
DEFERRED GAIN ON SALE TO CCA
No amortization of the CCA deferred gain occurred during the three months ended
March 31, 2000 and 1999.
CCA LEASES
During the three months ended December 31, 1999 and March 31, 2000, CCA has
failed to make timely contractual payments under the terms of the CCA Leases. As
of December 31, 1999, approximately $24.9 million of rents due from CCA to the
Company were unpaid. The terms of the CCA Leases provide that rental payments
were due and payable on December 25, 1999. During 2000, CCA has paid the $24.9
million of lease payments related to 1999 and $4.0 million of lease payments
related to 2000. For the three months ended March 31, 2000, the Company
recognized rental revenue from CCA of $80.2 million and recorded a reserve of
$71.2 million resulting in recognition of net rental revenue from CCA of $9.0
million. The reserve was recorded due to the uncertainty regarding the
collectiblity of the revenue. In addition, the Company expects that the CCA
Leases will be materially impacted by either the Pacific Life Restructuring or
by renegotiation of the CCA Leases with CCA.
In an effort to address CCA's liquidity needs prior to the completion of the
Pacific Life Restructuring, the Company and CCA intend to amend the terms of the
CCA Leases. Pursuant to this amendment, rent is expected to be payable on June
30 and December 31 of each year, instead of monthly. In addition, the amendment
is expected to provide that CCA is required to make certain scheduled monthly
installment payments of rent to the
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MARCH 31, 2000
(CONTINUED)
Company. At the time these installment payments are made, it is anticipated that
CCA will also be required to pay interest to the Company upon such payments at a
rate equal to the then current interest rate under CCA's revolving credit
facility. These installment payments represent a portion of CCA's rental payment
obligations accruing from January 1, 2000 to June 30, 2000 under the CCA Leases.
The Company is required to obtain the consent of its lenders under the terms of
the Amended Credit Facility with respect to the amendment of the CCA Leases as
discussed in Note 6 herein.
For the three months ended March 31, 1999, the Company recognized rental revenue
from CCA of $61.4 million.
TENANT INCENTIVE ARRANGEMENT
For the year ended December 31, 1999, the Company had paid tenant incentive fees
of $68.6 million (including $6.6 million during the three months ended March 31,
1999), with $2.9 million of those fees amortized against rental revenues, under
the terms of the Amended and Restated Tenant Incentive Agreement by and between
the Company and CCA (the "Amended and Restated Tenant Incentive Agreement").
During the fourth quarter of 1999, the Company undertook a plan that
contemplates either merging with CCA and thereby eliminating the CCA Leases or
amending the CCA Leases to reduce the lease payments to be paid by CCA to the
Company during 2000. Consequently, the Company determined that the remaining
deferred tenant incentive fees under the existing lease arrangements at December
31, 1999 were not realizable and wrote off fees totaling $65.7 million. During
the three months ended March 31, 2000, the Company opened one facility that is
operated by CCA. The Company has expensed the tenant incentive fees due CCA,
totaling $4.0 million, but has made no payments to CCA in 2000 with respect to
this agreement.
CCA TRADE NAME USE AGREEMENT
For the three months ended March 31, 2000 and 1999, the Company recognized
income of $2.6 million and $2.1 million, respectively, from CCA under the terms
of the Trade Name Use Agreement by and between the Company and CCA (the "Trade
Name Use Agreement"). At March 31, 2000, the Company had a receivable from CCA
totaling $4.8 million, of which $2.2 million has been collected subsequent to
March 31, 2000.
CCA RIGHT TO PURCHASE AGREEMENT
Since January 1, 1999, the Company has not purchased any assets from CCA under
the Right to Purchase Agreement by and between CCA and the Company (the "Right
to Purchase Agreement").
CCA SERVICES AGREEMENT
Costs incurred by the Company under the Amended and Restated Services Agreement
by and between the Company and CCA (the "Amended and Restated Services
Agreement") are capitalized as part of the facilities' development cost. Costs
incurred under the Amended and Restated Services Agreement and capitalized as
part of the facilities' development cost totaled $3.0 million and $12.1 million
for the three months ended March 31, 2000 and 1999, respectively.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
CCA BUSINESS DEVELOPMENT AGREEMENT
Costs incurred by the Company under the Business Development Agreement by and
between the Company and CCA (the "Business Development Agreement") are
capitalized as part of the facilities' development cost. For the three months
ended March 31, 2000, no costs were incurred under the Business Development
Agreement, and for the three months ended March 31, 1999, costs of $8.6 million
were incurred under the Business Development Agreement.
PROPOSED AMENDMENTS TO AGREEMENTS BETWEEN THE COMPANY AND CCA
The Company and CCA intend to amend the terms of the Amended and Restated Tenant
Incentive Agreement, the Amended and Restated Services Agreement and the
Business Development Agreement to provide for the deferral of the payment of all
fees under these agreements by the Company to CCA until September 30, 2000. The
Company is required to obtain the consent of its lenders under the terms of the
Amended Credit Facility to these amendments as discussed in Note 6 herein.
RECEIVABLE FROM CCA
As of March 31, 2000, the Company had recorded a receivable of $25.8 million
from CCA. This receivable was comprised primarily of (i) rent due under the CCA
Leases for the three months ended March 31, 2000 ($77.7 million) and a portion
of the month of December 1999 rent ($11.9 million) and (ii) licensing fees for
the fourth quarter of 1999 and the first quarter of 2000 due under the Trade
Name Use Agreement ($4.8 million). For the three months ended March 31, 2000,
the Company recognized rental revenue from CCA of $80.2 million and recorded a
reserve of $71.2 million resulting in recognition of net rental revenue from CCA
of $9.0 million. The reserve was recorded due to the uncertainty regarding the
collectibility of the revenue. Subsequent to March 31, 2000, CCA has paid for
obligations under the CCA Leases for 2000 and 1999 of $4.0 million and 11.9
million, respectively. In addition, subsequent to March 31, 2000, CCA has paid
$2.2 million for obligations due under the Trade Name Use Agreement for 1999.
CCA'S REVOLVING CREDIT FACILITY
The terms of CCA's revolving credit facility provide that CCA shall not amend or
modify the terms of the Amended and Restated Tenant Incentive Agreement, the
Amended and Restated Services Agreement, and the Business Development Agreement
in any manner which would be on terms and conditions less favorable to CCA than
are in effect immediately prior to such amendment or modification. If the
proposed amendments to these agreements are completed, CCA would be in violation
of its revolving credit facility. In addition, CCA's non-payment of amounts due
under the CCA Leases has resulted, and the proposed amendments to the CCA Leases
would result, in a violation of CCA's revolving credit facility. CCA's revolving
credit facility also requires that CCA have a net worth in excess of certain
specified amounts. On December 31, 1999 and March 31, 2000, CCA was not, and it
currently is not, in compliance with this financial covenant. The terms of CCA's
revolving credit facility also provide that CCA's execution of the agreement and
plan of merger setting forth the terms of the combination of the Company, CCA,
PMSI and JJFMSI contemplated by the Pacific Life Restructuring resulted in an
event of default under CCA's revolving credit facility.
F-45
<PAGE> 312
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
CCA has obtained the consent of the requisite percentage of the senior lenders
under its revolving credit facility for a waiver of its credit facility's
restrictions relating to:
- The proposed amendments of the terms of the Amended and Restated Tenant
Incentive Agreement, the Amended and Restated Services Agreement, and the
Business Development Agreement.
- CCA's non-payment of amounts due under the CCA Leases and the proposed
amendments to the CCA Leases.
- CCA's violation of the net worth covenant contained in its revolving credit
facility.
- CCA's execution of the agreement and plan of merger.
The terms of the waiver provide that the waiver shall remain in effect until
July 31, 2000. The waiver will terminate on a date which is earlier than July
31, 2000 if: (i) the Pacific Life securities purchase agreement is terminated;
(ii) CCA makes any payments to the Company other than as set forth in the
proposed amendments to CCA's agreements with the Company; or (iii) the senior
lenders under the Company's Amended Credit Facility exercise any rights with
respect to any default or event of default under the Amended Credit Facility.
There can be no assurance that CCA will be able to comply with and maintain the
waivers. In the event CCA is unable to comply with and maintain the waivers, the
senior lenders under CCA's revolving credit facility are entitled, at their
discretion, to exercise certain remedies, including acceleration of the
outstanding borrowings under the revolving credit facility. If the senior
lenders elect to exercise their rights to accelerate CCA's obligations under
CCA's revolving credit facility, such events would have a material adverse
effect on CCA's liquidity and financial position. CCA does not have sufficient
working capital in the event of an acceleration of CCA's revolving credit
facility. In addition, the terms of the Company's leases with CCA provide that
an event of default under CCA's revolving credit facility which results in the
acceleration of at least $25.0 million of CCA's indebtedness under the CCA
revolving credit facility prior to its stated maturity will result in an event
of default under the CCA Leases, which would result in an event of default under
the Company's Amended Credit Facility, also triggering defaults under the
Company's other indebtedness.
F-46
<PAGE> 313
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
CCA FINANCIAL INFORMATION
The following summarized unaudited operating information presents CCA's results
of operations for the three months ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
(UNAUDITED AND AMOUNTS IN THOUSANDS)
Revenues $ 137,952 $ 112,363
Net loss before taxes -- (67,124)
Net loss (62,690) (39,766)
</TABLE>
The following summarized unaudited balance sheet information presents CCA's
financial position as of March 31, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
<S> <C> <C>
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
Current assets $ 82,208 $ 88,647
Total assets 175,918 184,701
Current liabilities 313,951 258,421
Deferred credits 105,202 107,070
Total liabilities 419,153 365,491
Stockholders' equity (243,235) (180,790)
</TABLE>
The following summary presents CCA's cash flows for the three months ended March
31, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
(UNAUDITED AND AMOUNTS IN THOUSANDS)
Cash flows provided by (used in) operating activities $ 2,228 $(5,611)
Cash flows used in investing activities (415) (1,011)
Cash flows used in financing activities (10,034) (1,517)
-------- -------
Net decrease in cash for the three months ended $ (8,221) $(8,139)
======== =======
</TABLE>
During 2000, CCA has utilized cash from the deferral of its lease and other
contractual payments to the Company to offset its operating losses. During 1999,
CCA used cash from equity issuances and from payments from the Company for
tenant incentive arrangements and services provided to the Company to offset its
operating losses. CCA expects to continue to use cash from the deferral of its
lease and other contractual payments to the Company and its availability under a
line of credit to offset its anticipated
F-47
<PAGE> 314
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
losses from operations. Cash used in investing activities consists of equipment
additions. Cash used in financing activities consists of line of credit issuance
fee.
The Company has included additional financial information of CCA for the three
months ended March 31, 2000 and 1999 herein under "Results of Operations"
contained in "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
12. INVESTMENTS IN AFFILIATES
In connection with the 1999 Merger, Old CCA received 100% of the non-voting
interest in PMSI and JJFMSI valued at the implied fair market values of $67.1
million and $55.9 million, respectively. The Company succeeded to these
interests as a result of the 1999 Merger. The Company's ownership interests
obligate PMSI and JJFMSI to make distributions to the Company equal to 95% of
their net income as determined in accordance with generally accepted accounting
principles ("GAAP") plus non-cash expenses, as defined.
The following unaudited operating information presents a combined summary of the
results of operations for PMSI and JJFMSI for the three months ended March 31,
2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
(UNAUDITED AND AMOUNTS IN THOUSANDS)
Revenues $73,967 $69,082
Net income 3,625 5,276
</TABLE>
The following unaudited balance sheet information presents a combined summary of
the financial position for PMSI and JJFMSI as of March 31, 2000 and December 31,
1999:
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- ------------------
<S> <C> <C>
(UNAUDITED AND AMOUNTS IN THOUSANDS)
Current assets $ 62,321 $ 60,741
Total assets 149,507 151,167
Current liabilities 32,707 31,750
Total liabilities 33,573 32,622
Stockholders' equity 115,934 118,545
</TABLE>
Equity in earnings of unconsolidated entities and amortization of deferred gains
was $6.1 and $7.7 million for the three months ended March 31, 2000 and March
31, 1999, respectively. For the three months ended March 31, 2000, the Company
recognized equity in earnings of PMSI and JJFMSI of $2.1 million and $1.3
million, respectively, and received distributions from PMSI and JJFMSI of $0.6
million and $0.1 million, respectively. For the three months ended March 31,
2000, the Company recognized amortization of deferred gains of PMSI and JJFMSI
of $1.8 million and $0.9 million, respectively.
For the three months ended March 31, 1999, the Company recognized equity in
earnings of PMSI and JJFMSI of $1.9 million and $3.1 million, respectively. For
the three months ended March 31, 1999, the Company recognized amortization of
deferred gains of PMSI and JJFMSI of $1.8 million and $0.9 million,
respectively. The decrease in the equity in earnings of PMSI and JJFMSI is
attributable to less favorable operating results of PMSI and JJFMSI.
13. PROSPECTIVE EQUITY INVESTMENT AND RELATED RESTRUCTURING
On April 16, 2000, the Company entered into a definitive agreement with Pacific
Life with respect to the Pacific Life Restructuring providing for a
restructuring of the Company that includes: (i) the combination
F-48
<PAGE> 315
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
of the Company with each of CCA, PMSI and JJFMSI; (ii) a $200.0 million equity
investment in the Company; and (iii) a restructuring of the Company's existing
board of directors and management, and intending to serve as an alternative to
an agreement entered into on December 26, 1999 with a group of investors led by
affiliates of The Fortress Investment Group LLC, The Blackstone Group and Bank
of America Corporation (collectively, "Fortress/Blackstone") also with respect
to a series of restructuring transactions (the "Fortress/Blackstone
Restructuring"). In connection with the execution of the agreement with Pacific
Life, the Company terminated its agreement with Fortress/Blackstone.
The Fortress/Blackstone securities purchase agreement provided for, as a result
of its termination and the execution of the agreement with Pacific Life, the
payment by the Company to Fortress/Blackstone of a termination fee of $7.5
million, as well as a $15.2 million commitment fee and certain expenses incurred
by Fortress/Blackstone in connection with the proposed transaction. To date, the
Company has not paid these fees. These fees totaling $22.7 million, along with
approximately $4.4 million of professional fees incurred in connection with the
Fortress/Blackstone Restructuring, will be expensed during the three months
ending June 30, 2000.
