CORRECTIONS CORPORATION of AMERICA - FORM 424B4
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Filed Pursuant to Rule 424(b)(4)
Commission File No. 333-104240
PROSPECTUS SUPPLEMENT
(To Prospectus dated April 30, 2003)

7,600,000 Shares

(CORRECTIONS CORPORATION OF AMERICA LOGO)

Common Stock


We are offering 6,400,000 shares of our common stock. A selling stockholder is offering 1,200,000 shares of common stock. We will not receive any of the proceeds from the sale of shares by the selling stockholder.

Our common stock is traded on the New York Stock Exchange under the symbol “CXW.” On May 1, 2003, the last reported sale price of our common stock on the New York Stock Exchange was $20.65 per share.

Investing in our common stock involves risks. See Risk Factors beginning on page S-12 of this prospectus supplement and page 2 of the accompanying prospectus.

                 
Per Share Total


Public Offering Price
  $ 19.50     $ 148,200,000  
Underwriting Discounts and Commissions
  $ 0.975     $ 7,410,000  
Proceeds, before expenses, to Corrections Corporation of America
  $ 18.525     $ 118,560,000  
Proceeds, before expenses, to the Selling Stockholder
  $ 18.525     $ 22,230,000  

A selling stockholder has granted the underwriters a 30-day option to purchase up to an aggregate of 1,140,000 additional shares of our common stock on the same terms and conditions set forth above to cover over-allotments, if any.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus supplement or the accompanying prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Lehman Brothers, on behalf of the underwriters, expects to deliver the shares to purchasers on or about May 7, 2003.


LEHMAN BROTHERS

  UBS WARBURG
  SG COWEN
  FIRST ANALYSIS SECURITIES CORPORATION
  BB&T CAPITAL MARKETS
  MORGAN JOSEPH & CO. INC.

May 1, 2003


Table of Contents

The following graphic and image material is omitted from the form of prospectus supplement filed electronically:

Inside Front Cover:

[From the top of the page to the bottom of the page are the following: the heading “Corrections Corporation of America,” a map of the United States and a legend showing CCA’s owned and managed facilities, owned and leased/sub-leased facilities and managed only facilities.]

The following graphic and image material is omitted from the form of prospectus supplement filed electronically:

Inside Back Cover:

[From the top of the page to the bottom of the page are the following: two pictures of CCA employees interacting with inmates, a picture of the outside of a CCA facility, a picture of the inside of a CCA facility and a picture of a CCA employee and an inmate in a prison medical facility.]


TABLE OF CONTENTS

ABOUT THIS PROSPECTUS SUPPLEMENT
PROSPECTUS SUPPLEMENT SUMMARY
RISK FACTORS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
THE TRANSACTIONS
USE OF PROCEEDS
MARKET PRICE OF AND DISTRIBUTIONS ON COMMON STOCK
DIVIDEND POLICY
CAPITALIZATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SELECTED HISTORICAL FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS
MANAGEMENT
PRINCIPAL AND SELLING STOCKHOLDERS
DESCRIPTION OF CAPITAL STOCK
DESCRIPTION OF CERTAIN EXISTING INDEBTEDNESS
UNDERWRITING
LEGAL MATTERS
EXPERTS
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
INDEX TO FINANCIAL STATEMENTS
RISK FACTORS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
WHERE YOU CAN FIND ADDITIONAL INFORMATION
INCORPORATION OF INFORMATION BY REFERENCE
THE COMPANY
USE OF PROCEEDS
RATIO OF EARNINGS TO FIXED CHARGES
DESCRIPTION OF CERTAIN EXISTING INDEBTEDNESS AND OUTSTANDING PREFERRED STOCK
GENERAL DESCRIPTION OF SECURITIES WE MAY OFFER
DESCRIPTION OF DEBT SECURITIES
DESCRIPTION OF GUARANTEES
DESCRIPTION OF PREFERRED STOCK
DESCRIPTION OF COMMON STOCK
DESCRIPTION OF WARRANTS
SELLING STOCKHOLDER INFORMATION
PLAN OF DISTRIBUTION
LEGAL MATTERS
EXPERTS


Table of Contents

TABLES OF CONTENTS

         
Prospectus Supplement Page


About This Prospectus Supplement
    ii  
Prospectus Supplement Summary
    S-1  
Risk Factors
    S-12  
Special Note Regarding Forward-Looking Statements
    S-22  
The Transactions
    S-23  
Use of Proceeds
    S-25  
Market Price of and Distributions on Common Stock
    S-26  
Dividend Policy
    S-26  
Capitalization
    S-27  
Unaudited Pro Forma Condensed Consolidated Financial Statements
    S-29  
Selected Historical Financial Data
    S-36  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
    S-39  
Business
    S-65  
Management
    S-80  
Principal and Selling Stockholders
    S-85  
Description of Capital Stock
    S-88  
Description of Certain Existing Indebtedness
    S-89  
Underwriting
    S-95  
Legal Matters
    S-99  
Experts
    S-99  
Incorporation of Certain Documents by Reference
    S-100  
Index to Financial Statements
    F-1  
         
Prospectus Page


Risk Factors
    2  
Special Note Regarding Forward-Looking Statements
    12  
Where You Can Find Additional Information
    13  
Incorporation of Information by Reference
    13  
The Company
    14  
Use of Proceeds
    15  
Ratio of Earnings to Fixed Charges
    15  
Description of Certain Existing Indebtedness and Outstanding Preferred Stock
    15  
General Description of Securities We May Offer
    23  
Description of Debt Securities
    23  
Description of Guarantees
    32  
Description of Preferred Stock
    32  
Description of Common Stock
    32  
Description of Warrants
    33  
Selling Stockholder Information
    35  
Plan of Distribution
    36  
Legal Matters
    37  
Experts
    37  


      You should rely only on the information contained in or incorporated by reference in this prospectus supplement and the accompanying prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information provided by this prospectus supplement or the accompanying prospectus is accurate as of any date other than the date on the front of this prospectus supplement.


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ABOUT THIS PROSPECTUS SUPPLEMENT

      This prospectus supplement contains the terms of this offering. A description of our common stock is contained in the accompanying prospectus beginning on page 32.

      This prospectus supplement is part of and should be read in conjunction with the accompanying prospectus. The information we present in this prospectus supplement may add, update or change information included in the accompanying prospectus. If information in this prospectus supplement, or the information incorporated by reference in the accompanying prospectus, is inconsistent with the accompanying prospectus, this prospectus supplement, or the information incorporated by reference in the accompanying prospectus, will apply and will supersede that information in the accompanying prospectus.

      In this prospectus supplement, “we,” “us,” “our” and the “Company” refer to Corrections Corporation of America and its consolidated subsidiaries, unless otherwise expressly stated or the context otherwise requires. The symbol “$” refers to U.S. dollars, unless otherwise indicated.

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PROSPECTUS SUPPLEMENT SUMMARY

The following summary highlights certain significant aspects of our business and this offering, but you should carefully read this entire prospectus supplement and the accompanying prospectus, including the financial data and related notes and the documents incorporated by reference, which are described under “Incorporation of Certain Documents by Reference,” before making an investment decision. Because this is a summary, it may not contain all the information that is important to you. Our actual results could differ materially from those anticipated in certain forward-looking statements contained in this prospectus supplement as a result of certain factors, including those set forth under “Risk Factors.”

 
Our Company

      We are the nation’s largest owner and operator of private correctional and detention facilities and one of the largest prison operators in the United States behind only the federal government and four states. We provide the fundamental residential and health care services for our adult and juvenile inmates, as well as a variety of rehabilitation and educational programs designed to reduce recidivism and prepare our inmates for their successful reentry into society upon their release. Some of the additional services we offer include life skills training, basic education, employment training, religious services, behavioral rehabilitation and treatment, substance abuse treatment and work and recreational programs.

      We provide our essential services through 59 facilities, including 38 facilities that we own, with a total design capacity of approximately 59,000 beds in 20 states and the District of Columbia. We also provide inmate transportation services for government agencies through our subsidiary, TransCor America, LLC. For the year ended December 31, 2002, we had revenues of $962.8 million and operating income of $130.0 million.

      Our services address a total U.S. market that we believe exceeds $50.0 billion, of which only approximately 6.1% is currently outsourced to the private sector. We believe that the U.S. market will demonstrate consistent growth over the next decade as a result of stricter sentencing guidelines, longer prison sentences and prison terms for juvenile offenders, as well as the growing demographic of the 14 to 24 year-old at-risk population. We also expect the size of the private market to grow as a result of governments’ demonstrated need to augment their overcrowded and aging facilities, reduce costs, increase accountability and improve overall quality of service.

      Under our management services contracts, government agencies pay us at an inmate per diem rate based upon actual or minimum guaranteed occupancy levels. Our management services contracts typically have terms of one to five years, and contain multiple renewal options exercisable at the option of the contracting government agency. More than 40 of our approximately 80 contracts are with government entities for which we have been providing services for five years or more. Our management services contracts provide a reliable source of revenue, reflected by the renewal of more than 95% of our contracts over the past four years.

      We have increased our average compensated occupancy, based on rated capacity, for facilities in operation to 89.6% for the year ended December 31, 2002 from 88.4% for the year ended December 31, 2001. Our average compensated occupancy for facilities in operation for the quarter ended December 31, 2002 was 91.2%.

 
Competitive Strengths

      We believe that we benefit from the following competitive strengths:

      The Largest and Most Recognized Private Prison Operator. Our recognition as the industry’s leading private prison operator provides us with significant credibility with our current and prospective clients. We manage approximately 50% of all privately managed prison beds in the United States. We pioneered modern-day private prisons with a list of notable accomplishments, such as being the first company to design, build and operate a private prison and the first company to manage a private maximum-security

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facility under a direct contract with the federal government. We believe that we benefit from certain economies of scale in purchasing power for food services, healthcare services and other supplies.

      Available Beds Within Our Existing Facilities. Our available beds provide us with an opportunity for increasing operating cash flows without significant capital outlays. We currently have two facilities, our Northeast Ohio Correctional Center and Tallahatchie County Correctional Facility, that are substantially vacant and provide us with approximately 3,000 available beds. We also have a facility with approximately 1,500 beds located in Stewart County, Georgia, which is partially complete. In addition to the above facilities, as of March 1, 2003, we have a total of nine facilities that each have 200 or more beds available.

      Diverse, High Quality Customer Base. We provide services under management contracts with a diverse client base of approximately 50 different customers that generally have credit ratings of single-A or better. In addition, with average inmate lengths of stay of between three and five years and a majority of our contracts having terms between one and five years, our revenue base is relatively predictable and stable.

      Proven Senior Management Team. Our senior management team has applied their prior experience and diverse industry expertise to significantly improve our operations. Under our senior management team’s leadership, our average occupancy has increased from 84.8% in 2000 to 89.6% in 2002 while our average inmate per diem operating margin increased from $8.29 to $11.30 during the same period. Since the fourth quarter of 2000 we have secured the three largest contracts in our history, accounting for approximately 4,800 beds under contract with the Federal Bureau of Prisons (“BOP”). In addition, in 2001, we reduced our debt by $189.0 million and we refinanced our senior debt in 2002 on more favorable terms, resulting in significant interest savings.

Business Strategy

      Our primary business strategy is to provide quality corrections services, offer a compelling value, increase occupancy and revenue, and further improve our capital structure, while maintaining our position as the leading owner, operator and manager of privatized correctional and detention facilities. We will also consider opportunities for growth, including potential acquisitions of businesses within our line of business and those that provide complementary services, provided we believe such opportunities will broaden our market and/or increase the services we can provide to our customers.

      Own and Operate High Quality Correctional and Detention Facilities. We believe that our clients choose an outsourced correctional services provider based primarily upon the quality of the service provided. Approximately 80% of our facilities are accredited by the American Correctional Association, or the ACA, an independent organization of corrections industry professionals that establishes standards by which a correctional facility may gain accreditation. We believe that this percentage compares favorably to the percentage of government-operated adult prisons that are accredited by the ACA. The quality of our operations is further illustrated by the fact that for the three years ended December 31, 2001, we had an escape ratio at our adult prison facilities that was less than two-thirds of the national average for adult prisons (according to the 2001 Corrections Yearbook published by the Criminal Justice Institute). We have experienced wardens managing our facilities, with an average of over 23 years of corrections experience and an average tenure of almost eight years with us.

      Offer Compelling Value. We believe that our customers also seek a compelling value and service offering when selecting an outsourced correctional services provider. We believe that we offer a cost-effective alternative to our clients by reducing their correctional services costs. We attempt to accomplish this through improving operating performance and efficiency through the following key operating initiatives: (1) standardizing supply and service purchasing practices and usage; (2) outsourcing the purchase of food products and services nationwide; (3) improving inmate management, resource consumption and reporting procedures through the utilization of numerous technological initiatives; and (4) improving productivity and reducing employee turnover. We also intend to continue to implement a wide variety of specialized services that address the unique needs of various segments of the inmate population. Because the facilities we operate differ with respect to security levels, ages, genders and cultures of inmates, we focus on the

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particular needs of an inmate population and tailor our services based on local conditions and our ability to provide services on a cost-effective basis.

      Increase Occupancy. Our industry benefits from significant economies of scale, resulting in lower operating costs per inmate as occupancy rates increase. Our management team is pursuing a number of initiatives intended to increase occupancy through obtaining new and additional contracts. We are also focused on renewing and enhancing the terms of our existing contracts. Given our significant number of available beds, we believe we can increase operating cash flow from increased occupancy without incurring significant capital expenditures. In addition, we will consider the expansion of existing facilities or the development or purchase of new prison facilities that we believe have favorable investment returns and increase value to our stockholders.

      Improve Our Capital Structure. In 2001, we reduced debt by $189.0 million, and in 2002, we were able to reduce our cost of capital by refinancing our senior secured credit facility. The transactions contemplated hereby are intended to continue this effort by significantly reducing the after tax dividend and interest obligations associated with our outstanding preferred stock and our 10% convertible subordinated notes, respectively. We also intend to use an additional $25.0 million of cash on hand and the anticipated proceeds of a tax refund estimated to be approximately $32.0 million to further reduce outstanding borrowings under the term loan portion of our senior secured credit facility. We believe that based on our anticipated level of capital expenditures and the benefit of our net operating loss carry forwards we will generate free cash flow that will enable us to continue reducing our debt.

The Corrections and Detention Industry

      We believe we are well-positioned to capitalize on governmental outsourcing of correctional management services because of our competitive strengths and business strategy. The key reasons for this outsourcing trend include:

      Growing United States Prison Population. The average annual growth rate of the prison population in the United States between December 1995 and June 2002 was 3.8%. The growth rate declined somewhat to 2.8% between June 2001 and June 2002, with the sentenced state prison population rising by only 1.0%. However, from June 2001 to June 2002, the sentenced prison population for the federal government rose 5.7%, which represented over 40% of the growth in the nation’s prison population. In the first six months of 2002, the number of federal inmates increased 3.0%, which was more than twice the rate of state growth for the same period. Federal agencies are collectively our largest customer and accounted for approximately 33% of our management revenues (when aggregating all of our federal contracts) for the year ended December 31, 2002. Further growth is expected to come from stricter sentencing guidelines, longer prison sentences and prison terms for juvenile offenders, as well as the growing demographic of the 14 to 24 year-old at-risk population.