Under the terms of the Company's agreement with Pacific Life, the Company has
agreed to raise $200.0 million in additional capital by offering its existing
common shareholders transferable rights to purchase up to $200.0 million of its
common stock at a price equal to the lower of $4.00 per share and 65% of the
average market price of the Company's common stock over three trading days prior
to the commencement of the rights offering. In connection with the rights
offering, Pacific Life will provide a 100% backstop of up to $200.0 million for
any unsubscribed portion of the rights offering and will receive, in exchange
for such commitment, warrants to purchase 20.0 million shares of the Company's
common stock (or, if greater, warrants to purchase 10% of the Company's
outstanding common stock on a fully diluted basis) having a term of eight years.
The warrant exercise price will be set at a 20% premium to the average closing
market stock price over the five trading days prior to the end of the rights
offering. To the extent that the rights to purchase the Company's common stock
are not exercised in the rights offering, Pacific Life will purchase shares of
the Company's Series B convertible preferred stock equal to the difference
between $200.0 million and the gross proceeds received by the Company in the
rights offering, subject to a $10.0 million minimum investment in the shares of
Series B convertible preferred stock. The Series B convertible preferred stock
will provide for cash dividends at a rate of 6% per annum and a paid-in-kind, or
PIK, dividend at a rate of 4% per annum for the first three years following the
date of issuance, and cash dividends at a rate of 10% per annum thereafter,
payable quarterly in arrears. The Series B convertible preferred stock will be
convertible into shares of the Company's common stock at a conversion price
equal to the rights offering exercise price.
Under the terms of the Company's agreement with Pacific Life, the Company
intends to elect to be taxed as a REIT for its taxable year ending 1999 and, in
satisfaction of the Company's remaining REIT distribution requirements, will
distribute to all common shareholders approximately $150.0 million of 12% PIK
Series C convertible preferred stock. The Series C convertible preferred stock
will be convertible into shares of the Company's common stock during certain
specified periods at prescribed prices based on 100% of an average trading
price.
Upon completion of the Pacific Life Restructuring the board of directors of the
Company will be fixed at ten members, comprised of four members from the
Company's existing board, four members designated by Pacific Life and two
independent directors designated jointly by Pacific Life and the Company's
F-49
<PAGE> 316
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(CONTINUED)
existing board. An investment committee of the board of directors will also be
created, to be comprised of seven directors, with four designated by Pacific
Life, one non-executive director, one executive director and one outside
director jointly selected by the board of directors and Pacific Life. The
investment committee will, among other things, approve the selection of a new
chief executive officer and chief financial officer of the Company.
It is a condition to the obligations of Pacific Life under the Pacific Life
Restructuring that the existing securities litigation against the Company
described in Note 8 be finally settled on terms and conditions satisfactory to
Pacific Life or, in the alternative, that liability insurance be obtained by the
Company providing coverage for such potential liability. It is also a condition
to the obligations of Pacific Life that the Company's existing senior
indebtedness be refinanced or "rolled-over" by the existing lending group. The
completion of the transactions contemplated by the Pacific Life Restructuring,
including the issuance of the Series B convertible preferred stock and the
warrant, and the Company's election not to be taxed as a REIT commencing with
its 2000 taxable year, is subject to the approval of the Company's shareholders.
There can be no assurance that any or all of such conditions will be met or
that, if any of such conditions are not met, Pacific Life will waive such
conditions. In the event any such conditions are not met and are not waived by
Pacific Life, the Pacific Life Restructuring will not be completed, and the
Company's Board of Directors will be required to determine the best alternative
for the Company and its shareholders. The Company's Board of Directors expects
that if the Pacific Life Restructuring is not completed, the Company will
complete the merger with CCA provided (i) each of the Company and CCA obtain the
requisite shareholder approval, (ii) the Company is able to restructure the
terms of its indebtedness in a satisfactory manner, and (iii) the Board of
Directors of each of the companies determines that a combination without
additional equity is more favorable to such company and its respective
shareholders than seeking protection under the federal bankruptcy laws.
F-50
<PAGE> 317
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
Consolidated Financial Statements
As of December 31, 1999 and 1998
Together with Report of Independent Public Accountants
F-51
<PAGE> 318
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.
Nashville, Tennessee ARTHUR ANDERSEN LLP
March 27, 2000
F-52
<PAGE> 319
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS 1999 1998
----------------------------------------- ----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
(Continued)
F-53
<PAGE> 320
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
(Continued)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
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-54
<PAGE> 321
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
========= ========= =========
</TABLE>
(Continued)
F-55
<PAGE> 322
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)
(Continued)
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
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-56
<PAGE> 323
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
-------------------------------------- ------------------------------------------------
SERIES A SERIES B ISSUED TREASURY STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 - $ -- -- $ -- 65,650 $ 656 (20) $ (726)
Exchange of preferred
stock for
acquisition of
American Corrections - -- 380 380 -- -- (665) (32,812)
Transport
Stock options and
warrants exercised - -- -- -- 3,672 37 (36) (1,975)
Stock repurchased - -- -- -- -- -- (108) (5,329)
Income tax benefits of
incentive stock
option exercises - -- -- -- -- -- -- --
Conversion of
long-term debt - -- -- -- 879 9 -- --
Compensation expense
related to deferred
stock awards and
stock options - -- -- -- -- -- -- --
Net income (loss) - -- -- -- -- -- -- --
--- ------- ------ ---------- -------- --------- ------- ---------
BALANCE, DECEMBER 31, 1997 - -- 380 380 70,201 702 (829) (40,842)
--- ------- ------ ---------- -------- --------- ------- ---------
Conversion of
preferred stock - -- (380) (380) 610 6 -- --
Stock options and
warrants exercised - -- -- -- 5,161 52 (818) (20,148)
Stock repurchased - -- -- -- -- -- (175) (7,600)
Income tax benefits of
incentive stock
option exercises - -- -- -- -- -- -- --
Conversion of
long-term debt - -- -- -- 1,805 18 1,075 51,029
Retirement of treasury
stock - -- -- -- (747) (7) 747 17,561
CMSC stock issued to
Old CCA employees - -- -- -- -- -- -- --
Issuance of common
stock - -- -- -- 2,926 29 -- --
Compensation expense
related to deferred
stock awards and
stock options - -- -- -- -- -- -- --
Net income - -- -- -- -- -- -- --
--- ------- ------ ---------- -------- --------- ------- ---------
BALANCE, DECEMBER 31, 1998 - $ -- -- $ -- 79,956 $ 800 -- $ --
--- ------- ------ ---------- -------- --------- ------- ---------
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
PAID-IN RETAINED CUMULATIVE ACCUMULATED STOCKHOLDERS'
CAPITAL EARNINGS NET INCOME DISTRIBUTIONS EQUITY
------- -------- ---------- ------------- ------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ 239,690 $ 42,132 $ -- $ -- $ 281,752
Exchange of preferred
stock for
acquisition of
American Corrections 32,432 -- -- -- --
Transport
Stock options and
warrants exercised 14,786 (3,612) -- -- 9,236
Stock repurchased -- -- -- -- (5,329)
Income tax benefits of
incentive stock
option exercises 6,328 -- -- -- 6,328
Conversion of
long-term debt 1,668 -- -- -- 1,677
Compensation expense
related to deferred
stock awards and
stock options 457 -- -- -- 457
Net income (loss) -- 53,955 -- -- 53,955
--------- --------- --------- ----------- ---------
BALANCE, DECEMBER 31, 1997 295,361 92,475 -- -- 348,076
--------- --------- --------- ----------- ---------
Conversion of
preferred stock 374 -- -- -- --
Stock options and
warrants exercised 22,478 (1,733) -- -- 649
Stock repurchased -- -- -- -- (7,600)
Income tax benefits of
incentive stock
option exercises 4,475 -- -- -- 4,475
Conversion of
long-term debt 3,633 (48,885) -- -- 5,795
Retirement of treasury
stock (17,554) -- -- -- --
CMSC stock issued to
Old CCA employees 22,850 -- -- -- 22,850
Issuance of common
stock 66,119 -- -- -- 66,148
Compensation expense
related to deferred
stock awards and
stock options 757 -- -- -- 757
Net income -- 10,836 -- -- 10,836
--------- --------- --------- ----------- ---------
BALANCE, DECEMBER 31, 1998 $ 398,493 $ 52,693 $ -- $ -- $ 451,986
--------- --------- --------- ----------- ---------
</TABLE>
(Continued)
F-57
<PAGE> 324
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
(Continued)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
SERIES A SERIES B ISSUED TREASURY STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998 -- $ -- $-- -- 79,956 $ 800 -- $ --
Acquisition of Old
Prison Realty 4,300 107,500 -- -- 25,316 253 -- --
Effect of election of
status as a real
estate investment -- -- -- -- -- -- -- --
trust
Issuance of common
stock -- -- -- -- 7,981 79 -- --
Stock options exercised -- -- -- -- 146 2 (12) (242)
Conversion of
long-term debt -- -- -- -- 4,975 50 -- --
Shares issued to -- -- -- -- 9 -- -- --
trustees
Compensation expense
related to deferred
stock awards and
stock options -- -- -- -- 23 -- -- --
Net income -- -- -- -- -- -- -- --
Distributions to
shareholders -- -- -- -- -- -- -- --
----- ----------- ---- --- ------- ----------- --- -----------
BALANCE, DECEMBER 31, 1999 4,300 $ 107,500 $ -- -- 118,406 $ 1,184 (12) $ (242)
===== =========== ==== === ======= =========== === ===========
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
PAID-IN RETAINED CUMULATIVE ACCUMULATED STOCKHOLDERS'
CAPITAL EARNINGS NET INCOME DISTRIBUTIONS EQUITY
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998 $ 398,493 $ 52,693 $ -- $ -- $ 451,986
Acquisition of Old
Prison Realty 952,927 -- -- -- 1,060,680
Effect of election of
status as a real
estate investment 52,693 (52,693) -- -- --
trust
Issuance of common
stock 131,898 -- -- -- 131,977
Stock options exercised 406 -- -- -- 166
Conversion of
long-term debt 45,789 -- -- -- 45,839
Shares issued to 125 -- -- -- 125
trustees
Compensation expense
related to deferred
stock awards and
stock options 606 -- -- -- 606
Net income (83,200) -- 29,824 -- (53,376)
Distributions to
shareholders (152,510) -- -- (65,144) (217,654)
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1999 $ 1,347,227 $ -- $ 29,824 $ (65,144) $ 1,420,349
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-58
<PAGE> 325
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
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
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) --
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
--------- --------- ---------
</TABLE>
(Continued)
F-59
<PAGE> 326
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
(Continued)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C> <C>
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-60
<PAGE> 327
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
(Continued)
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
Property and equipment were acquired through the forgiveness of the direct
financing lease receivable and the issuance of a credit toward future
management fees:
<S> <C> <C> <C>
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-61
<PAGE> 328
PRISON REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
(Continued)
<TABLE>
<CAPTION>
1999 1998 1997
----------- --------- -----------
Sales of contracts to Old CCA, PMSI and JJFMSI:
<S> <C> <C> <C>
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-62
<PAGE> 329
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.
F-63
<PAGE> 330
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.
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
(UNAUDITED) DECEMBER 31, 1998
-----------------
<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.
F-64
<PAGE> 331
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 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.
F-65
<PAGE> 332
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.
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.
F-66
<PAGE> 333
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.
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.
F-67
<PAGE> 334
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 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.
F-68
<PAGE> 335
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>
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.
F-69
<PAGE> 336
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 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.
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<PAGE> 337
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.
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.
F-71
<PAGE> 338
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.
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.
F-72
<PAGE> 339
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.
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
F-73
<PAGE> 340
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%.
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).
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<PAGE> 341
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>
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.
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<PAGE> 342
Real estate properties as of December 31, 1999 consist of the following:
<TABLE>
<CAPTION>
COSTS CAPITALIZED SUBSEQUENT
INITIAL COST TO ACQUISITION
---------------------------- -----------------------------
BUILDINGS, BUILDINGS,
IMPROVEMENTS, IMPROVEMENTS,
EQUIPMENT, EQUIPMENT,
CONSTRUCTION IN CONSTRUCTION IN
LAND PROGRESS LAND PROGRESS
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Texas (9 properties) $ 2,930 $ 275,059 $ 559 $ 4,959
Oklahoma (4 properties) 826 225,572 -- 7,998
Kentucky (4 properties) 1,818 25,028 -- 33,489
Tennessee (5 properties) 15,485 114,052 -- 2,948
New Mexico (3 properties) 1,376 88,618 403 23,813
Arizona (3 properties) 2,688 401,666 -- 1,462
Colorado (3 properties) 956 78,978 -- 18,665
Georgia (5 properties) 1,297 154,058 -- --
California (4 properties) 3,699 231,824 -- --
North Carolina (2 properties) 406 83,448 -- --
Ohio (2 properties) 1,507 163,967 -- 2,215
All Other States (7 properties) 3,462 194,026 -- 873
United Kingdom (1 property) -- 88,151 -- --
---------- ---------- ---------- ----------
$ 36,450 $2,124,447 $ 962 $ 96,422
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
TOTAL HISTORICAL COST AT DECEMBER 31, 1999
-------------------------------------------
BUILDINGS,
IMPROVEMENTS,
EQUIPMENT,
CONSTRUCTION IN ACCUMULATED
LAND PROGRESS TOTAL DEPRECIATION
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Texas (9 properties) $ 3,489 $ 280,018 $ 283,507 $ 7,141
Oklahoma (4 properties) 826 233,570 234,396 5,599
Kentucky (4 properties) 1,818 58,517 60,335 1,293
Tennessee (5 properties) 15,485 117,000 132,485 7,197
New Mexico (3 properties) 1,779 112,431 114,210 3,166
Arizona (3 properties) 2,688 403,128 405,816 7,737
Colorado (3 properties) 956 97,643 98,599 4,497
Georgia (5 properties) 1,297 154,058 155,355 2,252
California (4 properties) 3,699 231,824 235,523 802
North Carolina (2 properties) 406 83,448 83,854 2,348
Ohio (2 properties) 1,507 166,182 167,689 4,104
All Other States (7 properties) 3,462 194,899 198,361 3,649
United Kingdom (1 property) -- 88,151 88,151 --
---------- ---------- ---------- ----------
$ 37,412 $2,220,869 $2,258,281 $ 49,785
========== ========== ========== ==========
</TABLE>
F-76
<PAGE> 343
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>
ACCUMULATED
HISTORICAL COST 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.