      Prison Overcrowding. The significant growth of the prison population in the United States has led to overcrowding in the state and federal prison systems. In 2001, at least 22 states and the federal prison system reported operating at above capacity. The federal prison system was operating at 31% above capacity at December 31, 2001.

      Acceptance of Privatization. The prisoner population housed in privately managed facilities in the United States at the end of June 2002 was 86,626. At June 30, 2002, 12.6% of all federal inmates and 5.2% of all state inmates were held in private facilities. Seven states and the District of Columbia, all of which are our customers, housed at least 20% of their prison population in private facilities as of June 30, 2002 — New Mexico (43%), the District of Columbia (27%), Montana (31%), Alaska (29%), Oklahoma (29%), Wyoming (28%), Hawaii (22%), and Idaho (22%).

      Governmental Budgeting Constraints. We believe the outsourcing of prison management services to private operators allows governments to manage increasing inmate populations while simultaneously controlling correctional costs and improving correctional services. The use of facilities owned and managed by private operators allows governments to expand prison capacity without incurring large capital

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commitments required to increase correctional capacity. In addition, contracting with a private operator allows governmental agencies to add beds without making significant capital investment or incurring new debt. We believe these advantages translate into significant cost savings for government agencies.

The Proposed Transactions

      We are undertaking a series of transactions as described below in order to enhance our capital structure and to provide us additional financing flexibility that will enable us to more effectively execute our business objectives in the future. We cannot assure you that these transactions will be successfully completed. See “The Transactions.”

      Common Stock and Notes Offerings. We are offering 6,400,000 shares of common stock for sale and a selling stockholder of the Company is offering 1,200,000 shares of common stock for sale. The Company will not receive any proceeds from the sale of shares from the selling stockholder. Concurrently with the common stock offering, we are also offering $250.0 million aggregate principal amount of our new senior notes due 2011 under a separate prospectus supplement.

      Tender Offer for Series B Preferred Stock. We are making an offer to purchase up to 90% of our outstanding series B preferred stock (approximately 4.2 million of the 4.7 million shares outstanding as of March 31, 2003). The offer price for the series B preferred stock is $26.00 per share.

      Redemption of Series A Preferred Stock. Immediately following consummation of the common stock offering and the notes offering, we intend to use approximately $100.0 million of the net proceeds from the offerings to redeem approximately 4.0 million of the 4.3 million shares of our series A preferred stock issued and outstanding at a price per share equal to the liquidation preference plus accrued and unpaid dividends to the redemption date.

      Purchase of Shares of Common Stock Issuable Upon Conversion of the MDP Notes. We have entered into an agreement with Income Opportunity Fund I, LLC, Millennium Holdings II LLC and Millennium Holdings III LLC (which we collectively refer to as “MDP”) in which MDP has agreed to convert the $40.0 million aggregate principal amount of our 10% convertible subordinated notes due 2008, or the MDP Notes, into 3,362,899 shares of our common stock and sell such shares to us. The aggregate purchase price for the shares and accrued interest payable on the notes will be approximately $81.1 million.

      Payments on and Amendments to Senior Secured Credit Facility. We intend to repay approximately $77.2 million in borrowings outstanding under the term loan portion of our senior secured credit facility. Depending upon the results of our tender offer to purchase up to 90% of our outstanding series B preferred stock, the amount of senior debt we will pay down would be adjusted. In connection with the transactions contemplated hereby, the required lenders under our senior secured credit facility have consented to the proposed transactions and to amend the senior secured credit facility to provide us with additional financial flexibility.

      Our obligation to consummate the common stock offering is not subject to the completion of any of the other transactions described above. The notes offering is conditioned upon completion of the common stock offering. The tender offer is conditioned upon, among other things, completion of the common stock and notes offerings. If the notes offering and tender offer are not completed, we anticipate, subject to obtaining consent of the lenders under our senior secured credit facility, using the proceeds from the common stock offering to purchase the 3,362,899 MDP shares and pay accrued interest payable on the notes in connection with the purchase (subject to certain conditions therein), repay senior indebtedness and for general corporate purposes.

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      The foregoing transactions are reflected in the following sources and uses table and as described below:

                     
Sources of Funds Uses of Funds


(dollars in thousands)
Common Stock Offering, Net Proceeds(1)
  $ 117,312    
Tender for Series B
Preferred Stock(2)
  $  97,178  
New Senior Notes
    250,000    
Redemption of Series A
       
           
  Preferred Stock
    101,465  
           
MDP Repurchase
    81,070  
           
Prepay Term Loans(3)
    77,202  
           
Fees and Expenses(4)
    10,397  
     
         
 
    $ 367,312         $ 367,312  
     
         
 


(1)  Based upon a price to the public in the common stock offering of $19.50 per share.
 
(2)  Assumes a successful tender for approximately 80% of the issued and outstanding series B preferred stock.
 
(3)  Subject to change to the extent we purchase more or fewer shares of series B preferred stock than as set forth above.
 
(4)  Includes approximately $7.5 million of underwriting discounts and anticipated expenses of the notes offering.

Our History

      Our predecessor, Corrections Corporation of America, a Tennessee corporation, was founded in 1983 as the first owner and operator of privatized correction and detention facilities. From January 1, 1999 to October 1, 2000, we operated as Prison Realty Trust, a publicly traded real estate investment trust, or REIT. Prison Realty Trust was the owner of all of our owned facilities while all of our prison operations (i.e., the management of our owned prisons and the management of government-owned prisons) were conducted by three operating companies.

      In order to provide a simplified and more stable corporate and financial structure that allows us to retain earnings for capital purposes and to reduce debt, we merged with the three operating companies during the fourth quarter of 2000. In connection with the consummation of these mergers, we resumed operations under the “Corrections Corporation of America” name and ceased operating as a REIT. See Notes 1 and 3 to the combined and consolidated financial statements set forth herein for a more detailed description of these events.

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The Offering

 
Common stock offered by us 6,400,000 shares
 
Common stock offered by the selling stockholder 1,200,000 shares
 
Common stock to be outstanding after this offering 34,503,360 shares
 
Over-allotment option granted by the selling stockholder 1,140,000 shares
 
Use of proceeds We intend to use the net proceeds from this offering, together with the net proceeds from our concurrent offering of the new senior notes due 2011, (a) to redeem $100.0 million (liquidation price) plus accrued dividends of the issued and outstanding shares of our series A preferred stock pursuant to their terms, (b) to consummate the tender offer to purchase up to approximately 4.2 million shares of our series B preferred stock, (c) to purchase the shares of common stock issuable upon conversion of the MDP Notes and pay interest due to the noteholders, and (d) to repay approximately $77.2 million of term indebtedness under our senior secured credit facility. See “Use of Proceeds” and “The Transactions.” We will receive no proceeds from the sale of common stock by the selling stockholder.
 
NYSE symbol “CXW”
 
Risk factors You should carefully read and consider the information set forth in “Risk Factors” beginning on page S-12 of this prospectus supplement and “Risk Factors” beginning on page 2 of the accompanying prospectus before investing in our common stock.


The number of shares of common stock to be outstanding after this offering:

  •  includes approximately 28,103,360 shares outstanding as of March 31, 2003;
 
  •  excludes 2,171,678 shares of common stock reserved for issuance and available for grant under our stock option and other employee benefit plans as of March 31, 2003 (this figure includes an additional 1,500,000 shares to be authorized and reserved for issuance under our 2000 Stock Incentive Plan and an additional 75,000 shares authorized and reserved for issuance under our Non-Employee Directors’ Compensation Plan, subject to approval by stockholders at the 2003 Annual Meeting);
 
  •  excludes outstanding options for the purchase of 3,713,307 shares of common stock as of March 31, 2003;
 
  •  excludes 3,369,599 shares of common stock reserved for issuance pursuant to the conversion of our 4% convertible subordinated notes due February 28, 2007;
 
  •  excludes warrants for the purchase of 287,835 shares of our common stock as of March 31, 2003; and
 
  •  excludes 309,823 shares of common stock to be issued in connection with the stockholder litigation settled in the first quarter of 2001.

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Summary Historical and Pro Forma Financial and Operating Data

      The following table sets forth certain of our historical and pro forma combined and consolidated financial data as of and for the periods indicated. Our summary historical financial data is derived from our audited combined and consolidated financial statements as of December 31, 2002 and 2001 and for the years ended December 31, 2002, 2001 and 2000, which are included elsewhere in this prospectus supplement and incorporated by reference in the accompanying prospectus. The summary pro forma financial data set forth below is derived from our Unaudited Pro Forma Condensed Consolidated Financial Statements included elsewhere in this prospectus supplement.

      Our financial information for the years ended December 31, 2002 and 2001 is the only information presented below that fully reflects operating and financial results under our current corporate structure for full periods as an owner, operator and manager of prisons and other correctional facilities. As the result of our mergers in the fourth quarter of 2000, our financial information for the year ended December 31, 2000 set forth below reflects nine months of operations primarily as a lessor of prisons and other correctional facilities and three months of operations as an owner, operator and manager of prisons and other correctional facilities. Therefore, the summary financial information for the year ended December 31, 2000 is not comparable to the financial information for the years ended December 31, 2002 and 2001. The following data should be read in conjunction with “Selected Historical Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical combined and consolidated financial statements and the related notes included in this prospectus supplement or incorporated by reference in the accompanying prospectus, each of which contains more detailed information with respect to our operations prior to 2001 and mergers in 2000.

      The pro forma adjustments are described in “Unaudited Pro Forma Condensed Consolidated Financial Statements” beginning on page S-29 and are based upon available information and various assumptions that management believes are reasonable. These adjustments give effect to events directly attributable to the transactions described in “Unaudited Pro Forma Condensed Consolidated Financial Statements.” The unaudited pro forma condensed consolidated statement of operations and other financial data do not purport to represent what our results of operations would actually have been had these transactions occurred on January 1, 2002, and the as adjusted condensed consolidated balance sheet data does not purport to represent what our financial position would have been had these transactions actually occurred on December 31, 2002.

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Year Ended December 31,

Pro Forma
2000 2001 2002 2002(1)




(dollars in thousands, except per share amounts)
Statements of Operations:
                               
Revenue:
                               
Management and other
  $ 261,774     $ 930,635     $ 959,137     $ 959,137  
Rental
    40,938       5,718       3,701       3,701  
Licensing fees from affiliates
    7,566                    
     
     
     
     
 
Total revenue
    310,278       936,353       962,838       962,838  
     
     
     
     
 
Expenses:
                               
Operating
    217,315       721,468       744,074       744,074  
General and administrative
    45,463       34,568       36,907       36,907  
Depreciation and amortization
    59,799       53,279       51,878       51,878  
Fees to Operating Company
    1,401                    
Write-off of amounts under lease arrangements
    11,920                    
Impairment losses
    527,919                    
     
     
     
     
 
Total expenses
    863,817       809,315       832,859       832,859  
     
     
     
     
 
Operating income (loss)
    (553,539 )     127,038       129,979       129,979  
     
     
     
     
 
Other (Income) Expense:
                               
Equity loss and amortization of deferred gain, net
    11,638       358       153       153  
Interest expense, net
    131,545       126,242       87,478       94,457  
Other income
    (3,099 )                  
Change in fair value of derivative instruments
          (14,554 )     (2,206 )     (2,206 )
Loss on disposals of assets
    1,733       74       111       111  
Unrealized foreign currency transaction (gain) loss
    8,147       219       (622 )     (622 )
Stockholder litigation settlements
    75,406                    
     
     
     
     
 
Total other (income) expense
    225,370       112,339       84,914       91,893  
     
     
     
     
 
Income (loss) from continuing operations before income taxes, minority interest, extraordinary charge and cumulative effect of accounting change
    (778,909 )     14,699       45,065 (1)     38,086 (1)
Income tax benefit
    48,002       3,358       63,284       63,284  
     
     
     
     
 
Income (loss) from continuing operations before minority interest, extraordinary charge and cumulative effect of accounting change
    (730,907 )     18,057       108,349     $ 101,370  
                             
 
Minority interest in net loss of PMSI and JJFMSI
    125                      
     
     
     
         
Income (loss) from continuing operations before extraordinary charge and cumulative effect of accounting change
    (730,782 )     18,057       108,349          
Income from discontinued operations, net of taxes
          7,637       681          
Extraordinary charge
                (36,670 )        
Cumulative effect of accounting change
                (80,276 )        
     
     
     
         
Net income (loss)
    (730,782 )     25,694       (7,916 )        
Distributions to preferred stockholders
    (13,526 )     (20,024 )     (20,959 )        
     
     
     
         
Net income (loss) available to common stockholders
  $ (744,308 )   $ 5,670     $ (28,875 )        
     
     
     
         

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Year Ended December 31,

Pro Forma
2000 2001 2002 2002(1)




(dollars in thousands, except per share amounts)
Basic earnings (loss) per share:
                               
Income (loss) from continuing operations before extraordinary charge and cumulative effect of accounting change
  $ (56.68 )   $ (0.08 )   $ 3.17     $ 2.94  
                             
 
Income from discontinued operations, net of taxes
          0.31       0.02          
Extraordinary charge
                (1.33 )        
Cumulative effect of accounting change
                (2.90 )        
     
     
     
         
Net income (loss) available to common stockholders
  $ (56.68 )   $ 0.23     $ (1.04 )        
     
     
     
         
Diluted earnings (loss) per share:
                               
Income (loss) from continuing operations before extraordinary charge and cumulative effect of accounting change
  $ (56.68 )   $ (0.08 )   $ 2.75     $ 2.66  
                             
 
Income from discontinued operations, net of taxes
          0.31       0.02          
Extraordinary charge
                (1.03 )        
Cumulative effect of accounting change
                (2.26 )        
     
     
     
         
Net income (loss) available to common stockholders
  $ (56.68 )   $ 0.23     $ (0.52 )        
     
     
     
         
Other Financial Data:
                               
EBITDA(2)
  $ (587,565 ) (3)   $ 194,220     $ 184,421     $ 184,421  
Capital expenditures
  $ (78,663 )   $ (6,435 )   $ (17,097 )   $ (17,097 )
                 
As of December 31, 2002

Actual As Adjusted(4)


(dollars in thousands)
Balance Sheet Data
               
Cash and cash equivalents
  $ 65,406     $ 65,406  
Total assets
    1,874,071       1,880,872  
Total debt
    955,959       1,088,757  
Total liabilities
    1,140,073       1,260,286  
Stockholders’ equity
    733,998       620,586  
                         
Year Ended December 31,

2000(5) 2001 2002



Facility Operating Data:
                       
Average available beds
    60,424       58,855       58,487  
Average compensated occupancy
    84.8 %     88.4 %     89.6 %
Total compensated man-days
    18,750,204       18,995,016       19,121,088  
Revenue per compensated man-day(6)
  $ 45.94     $ 48.11     $ 49.32  
Margin per compensated man-day(7)
  $ 8.29     $ 11.01     $ 11.30  


(1)  The pro forma statement of operations and other financial data are presented to give effect to the transactions described in “The Transactions” and “Unaudited Pro Forma Condensed Consolidated Financial Statements” as if the transactions had occurred on January 1, 2002.

  Primarily as the result of a change in tax law, the Company experienced a significant tax benefit in 2002 which may not recur in future years. Therefore, the Company believes it is useful to compare

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  historical pretax income from continuing operations before extraordinary charge and cumulative effect of accounting change available to common stockholders with pro forma pretax income from continuing operations before extraordinary charge and cumulative effect of accounting change available to common stockholders in analyzing the effects of the transactions. The calculation of comparative pretax income from continuing operations, extraordinary charge and cumulative effect of accounting change available to common stockholders is as follows:
                 
Year Ended
December 31, 2002

Actual Pro Forma


Income from continuing operations before income taxes, extraordinary charge and cumulative effect of accounting change
  $ 45,065     $ 38,086  
Series A Preferred Stock Dividends
    (8,600 )     (600 )
Series B Preferred Stock Dividends
    (12,359 )     (646 )
     
     
 
Income from continuing operations before income taxes, extraordinary charge and cumulative effect of accounting change available to common stockholders
  $ 24,106     $ 36,840  
     
     
 

  In addition, the transactions will provide another potential benefit because interest on the new senior notes is deductible for federal income tax purposes while preferred stock dividends are not.

(2)  We compute EBITDA by adding depreciation and amortization and interest expense, net, to income (loss) from continuing operations before income taxes, minority interest, extraordinary charge and cumulative effect of accounting change. EBITDA is presented because we believe it is frequently used by our lenders, securities analysts, investors and other interested parties to evaluate our operating results and our ability to service debt. However, other companies may calculate EBITDA differently than we do. EBITDA is not a measure of performance under generally accepted accounting principles, or GAAP, and should not be considered as an alternative to cash flows from operating activities or as a measure of liquidity or an alternative to net income as an indicator of our operating performance or any other measure of performance derived in accordance with GAAP. This data should be read in conjunction with our combined and consolidated financial statements and related notes included in this prospectus supplement and incorporated by reference into the accompanying prospectus. A reconciliation of EBITDA to operating income (loss) computed in accordance with GAAP is as follows:
                         
Year Ended December 31,

2000 2001 2002



(dollars in thousands)
EBITDA
  $ (587,565 )   $ 194,220     $ 184,421  
Depreciation and amortization
    (59,799 )     (53,279 )     (51,878 )
Stockholder litigation settlement
    75,406              
Equity loss and amortization of deferred gain, net
    11,638       358       153  
Other income
    (3,099 )            
Change in fair value of derivative instruments
          (14,554 )     (2,206 )
Loss on disposals of assets
    1,733       74       111  
Unrealized foreign currency transaction (gain) loss
    8,147       219       (622 )
     
     
     
 
Operating income (loss)
  $ (553,539 )   $ 127,038     $ 129,979  
     
     
     
 

(3)  The EBITDA for 2000 reflects impairment losses of $527.9 million and the write-off of amounts under lease arrangements of $11.9 million.

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(4)  The “As Adjusted” column gives effect to the transactions described in “The Transactions” and “Unaudited Pro Forma Condensed Consolidated Financial Statements” as if the transactions had occurred on December 31, 2002.
 
(5)  With respect to 2000, facility operating data includes that of the three operating companies combined.
 
(6)  Computed by dividing aggregate facility revenue by total compensated man-days.
 
(7)  Computed by deducting facility operating expense per compensated man-day from revenue per compensated man-day.

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RISK FACTORS

      You should carefully consider the risk factors set forth below, as well as the other information contained in this prospectus supplement and the accompanying prospectus and the documents incorporated or deemed to be incorporated by reference in the accompanying prospectus, before buying securities in this offering. The risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business operations. Any of the following risks could materially adversely affect our business, financial condition or results of operations.

Risks Related to Our Business and Industry

Our results of operations are dependent on revenues generated by our jails, prisons and detention facilities, which are subject to the following risks associated with the corrections and detention industry.

      General. We currently operate 59 correctional and detention facilities including 38 that we own. The facilities we manage have a total design capacity of approximately 59,000 beds in 20 states and the District of Columbia. Accordingly, we are subject to the operating risks associated with the corrections and detention industry, including those set forth below.

      We are subject to fluctuations in occupancy levels. While a substantial portion of our cost structure is fixed, a substantial portion of our revenues are generated under facility management contracts that specify per diem payments based upon occupancy. Under a per diem rate structure, a decrease in our occupancy rates could cause a decrease in revenue and profitability. Average compensated occupancy for our facilities in operation for 2002 and 2001 was 89.6% and 88.4%, respectively. Occupancy rates may, however, decrease below these levels in the future.

      We are subject to the termination or non-renewal of our government contracts. We typically enter into facility management contracts with governmental entities for terms of up to five years, with additional renewal periods at the option of the contracting governmental agency. Notwithstanding any contractual renewal option of a contracting governmental agency, 34 of our facility management contracts with the customers listed under “Business — Facilities and Facility Management Contracts” are currently scheduled to expire on or before December 31, 2003. See “Business — Facility Portfolio — Facilities and Facility Management Contracts.” One or more of these contracts may not be renewed by the corresponding governmental agency. In addition, these and any other contracting agencies may determine not to exercise renewal options with respect to any of our contracts in the future. In the first quarter of 2003, the State of Florida terminated our contract to manage the Okeechobee Juvenile Offender Correctional Center upon the expiration of a short-term extension to the existing contract, and the Commonwealth of Virginia Department of Corrections assumed operations of the Lawrenceville Corrections Center upon expiration of our contract on March 22, 2003. Governmental agencies typically may also terminate a facility contract at any time without cause or use the possibility of termination to negotiate a lower fee for per diem rates. In the event any of our management contracts are terminated or are not renewed on favorable terms or otherwise, we may not be able to obtain additional replacement contracts. The non-renewal or termination of any of our contracts with governmental agencies could materially adversely affect our financial condition, results of operations and liquidity, including our ability to secure new facility management contracts from others.

      Competition for inmates may adversely affect the profitability of our business. We compete with government entities and other private operators on the basis of cost, quality and range of services offered, experience in managing facilities and reputation of management and personnel. While there are barriers to entering the market for the management of correctional and detention facilities, these barriers may not be sufficient to limit additional competition. In addition, our government customers may assume the management of a facility currently managed by us upon the termination of the corresponding management contract or, if such customers have capacity at their facilities, may take inmates currently housed in our facilities and transfer them to government run facilities. Since we are paid on a per diem basis with no minimum guaranteed occupancy under certain of our contracts, the loss of such inmates and resulting decrease in occupancy would cause a decrease in our revenues and profitability. Further, many of our state

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customers are currently experiencing budget difficulties. These budget difficulties could result in decreases to our per diem rates, which could cause a decrease in our revenues and profitability.

      We are dependent on government appropriations. Our cash flow is subject to the receipt of sufficient funding of and timely payment by contracting governmental entities. If the appropriate governmental agency does not receive sufficient appropriations to cover its contractual obligations, it may terminate our contract or delay or reduce payment to us. Any delays in payment, or the termination of a contract, could have an adverse effect on our cash flow and financial condition. In addition, as a result of, among other things, recent economic developments, federal, state and local governments have encountered, and may encounter, unusual budgetary constraints. As a result, a number of state and local governments are under pressure to control additional spending or reduce current levels of spending. Accordingly, we may be requested in the future to reduce our existing per diem contract rates or forego prospective increases to those rates. In addition, it may become more difficult to renew our existing contracts on favorable terms or otherwise.

      Public resistance to privatization of correctional and detention facilities could result in our inability to obtain new contracts or the loss of existing contracts. The operation of correctional and detention facilities by private entities has not achieved complete acceptance by either governments or the public. The movement toward privatization of correctional and detention facilities has also encountered resistance from certain groups, such as labor unions and others that believe that correctional and detention facilities should only be operated by governmental agencies.

      Moreover, negative publicity about an escape, riot or other disturbance or perceived poor conditions at a privately managed facility may result in publicity adverse to us and the private corrections industry in general. Any of these occurrences or continued trends may make it more difficult for us to renew or maintain existing contracts or to obtain new contracts, which could have a material adverse effect on our business.

      Our ability to secure new contracts to develop and manage correctional and detention facilities depends on many factors outside our control. Our growth is generally dependent upon our ability to obtain new contracts to develop and manage new correctional and detention facilities. This possible growth depends on a number of factors we cannot control, including crime rates and sentencing patterns in various jurisdictions and acceptance of privatization. The demand for our facilities and services could be adversely affected by the relaxation of enforcement efforts, leniency in conviction and sentencing practices or through the decriminalization of certain activities that are currently proscribed by our criminal laws. For instance, any changes with respect to drugs and controlled substances or illegal immigration could affect the number of persons arrested, convicted and sentenced, thereby potentially reducing demand for correctional facilities to house them. Similarly, reductions in crime rates could lead to reductions in arrests, convictions and sentences requiring incarceration at correctional facilities.

      Moreover, certain jurisdictions recently have required successful bidders to make a significant capital investment in connection with the financing of a particular project, a trend that will require us to have sufficient capital resources to compete effectively. We may not be able to obtain these capital resources when needed. Additionally, our success in obtaining new awards and contracts may depend, in part, upon our ability to locate land that can be leased or acquired under favorable terms. Otherwise desirable locations may be in or near populated areas and, therefore, may generate legal action or other forms of opposition from residents in areas surrounding a proposed site.

      Failure to comply with unique and increased governmental regulation could result in material penalties or non-renewal or termination of our contracts to manage correctional and detention facilities. The industry in which we operate is subject to extensive federal, state and local regulations, including educational, health care and safety regulations, which are administered by many regulatory authorities. Some of the regulations are unique to the corrections industry, and the combination of regulations we face is unique. Facility management contracts typically include reporting requirements, supervision and on-site monitoring by representatives of the contracting governmental agencies. Corrections officers and juvenile care workers are customarily required to meet certain training standards and, in some instances, facility personnel are required to be licensed and subject to background investigation. Certain jurisdictions also

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require us to award subcontracts on a competitive basis or to subcontract with businesses owned by members of minority groups. Our facilities are also subject to operational and financial audits by the governmental agencies with which we have contracts. We may not always successfully comply with these regulations, and failure to comply can result in material penalties or non-renewal or termination of facility management contracts.

      In addition, private prison managers are increasingly subject to government legislation and regulation attempting to restrict the ability of private prison managers to house certain types of inmates, such as inmates from other jurisdictions or inmates at medium or higher security levels. Legislation has been enacted in several states, and has previously been proposed in the United States House of Representatives, containing such restrictions. Although we do not believe that existing legislation will have a material adverse effect on us, future legislation may have such an effect on us.

      Government agencies may investigate and audit our contracts and, if any improprieties are found, we may be required to refund revenues we have received, to forego anticipated revenues and we may be subject to penalties and sanctions, including prohibitions on our bidding in response to Requests for Proposals, or RFPs. Certain of the governmental agencies we contract with have the authority to audit and investigate our contracts with them. As part of that process, government agencies may review our performance of the contract, our pricing practices, our cost structure and our compliance with applicable laws, regulations and standards. For contracts that actually or effectively provide for certain reimbursement of expenses, if an agency determines that we have improperly allocated costs to a specific contract, we may not be reimbursed for those costs, and we could be required to refund the amount of any such costs that have been reimbursed. If a government audit asserts improper or illegal activities by us, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeitures of profits, suspension of payments, fines and suspension or disqualification from doing business with certain governmental entities. Any adverse determination could adversely impact our ability to bid in response to RFPs in one or more jurisdictions.

      We depend on a limited number of governmental customers for a significant portion of our revenues. We currently derive, and expect to continue to derive, a significant portion of our revenues from a limited number of governmental agencies. The loss of, or a significant decrease in, business from the BOP, U.S. Immigration and Naturalization Service now known as the Bureau of Immigration and Customs Enforcement (hereinafter referred to as “INS”) or U.S. Marshals Service (“USMS”) or various state agencies could seriously harm our financial condition and results of operations. The three federal governmental agencies with correctional and detention responsibilities, the BOP, INS and USMS, accounted for approximately 32% of our total revenues for the fiscal year ended December 31, 2002 ($308.9 million), with the BOP accounting for approximately 14% of our total revenues for such period ($132.6 million) and USMS accounting for approximately 11% of our total revenue for such period ($109.6 million). We expect to continue to depend upon the federal agencies and a relatively small group of other governmental customers, for a significant percentage of our revenues.

We are dependent upon our senior management and our ability to attract and retain sufficient qualified personnel.

      We are dependent upon the continued service of each member of our senior management team, including John D. Ferguson, our President and Chief Executive Officer. The unexpected loss of any of these persons could materially adversely affect our business and operations. We only have employment agreements with our President and Chief Executive Officer; Executive Vice President and Chief Financial Officer; Executive Vice President and Chief Operating Officer; and Executive Vice President and Chief Development Officer, all of which expire in 2003 subject to annual renewals unless either party gives notice of termination.

      In addition, the services we provide are labor-intensive. When we are awarded a facility management contract or open a new facility, we must hire operating management, correctional officers and other personnel. The success of our business requires that we attract, develop and retain these personnel. Our

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inability to hire sufficient qualified personnel on a timely basis or the loss of significant numbers of personnel at existing facilities could adversely affect our business and operations.

We are subject to necessary insurance costs.

      Workers’ compensation, employee health and general liability insurance represent significant costs to us. We continue to incur increasing insurance costs due to adverse claims experience and rising healthcare costs in general. In addition, since the events of September 11, 2001, and due to concerns over corporate governance and recent corporate accounting scandals, liability and other types of insurance have become more difficult and costly to obtain. Unanticipated additional insurance costs could adversely impact our results of operations and cash flows, and the failure to obtain or maintain any necessary insurance coverage could have a material adverse effect on us.

We may be adversely affected by inflation.

      Many of our facility management contracts provide for fixed management fees or fees that increase by only small amounts during their terms. If, due to inflation or other causes, our operating expenses, such as wages and salaries of our employees, and insurance, medical and food costs, increase at rates faster than increases, if any, in our management fees, then our profitability would be adversely affected. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Inflation.”

We are subject to legal proceedings associated with owning and managing correctional and detention facilities.