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<PAGE> 344
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 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.
F-78
<PAGE> 345
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>
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>
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<PAGE> 346
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.
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.
F-80
<PAGE> 347
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 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.
F-81
<PAGE> 348
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-82
<PAGE> 349
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 $.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.
F-83
<PAGE> 350
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 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.
F-84
<PAGE> 351
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 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.
F-85
<PAGE> 352
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 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.
F-86
<PAGE> 353
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 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
F-87
<PAGE> 354
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 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
F-88
<PAGE> 355
investment and related restructuring, the Company will be required to
amend the provisions of 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-89
<PAGE> 356
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>
F-90
<PAGE> 357
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 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.
F-91
<PAGE> 358
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 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.
F-92
<PAGE> 359
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 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.
F-93
<PAGE> 360
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.
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.
F-94
<PAGE> 361
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.
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
------------ -------------
<S> <C> <C>
(In thousands, except exercise prices)
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.
F-95
<PAGE> 362
Stock options outstanding at December 31, 1999 are summarized below:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS REMAINING OPTIONS
EXERCISE OUTSTANDING AT CONTRACTUAL LIFE WEIGHTED AVERAGE EXERCISABLE AT
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.
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.
F-96
<PAGE> 363
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>
F-97
<PAGE> 364
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 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
$.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-98
<PAGE> 365
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)
Net income (loss) per common
share - 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)
Net income (loss) per common
share - Diluted 0.23 0.27 0.27 (.67)
</TABLE>
F-99
<PAGE> 366
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
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.
F-100
<PAGE> 367
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 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.
F-101
<PAGE> 368
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 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,
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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, 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
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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
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");
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- 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;
- 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
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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"). 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.
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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 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.
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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
-------------- -----------------
<S> <C> <C>
ASSETS (UNAUDITED AND AMOUNTS IN THOUSANDS)
CURRENT ASSETS:
Cash and cash equivalents $ 2,504 $ 10,725
Accounts receivable, net of allowances 71,710 66,414
Prepaid expenses 3,196 3,733
Other current assets 4,798 7,775
---------- ----------
Total current assets 82,208 88,647
PROPERTY AND EQUIPMENT, NET 19,453 19,959
OTHER 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.
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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
------------------ ------------------
<S> <C> <C>
(UNAUDITED AND AMOUNTS IN THOUSANDS)
REVENUES $ 137,952 $ 112,363
----------- --------------
EXPENSES:
Operating 105,485 82,170
Trade name use agreement 2,576 2,139
Lease 79,314 80,735
General and administrative 6,159 5,775
Depreciation and amortization 2,170 2,062
----------- --------------
195,704 172,881
----------- --------------
OPERATING LOSS (57,752) (60,518)
Interest expense, net 4,888 6,606
----------- --------------
LOSS BEFORE INCOME TAXES (62,640) (67,124)
BENEFIT FOR INCOME TAXES -- (27,358)
----------- --------------
NET LOSS $ (62,640) $ (39,766)
=========== ==============
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
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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
-------------- --------------
<S> <C> <C>
(UNAUDITED AND AMOUNTS IN THOUSANDS)
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
======== ========
</TABLE>
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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
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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 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.
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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 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
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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
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
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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.
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").
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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:
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- 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.
- 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.
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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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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.
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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.
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.
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.
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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
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
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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.
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
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CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS 1999 1998
--------- ---------
<S> <C> <C>
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 27,080 --
Realty
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 93 93
issued and outstanding
Common stock - Class B - $0.01 (one cent) par
value; 100,000 shares authorized, 981 shares 10 10
issued and outstanding
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.
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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 ADDITIONAL TOTAL
--------------------------------------
CLASS A CLASS B 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.
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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
--------- -------
</TABLE>
(Continued)
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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)
(Continued)
<TABLE>
<CAPTION>
1999 1998
-------- ---------
<S> <C> <C>
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 $ -- $ --
======== =========
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.
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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.
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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 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
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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 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
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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 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
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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 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
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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 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.
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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, 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.
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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 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.
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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.
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.
F-137
<PAGE> 404
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.
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>
F-138
<PAGE> 405
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 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>
F-139
<PAGE> 406
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-140
<PAGE> 407
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
F-141
<PAGE> 408
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
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> <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
F-142
<PAGE> 409
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.
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.
F-143
<PAGE> 410
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-144
<PAGE> 411
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> 412
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-3
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-35
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-39
</TABLE>
i
<PAGE> 413
<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>
ii
<PAGE> 414
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:
A-1
<PAGE> 415
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.
A-2
<PAGE> 416
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 "CCA
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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 Prison Realty Stockholder Approval. This Agreement
has been duly executed and delivered by
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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 other 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 rules and regulations promulgated thereunder (the
"Securities Act") and the Exchange Act, as
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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.
(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
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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 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
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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
reasonably 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 form 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.
(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).
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(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.
(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
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(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 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
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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 considered 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 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
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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 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
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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.
(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
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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 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
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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
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.
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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.
(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
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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 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
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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; 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.
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(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.
(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.
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(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.
(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
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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 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
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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
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
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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, 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
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(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.
(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.
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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 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
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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,
(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,
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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 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
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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 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
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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 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
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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.
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.
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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 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
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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 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."
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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 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.
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(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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<PAGE> 460
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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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:
--------------------------------------
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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.
ARTICLE VII
OTHER CONSTITUENCIES
In considering the effect of a potential acquisition of control of the
Corporation, the Board of Directors of the Corporation may, but shall not be
required to, consider the effect of the potential acquisition of control on: (i)
stockholders, employees, suppliers, customers and creditors of the Corporation;
and (ii) communities in which offices or other establishments of the Corporation
are located.
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,
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information and belief, these matters and facts are true in all material
respects and that this statement is made under the penalties for perjury. yes
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 Title: President
</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.
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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
(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
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(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.
(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.
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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:
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(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;
(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.
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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;
(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.
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(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
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under subsection (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.
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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.
(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 DRAFT
CORRECTIONS CORPORATION OF AMERICA
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER __, 2000
The undersigned hereby appoints J. Michael Quinlan and Darrell K.
Massengale, or either of them, with full power of substitution, as proxies, and
hereby authorizes them to represent and to vote, as designated, all of the
voting common stock of Corrections Corporation of America, a Tennessee
corporation ("CCA"), held by the undersigned on July__, 2000, at the Special
Meeting of Shareholders to be held at the Lowes Vanderbilt Plaza, 2100 West End
Avenue, Nashville, Tennessee, on _______, September ___, 2000, at ___________,
local time, and any adjournment(s) or postponement(s) thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEM 1.
1. To approve and adopt an Agreement and Plan of Merger dated as
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
In their discretion, the proxies are authorized to vote upon such
business as may properly come before this meeting.
<PAGE> 482
THIS PROXY WHEN PROPERTY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDERS. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR ITEM 1.
Dated:________________________________, 2000
Signature:__________________________________
Signature if Held Jointly: _________________
Please sign exactly as name appears on your
share certificates. 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.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY.
<PAGE> 483
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The charter of Prison Realty currently provides for indemnification of
directors and officers to the fullest extent permitted by the laws of the State
of Maryland. Section 2-418 of the MGCL generally permits indemnification of any
director made a party to any proceedings by reason of service as a director
unless it is established that: (i) the act or omission of such person was
material to the matter giving rise to the proceedings and was committed in bad
faith or was the result of active and deliberate dishonesty; (ii) such person
actually received an improper personal benefit in money, property or services;
or (iii) in the case of any criminal proceedings, such person had reasonable
cause to believe that the act or omission was unlawful. The indemnity may
include judgments, penalties, fines, settlements and reasonable expenses
(including attorneys' fees) actually incurred by the director in connection with
the proceeding; but, if the proceeding is one by, or in the right of, the
corporation, indemnification is not permitted with respect to any proceeding in
which the director has been adjudged to be liable to the corporation, or if the
proceeding is one charging improper personal benefit to the director, whether or
not involving action in the director's official capacity, indemnification of the
director is not permitted if the director was adjudged to be liable on the basis
that personal benefit was improperly received. The termination of any proceeding
by conviction or upon a plea of nolo contendere or its equivalent, or an entry
of an order of probation prior to judgment, creates a rebuttable presumption
that the director did not meet the requisite standard of conduct required for
permitted indemnification. The termination of any proceeding by judgment, order
or settlement, however, does not create a presumption that the director failed
to meet the requisite standard of conduct for permitted indemnification.
Following the merger and related transactions and the restructuring,
the charter provisions pertaining to indemnification will be removed. Under the
provisions of Prison Realty's bylaws, as in effect upon completion of the merger
and related transactions and the restructuring, Prison Realty will be required
to indemnify a current or former director or officer for reasonable expenses
incurred if such individual has been successful, on the merits or otherwise, in
defense of any proceeding arising out of such individual's official capacity.
Under the provisions of its bylaws in effect after the merger and related
transactions and the restructuring, Prison Realty also will be required to
indemnify any current or former director, or any current or former officer in
any proceeding arising out of such individual's official capacity unless it is
established that:
- the proceeding involves an act or omission of such individual
which was material to the matter giving rise to the proceeding
and was either (i) committed in bad faith; or (ii) was the
result of active and deliberate dishonesty;
- the individual actually received an improper personal benefit
in money, property or services; or
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- in the case of a criminal proceeding, the director had
reasonable cause to believe the act or omission was unlawful.
In addition, under Maryland law, Prison Realty is required to indemnify a
current or former director or officer in any proceeding arising out of such
individual's official capacity if a court of appropriate jurisdiction determines
such individual is entitled to indemnification.
Under Maryland law, any such indemnification may be against judgments,
penalties, settlements and reasonable expenses actually incurred in connection
with the proceeding. However, if the proceeding is one by or in the right of the
corporation, Prison Realty may not provide indemnification with respect of any
proceeding in which the individual is adjudged liable to the corporation. In
addition, if the proceeding is one charging improper personal benefit to the
individual whether or not involving action in the director's official capacity,
indemnification is not permitted if the director is adjudged to be liable on the
basis that personal benefit was improperly received.
Under Prison Realty's bylaws, Prison Realty shall pay or reimburse, in
advance of final disposition of a proceeding, reasonable expenses incurred by a
current or former director or officer, if such individual affirms in good faith
that he or she has satisfied the applicable standard of conduct necessary for
indemnification and agrees to repay amounts paid to such individual if it is
determined that such standard is not met. Under Prison Realty's bylaws, Prison
Realty may also provide to directors or officers additional indemnification or
payment or reimbursement of expenses to the fullest extent permitted by Maryland
law for directors of Maryland corporations.
Indemnification under the provisions of Maryland law is not deemed
exclusive of any other rights, by indemnification or otherwise, to which a
director may be entitled under the charter, bylaws, any resolution of
stockholders or directors, any agreement or otherwise.
The statute permits a Maryland corporation to indemnify its officers,
employees and agents to the same extent as its directors. Prison Realty's
charter currently provides for indemnification of its officers, employees or
agents to the fullest extent permitted by law. Following the merger and related
transactions and the restructuring, the charter provisions pertaining to
indemnification will be removed. Following the merger and related transactions
and the restructuring, Prison Realty's bylaws will provide that Prison Realty
may, with the approval of its board of directors, indemnify any employee or
agent of Prison Realty (or a predecessor) to the extent to which Prison Realty
is required to indemnify its directors and officers and will provide that Prison
Realty must indemnify its officers to the same extent it indemnifies directors.
Prison Realty has entered into indemnification agreements ("the
Indemnification Agreements") with its directors and certain of its executive
officers. The Indemnification Agreements are intended to provide indemnification
to the maximum extent allowable by or not in violation of any law of the State
of Maryland. Each Indemnification Agreement provides that Prison Realty shall
indemnify a director or officer who is a party to the agreement (the
"Indemnitee"), if he or she was or is a party to or was or is otherwise involved
in any proceeding
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(other than a derivative proceeding) by reason of the fact that he or she was or
is a director or officer of Prison Realty, against losses incurred in connection
with the defense or settlement of such proceeding. The indemnification provided
under each Indemnification Agreement is limited to instances where the act or
omission giving rise to the claim for which indemnification is sought was not
otherwise indemnified by Prison Realty or insurance maintained by Prison Realty,
was not established to have been committed in bad faith or the result of active
and deliberate dishonesty, did not involve receipt of improper personal benefit,
did not result in a judgment of liability to Prison Realty in a proceeding by or
in the right of Prison Realty did not involve an accounting of profits pursuant
to Section 16(b) of the Exchange Act, and, with respect to any criminal
proceeding, the Indemnitee had no reasonable cause to believe his or her conduct
was unlawful.
Prison Realty has obtained directors and officers liability insurance.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE.
(a) The following exhibits are filed as a part of this registration
statement or incorporated herein by reference:
NUMBER DESCRIPTION
2.1 Agreement and Plan of Merger, dated as of April 17, 1998, by and among
CCA Prison Realty Trust, a Maryland real estate investment trust ("Old
Prison Realty") and USCC Corporation, a wholly-owned Kentucky
subsidiary of Old Prison Realty, and U.S. Corrections Corporation, a
Kentucky corporation (previously filed as Exhibit 2.2 to Old Prison
Realty's Current Report on Form 8-K (Commission File no. 1-13049),
filed with the U.S. Securities and Exchange Commission (the
"Commission") on April 22, 1998 and incorporated herein by reference).