      Our ownership and management of correctional and detention facilities, and the provision of inmate transportation services by a subsidiary, expose us to potential third-party claims or litigation by prisoners or other persons relating to personal injury or other damages resulting from contact with a facility, its managers, personnel or other prisoners, including damages arising from a prisoner’s escape from, or a disturbance or riot at, a facility we own or manage, or from the misconduct of our employees. To the extent the events serving as a basis for any potential claims are alleged or determined to constitute illegal or criminal activity, we could also be subject to criminal liability. Such liability could result in significant monetary fines and could affect our ability to bid on future contracts and retain our existing contracts. In addition, as an owner of real property, we may be subject to a variety of proceedings relating to personal injuries of persons at such facilities. The claims against our facilities may be significant and may not be covered by insurance. Even in cases covered by insurance, our deductible may be significant.

We are subject to tax-related risks.

      The Internal Revenue Service (“IRS”) has recently completed auditing our federal tax return for the taxable year ended December 31, 2000. The IRS has proposed an adjustment to the 2000 tax return that, if ultimately upheld by the Appeals Office of the IRS, would require us to make cash payments to the IRS in excess of $56.0 million, not including penalties and interest. See “Business — Legal Proceedings and Income Tax Matters and Contingencies — Income Tax Contingencies” for a further description of this matter. While we believe that we have sufficient liquidity available to us to satisfy any payments required to be made, in the event we are required to make payments in connection with such claim, the payments would reduce our working capital available to satisfy amounts due under the terms of our indebtedness. Any adjustment would also substantially eliminate our net operating loss carryforward, and would result in increased cash tax liabilities on taxable income thereafter.

      On October 24, 2002, we entered into a definitive settlement with the IRS in connection with the IRS’ audit of our predecessor’s 1997 federal income tax return. Under the terms of the settlement, in consideration for the IRS’ final determinations with respect to the 1997 tax year, in December 2002 we paid approximately $52.2 million in cash to satisfy federal and state taxes and interest.

      Due to a change in tax law created by the Job Creation and Worker Assistance Act (“JCWAA”) of 2002, which was signed into law in March 2002, the settlement created opportunity to utilize any 2002 tax losses to claim a refund of a portion of the taxes paid. We experienced tax losses during 2002 primarily resulting from a cumulative effect of accounting change in depreciable lives for tax purposes. Under terms

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of the new law, we utilized our net operating losses to offset taxable income generated in 1997, which was increased substantially in connection with the settlement with the IRS. As a result of the tax law change in 2002, combined with the adoption of an accounting change in the depreciable lives of certain tax assets, we will be due an income tax refund of approximately $32.1 million. The IRS could challenge the deduction associated with the change in depreciable lives of certain tax assets. The disallowance of all or a substantial portion of this deduction by the IRS would have a material adverse impact on our financial position, results of operations and expected cash flows.

      In addition, although the IRS has concluded its audit of our federal tax return for the taxable year ended December 31, 1999, the statute of limitations for such taxable year still has not expired. Thus, our election of REIT status for 1999 remains subject to review by the IRS generally until the expiration of three years from the date of filing of our 1999 federal tax return (September 2000). Should the IRS subsequently disallow our election to be taxed as a REIT for the 1999 taxable year, we would be subject to income taxes and interest on our 1999 taxable income and possibly could be subject to penalties, which would have an adverse impact on our financial position, results of operations and cash flows.

We are subject to risks associated with ownership of real estate.

      Our ownership of correctional and detention facilities subjects us to risks typically associated with investments in real estate. Investments in real estate, and in particular, correctional and detention facilities, are relatively illiquid and, therefore, our ability to divest ourselves of one or more of our facilities promptly in response to changed conditions is limited. Investments in correctional and detention facilities, in particular, subject us to risks involving potential exposure to environmental liability and uninsured loss. Our operating costs may be affected by the obligation to pay for the cost of complying with existing environmental laws, ordinances and regulations, as well as the cost of complying with future legislation. In addition, although we maintain insurance for many types of losses, there are certain types of losses, such as losses from earthquakes, riots and acts of terrorism, which may be either uninsurable or for which it may not be economically feasible to obtain insurance coverage, in light of the substantial costs associated with such insurance. As a result, we could lose both our capital invested in, and anticipated profits from, one or more of the facilities we own. Further, it is possible to experience losses that may exceed the limits of insurance coverage.

      Certain of our facilities are subject to options to purchase and reversions. Ten of our facilities are or will be subject to an option to purchase by certain governmental agencies. Such options are exercisable by the corresponding contracting governmental entity generally at any time during the term of the respective facility management contract. See “Business — Facility Portfolio — Facilities and Facility Management Contracts.” If any of these options are exercised, there exists the risk that we will be unable to invest the proceeds from the sale of the facility in one or more properties that yield as much cash flow as the property acquired by the government entity. In addition, in the event any of these options are exercised, there exists the risk that the contracting governmental agency will terminate the management contract associated with such facility. For the year ended December 31, 2002, the facilities subject to these options generated approximately $172.4 million in revenue (17.9% of total revenue) and incurred approximately $136.8 million in operating expenses.

      In addition, ownership of three of our facilities (including two of which are also subject to options to purchase) will, upon the expiration of certain ground leases with remaining terms generally ranging from 13 to 15 years, revert to the respective governmental agency contracting with us. See “Business — Facility Portfolio — Facilities and Facility Management Contracts.” At the time of such reversion, there exists the risk that the contracting governmental agency will terminate the management contract associated with such facility. For the year ended December 31, 2002, the facilities subject to reversion generated approximately $60.6 million in revenue (6.3% of total revenue) and incurred approximately $51.8 million in operating expenses.

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We may be adversely affected by the rising cost and increasing difficulty of obtaining adequate levels of surety credit on favorable terms.

      We are often required to post bid or performance bonds issued by a surety company as a condition to bidding on or being awarded a contract. Availability and pricing of these surety commitments is subject to general market and industry conditions, among other factors. Recent events in the economy have caused the surety market to become unsettled, causing many reinsurers and sureties to reevaluate their commitment levels and required returns. As a result, surety bond premiums generally are increasing. If we are unable to effectively pass along the higher surety costs to our customers, any increase in surety costs could adversely affect our operating results. We cannot assure you that we will have continued access to surety credit or that we will be able to secure bonds economically, without additional collateral, or at the levels required for any potential facility development or contract bids. If we are unable to obtain adequate levels of surety credit on favorable terms, we would have to rely upon letters of credit under our credit facility, which would entail higher costs even if such borrowing capacity was available when desired at the time, and out ability to bid for or obtain new contracts could be impaired.

Risks Related to Our Leveraged Capital Structure

Our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our obligations under our debt securities or the terms of our preferred stock.

      We have a significant amount of indebtedness. As of December 31, 2002, we had total indebtedness of $956.0 million, which was increased by $30.0 million in January 2003 in connection with a facility acquisition. Following completion of the transactions contemplated herein, our pro forma total indebtedness at December 31, 2002 would have increased to $1,088.8 million. The ratio of earnings to fixed charges at December 31, 2002 on a historical and on a pro forma basis was 1.5x and 1.4x, respectively.

      Our substantial indebtedness could have important consequences to you. For example, it could:

  •  make it more difficult for us to satisfy our obligations with respect to our indebtedness including the notes issued in the notes offering;
 
  •  increase our vulnerability to general adverse economic and industry conditions;
 
  •  require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;
 
  •  limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
 
  •  place us at a competitive disadvantage compared to our competitors that have less debt; and
 
  •  limit our ability to borrow additional funds or refinance existing indebtedness on favorable terms.

Our senior secured credit facility and other debt instruments, including the proposed senior notes to be issued pursuant to the notes offering, have restrictive covenants that could affect our financial condition.

      The indenture related to our 9.875% unsecured senior notes due 2009, referred to herein as the 9.875% notes, the proposed notes to be issued in the notes offering and our senior secured credit facility contain financial and other restrictive covenants that limit our ability to engage in activities that may be in our long-term best interests. Our ability to borrow under our senior secured credit facility is subject to financial covenants, including leverage, interest rate and fixed charge coverage ratios. Our senior secured credit facility limits our ability to effect mergers, asset sales and change of control events. See “Description of Certain Existing Indebtedness — Senior Secured Credit Facility.” These covenants also contain restrictions regarding our ability to make capital expenditures in the future. The indenture related to the 9.875% notes and the proposed notes to be issued in the notes offering also contain and will contain

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limitations on our ability to effect mergers and change of control events, as well as other limitations, including:

  •  limitations on incurring additional indebtedness;
 
  •  limitations on the sale of assets;
 
  •  limitations on the declaration and payment of dividends or other restricted payments;
 
  •  limitations on transactions with affiliates; and
 
  •  limitations on liens.

See “Description of Certain Existing Indebtedness — Indebtedness — 9.875% senior notes.” Our failure to comply with these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debts. We do not have sufficient working capital to satisfy our debt obligations in the event of an acceleration of all or a significant portion of our outstanding indebtedness.

Despite current indebtedness levels, we may still incur more debt. This could further exacerbate the risks described above.

      The terms of the indenture for our 9.875% notes, the indentures contemplated for the proposed notes to be issued in the notes offering and our senior secured credit facility restrict our ability to incur significant additional indebtedness in the future. However, in the future we may refinance all or a portion of our indebtedness, including our senior secured credit facility, and incur more indebtedness as a result. If new debt is added to our and our subsidiaries’ current debt levels, the related risks that we and they now face could intensify. As of December 31, 2002, we had $58.0 million available for borrowing under our senior secured credit facility. See “Description of Certain Existing Indebtedness — Senior Secured Credit Facility.”

Servicing our indebtedness will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.

      Our ability to make payments on and to refinance our indebtedness, including the notes to be issued in the notes offering, and to fund planned capital expenditures will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

      The risk exists that our business will be unable to generate sufficient cash flow from operations or that future borrowings will not be available to us under our senior secured credit facility in an amount sufficient to enable us to pay our indebtedness, including our existing senior notes, notes to be issued in the notes offering, or new debt securities, or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness, including our existing senior notes, notes to be issued in the notes offering, or new debt securities, on or before maturity. We may not, however, be able to refinance any of our indebtedness, including our senior secured credit facility and including our existing senior notes, notes to be issued in the notes offering, or new debt securities, on commercially reasonable terms or at all.

Because portions of our indebtedness have floating interest rates, a general increase in interest rates will adversely affect cash flows.

      Our senior secured credit facility bears interest at a variable rate. To the extent our exposure to increases in interest rates is not eliminated through interest rate protection agreements, such increases will adversely affect our cash flows. In accordance with terms of the senior secured credit facility, we have entered into an interest rate cap agreement capping LIBOR at 5.0% (prior to our contractual interest rate margin) on outstanding balances of $200.0 million through expiration of the cap agreement on May 20, 2004. There can be no assurance that these interest rate protection provisions will be effective, or that once the interest rate protection agreement expires, we will enter into additional interest rate protection agreements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Quantitative and Qualitative Disclosures About Market Risk” for a further discussion of our exposure to interest rate increases.

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We are required to repurchase all or a portion of our 9.875% notes and the proposed notes to be issued in the notes offering upon a change of control.

      Upon certain change of control events, as that term is defined in the indenture for our 9.875% notes and the indenture contemplated for the proposed notes to be issued in the notes offering, including a change of control caused by an unsolicited third party, we are required to make an offer in cash to repurchase all or any part of each holder’s notes at a repurchase price equal to 101% of the principal thereof, plus accrued interest. The source of funds for any such repurchase would be our available cash or cash generated from operations or other sources, including borrowings, sales of equity or funds provided by a new controlling person or entity. Sufficient funds may not be available to us, however, at the time of any change of control event to repurchase all or a portion of the tendered notes pursuant to this requirement. Our failure to offer to repurchase notes, or to repurchase notes tendered, following a change of control will result in a default under the respective indentures, which could lead to a cross-default under our senior secured credit facility and under the terms of our other indebtedness. In addition, our senior secured credit facility prohibits us from making any such required repurchases. Prior to repurchasing the notes upon a change of control event, we must either repay outstanding indebtedness under our senior secured credit facility or obtain the consent of the lenders under our senior secured credit facility. If we do not obtain the required consents or repay our outstanding indebtedness under our senior secured credit facility, we would remain effectively prohibited from offering to purchase the notes. See “Description of Certain Existing Indebtedness — Senior Secured Credit Facility.”

Other Risks Related to an Investment in Our Common Stock Sold in the Common Stock Offering and Notes Issued in the Notes Offering

The market price for our equity securities may be volatile.

      In recent periods, there has been volatility in the market price for our publicly traded equity securities. In addition, the market price of our publicly traded equity securities could fluctuate substantially in the future in response to a number of factors, including the following:

  •  our quarterly operating results or the operating results of other private corrections and detention companies;
 
  •  changes in general conditions in the economy, the financial markets or the privatized corrections industry;
 
  •  changes in financial estimates or recommendations by stock market analysts regarding us or our competitors;
 
  •  announcements by us or our competitors of significant acquisitions;
 
  •  increases in labor and other costs; and
 
  •  natural disasters, riots or other developments affecting us or our competitors.

In addition, in recent years the stock market has experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to their operating performance. These broad market fluctuations may materially adversely affect our stock price, regardless of our operating results.

Future sales of our common stock in the public market could adversely affect the price of our common stock and our ability to raise funds in new common stock offerings.

      Future sales of substantial amounts of our common stock in the public market, or the perception that such sales could occur, could adversely affect prevailing market prices of our common stock and could impair our ability to raise capital through future offerings of equity securities. All of the shares sold in this common stock offering will be freely tradeable, other than those shares sold in the common stock offering to any of our affiliates.

      We and our directors and executive officers and the selling stockholder have agreed not to sell or otherwise transfer any shares of our common stock for 90 days after the date of this prospectus

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supplement, without first obtaining the written consent of Lehman Brothers. With this consent, we, our directors and executive officers and the selling stockholder may sell shares before the expiration of such period without prior notice to our other stockholders or to any public market in which our common stock trades. For more information about these “lock-up” agreements, see “Underwriting.”

Our issuance of additional series of preferred stock could adversely affect holders of our common stock and discourage a takeover.

      Our board of directors has the power to issue up to 50.0 million shares of preferred stock without any action on the part of our stockholders. If as currently contemplated, the Company redeems a portion of the series A preferred stock and repurchases a portion of the series B preferred stock, any redeemed shares would become authorized but unissued shares of the Company’s preferred stock and available for future issuances. As of March 31, 2003, 4.3 million shares of series A preferred stock and approximately 4.7 million shares of series B preferred stock were outstanding. Our board of directors also has the power, without stockholder approval, to set the terms of any new series of preferred stock that may be issued, including voting rights, dividend rights, preferences over our common stock with respect to dividends or in the event of a dissolution, liquidation or winding up and other terms. In the event that we issue additional shares of preferred stock in the future that has preference over our common stock, with respect to payment of dividends or upon our liquidation, dissolution or winding up, or if we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of the holders of our common stock or the market price of our common stock could be adversely affected. In addition, the ability of our board of directors to issue shares of preferred stock without any action on the part of our stockholders may impede a takeover of us and prevent a transaction favorable to our stockholders.