2.2 Amended and Restated Agreement and Plan of Merger, dated as of
September 29, 1998, by and among the old Corrections Corporation of
America, a Tennessee corporation ("Old CCA"), Old Prison Realty and
Prison Realty Trust, Inc., formerly Prison Realty Corporation and a
Maryland corporation ("Prison Realty")(previously filed as Appendix A
to the Prospectus filed pursuant to Rule 424(b)(4) included in the
Company's Registration Statement on Form S-4 (Commission File no.
333-65017), filed with the Commission on September 30, 1998, as
declared effective on October 16, 1998, and incorporated herein by
reference) (as directed by Item 601(b)(2) of Regulation S-K, certain
schedules and exhibits to this document were omitted from that filing,
and the Company has agreed to furnish supplementally a copy of any
omitted schedule or exhibit to the Commission upon request).
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2.3 Agreement and Plan of Merger, dated as of December 26, 1999, by and
among Prison Realty, CCA Acquisition Sub, Inc., a Tennessee corporation
("CCA Sub"), PMSI Acquisition Sub, Inc., a Tennessee corporation, and
JJFMSI Acquisition Sub, Inc , a Tennessee corporation, and Corrections
Corporation of America, a Tennessee corporation ("CCA"), Prison
Management Services, Inc., a Tennessee corporation ("PMSI"), and
Juvenile and Jail Facility Management Services, Inc., a Tennessee
corporation("JFMSI") (previously filed as Exhibit 2.1 to Prison
Realty's Current Report on Form 8-K (Commission File no. 0-25245),
filed with the Commission on December 28, 1999 and incorporated herein
by reference) (as directed by Item 601(b)(2) of Regulation S-K, certain
schedules and exhibits to this document were omitted from that filing,
and Prison Realty has agreed to furnish supplementally a copy of any
omitted schedule or exhibit to the Commission upon request).
2.4 Agreement and Plan of Merger, dated as of June 30, 2000, by and among
Prison Realty, CCA Sub, and CCA, (previously filed as Exhibit 2.1 to
Prison Realty's current Report on Form 8-K (File no. 0-25245) filed
with the Commission on June 30, 2000 and incorporated herein by
reference.)
4.2 Specimen of certificate representing Prison Realty's Common Stock
(previously filed as Exhibit 4.2 to Prison Realty's Registration
Statement on Form S-4 (Commission File no. 333-65017), filed with the
Commission on September 30, 1998 and incorporated herein by reference).
4.3 Specimen of certificate representing Prison Realty's 8.0% Series A
Preferred Stock (previously filed as Exhibit 4.3 to Prison Realty's
Registration Statement on Form S-4 (Commission File no. 333-65017),
filed with the Commission on September 30, 1998 and incorporated herein
by reference).
4.4 Note from Prison Realty made payable to MDP Ventures IV LLC, dated as
of December 31, 1998, in the principal amount of $20.0 million
(previously filed as Exhibit 4.7 to Prison Realty's Current Report on
Form 8-K (Commission File no. 0-25245), filed with the Commission on
January 6, 1999 and incorporated herein by reference).
4.5 Notes from Prison Realty made payable to MDP Ventures IV LLC, and
certain other purchasers, dated as of January 29, 1999, in the
aggregate principal amount of $20.0 million (previously filed as
Exhibit 4.21 to Prison Realty's Annual Report on Form 10-K (Commission
File no. 0-25245), filed with the Commission on March 30, 1999 and
incorporated herein by reference).
4.6 Prison Realty Trust, Inc. Dividend Reinvestment and Stock Purchase Plan
(previously filed as Exhibit 4.1 to Prison Realty's Quarterly Report on
Form 10-Q for the quarterly
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period ending March 31, 1999 (Commission File No. 0-25245), filed with
the Commission on May 14, 1999 and incorporated herein by reference).
4.7 Indenture, dated as of June 10, 1999, by and between Prison Realty and
State Street Bank and Trust Company, as trustee, relating to the
issuance of debt securities (previously filed as Exhibit 4.1 to Prison
Realty's Quarterly Report on Form 10-Q for the quarterly period ending
June 30, 1999 (Commission File No. 0-25245), filed with the Commission
on August 17, 1999 and incorporated herein by reference).
4.8 First Supplemental Indenture, by and between Prison Realty and State
Street Bank and Trust Company, as trustee, dated as of June 11, 1999,
relating to the $100.0 million aggregate principal amount of Prison
Realty's 12% Senior Notes due 2006 (previously filed as Exhibit 4.2 to
Prison Realty's Quarterly Report on Form 10-Q for the quarterly period
ending June 30, 1999 (Commission File No. 0-25245), filed with the
Commission on August 17, 1999 and incorporated herein by reference).
5.1 Opinion of Stokes Bartholomew Evans & Petree, P.A. regarding the
validity of the Prison Realty common stock being offered hereby.
5.2 Opinion of Miles & Stockbridge P.C. regarding the validity of the
Prison Realty common stock being offered hereby.
8.1 Opinion of Stokes Bartholomew Evans & Petree, P.A. regarding certain
federal income tax consequences of the merger of CCA with and into CCA
Sub (the "Merger").
10.1 Master Agreement to Lease, dated as of January 1, 1999, by and between
Prison Realty, USCC, Inc. and CCA (previously filed as Exhibit 10.1 to
Prison Realty's Current Report on Form 8-K (Commission File no.
0-25245), filed with the Commission on January 6, 1999 and incorporated
herein by reference).
10.2 Form of Lease Agreement by and between Prison Realty and CCA
(previously filed as Exhibit 10.2 to Prison Realty's Current Report on
Form 8-K (Commission File no. 0- 25245), filed with the Commission on
January 6, 1999 and incorporated herein by reference).
10.3 Right to Purchase Agreement, dated as of January 1, 1999, by and
between Prison Realty and CCA (previously filed as Exhibit 10.3 to
Prison Realty's Current Report on Form 8- K (Commission File no.
0-25245), filed with the Commission on January 6, 1999 and incorporated
herein by reference).
10.4 Service Mark and Trade Name Use Agreement, dated as of December 31,
1998, by and between Old CCA and CCA (previously filed as Exhibit 10.4
to Prison Realty's Current
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Report on Form 8-K (Commission File no. 0-25245), filed with the
Commission on January 6, 1999 and incorporated herein by reference).
10.5 Service Mark and Trade Name Use Agreement, dated as of December 31,
1998, by and between CCA and Prison Management Services, LLC
(previously filed as Exhibit 10.5 to Prison Realty's Current Report on
Form 8-K (Commission File no. 0-25245), filed with the Commission on
January 6, 1999 and incorporated herein by reference).
10.6 Service Mark and Trade Name Use Agreement, dated as of December 31,
1998, by and between CCA and Juvenile and Jail Facility Management
Services, LLC (previously filed as Exhibit 10.6 to Prison Realty's
Current Report on Form 8-K (Commission File no. 0- 25245), filed with
the Commission on January 6, 1999 and incorporated herein by
reference).
10.7 Promissory Note, dated as of December 31, 1998, executed by CCA made
payable to Old CCA in the principal amount of $137.0 million
(previously filed as Exhibit 10.7 to Prison Realty's Current Report on
Form 8-K (Commission File no. 0-25245), filed with the Commission on
January 6, 1999 and incorporated herein by reference).
10.8 Guaranty Agreement, dated as of December 31, 1998, executed and
delivered by Doctor R. Crants to Old CCA (previously filed as Exhibit
10.8 to Prison Realty's Current Report on Form 8-K (Commission File no.
0-25245), filed with the Commission on January 6, 1999 and incorporated
herein by reference).
10.9 Assignment Agreement, dated as of December 31, 1998, by and between Old
CCA and Corrections Partners, Inc. and related Bill of Sale (previously
filed as Exhibit 10.9 to Prison Realty's Current Report on Form 8-K
(Commission File no. 0-25245), filed with the Commission on January 6,
1999 and incorporated herein by reference).
10.10 Assignment Agreement, dated as of December 31, 1998, by and among
Corrections Partners, Inc., Concept Incorporated, TransCor America,
Inc., certain other subsidiaries of Old CCA, and CCA and related Bill
of Sale (previously filed as Exhibit 10.10 to Prison Realty's Current
Report on Form 8-K (Commission File no. 0-25245), filed with the
Commission on January 6, 1999 and incorporated herein by reference).
10.11 Contribution Agreement, dated as of December 31, 1998, by and between
Old CCA and CCA (previously filed as Exhibit 10.11 to Prison Realty's
Current Report on Form 8-K (Commission File no. 0-25245), filed with
the Commission on January 6, 1999 and incorporated herein by
reference).
10.12 Contribution Agreement, dated as of December 31, 1998, by and between
Old CCA and Prison Management Services, LLC (previously filed as
Exhibit 10.12 to Prison Realty's
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<PAGE> 489
Current Report on Form 8-K (Commission File no. 0-25245), filed with
the Commission on January 6, 1999 and incorporated herein by
reference).
10.13 Contribution Agreement, dated as of December 31, 1998, by and between
Old CCA and Juvenile and Jail Facility Management Services, LLC
(previously filed as Exhibit 10.13 to Prison Realty's Current Report on
Form 8-K (Commission File no. 0-25245), filed with the Commission on
January 6, 1999 and incorporated herein by reference).
10.14 Assignment and Assumption Agreement, dated as of December 31, 1998, by
and among Old CCA, Corrections Partners, Inc., Gadsden Correctional
Institution, Inc., and Prison Management Services, LLC (previously
filed as Exhibit 10.14 to Prison Realty's Current Report on Form 8-K
(Commission File no. 0-25245), filed with the Commission on January 6,
1999 and incorporated herein by reference).
10.15 Assignment and Assumption Agreement, dated as of December 31, 1998, by
and among Old CCA, Concept Incorporated, Corrections Partners, Inc. and
Juvenile and Jail Facility Management Services, LLC (previously filed
as Exhibit 10.15 to Prison Realty's Current Report on Form 8-K
(Commission File no. 0-25245), filed with the Commission on January 6,
1999 and incorporated herein by reference).
10.16 Services Agreement, dated as of January 1, 1999, by and between Prison
Realty and CCA (previously filed as Exhibit 10.16 to Prison Realty's
Current Report on Form 8-K (Commission File no. 0-25245), filed with
the Commission on January 6, 1999 and incorporated herein by
reference).
10.17 Tenant Incentive Agreement, dated as of January 1, 1999, by and between
Prison Realty and CCA (previously filed as Exhibit 10.17 to Prison
Realty's Current Report on Form 8- K (Commission File no. 0-25245),
filed with the Commission on January 6, 1999 and incorporated herein by
reference).
10.18 Note Purchase Agreement, dated as of January 1, 1999, by and between
CCA and PMI Mezzanine Fund, L.P., including, as Exhibit R-1 thereto,
Registration Rights Agreement, dated as of January 1, 1999, by and
between CCA and PMI Mezzanine Fund, L.P. (previously filed as Exhibit
10.22 to Prison Realty's Current Report on Form 8-K (Commission File
no. 0-25245), filed with the Commission on January 6, 1999 and
incorporated herein by reference).
10.19 Agreement in Principle by and among Sodexho, Old CCA and Old Prison
Realty (previously filed as Exhibit 10.13 to Prison Realty's
Registration Statement on Form S-4 (Commission File no. 333-65017),
filed with the Commission on September 30, 1998 and incorporated herein
by reference).
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<PAGE> 490
10.20 1998 Amendment to 1994 Securities Purchase Agreement by and between Old
CCA and Sodexho S.A., dated as of December 30, 1998 (previously filed
as Exhibit 10.86 to Prison Realty's Annual Report on Form 10-K
(Commission File no. 0-25245), filed with the Commission on March 30,
1999 and incorporated herein by reference).
10.21 Agreement in Principle, dated as of October 15, 1998, by and between
Baron Asset Fund, and all series thereof, on behalf of itself and one
or more mutual funds managed by it, or its affiliates, Old CCA, Old
Prison Realty and CCA (previously filed as Exhibit 10.14 to Prison
Realty's Registration Statement on Form S-4 (Commission File no.
333-65017) Amendment no. 4, filed with the Commission on September 30,
1998 and incorporated herein by reference).
10.22 Administrative Services Agreement, dated as of January 1, 1999, by and
between CCA and PMSI (previously filed as Exhibit 10.26 to Prison
Realty's Current Report on Form 8-K (Commission File no. 0-25245),
filed with the Commission on January 6, 1999 and incorporated herein by
reference).
10.23 Administrative Services Agreement, dated as of January 1, 1999, by and
between CCA and JJFMSI (previously filed as Exhibit 10.27 to Prison
Realty's Current Report on Form 8-K (Commission File no. 0-25245),
filed with the Commission on January 6, 1999 and incorporated herein by
reference).
10.24 Employment Agreement, dated as of January 1, 1999, by and between
Doctor R. Crants and Prison Realty (previously filed as Exhibit 10.28
to Prison Realty's Current Report on Form 8-K (Commission File no.
0-25245), filed with the Commission on January 6, 1999 and incorporated
herein by reference).
10.25 Employment Agreement, dated as of January 1, 1999, by and between
Doctor R. Crants and CCA (previously filed as Exhibit 10.29 to Prison
Realty's Current Report on Form 8- K (Commission File no. 0-25245),
filed with the Commission on January 6, 1999 and incorporated herein by
reference).
10.26 Form of Officer and Director Indemnification Agreement by and between
Prison Realty and its officers and directors (previously filed as
Exhibit 10.48 to Prison Realty's Registration Statement on Form S-4
(Commission File no. 333-65017), filed with the Commission on September
30, 1998 and incorporated herein by reference).
10.27 Amended and Restated Charter of CCA (previously filed as Exhibit 10.50
to Prison Realty's Registration Statement on Form S-4 (Commission File
no. 333-65017), filed with the Commission on September 30, 1998 and
incorporated herein by reference).
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<PAGE> 491
10.28 Bylaws of CCA (previously filed as Exhibit 10.51 to Prison Realty's
Registration Statement on Form S-4 (Commission File no. 333-65017),
filed with the Commission on September 30, 1998 and incorporated herein
by reference).
10.29 Amended and Restated Charter of PMSI (previously filed as Exhibit 10.31
to Prison Realty's Current Report on Form 8-K (Commission File no.
0-25245), filed with the Commission on January 6, 1999 and incorporated
herein by reference).