ERISA plan fiduciaries must consider certain factors before investing.

      Depending upon the particular circumstances of the plan, an investment in our securities may not be an appropriate investment for an ERISA (as hereinafter defined) plan, a qualified plan or individual retirement accounts and individual retirement annuities (collectively, “IRAs”). The Employee Retirement Income Security Act of 1974, as amended (“ERISA”), is a broad statutory framework that governs most non-governmental employee benefit plans in the United States. In deciding whether to purchase any of our securities, a fiduciary of a pension, profit-sharing or other employee benefit plan subject to ERISA (an “ERISA Plan”), in consultation with its advisors, should carefully consider its fiduciary responsibilities under ERISA, the prohibited transactions rules of ERISA and the Internal Revenue Code of 1986, as amended (the “Code”), and the effect of the “plan asset” regulations issued by the U.S. Department of Labor.

Our charter and bylaws and Maryland law could make it difficult for a third party to acquire our company.

      The Maryland General Corporation Law and our charter and bylaws contain provisions that could delay, deter or prevent a change in control of our company or our management. These provisions could also discourage proxy contests and make it more difficult for our stockholders to elect directors and take other corporate actions. These provisions:

  •  authorize us to issue “blank check” preferred stock, which is preferred stock that can be created and issued by our board of directors, without stockholder approval, with rights senior to those of common stock;
 
  •  provide that directors may be removed with or without cause only by the affirmative vote of at least a majority of the votes of shares entitled to vote thereon; and
 
  •  establish advance notice requirements for submitting nominations for election to the board of directors and for proposing matters that can be acted upon by stockholders at a meeting.

      We are also subject to anti-takeover provisions under Maryland law, which could also delay or prevent a change of control. Together, these provisions of our charter and bylaws and Maryland law may discourage transactions that otherwise could provide for the payment of a premium over prevailing market

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prices for our common stock, and also could limit the price that investors are willing to pay in the future for shares of our common stock.

Our former independent public accountant, Arthur Andersen LLP, has been found guilty of federal obstruction of justice charges and you are unlikely to be able to exercise effective remedies against such firm in any legal action.

      Our combined and consolidated financial statements as of December 31, 2000, and for the year then ended were audited by Arthur Andersen LLP. See “Experts” for a discussion of the financial statements included in this prospectus supplement. On March 14, 2002, Arthur Andersen was indicted on federal obstruction of justice charges arising from the federal government’s investigation of Enron Corporation. On June 15, 2002, a jury returned with a guilty verdict against Arthur Andersen following a trial. In light of the jury verdict and the underlying events, on August 31, 2002 Arthur Andersen ceased practicing before the Commission. However, we are including herein the combined and consolidated financial statements audited by Arthur Andersen as of December 31, 2000, and for the year then ended. Arthur Andersen has not performed any procedures in connection with this prospectus supplement, the accompanying prospectus or the registration statement of which this prospectus supplement is a part and has not consented to the incorporation by reference of its reports herein.

      In reliance on Rule 437a under the Securities Act, as amended (the “Securities Act”), we have not filed a consent of Arthur Andersen to the inclusion of their report herein. Because Arthur Andersen has not consented to the incorporation by reference of its report in the accompanying prospectus, you will not be able to recover against Arthur Andersen under Section 11 of the Securities Act for any untrue statements of material fact contained in the financial statements audited by Arthur Andersen or any omissions to state a material fact required to be stated therein. Furthermore, relief in connection with claims that may be available to stockholders under the federal securities laws against auditing firms may not be available to stockholders as a practical matter against Arthur Andersen because it no longer operates as an accounting firm. See also “Experts.”

      Moreover, as a public company, we are required to file with the Commission periodic financial statements audited or reviewed by an independent public accountant. The Commission has said that it will continue accepting financial statements audited by Arthur Andersen on an interim basis so long as a reasonable effort is made to have Arthur Andersen reissue its reports and to obtain a manually signed accountant’s report from Arthur Andersen. Arthur Andersen has informed us that it is no longer able to reissue its audit reports because both the partner and the audit manager who were assigned to our account have left the firm. In addition, Arthur Andersen is unable to perform procedures to assure the continued accuracy of its report on our audited financial statements included in this prospectus supplement. Arthur Andersen will also be unable to perform such procedures or to provide other information or documents that would customarily be received by us or underwriters in connection with financings or other transactions, including consents and “comfort” letters. As a result, we may encounter delays, additional expense and other difficulties in future financings. Any resulting delay in accessing or inability to access the public capital markets could have a material adverse effect on us.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

      This prospectus supplement, the accompanying prospectus, and the documents incorporated or deemed to be incorporated in the accompanying prospectus contain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements address our beliefs and expectations of the outcome of future events that are forward-looking in nature, including, without limitation, the statements under “Prospectus Supplement Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business.” All statements other than statements of current or historical fact contained in this prospectus supplement, the accompanying prospectus, and the documents incorporated or deemed to be incorporated in the accompanying prospectus are forward-looking statements. The words “believe,” “anticipate,” “plan,” “expect,” “intend,” “estimate” and similar expressions, as they relate to us, are intended to identify these forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the statements made. These include, but are not limited to, the risks and uncertainties associated with:

  •  the growth in the privatization of the corrections and detention industry and the public acceptance of our services;
 
  •  our ability to obtain and maintain correctional facility management contracts, including as the result of sufficient governmental appropriations, and the timing of the opening of new facilities;
 
  •  changes in governmental policy, legislation and regulation of the corrections and detention industry that adversely affect our business;
 
  •  availability of debt and equity financing, on terms that are favorable to us;
 
  •  fluctuations in operating results because of changes in occupancy level, competition, increases in costs of operations, fluctuations in interest rates and risks of operations;
 
  •  tax related risks; and
 
  •  general economic and market conditions.

      All forward-looking statements included in this prospectus supplement, the accompanying prospectus, and the documents incorporated or deemed to be incorporated in the accompanying prospectus are based on information available to us on the date of this prospectus supplement. Except as required by law, we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained throughout this prospectus supplement.

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THE TRANSACTIONS

      We have determined to undertake a series of transactions as described below in order to enhance our capital structure and to provide us additional financing flexibility that we believe will enable us to more effectively execute our business objectives in the future. We cannot assure you that these transactions will be successfully completed. The transactions that we are undertaking are defined below:

      Common Stock Offering. We are offering 6,400,000 shares of common stock for sale and a selling stockholder of the Company is offering 1,200,000 shares of common stock for sale. The Company will not receive any proceeds from the sale of shares from the selling stockholder. Consummation of the common stock offering is not subject to the concurrent consummation of the other transactions described herein.

      Note Offering. Concurrently with the common stock offering, we are also offering $250.0 million aggregate principal amount of new senior notes due 2011 under a separate prospectus supplement. The new senior notes will bear interest at the rate of 7 1/2% per annum and will mature in May 2011. The new senior notes will be senior unsecured obligations of the Company and will be guaranteed by our domestic subsidiaries. Consummation of the notes offering will be subject to the consummation of the common stock offering.

      Tender Offer for Series B Preferred Stock. The Company is making an offer to purchase up to 90% of its outstanding series B preferred stock (approximately 4.2 million shares as of April 1, 2003). The offer price for the series B preferred stock (inclusive of all accrued and unpaid dividends) is $26.00 per share. Consummation of the offer to purchase is subject to consummation of the common stock and the note offerings. The offer to purchase will expire at 12:00 midnight on May 13, 2003, unless extended by us. Any shares of series B preferred stock properly tendered on or before the expiration of the offer to purchase will be purchased by us promptly following the successful consummation of this offering. See “Description of Capital Stock — Preferred Stock — Series B Preferred Stock.”

      Purchase of Shares of Common Stock Issuable Upon Conversion of the MDP Notes. We have entered into an agreement with MDP in which MDP has agreed to convert the $40.0 million aggregate principal amount of our 10% convertible subordinated notes due 2008 into 3,362,899 shares of our common stock and sell such shares to us. The aggregate purchase price for the MDP shares, inclusive of estimated accrued interest of $15.5 million, is approximately $81.1 million. We are not obligated to purchase the MDP shares unless the common stock offering is consummated. See “Description of Certain Existing Indebtedness — $40 Million Convertible Subordinated Notes.”

      Redemption of Series A Preferred Stock. Immediately following consummation of the common stock and the note offerings, we intend to give notice to the holders of our outstanding series A preferred stock that approximately 90% of the series A preferred stock is being called for redemption. There are currently 4.3 million shares of series A preferred stock outstanding with a liquidation value of $107.5 million. The dividend payment dates for the series A preferred stock are the 15th day of January, April, July and October. The redemption will consist of $100.0 million plus accrued and unpaid dividends to the redemption date. The redemption shall be pro rata among the holders of such outstanding shares. We will not call the series A preferred stock for redemption unless we consummate the common stock offering and the notes offering. See “Description of Capital Stock — Preferred Stock — Series A Preferred Stock.”

      Payments on and Amendments to Senior Secured Credit Facility. We have a $745.0 million senior secured credit facility, which is comprised of a $75.0 million revolving loan ($58.0 million available as of March 1, 2003) with a remaining term of approximately three years, a $75.0 million term loan with a remaining term of approximately three years ($63.8 million outstanding as of March 1, 2003) and a $595.0 million term loan with a remaining term of approximately five years ($590.8 million outstanding as of March 1, 2003). We intend to use the remaining net proceeds of the common stock and notes offerings after application as described above to reduce amounts outstanding under the term loan portions of the senior secured credit facility, which is described and defined in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.” In connection with the

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common stock offering and the notes offering, the lenders under our senior secured credit facility have consented to the issuance of the new senior notes and the use of proceeds from the common stock and notes offerings to purchase the shares of common stock issuable upon conversion of the MDP notes, redeem the series A preferred stock and purchase shares of series B preferred stock pursuant to the offer to purchase. In connection with the consent, we also will modify certain provisions of the senior secured credit facility generally to provide additional borrowing capacity and operational flexibility including, but not limited to, (i) providing for a possible increase in the revolving credit portion of the facility from $75 million up to $110 million (subject to the receipt of lender commitments), (ii) increasing our ability to incur certain indebtedness, (iii) increasing our permitted annual capital expenditures, (iv) increasing our ability to assume indebtedness in connection with an acquisition and (v) increasing our ability to make acquisitions. See “Description of Certain Existing Indebtedness — Senior Secured Credit Facility.”

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USE OF PROCEEDS

      We expect to receive proceeds of approximately $117.3 million from the sale of 6,400,000 shares of common stock after deducting the underwriting discounts and our estimated offering expenses. The following table illustrates the estimated sources and uses of funds from this offering and the other proposed transactions. The actual amounts may differ.

                     
Sources of Funds Uses of Funds


(dollars in thousands)
Common Stock Offering, Net Proceeds (1)
  $ 117,312    
Tender for Series B Preferred Stock(2)
  $  97,178  
New Senior Notes
    250,000    
Redemption of Series A Preferred Stock
    101,465  
           
MDP Repurchase
    81,070  
           
Prepay Term Loans(3)
    77,202  
           
Fees and Expenses(4)
    10,397  
     
         
 
    $ 367,312         $ 367,312  
     
         
 


(1)  Based upon a price to the public in the common stock offering of $19.50 per share.
 
(2)  Assumes a successful tender for approximately 80% of the issued and outstanding series B preferred stock.
 
(3)  Subject to change to the extent we redeem more or less shares of series B preferred stock than as set forth above.
 
(4)  Includes approximately $7.5 million of underwriting discounts and anticipated expenses of the notes offering.

We will not receive any of the proceeds from the sale of shares by the selling stockholder.

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MARKET PRICE OF AND DISTRIBUTIONS ON COMMON STOCK

      Our common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “CXW.” The following table sets forth, for the fiscal quarters indicated, the range of high and low sale prices of our common stock, on the NYSE. We completed a reverse stock split of our common stock effective May 18, 2001, at a ratio of one-for-ten. Accordingly, all per share amounts of the common stock have been retroactively restated to reflect the reduction in common shares and corresponding increase in per share amounts resulting from the reverse stock split.

                   
Sales Price

High Low


2001
               
 
First Quarter
  $ 15.00     $ 3.75  
 
Second Quarter
  $ 16.00     $ 6.00  
 
Third Quarter
  $ 17.88     $ 12.40  
 
Fourth Quarter
  $ 19.25     $ 13.10  
2002
               
 
First Quarter
  $ 19.25     $ 12.15  
 
Second Quarter
  $ 18.63     $ 12.80  
 
Third Quarter
  $ 17.22     $ 11.69  
 
Fourth Quarter
  $ 18.30     $ 13.95  
2003
               
 
First Quarter
  $ 18.35     $ 16.42  
 
Second Quarter (through May 1, 2003)
  $ 22.86     $ 17.48  

DIVIDEND POLICY

      Pursuant to the terms of the senior secured credit facility, we are restricted from declaring or paying cash dividends with respect to outstanding shares of common stock. Moreover, even if such restriction is ultimately removed, we do not intend to pay dividends with respect to shares of our common stock in the foreseeable future.

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CAPITALIZATION

      The following table sets forth our consolidated cash and cash equivalents and capitalization as of December 31, 2002 (1) on an actual basis and (2) on an as adjusted basis to reflect the following transactions as if they had occurred on that date:

  •  the sale of 6,400,000 shares of our common stock in the common stock offering and our receipt of $117.3 million in estimated net proceeds (based on a public offering price of $19.50 per share) after deducting the underwriting discount and estimated expenses of the offering;
 
  •  the sale of $250.0 million aggregate principal amount of notes in the notes offering and our receipt of $242.5 million in estimated net proceeds, after deducting the underwriting discount and estimated expenses of the offering; and
 
  •  the application of the estimated net proceeds from this offering and the concurrent offering as described in “Use of Proceeds” and “The Transactions.”
                     
As of December 31, 2002

Actual As Adjusted(1)


(in thousands, except
per share data)
Cash and cash equivalents
  $ 65,406     $ 65,406  
     
     
 
Long-term debt (including current maturities):
               
 
Term loans under senior secured credit facility
  $ 624,513     $ 547,311  
 
12% senior notes due 2006
    10,795       10,795  
 
9.875% senior notes due 2009
    250,000       250,000  
 
7.5% senior notes due 2011
          250,000  
 
10% convertible subordinated notes due December 2008
    40,000        
 
8% convertible subordinated notes due February 2005
    30,000       30,000  
 
Other long-term debt
    651       651  
     
     
 
 
Total long-term debt
    955,959       1,088,757  
     
     
 
Stockholders’ equity:
               
 
Preferred stock, $0.01 par value, 50,000 shares authorized:
               
 
Series A — 4,300 shares authorized, issued and outstanding, actual and 300 issued and outstanding, as adjusted; stated at liquidation preference of $25.00 per share
    107,500       7,500 (2)
 
Series B — 12,000 shares authorized, with 4,408 shares issued and outstanding, actual, and 670 shares issued and outstanding, as adjusted; stated at liquidation preference of $24.46 per share
    107,831       16,409 (3)
 
Common stock, $0.01 par value, 80,000 shares authorized, 27,986 shares issued and outstanding, actual, and 34,386 shares issued and outstanding, as adjusted
    280       344 (4)
 
Additional paid-in capital
    1,343,066       1,434,428  
 
Deferred compensation
    (1,604 )     (1,604 )
 
Retained deficit
    (822,111 )     (835,527 )
 
Accumulated other comprehensive loss
    (964 )     (964 )
     
     
 
   
Total stockholders’ equity
    733,998       620,586  
     
     
 
   
Total capitalization
  $ 1,689,957     $ 1,709,343  
     
     
 

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(1)  The “As Adjusted” column gives effect to the transactions described in “The Transactions” and “Unaudited Pro Forma Condensed Consolidated Financial Statements” as if the transactions had occurred on December 31, 2002.
 
(2)  Assumes redemption of $100.0 million stated amount of our series A preferred stock, expected to occur approximately 30 days following consummation of the common stock offering and the notes offering.
 
(3)  Assumes the purchase of 3,738,000 shares (80% of shares outstanding) of our series B preferred stock pursuant to our Offer to Purchase.
 
(4)  Common stock totals do not include a total of 4,431,468 shares of our common stock reserved for issuance under our stock option and other employee benefit plans at December 31, 2002. Options to purchase 3,102,039 shares of our common stock at a weighted average exercise price of $20.86 per share were outstanding under our stock option plans as of December 31, 2002. In addition, 3,967,257 shares of common stock were not included in the common stock totals which are reserved for issuance upon conversion of the remaining convertible notes, to satisfy our remaining requirement under settlement agreements related to litigation and outstanding warrants to purchase our common stock.

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

      The following unaudited pro forma condensed consolidated financial statements are based on our consolidated financial statements as of and for the year ended December 31, 2002. The transactions which are given effect to in the following unaudited pro forma condensed consolidated financial statements include:

  •  the sale of 6,400,000 shares of our common stock in the common stock offering and our receipt of $117.3 million in estimated proceeds, after deducting the underwriting discount and estimated expenses of the offering;
 
  •  the sale of $250.0 million aggregate principal amount of notes in the notes offering and our receipt of $242.5 million in estimated net proceeds, after deducting the underwriting discount and estimated expenses of the offering; and
 
  •  the application of the estimated net proceeds from the common stock offering and the notes offering as described in “Use of Proceeds” and “The Transactions.”

      The unaudited pro forma condensed consolidated balance sheet has been prepared as if the transactions occurred on December 31, 2002, and the pro forma condensed consolidated statement of operations has been prepared as if the transactions occurred on January 1, 2002. See “Use of Proceeds” and “The Transactions.”

      The unaudited pro forma financial statements appearing below are based upon a number of assumptions and estimates and are subject to uncertainties, and do not purport to be indicative of the actual results of operations or financial condition that would have occurred had the transactions described above in fact occurred on the dates indicated, nor do they purport to be indicative of the results of operations or financial condition that we may achieve in the future.

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Corrections Corporation of America and Subsidiaries

Unaudited Pro Forma Condensed Consolidated Balance Sheet
As of December 31, 2002
(in thousands)
                           
Actual Pro Forma
December 31, Total December 31,
2002 Adjustments 2002



ASSETS
                       
Cash and cash equivalents
  $ 65,406     $     $ 65,406  
Restricted cash
    7,363             7,363  
Accounts receivable, net
    122,829             122,829  
Income tax receivable
    32,499             32,499  
Prepaid expenses and other current assets
    12,435             12,435  
Current assets of discontinued operations
    13,815             13,815  
     
     
     
 
 
Total Current Assets
    254,347             254,347  
Property and equipment, net
    1,552,265             1,552,265  
Investment in direct financing lease
    18,346             18,346  
Goodwill
    20,902             20,902  
Other assets
    28,211       6,801  (A)     35,012  
     
     
     
 
 
Total Assets
  $ 1,874,071     $ 6,801     $ 1,880,872  
     
     
     
 
LIABILITIES & STOCKHOLDERS’ EQUITY
                       
Accounts payable and accrued expenses
  $ 152,905     $ (12,585 )(B)   $ 140,320  
Income tax payable
    3,685             3,685  
Distributions payable
    5,330             5,330  
Current portion of long-term debt
    23,054             23,054  
Current liabilities of discontinued operations
    992             992  
     
     
     
 
 
Total Current Liabilities
    185,966       (12,585 )     173,381  
Long-term debt, net of current portion
    932,905       132,798  (C)     1,065,703  
Other liabilities
    21,202             21,202  
     
     
     
 
 
Total Liabilities
    1,140,073       120,213       1,260,286  
     
     
     
 
Stockholders’ Equity
                       
 
Preferred stock — series A
    107,500       (100,000 )(D)     7,500  
 
Preferred stock — series B
    107,831       (91,422 )(E)     16,409  
 
Common stock
    280       64  (F)     344  
 
Additional paid-in-capital
    1,343,066       91,362  (F)     1,434,428  
 
Deferred compensation
    (1,604 )           (1,604 )
 
Retained deficit
    (822,111 )     (13,416 )(G)     (835,527 )
 
Accumulated other comprehensive loss
    (964 )           (964 )
     
     
     
 
 
Total Stockholders’ Equity
    733,998       (113,412 )     620,586  
     
     
     
 
 
Total Liabilities & Stockholders’ Equity
  $ 1,874,071     $ 6,801     $ 1,880,872  
     
     
     
 

See Footnote Explanations to these Unaudited Pro Forma Condensed Consolidated Financial Statements.

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Corrections Corporation of America and Subsidiaries

Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the Year Ended December 31, 2002
(In thousands, except per share amounts)
                             
Actual Pro Forma
Year Ended Year Ended
December 31, Total December 31,
2002 Adjustments 2002



Revenues:
                       
 
Management and other
  $ 959,137     $     $ 959,137  
 
Rental
    3,701             3,701  
     
     
     
 
   
Total Revenues
    962,838             962,838  
     
     
     
 
Expenses:
                       
 
Operating
    744,074             744,074  
 
General and administrative
    36,907             36,907  
 
Depreciation and amortization
    51,878             51,878  
     
     
     
 
   
Operating Income
    129,979             129,979  
     
     
     
 
Other (Income) Expense:
                       
 
Equity loss of joint venture
    153             153  
 
Interest expense, net
    87,478       6,979 (A),(C)     94,457  
 
Change in fair value of derivative instruments
    (2,206 )           (2,206 )
 
Loss on disposals of assets
    111             111  
 
Unrealized foreign currency transaction gain
    (622 )           (622 )
     
     
     
 
      84,914       6,979       91,893  
     
     
     
 
Income From Continuing Operations Before Income Taxes, Extraordinary Charge and Cumulative Effect of Accounting Change
    45,065 (D)     (6,979 )     38,086 (D)
 
Income tax benefit
    63,284             63,284  
     
     
     
 
Income From Continuing Operations Before Extraordinary Charge and Cumulative Effect of Accounting Change
    108,349       (6,979 )     101,370  
 
Series A Preferred Stock Dividends
    (8,600 )     8,000 (B)     (600 )
 
Series B Preferred Stock Dividends
    (12,359 )     11,713 (B),(C)     (646 )
     
     
     
 
Income from Continuing Operations Available to Common Stockholders Before Extraordinary Charge and Cumulative Effect of Accounting Change
  $ 87,390     $ 12,734     $ 100,124  
     
     
     
 
EPS Basic:
                       
Income from continuing operations available to common stockholders before extraordinary charge and cumulative effect of accounting change
  $ 3.17             $ 2.94  
     
             
 
EPS Diluted:
                       
Income from continuing operations available to common stockholders before extraordinary charge and cumulative effect of accounting change
  $ 2.75             $ 2.66  
     
             
 
Weighted Average Shares:
                       
 
Basic
    27,669       6,400       34,069  
     
     
     
 
 
Diluted
    35,574       3,037       38,611  
     
     
     
 

See Footnote Explanations to these Unaudited Pro Forma Condensed Consolidated Financial Statements.

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Corrections Corporation of America and Subsidiaries

Unaudited Pro Forma Condensed Consolidated Financial Statements
Footnote Explanations

(In thousands, except per share amounts)

 
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET — DECEMBER 31, 2002

(A) Reflects the estimated payment of $8,405 for fees and expenses related to the issuance of $250,000 of new senior notes, as well as a consent fee related to an amendment of our senior secured credit facility. These fees will be capitalized and amortized over the term of the new senior notes of eight years. Additionally, this adjustment reflects the reduction of capitalized debt issuance costs as a result of the conversion of the $40,000 convertible subordinated notes and the anticipated $77,202 prepayment of the senior secured credit facility. The gross adjustments to capitalized debt issuance costs are as follows:

           
Issuance of new senior notes (including related consent fee)
  $ 8,405  
Conversion of $40,000 convertible subordinated notes
    (309 )
Prepayment on senior secured credit facility
    (1,295 )
     
 
 
Pro forma adjustment
  $ 6,801  
     
 

(B) Reflects the portion of the total interest payment on the $40,000 convertible subordinated notes expected to be made on the close of the transactions, which was accrued as of December 31, 2002. The difference between the total expected interest payment of $15,493 at May 7, 2003 and the balance accrued as of December 31, 2002 of $12,585 is included as an adjustment to retained earnings on this pro forma balance sheet (see note G).

(C) Reflects the issuance of $250,000 of our new senior notes, the estimated prepayment of the senior secured credit facility, and the conversion of the $40,000 convertible subordinated notes. The gross adjustments are as follows:

           
Issuance of new senior notes
  $ 250,000  
Prepayment on senior secured credit facility
    (77,202 )
Conversion of $40,000 convertible subordinated notes
    (40,000 )
     
 
 
Pro forma adjustment
  $ 132,798  
     
 

(D) Reflects the estimated redemption of 4,000 shares of series A preferred stock (out of 4,300 issued and outstanding) at the liquidation preference of $25.00 per share. See footnote (G) for a discussion of the associated transaction fees.

(E) Reflects the redemption of 3,738 shares of series B preferred stock purchased under the tender offer, assuming that approximately 80% of the shares outstanding as of May 7, 2003, are tendered at $26.00 per share. The liquidation preference of the series B preferred stock is $24.46 per share.

      The maximum percentage of series B preferred stock that we are tendering for is equal to 90% of the shares issued and outstanding as of the date of the tender solicitation. Every 10 percentage point change in the percent of series B preferred stock tendered changes the payment to repurchase series B preferred stock by approximately $11,433, including the tender premium and fees. As a result of every 10 percentage point change in the percent of series B preferred stock tendered, the amount of the prepayment on the senior secured credit facility changes by approximately $12,327.

(F) Reflects the issuance of 6,400 shares of common stock. The pro forma calculations assume a stock issuance price of $19.50 per share. The adjustment also reflects the issuance of 3,363 shares of common stock upon conversion of the $40,000 convertible subordinated notes and the purchase of those shares by the Company, as treasury stock, as soon as practicable following the closing of the common stock offering

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Corrections Corporation of America and Subsidiaries
Unaudited Pro Forma Condensed Consolidated Financial Statements
Footnote Explanations

(In thousands, except per share amounts)

at a purchase price of $19.50 per share. Upon conversion of the $40,000 convertible subordinated notes, the associated unamortized loan issuance costs of $309 is charged to additional paid-in-capital. The changes to the common stock and additional paid-in-capital accounts are as follows:

                   
Common Stock Paid-In Capital


Issuance of primary shares
  $ 64     $ 124,736  
Less: stock issuance costs at 6.0%
          (7,488 )
     
     
 
      64       117,248  
Conversion of $40.0 million convertible subordinated notes into 3,363 common shares and the write-off of $309 of unamortized loan issuance costs
    34       39,657  
Purchase of 3,363 treasury shares
    (34 )     (65,543 )
     
     
 
 
Pro forma adjustment
  $ 64     $ 91,362  
     
     
 

(G) Reflects a summary of the various transaction fees and expenses and other payments that will be charged to the statement of operations in 2003 upon closing of the transactions, including (1) the series B preferred stock tender premium of $1.54 per share; (2) fees and expenses associated with the series A preferred stock redemption and series B preferred stock tender; (3) legal and other fees associated with the conversion of the $40,000 convertible subordinated notes; (4) the $1,465 of series A preferred stock dividends accrued as of June 6, 2003 to be paid in cash on the shares that are redeemed; (5) a pro rata reduction in the unamortized loan issuance costs related to the senior secured credit facility as a result of the $77,202 prepayment; and (6) the difference between the total expected interest payment of $15,493 at May 7, 2003 and the balance accrued as of December 31, 2002 (see Note B). The table below details the components of this pro forma adjustment:

           
Tender premium on purchase of 3,738 shares of series B preferred stock
  $ 5,756  
Series A and series B preferred stock redemption fees and expenses
    1,892  
$40.0 million convertible subordinated notes conversion fees
    100  
Series A preferred stock dividends
    1,465  
Write-off of unamortized loan issuance costs — senior secured credit facility
    1,295  
Difference between interest accrual of $12,585 at December 31, 2002 and $15,493 payment due at conversion on May 7, 2003 of the $40.0 million convertible subordinated notes
    2,908  
     
 
 
Pro forma adjustment
  $ 13,416  
     
 

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Corrections Corporation of America and Subsidiaries
Unaudited Pro Forma Condensed Consolidated Financial Statements
Footnote Explanations

(In thousands, except per share amounts)

NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS — FOR THE YEAR ENDED DECEMBER 31, 2002

(A) Reflects the net adjustment to interest expense related to (1) additional interest expense associated with the issuance of $250,000 of new senior notes at 7 1/2%, (2) reduction in interest expense associated with the anticipated prepayment of $77,202 of term loans under the senior secured credit facility at a weighted average interest rate of 6.05% for the year ended December 31, 2002, (3) reduction in amortization of debt issuance costs associated with the prepayment of the senior secured credit facility, (4) amortization of debt issuance costs, amortized over the eight year term of the new senior notes, (5) elimination of interest expense associated with the conversion of the $40,000 convertible subordinated notes, (6) reduction in amortization of debt issuance costs associated with the conversion of the $40,000 convertible subordinated notes. The following table details the components of this pro forma adjustment:

           
Interest on new senior notes
  $ 18,750  
Interest on senior secured credit facility
    (4,671 )
Amortization of debt issuance costs on senior secured credit facility
    (253 )
Amortization of debt issuance costs on new senior notes
    1,051  
Interest on $40.0 million convertible subordinated notes
    (7,847 )
Amortization of debt issuance costs on $40.0 million convertible subordinated notes
    (51 )
     
 
 
Pro forma adjustment
  $ 6,979  
     
 

(B) Reflects the elimination of the preferred stock dividends resulting from the redemption of the 4,000 series A preferred shares and the tender of approximately 80% of the series B preferred shares. The redemption of the series A preferred shares would result in the pro forma reduction in series A preferred dividends of $8,000. The tender of approximately 80% of the series B preferred shares would result in the pro forma reduction in series B preferred dividends of $11,713.