10.30 Bylaws of PMSI (previously filed as Exhibit 10.53 to Prison Realty's
Registration Statement on Form S-4 (Commission File no. 333-65017),
filed with the Commission on September 30, 1998 and incorporated herein
by reference).
10.31 Amended and Restated Charter of JJFMSI (previously filed as Exhibit
10.32 to Prison Realty's Current Report on Form 8-K (Commission File
no. 0-25245), filed with the Commission on January 6, 1999 and
incorporated herein by reference).
10.32 Bylaws of JJFMSI (previously filed as Exhibit 10.55 to Prison Realty's
Registration Statement on Form S-4 (Commission File no. 333-65017),
filed with the Commission on September 30, 1998 and incorporated herein
by reference).
10.33 Credit Agreement, dated as of January 1, 1999, by and among Prison
Realty and certain of its subsidiaries and NationsBank, N.A., as
Administrative Agent, Lehman Commercial Paper, Inc., as Documentation
Agent, and the Bank of Nova Scotia, as Syndication Agent (previously
filed as Exhibit 10.33 to Prison Realty's Current Report on Form 8-K
(Commission File no. 0-25245), filed with the Commission on January 6,
1999 and incorporated herein by reference).
10.34 Note Purchase Agreement, dated as of December 31, 1998, by and between
Prison Realty and MDP Ventures IV LLC (previously filed as Exhibit
10.36 to Prison Realty's Current Report on Form 8-K (Commission File
no. 0-25245), filed with the Commission on January 6, 1999 and
incorporated herein by reference).
10.35 Registration Rights Agreement, dated as of December 31, 1998, by and
between Prison Realty and MDP Ventures IV LLC (previously filed as
Exhibit 10.37 to Prison Realty's Current Report on Form 8-K (Commission
File no. 0-25245), filed with the Commission on January 6, 1999 and
incorporated herein by reference).
10.36 Preemptive Rights Agreement, dated as of January 1, 1999, by and
between Prison Realty and CCA (previously filed as Exhibit 10.38 to
Prison Realty's Current Report on Form 8- K (Commission File no.
0-25245), filed with the Commission on January 6, 1999 and incorporated
herein by reference).
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<PAGE> 492
10.37 REIT Management Agreement, dated as of July 21, 1997, by and between
Old Prison Realty and Prison Realty Management, Inc. (previously filed
as Exhibit 10(hh) to Old Prison Realty's Annual Report on Form 10-K
(Commission File no. 1-13049), filed with the Commission on March 18,
1998 and incorporated herein by reference).
10.38 Old Prison Realty's 1997 Employee Share Incentive Plan (previously
filed as Exhibit 10.25 to Old Prison Realty's Quarterly Report on Form
10-Q (Commission File no. 1- 13049), filed with the Commission on
August 25, 1997 and incorporated herein by reference).
10.39 Old Prison Realty's Non-Employee Trustees' Share Option Plan, as
amended (previously filed as Exhibit 10.26 to Old Prison Realty's
Quarterly Report on Form 10-Q (Commission File no. 1-13049), filed with
the Commission on August 25, 1997 and incorporated herein by
reference).
10.40 Old Prison Realty's Non-Employee Trustees' Compensation Plan
(previously filed as Exhibit 4.3 to Old Prison Realty's Registration
Statement on Form S-8 (Commission File no. 333-58339), filed with the
Commission on July 1, 1998 and incorporated herein by reference).
10.41 Old CCA's Option Plan, dated as of January 23, 1985, as amended by
First Amendment to Old CCA's Stock Option Plan, together with forms of
Incentive Stock Option Agreement and Non-Qualified Stock Option
Agreement (previously filed as Exhibit 10(c) to Old CCA's Registration
Statement on Form S-1 (Commission File no. 33-8052), filed with the
Commission on August 15, 1986 and incorporated herein by reference).
10.42 Non-Qualified Stock Option Plan of Old CCA, dated as of January 16,
1986, and related form of Non-Qualified Stock Option Agreement
(previously filed as Exhibit 10(d) to Old CCA's Registration Statement
on Form S-1 (Commission File no. 33-8052), filed with the Commission on
August 15, 1986 and incorporated herein by reference).
10.43 Old CCA's 1988 Flexible Stock Option Plan (previously filed as Exhibit
A to Old CCA's definitive Proxy Statement relating to Old CCA's 1988
Annual Meeting of Shareholders (Commission File no. 0-15719), filed
with the Commission on April 29, 1988 and incorporated herein by
reference).
10.44 Second Amendment to Old CCA's Stock Option Plan, dated as of March 27,
1987, together with form of Incentive Stock Option Agreement
(previously filed as Exhibit 10(aa) to Old CCA's Annual Report on Form
10-K (Commission File no. 0-15719), filed with the Commission on March
31, 1987 and incorporated herein by reference).
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10.45 Third Amendment to Old CCA's Stock Option Plan, dated as of March 18,
1988 (previously filed as Exhibit B to Old CCA's definitive Proxy
Statement relating to Old CCA's 1988 Annual Meeting of Shareholders
(Commission File no. 0-15719), filed with the Commission on April 29,
1988 and incorporated herein by reference).
10.46 Old CCA's 1989 Stock Bonus Plan (previously filed as Exhibit 10(zz) to
Old CCA's Annual Report on Form 10-K (Commission File no. 0-15719),
filed with the Commission on March 30, 1990 and incorporated herein by
reference).
10.47 First Amendment to Old CCA's 1988 Flexible Stock Option Plan, dated as
of June 8, 1989 (previously filed as Exhibit 10(mmm) to Old CCA's
Annual Report on Form 10-K Commission File no. 0-15719), filed with the
Commission on March 30, 1990 and incorporated herein by reference).
10.48 First Amendment to Old CCA's Non-Qualified Stock Option Plan, dated as
of June 8, 1989 (previously filed as Exhibit 10(nnn) to Old CCA's
Annual Report on Form 10-K (Commission File no. 0-15719), filed with
the Commission on March 30, 1990 and incorporated herein by reference).
10.49 Amended and Restated Employee Stock Ownership Plan (previously filed as
Exhibit 10(iiii) to Old CCA's Annual Report on Form 10-K (Commission
File no. 0-15719), filed with the Commission on March 30, 1992 and
incorporated herein by reference).
10.50 Old CCA's Non-Employee Director Stock Option Plan (previously filed as
Exhibit 10(yyyy) to Old CCA's Annual Report on Form 10-K (Commission
File no. 0-15719), filed with the Commission on March 31, 1994 and
incorporated herein by reference).
10.51 First Amendment to Old CCA's 1991 Flexible Stock Option Plan, dated as
of March 11, 1994 (previously filed as Exhibit 10.102 to Old CCA's
Annual Report on Form 10-K (Commission File no. 1-13049), filed with
the Commission on March 31, 1995 and incorporated herein by reference).
10.52 Amendments to the Amended and Restated Old CCA Employee Stock Ownership
Plan, dated as of June 3, 1994 (previously filed as Exhibit 10.109 to
Old CCA's Annual Report on Form 10-K (Commission File no. 1-13049),
filed with the Commission on March 31, 1995 and incorporated herein by
reference).
10.53 Amended and Restated Old CCA 1989 Stock Bonus Plan, dated as of
February 20, 1995 (previously filed as Exhibit 10.138 to Old CCA's
Annual Report on Form 10-K (Commission File no. 1-13560), filed with
the Commission on March 31, 1995 and incorporated herein by reference).
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10.54 Old CCA's 1995 Employee Stock Incentive Plan, effective as of March 20,
1995 (previously filed as Exhibit 4.3 to Old CCA's Registration
Statement on Form S-8 (Commission File no. 33-61173), filed with the
Commission on July 20, 1995 and incorporated herein by reference).
10.55 First Amendment to Amended and Restated Old CCA 1989 Stock Bonus Plan,
dated as of November 3, 1995 (previously filed as Exhibit 10.153 to Old
CCA's Annual Report on Form 10-K (Commission File no. 1-13560), filed
with the Commission on March 29, 1996 and incorporated herein by
reference).
10.56 Option Agreement, dated March 31, 1997, by and between Old CCA and
Joseph F. Johnson, Jr. relating to the grant of an option to purchase
80,000 shares of Old CCA Common Stock (previously filed as Appendix B
to Old CCA's definitive Proxy Statement relating to Old CCA's 1998
Annual Meeting of Shareholders (Commission File no. 0-15719), filed
with the Commission on March 31, 1998 and incorporated herein by
reference).
10.57 Old CCA's Non-Employee Directors' Compensation Plan (previously filed
as Appendix A to Old CCA's definitive Proxy Statement relating to Old
CCA's 1998 Annual Meeting of Shareholders (Commission File no.
0-15719), filed with the Commission on March 31, 1998 and incorporated
herein by reference).
10.58 Amended and Restated Tenant Incentive Agreement by and between Prison
Realty and CCA (previously filed as Exhibit 10.1 to Prison Realty's
Quarterly Report on Form 10-Q for the quarterly ended March 31, 1999
(Commission File no. 0-25245), filed with the Commission on May 14,
1999 and incorporated herein by reference).
10.59 Business Development Agreement by and between Prison Realty and CCA
(previously filed as Exhibit 10.2 to Prison Realty's Quarterly Report
on Form 10-Q for the quarterly ended March 31, 1999 (Commission File
no. 0-25245), filed with the Commission on May 14, 1999 and
incorporated herein by reference).
10.60 Amended and Restated Credit Agreement, dated as of August 4, 1999, by
and among Prison Realty, as Borrower, certain subsidiaries of Prison
Realty, as Guarantor, the several lenders from time to time party
thereto, Lehman Commercial Paper Inc., as Administrative Agent, Societe
Generale, as Documentation Agent, The Bank of Nova Scotia, as
Syndication Agent, SouthTrust Bank, N.A., as Co-Agent, and Lehman
Brothers Inc., as Advisor, as Lead Arranger, and as Book Manager
(previously filed as Exhibit 10.1 to Prison Realty's Quarterly Report
on Form 10-Q for the quarterly ended June 30, 1999 (Commission File no.
0-25245), filed with the Commission on August 17, 1999 and incorporated
herein by reference).
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10.61 Securities Purchase Agreement, dated as of December 26, 1999, by and
between Prison Realty, CCA, PMSI, and JJFMSI, on the one hand, and
Prison Acquisition Company, L.L.C., on the other hand, including: (i)
as Exhibit A thereto, the Agreement and Plan of Merger; (ii) as Exhibit
B thereto, the Form of Articles of Amendment and Restatement of Prison
Realty; (iii) as Exhibit C thereto, the Amended and Restated Bylaws of
Prison Realty; (iv) as Exhibit D thereto, the Form of Articles
Supplementary for Series B Cumulative Convertible Preferred Stock; (v)
as Exhibit E thereto, the Form of Warrant; (vi) as Exhibit F thereto,
the Form of Articles Supplementary for Series C Cumulative Convertible
Preferred Stock; (vii) as Exhibit G thereto, the Form of Registration
Rights Agreement; and (viii) as Exhibit H thereto, the Financing
Commitment Letter (previously filed as Exhibit 10.1 to Prison Realty's
Current Report on Form 8-K (Commission File no. 0- 25245), filed with
the Commission on December 28, 1999 and incorporated herein by
reference) (as directed by Item 601(b)(2) of Regulation S-K, certain
schedules and exhibits to this document were omitted from that filing,
and Prison Realty agreed to furnish supplementally a copy of any
omitted schedule or exhibit to the Commission upon request).
10.62 First Amendment to Master Agreement to Lease, dated as of December 31,
1999, by and between Prison Realty and CCA. (previously filed as
Exhibit 10.67 to Prison Realty's Annual Report on Form 10-K for the
year ended December 31, 1999 (Commission File no. 0-25245), filed with
the Commission on March 30, 2000 and incorporated herein by reference).
10.63 Master Amendment to Lease Agreements, dated as of December 31, 1999, by
and between Prison Realty and CCA (previously filed as Exhibit 10.68 to
Prison Realty's Annual Report on Form 10-K for the year ended December
31, 1999 (Commission File no. 0-25245), filed with the Commission on
March 30, 2000 and incorporated herein by reference).
10.64 Severance Agreement, dated as of December 31, 1999, by and among D.
Robert Crants, III, Prison Realty and CCA (previously filed as Exhibit
10.69 to Prison Realty's Annual Report on Form 10-K for the year ended
December 31, 1999 (Commission File no. 0-25245), filed with the
Commission on March 30, 2000 and incorporated herein by reference).
10.65 Severance Agreement, dated as of December 31, 1999, by and among
Michael W. Devlin, Prison Realty and CCA (previously filed as Exhibit
10.70 to Prison Realty's Annual Report on Form 10-K for the year ended
December 31, 1999 (Commission File no. 0-25245), filed with the
Commission on March 30, 2000 and incorporated herein by reference).
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10.66 First Amendment to Securities Purchase Agreement, dated as of February
28, 2000, by and among Prison Realty, CCA, PMSI, and JJFMSI, on the one
hand, and Prison Acquisition Company, L.L.C., a Delaware limited
liability company, on the other hand (previously filed as Exhibit 10.1
to Prison Realty's Current Report on Form 8-K filed with the Commission
on March 1, 2000 and incorporated herein by this reference).
10.67 Securities Purchase Agreement as executed by Prison Realty, CCA, PMSI
and JJFMSI, on the one hand, and Pacific Life Insurance Company
("Pacific Life"), on the other hand, on April 16, 2000 with the
following exhibits attached: (i) as Exhibit A thereto, Agreement and
Plan of Merger, dated as of December 26, 1999, by and among Prison
Realty, CCA Acquisition Sub, Inc., PMSI Acquisition Sub, Inc. and
JJFMSI Acquisition Sub, Inc., and CCA, PMSI and JJFMSI; (ii) as Exhibit
B thereto, the Form of Articles of Amendment and Restatement of Prison
Realty; (iii) as Exhibit C thereto, the Amended and Restated Bylaws of
Prison Realty; (iv) as Exhibit D thereto, the Form of Articles
Supplementary for Series C Cumulative Convertible Preferred Stock; (v)
as Exhibit E thereto, the Form of Articles Supplementary for Series B
Cumulative Convertible Preferred Stock; (vi) as Exhibit F thereto, the
Form of Warrant; and (vii) as Exhibit G thereto, the Form of
Registration Rights Agreement (the Securities Purchase Agreement,
together with items (i), (iii), (iv), (v), (vi), (vii), have been
previously filed as Exhibit 10.1 to Prison Realty's Current Report on
Form 8-K filed with the Commission on April 18, 2000 and incorporated
herein by this reference, with the Agreement and Plan of Merger having
been previously filed as Exhibit 2.1 to Prison Realty's Current Report
on Form 8-K filed with the Commission on December 28, 1999 and
incorporated herein by this reference).
10.68 Waiver and Amendment, dated as of June 9, 2000, by and among Prison
Realty, as Borrower, certain of Prison Realty's subsidiaries as
Subsidiary Guarantors, the Lenders, and Lehman Commercial Paper Inc.,
as Administrative (previously filed as Exhibit 10.1 to Prison Realty's
Current Report on Form 8-K (Commission File no. 0-25245), filed with
the Commission on June 12, 2000 and incorporated herein by reference).
10.69 Second Master Amendment to Lease Agreements, dated June 9, 2000, by and
between Prison Realty and Corrections Corporation of America ("CCA")
(previously filed as Exhibit 10.2 to Prison Realty's Current Report on
Form 8-K (Commission File no. 0-25245), filed with the Commission on
June 12, 2000 and incorporated herein by reference).
10.70 Amendment Number One to Amended and Restated Tenant Incentive
Agreement, dated June 9, 2000, by and between Prison Realty and CCA
(previously filed as Exhibit 10.3 to Prison Realty's Current Report on
Form 8-K (Commission File no. 0-25245), filed with the Commission on
June 12, 2000 and incorporated herein by reference).
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<PAGE> 497
10.71 Amendment Number One to Business Development Agreement, dated June 9,
2000, by and between Prison Realty and CCA (previously filed as Exhibit
10.4 to Prison Realty's Current Report on Form 8-K (Commission File no.
0-25245), filed with the Commission on June 12, 2000 and incorporated
herein by reference).
10.72 Amendment Number One to Amended and Restated Services Agreement, dated
June 9, 2000, by and between Prison Realty and CCA (previously filed as
Exhibit 10.5 to Prison Realty's Current Report on Form 8-K (Commission
File no. 0-25245), filed with the Commission on June 12, 2000 and
incorporated herein by reference).
10.73 Mutual Termination and Release Agreement dated June 30, 2000, by and
among Prison Realty, CCA, PMSI, and JJFMSI, on the one hand, and
Pacific Life, on the other hand (previously filed as Exhibit 10.1 to
Prison Realty's Current Report on Form 8-K (Commission File no.
0-25245), filed with the Commission on June 30, 2000 and incorporated
herein by reference).
10.74 Mutual Written Consent to Terminate Agreement and Plan of Merger, dated
as of June 30, 2000, by and among Prison Realty, CCA Sub, PMSI
Acquisition Sub, Inc., JJFMSI Acquisition Sub, Inc., CCA, PMSI, and
JJFMSI (previously filed as Exhibit 10.2 to Prison Realty's Current
Report on Form 8-K (Commission File no. 0-25245), filed with the
Commission on June 30, 2000 and incorporated herein by reference).
10.75 Stock Purchase Agreement, dated as of June 30, 2000, by and between
Prison Realty and Baron Asset Fund, and all series thereof, on behalf
of itself and one or more mutual funds managed by it, or its affiliates
(previously filed as Exhibit 10.3 to Prison Realty's Current Report on
Form 8-K (Commission File no. 0-25245), filed with the Commission on
June 30, 2000 and incorporated herein by reference).
10.76 Waiver and Amendment, dated as of June 30, 2000, by and between Prison
Realty and MDP Ventures IV LLC, with form of replacement note and PIK
note attached thereto as Exhibit B and C, respectively (previously
filed as Exhibit 10.4 to Prison Realty's Current Report on Form 8-K
(Commission File no. 0-25245), filed with the Commission on June 30,
2000 and incorporated herein by reference).
10.77 Waiver and Amendment, dated as of June 30, 2000, by and between Prison
Realty and PMI Mezzanine Fund, L.P., with form of replacement note
attached thereto as Exhibit B (previously filed as Exhibit 10.5 to
Prison Realty's Current Report on Form 8-K (Commission File no.
0-25245), filed with the Commission on June 30, 2000 and incorporated
herein by reference).
12 Statement re: computation of ratios (included in this joint proxy
statement/prospectus).
II-15
<PAGE> 498
21 Subsidiaries of Prison Realty.
23.1 Consent of Arthur Andersen LLP with respect to Prison Realty.
23.2 Consent of Arthur Andersen LLP with respect to CCA.
24 Powers of Attorney (included on signature pages).
(b) All schedules for which provision is made in Regulation S-X and
Item 14(e), Item 17(a) or Item 17(b)(9) of Form S-4 are either not required to
be included herein or the related information is included in the footnotes to
the applicable financial statements included or incorporated by reference in the
joint proxy statement/prospectus contained in this registration statement.
ITEM 22. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in this Registration Statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(b)(1) The undersigned Registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered hereunder through
use of a prospectus which is a part of this Registration Statement, by any
person or party who is deemed to be an underwriter within the meaning of Rule
145(c), the issuer undertakes that such offering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
(b)(2) The undersigned Registrant undertakes that every prospectus: (i)
that is filed pursuant to paragraph (1) immediately preceding; or (ii) that
purports to meet the requirements of Section 10(a)(3) of the Securities Act and
is used in connection with an offering of securities subject to Rule 415, will
be filed as a part of an amendment to this Registration Statement and will not
be used until such amendment is effective, and that, for purposes of determining
any liability under the Securities Act, each such post-effective amendment shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-16
<PAGE> 499
(c) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(d) The undersigned Registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Item 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of this Registration Statement through
the date of responding to the request.
(e) The undersigned Registrant hereby undertakes to supply means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in this Registration Statement when it became effective.
(f)(1) The undersigned Registrant hereby undertakes to file, during
any period in which offers or sales are being made, a post-effective amendment
to this registration statement: (i) to include any prospectus required by
Section 10(a)(3) of the Securities Act of 1933; (ii) to reflect in the
prospectus any facts or events arising after the effective date of the
registration statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental change in the
information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in the
effective registration statement; (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement.
(f)(2) The undersigned Registrant hereby undertakes that, for the
purpose of determining any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(f)(3) The undersigned Registrant hereby undertakes to remove from
registration by means of a post-effective amendment any of the securities being
registered which remain unsold at the termination of the offering.
II-17
<PAGE> 500
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Nashville, State of
Tennessee, on July 19, 2000.
PRISON REALTY TRUST, INC.
Registrant
By: /s/ Thomas W. Beasley
------------------------------------
Chairman of the Board of Directors
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and
appoints J. Michael Quinlan and Vida H. Carroll, and each of them, the true and
lawful attorneys-in-fact and agents of the undersigned, with full power of
substitution and resubstitution, for and in the name, place and stead of the
undersigned, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement and any
registration statement relating to the same offering as the Registration
Statement that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Commission, and hereby grants to
such attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done,
as fully to all intents and purposes as the undersigned might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Thomas W. Beasley Chairman of the Board July 19, 2000
------------------------------------------------ of Directors and Director
Thomas W. Beasley
/s/ J. Michael Quinlan President July 19, 2000
------------------------------------------------ (Principal Executive Officer)
J. Michael Quinlan
</TABLE>
<PAGE> 501
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> /s/ Vida H. Carroll <C> <C>
----------------------------------------------- Chief Financial Officer July 19, 2000
Vida H. Carroll Principal Financial and
Accounting Officer),
Secretary and Treasurer
----------------------------------------------- Director July , 2000
C. Ray Bell
----------------------------------------------- Director July , 2000
Jean-Pierre Cuny
/s/ Ted Feldman
----------------------------------------------- Director July 19, 2000
Ted Feldman
/s/ Joseph V. Russell
----------------------------------------------- Director July 19, 2000
Joseph V. Russell
/s/ Charles W. Thomas
----------------------------------------------- Director July 19, 2000
Charles W. Thomas
</TABLE>
<PAGE> 502
EXHIBIT INDEX
REGISTRATION STATEMENT ON FORM S-4
NUMBER DESCRIPTION
------ -----------
2.1 Agreement and Plan of Merger, dated as of April 17, 1998, by and
among CCA Prison Realty Trust, a Maryland real estate investment
trust ("Old Prison Realty") and USCC Corporation, a wholly-owned
Kentucky subsidiary of Old Prison Realty, and U.S. Corrections
Corporation, a Kentucky corporation (previously filed as Exhibit
2.2 to Old Prison Realty's Current Report on Form 8-K (Commission
File no. 1-13049), filed with the U.S. Securities and Exchange
Commission (the "Commission") on April 22, 1998 and incorporated
herein by reference).
2.2 Amended and Restated Agreement and Plan of Merger, dated as of
September 29, 1998, by and among the old Corrections Corporation
of America, a Tennessee corporation ("Old CCA"), Old Prison Realty
and Prison Realty Trust, Inc., formerly Prison Realty Corporation
and a Maryland corporation ("Prison Realty")(previously filed as
Appendix A to the Prospectus filed pursuant to Rule 424(b)(4)
included in the Company's Registration Statement on Form S-4
(Commission File no. 333-65017), filed with the Commission on
September 30, 1998, as declared effective on October 16, 1998, and
incorporated herein by reference) (as directed by Item 601(b)(2)
of Regulation S-K, certain schedules and exhibits to this document
were omitted from that filing, and the Company has agreed to
furnish supplementally a copy of any omitted schedule or exhibit
to the Commission upon request).
2.3 Agreement and Plan of Merger, dated as of December 26, 1999, by
and among Prison Realty, CCA Acquisition Sub, Inc., a Tennessee
corporation ("CCA Sub"), PMSI Acquisition Sub, Inc., a Tennessee
corporation, and JJFMSI Acquisition Sub, Inc , a Tennessee
corporation, and Corrections Corporation of America, a Tennessee
corporation ("CCA"), Prison Management Services, Inc., a Tennessee
corporation ("PMSI"), and Juvenile and Jail Facility Management
Services, Inc., a Tennessee corporation("JFMSI") (previously filed
as Exhibit 2.1 to Prison Realty's Current Report on Form 8-K
(Commission File no. 0-25245), filed with the Commission on
December 28, 1999 and incorporated herein by reference) (as
directed by Item 601(b)(2) of Regulation S-K, certain schedules
and exhibits to this document were omitted from that filing, and
Prison Realty has agreed to furnish supplementally a copy of any
omitted schedule or exhibit to the Commission upon request).
2.4 Agreement and Plan of Merger, dated as of June 30, 2000, by and
among Prison Realty, CCA Sub, and CCA, (previously filed as
Exhibit 2.1 to Prison Realty's
<PAGE> 503
current Report on Form 8-K (File no. 0-25245) filed with the
Commission on June 30, 2000 and incorporated herein by reference.)
4.2 Specimen of certificate representing Prison Realty's Common Stock
(previously filed as Exhibit 4.2 to Prison Realty's Registration
Statement on Form S-4 (Commission File no. 333-65017), filed with
the Commission on September 30, 1998 and incorporated herein by
reference).
4.3 Specimen of certificate representing Prison Realty's 8.0% Series A
Preferred Stock (previously filed as Exhibit 4.3 to Prison
Realty's Registration Statement on Form S-4 (Commission File no.
333-65017), filed with the Commission on September 30, 1998 and
incorporated herein by reference).
4.4 Note from Prison Realty made payable to MDP Ventures IV LLC, dated
as of December 31, 1998, in the principal amount of $20.0 million
(previously filed as Exhibit 4.7 to Prison Realty's Current Report
on Form 8-K (Commission File no. 0-25245), filed with the
Commission on January 6, 1999 and incorporated herein by
reference).
4.5 Notes from Prison Realty made payable to MDP Ventures IV LLC, and
certain other purchasers, dated as of January 29, 1999, in the
aggregate principal amount of $20.0 million (previously filed as
Exhibit 4.21 to Prison Realty's Annual Report on Form 10-K
(Commission File no. 0-25245), filed with the Commission on March
30, 1999 and incorporated herein by reference).
4.6 Prison Realty Trust, Inc. Dividend Reinvestment and Stock Purchase
Plan (previously filed as Exhibit 4.1 to Prison Realty's Quarterly
Report on Form 10-Q for the quarterly period ending March 31, 1999
(Commission File No. 0-25245), filed with the Commission on May
14, 1999 and incorporated herein by reference).
4.7 Indenture, dated as of June 10, 1999, by and between Prison Realty
and State Street Bank and Trust Company, as trustee, relating to
the issuance of debt securities (previously filed as Exhibit 4.1
to Prison Realty's Quarterly Report on Form 10-Q for the quarterly
period ending June 30, 1999 (Commission File No. 0-25245), filed
with the Commission on August 17, 1999 and incorporated herein by
reference).
4.8 First Supplemental Indenture, by and between Prison Realty and
State Street Bank and Trust Company, as trustee, dated as of June
11, 1999, relating to the $100.0 million aggregate principal
amount of Prison Realty's 12% Senior Notes due 2006 (previously
filed as Exhibit 4.2 to Prison Realty's Quarterly Report on Form
10-Q for the quarterly period ending June 30, 1999 (Commission
File No. 0-25245), filed with the Commission on August 17, 1999
and incorporated herein by reference).
<PAGE> 504
5.1 Opinion of Stokes Bartholomew Evans & Petree, P.A. regarding the
validity of the Prison Realty common stock being offered hereby.
5.2 Opinion of Miles & Stockbridge P.C. regarding the validity of the
Prison Realty common stock being offered hereby.
8.1 Opinion of Stokes Bartholomew Evans & Petree, P.A. regarding
certain federal income tax consequences of the merger of CCA with
and into CCA Sub (the "Merger").