(C) The pro forma statement of operations for the year ended December 31, 2002 included herein assumes that approximately 80% of the series B preferred shares are tendered. Each incremental 10% increase or decrease of series B preferred stock tendered will result in an increase/(decrease) in the following pro forma adjustments:

                 
10% Increase 10% Decrease


Interest expense
  $ 791     $ (791 )
Preferred dividend distributions
  $ (1,435 )   $ 1,435  

(D) Primarily as the result of a change in tax law, the Company experienced a significant tax benefit in 2002 which may not recur in future years. Therefore, the Company believes it is useful to compare historical pretax income from continuing operations before extraordinary charge and cumulative effect of accounting change available to common stockholders with pro forma pretax income from continuing operations before extraordinary charge and cumulative effect of accounting change available to common

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Corrections Corporation of America and Subsidiaries
Unaudited Pro Forma Condensed Consolidated Financial Statements
Footnote Explanations

(In thousands, except per share amounts)

stockholders in analyzing the effects of the transactions. The calculation of comparative pretax income available to common stockholders is as follows:

                 
Year Ended
December 31, 2002

Actual Pro Forma


Income from continuing operations before income taxes, extraordinary charge and cumulative effect of accounting change
  $ 45,065     $ 38,086  
Series A Preferred Stock Dividends
    (8,600 )     (600 )
Series B Preferred Stock Dividends
    (12,359 )     (646 )
     
     
 
Income from continuing operations before income taxes, extraordinary charge and cumulative effect of accounting change available to common stockholders
  $ 24,106     $ 36,840  
     
     
 

In addition, the transactions will provide another potential benefit because interest on the new senior notes is deductible for federal income tax purposes while preferred stock dividends are not.

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SELECTED HISTORICAL FINANCIAL DATA

      The following table sets forth certain of our historical financial data for the five most recent fiscal years. Our selected financial data is derived from our combined and consolidated financial statements for such periods. Our audited combined and consolidated financial statements as of December 31, 2002 and 2001 and for the years ended December 31, 2002, 2001 and 2000 are included elsewhere in this prospectus supplement.

      Our financial information for the years ended December 31, 2002 and 2001 is the only information presented below that fully reflects operating and financial results under our current corporate structure for full periods as an owner, operator and manager of prisons and other correctional facilities. As the result of our mergers in the fourth quarter of 2000, our financial information for the year ended December 31, 2000 set forth below reflects nine months of operations primarily as a lessor of prisons and other correctional facilities and three months of operations as an owner, operator and manager of prisons and other correctional facilities. Our financial information for the year ended December 31, 1999 set forth below reflects the results of our operations as a REIT. Our financial information for the year ended December 31, 1998 is derived from the historical financial statements of the old Corrections Corporation of America, a Tennessee corporation and a predecessor to the Company (“Old CCA”). Therefore, the selected financial information for the years ended December 31, 1998, 1999, and 2000 is not comparable to the financial information for the years ended December 31, 2002 and 2001. The following data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical combined and consolidated financial statements and the related notes included elsewhere in this prospectus supplement which contain more detailed information with respect to our merger with Old CCA, our operations as a REIT for 1999 and our operations and mergers in 2000.

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Year Ended December 31,

1998 1999 2000 2001 2002





(dollars in thousands, except per share amounts)
Statements of Operations:
                                       
Revenue:
                                       
 
Management and other
  $ 626,016     $     $ 261,774     $ 930,635     $ 959,137  
 
Rental
          270,134       40,938       5,718       3,701  
 
Licensing fees from affiliates
          8,699       7,566              
     
     
     
     
     
 
Total revenue
    626,016       278,833       310,278       936,353       962,838  
     
     
     
     
     
 
Expenses:
                                       
 
Operating
    465,726             217,315       721,468       744,074  
 
General and administrative
    28,628       24,125       45,463       34,568       36,907  
 
Lease
    58,018                          
 
Depreciation and amortization
    12,261       44,062       59,799       53,279       51,878  
 
Fees to Operating Company
                1,401              
 
Write-off of amounts under lease arrangements
          65,677       11,920              
 
Impairment losses
          76,433       527,919              
 
Old CCA compensation charge
    22,850                          
     
     
     
     
     
 
Total expenses
    587,483       210,297       863,817       809,315       832,859  
     
     
     
     
     
 
Operating income (loss)
    38,533       68,536       (553,539 )     127,038       129,979  
     
     
     
     
     
 
Other (Income) Expense:
                                       
Equity (earnings) loss and amortization of deferred gain, net
          (3,608 )     11,638       358       153  
Interest expense (income), net
    (2,770 )     45,036       131,545       126,242       87,478  
Other (income) expense
    2,043       14,567       (3,099 )            
Change in fair value of derivative instruments
                      (14,554 )     (2,206 )
Loss on disposals of assets
          1,995       1,733       74       111  
Unrealized foreign currency transaction (gain) loss
                8,147       219       (622 )
Stockholder litigation settlements
                75,406              
     
     
     
     
     
 
Total other (income) expense
    (727 )     57,990       225,370       112,339       84,914  
     
     
     
     
     
 
Income (loss) from continuing operations before income taxes, minority interest, extraordinary charge and cumulative effect of accounting change
    39,260       10,546       (778,909 )     14,699       45,065  
Income tax (expense) benefit
    (14,280 )     (83,200 )     48,002       3,358       63,284  
     
     
     
     
     
 
Income (loss) from continuing operations before minority interest, extraordinary charge and cumulative effect of accounting change
    24,980       (72,654 )     (730,907 )     18,057       108,349  
Minority interest in net loss of PMSI and JJFMSI
                125              
     
     
     
     
     
 
Income (loss) from continuing operations before extraordinary charge and cumulative effect of accounting change
    24,980       (72,654 )     (730,782 )     18,057       108,349  
Income from discontinued operations, net of taxes
    2,001                   7,637       681  
Extraordinary charge
                            (36,670 )
Cumulative effect of accounting change
    (16,145 )                       (80,276 )
     
     
     
     
     
 
Net income (loss)
    10,836       (72,654 )     (730,782 )     25,694       (7,916 )
Distributions to preferred stockholders
          (8,600 )     (13,526 )     (20,024 )     (20,959 )
     
     
     
     
     
 
Net income (loss) available to common stockholders
  $ 10,836     $ (81,254 )   $ (744,308 )   $ 5,670     $ (28,875 )
     
     
     
     
     
 

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Year Ended December 31,

1998 1999 2000 2001 2002





(dollars in thousands, except per share amounts)
Basic earnings (loss) per share:
                                       
Income (loss) from continuing operations before extraordinary charge and cumulative effect of accounting change
  $ 3.50     $ (7.06 )   $ (56.68 )   $ (0.08 )   $ 3.17  
Income from discontinued operations, net of taxes
    0.28                   0.31       0.02  
Extraordinary charge
                            (1.33 )
Cumulative effect of accounting change
    (2.26 )                       (2.90 )
     
     
     
     
     
 
Net income (loss) available to common stockholders
  $ 1.52     $ (7.06 )   $ (56.68 )   $ 0.23     $ (1.04 )
     
     
     
     
     
 
Diluted earnings (loss) per share:
                                       
Income (loss) from continuing operations before extraordinary charge and cumulative effect of accounting change
  $ 3.21     $ (7.06 )   $ (56.68 )   $ (0.08 )   $ 2.75  
Income from discontinued operations, net of taxes
    0.26                   0.31       0.02  
Extraordinary charge
                            (1.03 )
Cumulative effect of accounting change
    (2.05 )                       (2.26 )
     
     
     
     
     
 
Net income (loss) available to common stockholders
  $ 1.42     $ (7.06 )   $ (56.68 )   $ 0.23     $ (0.52 )
     
     
     
     
     
 
Other Financial Data:
                                       
Ratio of earnings to fixed charges(1)
    2.4 x     1.0 x     N/A       1.1 x     1.5 x
                                         
As of December 31,

1998 1999 2000 2001 2002





Balance Sheet Data:
                                       
Cash and cash equivalents
  $ 31,141     $ 84,493     $ 20,889     $ 46,307     $ 65,406  
Total assets
    1,090,437       2,716,644       2,176,992       1,971,280       1,874,071  
Total debt
    299,833       1,098,991       1,152,570       963,600       955,959  
Total liabilities excluding deferred gains
    395,999       1,209,528       1,488,977       1,224,119       1,140,073  
Stockholders’ equity
    451,986       1,401,071       688,015       747,161       733,998  


(1)  For the purpose of computing the ratio of earnings to fixed charges, earnings consist of income from continuing operations plus fixed charges, excluding capitalized interest, and fixed charges consist of interest, whether expensed or capitalized, and amortization of loan costs. Deficiency in earnings available to cover fixed charges for the year ended December 31, 2000 was $759.1 million. This deficit is primarily the result of impairment losses of $527.9 million and the write-off of amounts under lease arrangements of $11.9 million. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our combined and consolidated financial statements and related notes included elsewhere in this prospectus supplement.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

      The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this prospectus supplement or incorporated by reference in the accompanying prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those described under “Risk Factors” and included in other portions of this prospectus supplement.

Overview

The Company

      We are the nation’s largest owner and operator of privatized correctional and detention facilities and one of the largest prison operators in the United States, behind only the federal government and four states. As of December 31, 2002, we owned 40 correctional, detention and juvenile facilities, three of which we leased to other operators, and one additional facility which is not yet in operation. As of December 31, 2002, we operated 60 facilities (including 37 facilities that we owned), with a total design capacity of approximately 59,000 beds in 21 states and the District of Columbia.

      We specialize in owning, operating and managing prisons and other correctional facilities and providing inmate residential and prisoner transportation services for governmental agencies. In addition to providing the fundamental residential services relating to inmates, our facilities offer a variety of rehabilitation and education programs, including basic education, religious services, life skills and employment training and substance abuse treatment. These services are intended to reduce recidivism and to prepare inmates for their successful re-entry into society upon their release. We also provide health care (including medical, dental and psychiatric services), food services and work and recreational programs.

      Our website address is http://www.correctionscorp.com. We make our Form 10-K, Form 10-Q and Form 8-K reports available on our website, free of charge, as soon as reasonably practicable after these reports are filed with or furnished to the SEC. Information contained on our website is not part of this prospectus supplement.

Critical Accounting Policies

      Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. A summary of our significant accounting policies is described in Note 4 to our financial statements contained elsewhere in this prospectus supplement. The significant accounting policies and estimates which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

      Accounts receivable. As of December 31, 2002, accounts receivable included $13.8 million due from the Commonwealth of Puerto Rico, classified as current assets of discontinued operations due to the termination of our contracts to manage three facilities in the Commonwealth of Puerto Rico during the second and third quarters of 2002. In February 2003, we entered into an agreement with the Commonwealth of Puerto Rico regarding the payment and resolution of the balance of the receivable. The agreement specifies payment dates for $11.3 million, of which $4.7 million has been collected, with the balance to be paid upon reconciliation of invoices presented. We currently expect to collect the balance of the receivable and, therefore, no allowance for doubtful accounts has been established for the accounts receivable balance. However, no assurance can be given as to the timing and ultimate collectibility of the remaining amounts due.

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      Asset impairments. As of December 31, 2002, we had approximately $1.6 billion in long-lived assets. We evaluate the recoverability of the carrying values of our long-lived assets, other than intangibles, when events suggest that an impairment may have occurred. In these circumstances, we utilize 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 estimated fair value of the asset.

      Goodwill impairments. Effective January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” or SFAS 142, which established new accounting and reporting requirements for goodwill and other intangible assets. Under SFAS 142, all goodwill amortization ceased effective January 1, 2002 and goodwill attributable to each of our reporting units was tested for impairment by comparing the fair value of each reporting unit with its carrying value. Fair value was determined using a collaboration of various common valuation techniques, including market multiples, discounted cash flows and replacement cost methods. These impairment tests are required to be performed at adoption of SFAS 142 and at least annually thereafter. On an ongoing basis (absent any impairment indicators), we expect to continue to perform our impairment tests during the fourth quarter, in connection with our annual budgeting process.

      Based on our initial impairment tests, we recognized an impairment of $80.3 million to write-off the carrying value of goodwill associated with our locations included in the owned and managed reporting segment during the first quarter of 2002. This goodwill was established in connection with the acquisition of Correctional Management Services Corporation, referred to herein as Operating Company. The remaining goodwill, which is associated with the facilities we manage but do not own, was deemed to be not impaired, and remains recorded on the balance sheet. This remaining goodwill was established in connection with the acquisitions of Prison Management Services, Inc., or PMSI, and Juvenile and Jail Facility Management Services, Inc., or JJFMSI, both of which were privately-held service companies, referred to herein as the Service Companies, that managed certain government-owned adult and juvenile prison and jail facilities. The implied fair value of goodwill of the locations included in the owned and managed reporting segment did not support the carrying value of any goodwill, primarily due to the highly leveraged capital structure. No impairment of goodwill allocated to the locations included in the managed-only reporting segment was deemed necessary, primarily because of the relatively minimal capital expenditure requirements, and therefore indebtedness, in connection with obtaining such management contracts. Under SFAS 142, the impairment recognized at adoption of the new rules was reflected as a cumulative effect of accounting change in our statement of operations for the first quarter of 2002. Impairment adjustments recognized after adoption, if any, are required to be recognized as operating expenses.

      Income taxes. As of December 31, 2002, we had approximately $141.4 million in gross deferred tax assets. Deferred income taxes reflect the net tax effect 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 our ability to generate taxable income within the net operating loss carryforward period. Since the change in tax status in connection with the restructuring in 2000, and as of December 31, 2002, we have provided a valuation allowance to substantially reserve the deferred tax assets in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” or SFAS 109. The valuation allowance is recognized based on the weight of available evidence indicating that it is more likely than not that the deferred tax assets will not be realized. This evidence primarily consists of, but is not limited to, recurring operating losses for federal tax purposes.