10.1 Master Agreement to Lease, dated as of January 1, 1999, by and
between Prison Realty, USCC, Inc. and CCA (previously filed as
Exhibit 10.1 to Prison Realty's Current Report on Form 8-K
(Commission File no. 0-25245), filed with the Commission on
January 6, 1999 and incorporated herein by reference).
10.2 Form of Lease Agreement by and between Prison Realty and CCA
(previously filed as Exhibit 10.2 to Prison Realty's Current
Report on Form 8-K (Commission File no. 0-25245), filed with the
Commission on January 6, 1999 and incorporated herein by
reference).
10.3 Right to Purchase Agreement, dated as of January 1, 1999, by and
between Prison Realty and CCA (previously filed as Exhibit 10.3 to
Prison Realty's Current Report on Form 8-K (Commission File no.
0-25245), filed with the Commission on January 6, 1999 and
incorporated herein by reference).
10.4 Service Mark and Trade Name Use Agreement, dated as of December
31, 1998, by and between Old CCA and CCA (previously filed as
Exhibit 10.4 to Prison Realty's Current Report on Form 8-K
(Commission File no. 0-25245), filed with the Commission on
January 6, 1999 and incorporated herein by reference).
10.5 Service Mark and Trade Name Use Agreement, dated as of December
31, 1998, by and between CCA and Prison Management Services, LLC
(previously filed as Exhibit 10.5 to Prison Realty's Current
Report on Form 8-K (Commission File no. 0-25245), filed with the
Commission on January 6, 1999 and incorporated herein by
reference).
10.6 Service Mark and Trade Name Use Agreement, dated as of December
31, 1998, by and between CCA and Juvenile and Jail Facility
Management Services, LLC (previously filed as Exhibit 10.6 to
Prison Realty's Current Report on Form 8-K (Commission File no.
0-25245), filed with the Commission on January 6, 1999 and
incorporated herein by reference).
<PAGE> 505
10.7 Promissory Note, dated as of December 31, 1998, executed by CCA
made payable to Old CCA in the principal amount of $137.0 million
(previously filed as Exhibit 10.7 to Prison Realty's Current
Report on Form 8-K (Commission File no. 0-25245), filed with the
Commission on January 6, 1999 and incorporated herein by
reference).
10.8 Guaranty Agreement, dated as of December 31, 1998, executed and
delivered by Doctor R. Crants to Old CCA (previously filed as
Exhibit 10.8 to Prison Realty's Current Report on Form 8-K
(Commission File no. 0-25245), filed with the Commission on
January 6, 1999 and incorporated herein by reference).
10.9 Assignment Agreement, dated as of December 31, 1998, by and
between Old CCA and Corrections Partners, Inc. and related Bill of
Sale (previously filed as Exhibit 10.9 to Prison Realty's Current
Report on Form 8-K (Commission File no. 0-25245), filed with the
Commission on January 6, 1999 and incorporated herein by
reference).
10.10 Assignment Agreement, dated as of December 31, 1998, by and among
Corrections Partners, Inc., Concept Incorporated, TransCor
America, Inc., certain other subsidiaries of Old CCA, and CCA and
related Bill of Sale (previously filed as Exhibit 10.10 to Prison
Realty's Current Report on Form 8-K (Commission File no. 0-25245),
filed with the Commission on January 6, 1999 and incorporated
herein by reference).
10.11 Contribution Agreement, dated as of December 31, 1998, by and
between Old CCA and CCA (previously filed as Exhibit 10.11 to
Prison Realty's Current Report on Form 8-K (Commission File no.
0-25245), filed with the Commission on January 6, 1999 and
incorporated herein by reference).
10.12 Contribution Agreement, dated as of December 31, 1998, by and
between Old CCA and Prison Management Services, LLC (previously
filed as Exhibit 10.12 to Prison Realty's Current Report on Form
8-K (Commission File no. 0-25245), filed with the Commission on
January 6, 1999 and incorporated herein by reference).
10.13 Contribution Agreement, dated as of December 31, 1998, by and
between Old CCA and Juvenile and Jail Facility Management
Services, LLC (previously filed as Exhibit 10.13 to Prison
Realty's Current Report on Form 8-K (Commission File no. 0-
25245), filed with the Commission on January 6, 1999 and
incorporated herein by reference).
10.14 Assignment and Assumption Agreement, dated as of December 31,
1998, by and among Old CCA, Corrections Partners, Inc., Gadsden
Correctional Institution, Inc., and Prison Management Services,
LLC (previously filed as Exhibit 10.14 to Prison Realty's Current
Report on Form 8-K (Commission File no. 0-25245), filed with the
Commission on January 6, 1999 and incorporated herein by
reference).
<PAGE> 506
10.15 Assignment and Assumption Agreement, dated as of December 31,
1998, by and among Old CCA, Concept Incorporated, Corrections
Partners, Inc. and Juvenile and Jail Facility Management Services,
LLC (previously filed as Exhibit 10.15 to Prison Realty's Current
Report on Form 8-K (Commission File no. 0-25245), filed with the
Commission on January 6, 1999 and incorporated herein by
reference).
10.16 Services Agreement, dated as of January 1, 1999, by and between
Prison Realty and CCA (previously filed as Exhibit 10.16 to Prison
Realty's Current Report on Form 8- K (Commission File no.
0-25245), filed with the Commission on January 6, 1999 and
incorporated herein by reference).
10.17 Tenant Incentive Agreement, dated as of January 1, 1999, by and
between Prison Realty and CCA (previously filed as Exhibit 10.17
to Prison Realty's Current Report on Form 8-K (Commission File no.
0-25245), filed with the Commission on January 6, 1999 and
incorporated herein by reference).
10.18 Note Purchase Agreement, dated as of January 1, 1999, by and
between CCA and PMI Mezzanine Fund, L.P., including, as Exhibit
R-1 thereto, Registration Rights Agreement, dated as of January 1,
1999, by and between CCA and PMI Mezzanine Fund, L.P. (previously
filed as Exhibit 10.22 to Prison Realty's Current Report on Form
8-K (Commission File no. 0-25245), filed with the Commission on
January 6, 1999 and incorporated herein by reference).
10.19 Agreement in Principle by and among Sodexho, Old CCA and Old
Prison Realty (previously filed as Exhibit 10.13 to Prison
Realty's Registration Statement on Form S-4 (Commission File no.
333-65017), filed with the Commission on September 30, 1998 and
incorporated herein by reference).
10.20 1998 Amendment to 1994 Securities Purchase Agreement by and
between Old CCA and Sodexho S.A., dated as of December 30, 1998
(previously filed as Exhibit 10.86 to Prison Realty's Annual
Report on Form 10-K (Commission File no. 0-25245), filed with the
Commission on March 30, 1999 and incorporated herein by
reference).
10.21 Agreement in Principle, dated as of October 15, 1998, by and
between Baron Asset Fund, and all series thereof, on behalf of
itself and one or more mutual funds managed by it, or its
affiliates, Old CCA, Old Prison Realty and CCA (previously filed
as Exhibit 10.14 to Prison Realty's Registration Statement on Form
S-4 (Commission File no. 333-65017) Amendment no. 4, filed with
the Commission on September 30, 1998 and incorporated herein by
reference).
10.22 Administrative Services Agreement, dated as of January 1, 1999, by
and between CCA and PMSI (previously filed as Exhibit 10.26 to
Prison Realty's Current Report
<PAGE> 507
on Form 8-K (Commission File no. 0-25245), filed with the
Commission on January 6, 1999 and incorporated herein by
reference).
10.23 Administrative Services Agreement, dated as of January 1, 1999, by
and between CCA and JJFMSI (previously filed as Exhibit 10.27 to
Prison Realty's Current Report on Form 8-K (Commission File no.
0-25245), filed with the Commission on January 6, 1999 and
incorporated herein by reference).
10.24 Employment Agreement, dated as of January 1, 1999, by and between
Doctor R. Crants and Prison Realty (previously filed as Exhibit
10.28 to Prison Realty's Current Report on Form 8-K (Commission
File no. 0-25245), filed with the Commission on January 6, 1999
and incorporated herein by reference).
10.25 Employment Agreement, dated as of January 1, 1999, by and between
Doctor R. Crants and CCA (previously filed as Exhibit 10.29 to
Prison Realty's Current Report on Form 8-K (Commission File no.
0-25245), filed with the Commission on January 6, 1999 and
incorporated herein by reference).
10.26 Form of Officer and Director Indemnification Agreement by and
between Prison Realty and its officers and directors (previously
filed as Exhibit 10.48 to Prison Realty's Registration Statement
on Form S-4 (Commission File no. 333-65017), filed with the
Commission on September 30, 1998 and incorporated herein by
reference).
10.27 Amended and Restated Charter of CCA (previously filed as Exhibit
10.50 to Prison Realty's Registration Statement on Form S-4
(Commission File no. 333-65017), filed with the Commission on
September 30, 1998 and incorporated herein by reference).
10.28 Bylaws of CCA (previously filed as Exhibit 10.51 to Prison
Realty's Registration Statement on Form S-4 (Commission File no.
333-65017), filed with the Commission on September 30, 1998 and
incorporated herein by reference).
10.29 Amended and Restated Charter of PMSI (previously filed as Exhibit
10.31 to Prison Realty's Current Report on Form 8-K (Commission
File no. 0-25245), filed with the Commission on January 6, 1999
and incorporated herein by reference).
10.30 Bylaws of PMSI (previously filed as Exhibit 10.53 to Prison
Realty's Registration Statement on Form S-4 (Commission File no.
333-65017), filed with the Commission on September 30, 1998 and
incorporated herein by reference).
10.31 Amended and Restated Charter of JJFMSI (previously filed as
Exhibit 10.32 to Prison Realty's Current Report on Form 8-K
(Commission File no. 0-25245), filed with the Commission on
January 6, 1999 and incorporated herein by reference).
<PAGE> 508
10.32 Bylaws of JJFMSI (previously filed as Exhibit 10.55 to Prison
Realty's Registration Statement on Form S-4 (Commission File no.
333-65017), filed with the Commission on September 30, 1998 and
incorporated herein by reference).
10.33 Credit Agreement, dated as of January 1, 1999, by and among Prison
Realty and certain of its subsidiaries and NationsBank, N.A., as
Administrative Agent, Lehman Commercial Paper, Inc., as
Documentation Agent, and the Bank of Nova Scotia, as Syndication
Agent (previously filed as Exhibit 10.33 to Prison Realty's
Current Report on Form 8-K (Commission File no. 0-25245), filed
with the Commission on January 6, 1999 and incorporated herein by
reference).
10.34 Note Purchase Agreement, dated as of December 31, 1998, by and
between Prison Realty and MDP Ventures IV LLC (previously filed as
Exhibit 10.36 to Prison Realty's Current Report on Form 8-K
(Commission File no. 0-25245), filed with the Commission on
January 6, 1999 and incorporated herein by reference).
10.35 Registration Rights Agreement, dated as of December 31, 1998, by
and between Prison Realty and MDP Ventures IV LLC (previously
filed as Exhibit 10.37 to Prison Realty's Current Report on Form
8-K (Commission File no. 0-25245), filed with the Commission on
January 6, 1999 and incorporated herein by reference).
10.36 Preemptive Rights Agreement, dated as of January 1, 1999, by and
between Prison Realty and CCA (previously filed as Exhibit 10.38
to Prison Realty's Current Report on Form 8-K (Commission File no.
0-25245), filed with the Commission on January 6, 1999 and
incorporated herein by reference).
10.37 REIT Management Agreement, dated as of July 21, 1997, by and
between Old Prison Realty and Prison Realty Management, Inc.
(previously filed as Exhibit 10(hh) to Old Prison Realty's Annual
Report on Form 10-K (Commission File no. 1-13049), filed with the
Commission on March 18, 1998 and incorporated herein by
reference).
10.38 Old Prison Realty's 1997 Employee Share Incentive Plan (previously
filed as Exhibit 10.25 to Old Prison Realty's Quarterly Report on
Form 10-Q (Commission File no. 1- 13049), filed with the
Commission on August 25, 1997 and incorporated herein by
reference).
10.39 Old Prison Realty's Non-Employee Trustees' Share Option Plan, as
amended (previously filed as Exhibit 10.26 to Old Prison Realty's
Quarterly Report on Form 10-Q (Commission File no. 1-13049), filed
with the Commission on August 25, 1997 and incorporated herein by
reference).
<PAGE> 509
10.40 Old Prison Realty's Non-Employee Trustees' Compensation Plan
(previously filed as Exhibit 4.3 to Old Prison Realty's
Registration Statement on Form S-8 (Commission File no.
333-58339), filed with the Commission on July 1, 1998 and
incorporated herein by reference).
10.41 Old CCA's Option Plan, dated as of January 23, 1985, as amended by
First Amendment to Old CCA's Stock Option Plan, together with
forms of Incentive Stock Option Agreement and Non-Qualified Stock
Option Agreement (previously filed as Exhibit 10(c) to Old CCA's
Registration Statement on Form S-1 (Commission File no. 33-8052),
filed with the Commission on August 15, 1986 and incorporated
herein by reference).
10.42 Non-Qualified Stock Option Plan of Old CCA, dated as of January
16, 1986, and related form of Non-Qualified Stock Option Agreement
(previously filed as Exhibit 10(d) to Old CCA's Registration
Statement on Form S-1 (Commission File no. 33- 8052), filed with
the Commission on August 15, 1986 and incorporated herein by
reference).
10.43 Old CCA's 1988 Flexible Stock Option Plan (previously filed as
Exhibit A to Old CCA's definitive Proxy Statement relating to Old
CCA's 1988 Annual Meeting of Shareholders (Commission File no.
0-15719), filed with the Commission on April 29, 1988 and
incorporated herein by reference).
10.44 Second Amendment to Old CCA's Stock Option Plan, dated as of March
27, 1987, together with form of Incentive Stock Option Agreement
(previously filed as Exhibit 10(aa) to Old CCA's Annual Report on
Form 10-K (Commission File no. 0-15719), filed with the Commission
on March 31, 1987 and incorporated herein by reference).
10.45 Third Amendment to Old CCA's Stock Option Plan, dated as of March
18, 1988 (previously filed as Exhibit B to Old CCA's definitive
Proxy Statement relating to Old CCA's 1988 Annual Meeting of
Shareholders (Commission File no. 0-15719), filed with the
Commission on April 29, 1988 and incorporated herein by
reference).
10.46 Old CCA's 1989 Stock Bonus Plan (previously filed as Exhibit
10(zz) to Old CCA's Annual Report on Form 10-K (Commission File
no. 0-15719), filed with the Commission on March 30, 1990 and
incorporated herein by reference).
10.47 First Amendment to Old CCA's 1988 Flexible Stock Option Plan,
dated as of June 8, 1989 (previously filed as Exhibit 10(mmm) to
Old CCA's Annual Report on Form 10-K Commission File no. 0-15719),
filed with the Commission on March 30, 1990 and incorporated
herein by reference).
<PAGE> 510
10.48 First Amendment to Old CCA's Non-Qualified Stock Option Plan,
dated as of June 8, 1989 (previously filed as Exhibit 10(nnn) to
Old CCA's Annual Report on Form 10- K (Commission File no.
0-15719), filed with the Commission on March 30, 1990 and
incorporated herein by reference).
10.49 Amended and Restated Employee Stock Ownership Plan (previously
filed as Exhibit 10(iiii) to Old CCA's Annual Report on Form 10-K
(Commission File no. 0-15719), filed with the Commission on March
30, 1992 and incorporated herein by reference).
10.50 Old CCA's Non-Employee Director Stock Option Plan (previously
filed as Exhibit 10(yyyy) to Old CCA's Annual Report on Form 10-K
(Commission File no. 0- 15719), filed with the Commission on March
31, 1994 and incorporated herein by reference).
10.51 First Amendment to Old CCA's 1991 Flexible Stock Option Plan,
dated as of March 11, 1994 (previously filed as Exhibit 10.102 to
Old CCA's Annual Report on Form 10-K (Commission File no.
1-13049), filed with the Commission on March 31, 1995 and
incorporated herein by reference).
10.52 Amendments to the Amended and Restated Old CCA Employee Stock
Ownership Plan, dated as of June 3, 1994 (previously filed as
Exhibit 10.109 to Old CCA's Annual Report on Form 10-K (Commission
File no. 1-13049), filed with the Commission on March 31, 1995 and
incorporated herein by reference).
10.53 Amended and Restated Old CCA 1989 Stock Bonus Plan, dated as of
February 20, 1995 (previously filed as Exhibit 10.138 to Old CCA's
Annual Report on Form 10-K (Commission File no. 1-13560), filed
with the Commission on March 31, 1995 and incorporated herein by
reference).
10.54 Old CCA's 1995 Employee Stock Incentive Plan, effective as of
March 20, 1995 (previously filed as Exhibit 4.3 to Old CCA's
Registration Statement on Form S-8 (Commission File no. 33-61173),
filed with the Commission on July 20, 1995 and incorporated herein
by reference).
10.55 First Amendment to Amended and Restated Old CCA 1989 Stock Bonus
Plan, dated as of November 3, 1995 (previously filed as Exhibit
10.153 to Old CCA's Annual Report on Form 10-K (Commission File
no. 1-13560), filed with the Commission on March 29, 1996 and
incorporated herein by reference).
10.56 Option Agreement, dated March 31, 1997, by and between Old CCA and
Joseph F. Johnson, Jr. relating to the grant of an option to
purchase 80,000 shares of Old CCA Common Stock (previously filed
as Appendix B to Old CCA's definitive Proxy
<PAGE> 511
Statement relating to Old CCA's 1998 Annual Meeting of
Shareholders (Commission File no. 0-15719), filed with the
Commission on March 31, 1998 and incorporated herein by
reference).
10.57 Old CCA's Non-Employee Directors' Compensation Plan (previously
filed as Appendix A to Old CCA's definitive Proxy Statement
relating to Old CCA's 1998 Annual Meeting of Shareholders
(Commission File no. 0-15719), filed with the Commission on March
31, 1998 and incorporated herein by reference).
10.58 Amended and Restated Tenant Incentive Agreement by and between
Prison Realty and CCA (previously filed as Exhibit 10.1 to Prison
Realty's Quarterly Report on Form 10-Q for the quarterly ended
March 31, 1999 (Commission File no. 0-25245), filed with the
Commission on May 14, 1999 and incorporated herein by reference).
10.59 Business Development Agreement by and between Prison Realty and
CCA (previously filed as Exhibit 10.2 to Prison Realty's Quarterly
Report on Form 10-Q for the quarterly ended March 31, 1999
(Commission File no. 0-25245), filed with the Commission on May
14, 1999 and incorporated herein by reference).
10.60 Amended and Restated Credit Agreement, dated as of August 4, 1999,
by and among Prison Realty, as Borrower, certain subsidiaries of
Prison Realty, as Guarantor, the several lenders from time to time
party thereto, Lehman Commercial Paper Inc., as Administrative
Agent, Societe Generale, as Documentation Agent, The Bank of Nova
Scotia, as Syndication Agent, SouthTrust Bank, N.A., as Co-Agent,
and Lehman Brothers Inc., as Advisor, as Lead Arranger, and as
Book Manager (previously filed as Exhibit 10.1 to Prison Realty's
Quarterly Report on Form 10-Q for the quarterly ended June 30,
1999 (Commission File no. 0-25245), filed with the Commission on
August 17, 1999 and incorporated herein by reference).
10.61 Securities Purchase Agreement, dated as of December 26, 1999, by
and between Prison Realty, CCA, PMSI, and JJFMSI, on the one hand,
and Prison Acquisition Company, L.L.C., on the other hand,
including: (i) as Exhibit A thereto, the Agreement and Plan of
Merger; (ii) as Exhibit B thereto, the Form of Articles of
Amendment and Restatement of Prison Realty; (iii) as Exhibit C
thereto, the Amended and Restated Bylaws of Prison Realty; (iv) as
Exhibit D thereto, the Form of Articles Supplementary for Series B
Cumulative Convertible Preferred Stock; (v) as Exhibit E thereto,
the Form of Warrant; (vi) as Exhibit F thereto, the Form of
Articles Supplementary for Series C Cumulative Convertible
Preferred Stock; (vii) as Exhibit G thereto, the Form of
Registration Rights Agreement; and (viii) as Exhibit H thereto,
the Financing Commitment Letter (previously filed as Exhibit 10.1
to Prison Realty's Current Report on Form 8-K (Commission File no.
0- 25245), filed with the Commission on December 28, 1999 and
incorporated herein by reference) (as directed
<PAGE> 512
by Item 601(b)(2) of Regulation S-K, certain schedules and
exhibits to this document were omitted from that filing, and
Prison Realty agreed to furnish supplementally a copy of any
omitted schedule or exhibit to the Commission upon request).
10.62 First Amendment to Master Agreement to Lease, dated as of December
31, 1999, by and between Prison Realty and CCA. (previously filed
as Exhibit 10.67 to Prison Realty's Annual Report on Form 10-K for
the year ended December 31, 1999 (Commission File no. 0-25245),
filed with the Commission on March 30, 2000 and incorporated
herein by reference).
10.63 Master Amendment to Lease Agreements, dated as of December 31,
1999, by and between Prison Realty and CCA (previously filed as
Exhibit 10.68 to Prison Realty's Annual Report on Form 10-K for
the year ended December 31, 1999 (Commission File no. 0-25245),
filed with the Commission on March 30, 2000 and incorporated
herein by reference).
10.64 Severance Agreement, dated as of December 31, 1999, by and among
D. Robert Crants, III, Prison Realty and CCA (previously filed as
Exhibit 10.69 to Prison Realty's Annual Report on Form 10-K for
the year ended December 31, 1999 (Commission File no. 0-25245),
filed with the Commission on March 30, 2000 and incorporated
herein by reference).
10.65 Severance Agreement, dated as of December 31, 1999, by and among
Michael W. Devlin, Prison Realty and CCA (previously filed as
Exhibit 10.70 to Prison Realty's Annual Report on Form 10-K for
the year ended December 31, 1999 (Commission File no. 0-25245),
filed with the Commission on March 30, 2000 and incorporated
herein by reference).
10.66 First Amendment to Securities Purchase Agreement, dated as of
February 28, 2000, by and among Prison Realty, CCA, PMSI, and
JJFMSI, on the one hand, and Prison Acquisition Company, L.L.C., a
Delaware limited liability company, on the other hand (previously
filed as Exhibit 10.1 to Prison Realty's Current Report on Form
8-K filed with the Commission on March 1, 2000 and incorporated
herein by this reference).
10.67 Securities Purchase Agreement as executed by Prison Realty, CCA,
PMSI and JJFMSI, on the one hand, and Pacific Life Insurance
Company ("Pacific Life"), on the other hand, on April 16, 2000
with the following exhibits attached: (i) as Exhibit A thereto,
Agreement and Plan of Merger, dated as of December 26, 1999, by
and among Prison Realty, CCA Acquisition Sub, Inc., PMSI
Acquisition Sub, Inc. and JJFMSI Acquisition Sub, Inc., and CCA,
PMSI and JJFMSI; (ii) as Exhibit B thereto, the Form of Articles
of Amendment and Restatement of Prison Realty; (iii) as Exhibit
<PAGE> 513
C thereto, the Amended and Restated Bylaws of Prison Realty ; (iv)
as Exhibit D thereto, the Form of Articles Supplementary for
Series C Cumulative Convertible Preferred Stock; (v) as Exhibit E
thereto, the Form of Articles Supplementary for Series B
Cumulative Convertible Preferred Stock; (vi) as Exhibit F thereto,
the Form of Warrant; and (vii) as Exhibit G thereto, the Form of
Registration Rights Agreement (the Securities Purchase Agreement,
together with items (i), (iii), (iv), (v), (vi), (vii), have been
previously filed as Exhibit 10.1 to Prison Realty's Current Report
on Form 8-K filed with the Commission on April 18, 2000 and
incorporated herein by this reference, with the Agreement and Plan
of Merger having been previously filed as Exhibit 2.1 to Prison
Realty's Current Report on Form 8-K filed with the Commission on
December 28, 1999 and incorporated herein by this reference).
10.68 Waiver and Amendment, dated as of June 9, 2000, by and among
Prison Realty, as Borrower, certain of Prison Realty's
subsidiaries as Subsidiary Guarantors, the Lenders, and Lehman
Commercial Paper Inc., as Administrative (previously filed as
Exhibit 10.1 to Prison Realty's Current Report on Form 8-K
(Commission File no. 0- 25245), filed with the Commission on June
12, 2000 and incorporated herein by reference).
10.69 Second Master Amendment to Lease Agreements, dated June 9, 2000,
by and between Prison Realty and Corrections Corporation of
America ("CCA") (previously filed as Exhibit 10.2 to Prison
Realty's Current Report on Form 8-K (Commission File no. 0-25245),
filed with the Commission on June 12, 2000 and incorporated herein
by reference).
10.70 Amendment Number One to Amended and Restated Tenant Incentive
Agreement, dated June 9, 2000, by and between Prison Realty and
CCA (previously filed as Exhibit 10.3 to Prison Realty's Current
Report on Form 8-K (Commission File no. 0- 25245), filed with the
Commission on June 12, 2000 and incorporated herein by reference).
10.71 Amendment Number One to Business Development Agreement, dated June
9, 2000, by and between Prison Realty and CCA (previously filed as
Exhibit 10.4 to Prison Realty's Current Report on Form 8-K
(Commission File no. 0-25245), filed with the Commission on June
12, 2000 and incorporated herein by reference).
10.72 Amendment Number One to Amended and Restated Services Agreement,
dated June 9, 2000, by and between Prison Realty and CCA
(previously filed as Exhibit 10.5 to Prison Realty's Current
Report on Form 8-K (Commission File no. 0-25245), filed with the
Commission on June 12, 2000 and incorporated herein by reference).
<PAGE> 514
10.73 Mutual Termination and Release Agreement dated June 30, 2000, by
and among Prison Realty, CCA, PMSI, and JJFMSI, on the one hand,
and Pacific Life, on the other hand (previously filed as Exhibit
10.1 to Prison Realty's Current Report on Form 8-K (Commission
File no. 0-25245), filed with the Commission on June 30, 2000 and
incorporated herein by reference).
10.74 Mutual Written Consent to Terminate Agreement and Plan of Merger,
dated as of June 30, 2000, by and among Prison Realty, CCA Sub,
PMSI Acquisition Sub, Inc., JJFMSI Acquisition Sub, Inc., CCA,
PMSI, and JJFMSI (previously filed as Exhibit 10.2 to Prison
Realty's Current Report on Form 8-K (Commission File no. 0-25245),
filed with the Commission on June 30, 2000 and incorporated herein
by reference).
10.75 Stock Purchase Agreement, dated as of June 30, 2000, by and
between Prison Realty and Baron Asset Fund, and all series
thereof, on behalf of itself and one or more mutual funds managed
by it, or its affiliates (previously filed as Exhibit 10.3 to
Prison Realty's Current Report on Form 8-K (Commission File no.
0-25245), filed with the Commission on June 30, 2000 and
incorporated herein by reference).
10.76 Waiver and Amendment, dated as of June 30, 2000, by and between
Prison Realty and MDP Ventures IV LLC, with form of replacement
note and PIK note attached thereto as Exhibit B and C,
respectively (previously filed as Exhibit 10.4 to Prison Realty's
Current Report on Form 8-K (Commission File no. 0-25245), filed
with the Commission on June 30, 2000 and incorporated herein by
reference).
10.77 Waiver and Amendment, dated as of June 30, 2000, by and between
Prison Realty and PMI Mezzanine Fund, L.P., with form of
replacement note attached thereto as Exhibit B (previously filed
as Exhibit 10.5 to Prison Realty's Current Report on Form 8-K
(Commission File no. 0-25245), filed with the Commission on June
30, 2000 and incorporated herein by reference).
12 Statement re: computation of ratios (included in this joint proxy
statement/prospectus).
21 Subsidiaries of Prison Realty.
23.1 Consent of Arthur Andersen LLP with respect to Prison Realty.
23.2 Consent of Arthur Andersen LLP with respect to CCA.
24 Powers of Attorney (included on signature pages).