      Our assessment of the valuation allowance could change in the future based upon our actual and projected taxable income. Removal of the valuation allowance in whole or in part would result in a non-cash reduction in income tax expense during the period of removal. In addition, because a portion of the valuation allowance as of December 31, 2002 was established to reserve certain deferred tax assets upon the acquisitions of PMSI and JJFMSI, in accordance with SFAS 109, removal of the valuation allowance would result in a reduction to any remaining goodwill recorded in connection with such acquisitions to the extent the reversal relates to the valuation allowance applied to deferred tax assets existing at the date

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PMSI and JJFMSI were acquired. If the valuation allowance as of December 31, 2002 were to be removed in its entirety, the reduction to goodwill would amount to approximately $4.5 million. To the extent no valuation allowance is established for our deferred tax assets, future financial statements would reflect a provision for income taxes at the applicable federal and state tax rates on income before taxes.

      On October 24, 2002, we entered into a definitive settlement with the IRS, in connection with the IRS’s audit of our predecessor’s 1997 federal income tax return. Under the terms of the settlement, in consideration for the IRS’s final determinations with respect to the 1997 tax year, in December 2002 we paid approximately $52.2 million in cash to satisfy federal and state taxes and interest.

      Pursuant to the terms of the settlement, the audit adjustments agreed to for the 1997 tax year did not trigger any additional distribution requirements by us in order to preserve our status as a real estate investment trust for federal income tax purposes for 1999. The adjustments will, however, serve to increase our accumulated earnings and profits in 2002 and therefore will affect the taxability of dividends paid on our Series A and Series B Preferred Stock in 2002 and later years.

      In addition, due to a change in tax law created by the Job Creation and Worker Assistance Act of 2002, which was signed into law in March 2002, the settlement created an opportunity to utilize any 2002 tax losses to claim a refund of a portion of the taxes paid. We experienced tax losses during 2002 primarily resulting from a cumulative effect of accounting change in depreciable lives for tax purposes. Under terms of the new law, we utilized our net operating losses to offset taxable income generated in 1997, which was increased substantially in connection with the settlement with the IRS. As a result of the tax law change in 2002, combined with the adoption of an accounting change in the depreciable lives of certain tax assets, we will be due an income tax refund of approximately $32.1 million. While we do not currently expect the IRS to challenge the deduction associated with the change in depreciable lives of certain tax assets, the disallowance of all or a substantial portion of this deduction by the IRS would have a material adverse impact on our results of operations and expected cash flows.

      The cumulative effect of accounting change in tax depreciation resulted in the establishment of a significant deferred tax liability for the tax effect of the book over tax basis of certain assets. The creation of such a deferred tax liability, and the significant improvement in our tax position since the original valuation allowance was established to reserve our deferred tax assets, resulted in the reduction of the valuation allowance, generating an income tax benefit of approximately $30.3 million during the fourth quarter of 2002, as we determined that substantially all of these deferred tax liabilities will be utilized to offset the reversal of deferred tax assets during the net operating loss carryforward periods. We continue to evaluate additional tax strategies to maximize the opportunities created by the new law, which could result in an additional income tax refund and income tax benefits, although we can provide no assurance that any such tax strategies will come to fruition.

      The IRS has recently completed auditing our federal tax return for the taxable year ended December 31, 2000. The IRS has proposed the disallowance of a loss we claimed as the result of our forgiveness in September 2000 of certain indebtedness of Operating Company. This finding is currently being protested with the Appeals Office of the IRS. In the event that, after we seek all available remedies, the IRS prevails, we would be required to pay the IRS in excess of $56.0 million in cash plus penalties and interest. This adjustment would also substantially eliminate our net operating loss carryforward. We believe that we have meritorious defenses of our positions. We have not established a reserve for this matter. However, no assurance can be given that the IRS will not make such an assessment and prevail in any such claim against us.

      Self-funded insurance reserves. As of December 31, 2002, we had approximately $25.6 million in accrued liabilities for employee health, workers’ compensation and automobile insurance. We are significantly self-insured for employee health, workers’ compensation and automobile liability insurance. As such, our insurance expense is largely dependent on claims experience and our ability to control our claims. We have consistently accrued the estimated liability for employee health insurance based on our history of claims experience and time lag between the incident date and the date the cost is paid by us.

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We have accrued the estimated liability for workers’ compensation and automobile insurance based on a third-party actuarial valuation of the outstanding liabilities. These estimates could change in the future.

      Legal reserves. As of December 31, 2002, we had approximately $20.7 million in accrued liabilities for litigation for certain legal proceedings in which we are involved. We have accrued our estimate of the probable costs for the resolution of these claims based on a range of potential outcomes. In addition, we are subject to current and potential future legal proceedings for which little or no accrual has been reflected because our current assessment of the potential exposure is nominal. These estimates have been developed in consultation with our General Counsel’s office and, as appropriate, outside counsel handling these matters, and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. It is possible, however, that future cash flows and results of operations could be materially affected by changes in our assumptions, new developments, or by the effectiveness of our strategies.

Results of Operations

      We do not believe the comparison between our results of operations or cash flows for the years ended December 31, 2002 and 2001 with the year ended December 31, 2000 is meaningful because the 2000 results of operations and cash flows reflect real estate activities between Operating Company and us for the period from January 1, 2000 through September 30, 2000 during a period of severe liquidity problems, and as of October 1, 2000, our financial condition, results of operations and cash flows include the operations of the correctional and detention facilities previously leased to and managed by Operating Company. In addition, our financial condition, results of operations and cash flows as of and for the year ended December 31, 2000 also include the operations of the Service Companies as of December 1, 2000 (acquisition date) on a consolidated basis. For the period January 1, 2000 through August 31, 2000, the investments in the Service Companies were accounted for and were presented under the equity method of accounting. For the period from September 1, 2000 through November 30, 2000, the investments in the Service Companies were accounted for on a combined basis due to the repurchase by the wholly-owned subsidiaries of the Service Companies of the non-management, outside stockholders’ equity interest in the Service Companies during September 2000. The resulting increase in our assets and liabilities as of September 1, 2000 as a result of combining the balance sheets of PMSI and JJFMSI has been treated as a non-cash transaction in the combined statement of cash flows for the year ended December 31, 2000, with the September 1, 2000 combined cash balances of PMSI and JJFMSI ($22.0 million) included in “cash and cash equivalents, beginning of year.” The economic interests in each of PMSI and JJFMSI are presented under the equity method for all periods prior to September 1, 2000. For the entire years ended December 31, 2002 and 2001, our consolidated results of operations and cash flows reflect our results as a business specializing in owning, operating and managing prisons and other correctional facilities and providing prisoner transportation services for governmental agencies.

      Our 2002 and 2001 results of operations were impacted by, and the following table sets forth for the years ended December 31, 2002 and 2001, the number of facilities we owned and managed, the number of

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facilities we managed but did not own, the number of facilities we leased to other operators, and the facilities we owned that were not yet in operation.
                                         
Owned
and Managed
Managed Only Leased Incomplete Total





Facilities as of December 31, 2000
    40       28       4       2       74  
Sale of the Mountain View Correctional Facility
    (1 )                       (1 )
Sale of Agecroft Properties, Inc., which owned an interest in the Agecroft facility located in Salford, England
    (1 )                       (1 )
Sale of the Pamlico Correctional Facility
    (1 )                       (1 )
Termination of the management contract for the Brownfield Intermediate Sanction Facility
          (1 )                 (1 )
Sale of the Southern Nevada Women’s Correctional Center, and due to the amendment of the previous contract terms, continued management of the facility
    (1 )     1                    
     
     
     
     
     
 
Facilities as of December 31, 2001
    36       28       4       2       70  
     
     
     
     
     
 
Termination of the management contract for the Southwest Indiana Regional Youth Village
          (1 )                 (1 )
Termination of the management contracts for facilities in Puerto Rico
          (3 )                 (3 )
Management contract award by the Federal Bureau of Prisons for the McRae Correctional Facility
    1                   (1 )      
Sale of interest in a juvenile facility
                (1 )           (1 )
Termination of the management contract for the Delta Correctional Center
          (1 )                 (1 )
     
     
     
     
     
 
Facilities as of December 31, 2002
    37       23       3       1       64  
     
     
     
     
     
 

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

      We incurred a net loss available to common stockholders of ($28.9) million, or ($0.52) per diluted share, for the year ended December 31, 2002, compared with net income available to common stockholders of $5.7 million, or $0.23 per diluted share, for the year ended December 31, 2001.

      The net loss in 2002 resulted from the combined effects of a non-cash charge for the cumulative effect of accounting change for goodwill of $80.3 million, or $2.26 per diluted share, related to the adoption of SFAS 142 during the first quarter of 2002 and the extraordinary charge of $36.7 million, or $1.03 per diluted share, incurred in connection with the comprehensive refinancing completed during the second quarter of 2002. Offsetting these charges in 2002 was an aggregate income tax benefit of $63.3 million, which included a cash income tax benefit of $32.2 million recognized during the first quarter of 2002 related to a change in tax law that became effective in March 2002, which enabled us to utilize certain of our net operating losses to offset taxable income generated in 1997 and 1996. In addition, approximately $30.3 million of the income tax benefit in 2002 was due to the reduction of the tax valuation allowance applied to certain deferred tax assets arising primarily as a result of 2002 tax deductions based on a cumulative effect of accounting change for tax depreciation to be reported on our 2002 federal income tax return. Additionally, net interest expense decreased approximately $38.8 million during 2002 compared with 2001 due to the comprehensive refinancing completed in May of 2002, as well as the reduction of debt balances outstanding through the sale of fixed assets and internally generated cash, and lower market interest rates.

      The net income available to common stockholders during 2001 included a loss from continuing operations after preferred stock distributions of $2.0 million, or $0.08 per diluted share, while income from

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discontinued operations was $7.6 million, or $0.31 per diluted share. Contributing to the net income attributable to common stockholders during 2001 was a non-cash gain of $25.6 million related to the extinguishment of a $26.1 million promissory note issued in connection with our federal stockholder litigation settlement, as further discussed below under the caption “change in fair value of derivative instruments.” Results for 2001 also included the non-cash effect of an $11.1 million charge associated with the accounting for an interest rate swap agreement required under prior terms of our then existing senior secured credit facility, referred to herein as the Old Senior Bank Credit Facility.

Facility Operations

      A key performance indicator we use to measure the revenue and expenses associated with the operation of the facilities we own or manage is expressed in terms of a compensated man-day, and represents the revenue we generate and expenses we incur for one inmate for one calendar day. Revenue and expenses per compensated man-day are computed by dividing facility revenue and expenses by the total number of compensated man-days during the period. A compensated man-day represents a calendar day for which we are paid for the occupancy of an inmate. We believe the measurement is useful because we are compensated for operating and managing facilities at an inmate per diem rate based upon actual or minimum guaranteed occupancy levels. We also measure our ability to contain costs on a per-compensated man-day basis, which is largely dependent upon the number of inmates we accommodate. Further, per man-day measurements are also used to estimate our potential profitability based on certain occupancy levels relative to design capacity. Revenue and expenses per compensated man-day for all of the facilities we owned or managed, exclusive of those discontinued (see further discussion below regarding discontinued operations), were as follows for the years ended December 31, 2002 and 2001:

                   
For the Years Ended
December 31,

2002 2001


Revenue per compensated man-day
  $ 49.32     $ 48.11  
Operating expenses per compensated man-day:
               
 
Fixed expense
    27.72       27.28  
 
Variable expense
    10.30       9.82  
     
     
 
Total
    38.02       37.10  
     
     
 
Operating margin per compensated man-day
  $ 11.30     $ 11.01  
     
     
 
Operating margin
    22.9 %     22.9 %
     
     
 
Average compensated occupancy
    89.6 %     88.4 %
     
     
 

      Management and other revenue consists of revenue earned from the operation and management of adult and juvenile correctional and detention facilities we own or manage and from our inmate transportation subsidiary, which, for the years ended December 31, 2002 and 2001, totaled $959.1 million and $930.6 million, respectively. Business from our federal customers, including the BOP, the USMS, and the INS, remains strong, while many of our state customers are currently experiencing budget difficulties. Our federal customers generated approximately 33% of our management revenue during 2002, compared with approximately 29% during 2001. While the budget difficulties experienced by our state customers present short-term challenges with respect to our per diem rates resulting in pressure on our management revenue in future quarters, these governmental entities are also constrained with respect to funds available for prison construction. As a result, because we believe inmate populations will continue to rise, we currently expect the lack of new bed supply to lead to higher occupancies in the long-term. In addition, where customers have requested a reduction in per diem rates, we have been somewhat successful in mitigating the reduction in revenue by obtaining the flexibility to reduce our operating expenses, such as through the reduction in the use of our various program services or through the consolidation of inmates into fewer facilities.

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      Operating expenses totaled $744.1 million and $721.5 million for the years ended December 31, 2002 and 2001, respectively. Operating expenses consist of those expenses incurred in the operation and management of adult and juvenile correctional and detention facilities, and for our inmate transportation subsidiary.

      Salaries and benefits represent the most significant component of fixed operating expenses and was the primary cause of the increase in fixed expenses per compensated man-day. During 2002 and 2001, we have incurred wage increases due to tight labor markets for correctional officers and benefit increases due to surging healthcare costs. The increase in salaries and benefits contributed approximately $0.51 per compensated man-day to the increase in fixed expenses per compensated man-day from $27.28 during 2001 to $27.72 during 2002. Further, the turnover rate for correctional officers for our company, and for the corrections industry in general, also remains high. We are developing strategies to reduce our turnover rate, but we can provide no assurance that these strategies will be successful. In addition, ten of our facilities currently have contracts with the federal government requiring that our wage and benefit rates comply with wage determination rates set forth, and as adjusted from time to time, under the Service Contract Act of the U.S. Department of Labor. Our contracts generally provide for reimbursement of a portion of the increased costs resulting from wage determinations in the form of increased per diems, thereby mitigating the effect of increased salaries and benefits expenses at those facilities. We may also be subject to adverse claims, or government audits, relating to alleged violations of wage and hour laws applicable to us, which may result in adjustments to amounts previously paid as wages and, potentially interest and/or monetary penalties.

      We also experienced a trend of increasing insurance expense during 2002 compared with 2001. Because we are significantly self-insured for employee health, workers’ compensation and automobile liability insurance, our insurance expense is dependent on claims experience and our ability to control our claims. Our insurance policies contain various deductibles and stop-loss amounts intended to limit our exposure for individually significant occurrences. However, the nature of our self-insurance provides little protection for a deterioration in claims experience or increasing employee medical costs in general. We continue to incur increasing insurance expense due to adverse claims experience primarily resulting from rising healthcare costs throughout the country. We continue to develop new strategies to improve the management of our future loss claims, but can provide no assurance that these strategies will be successful. Additionally, general liability insurance costs have risen substantially since the terrorist attacks on September 11, 2001, and other types of insurance, such as directors and officers liability insurance, are currently expected to increase due to several recent high profile business failures and concerns about corporate governance and accounting in the marketplace. Unanticipated additional insurance expenses resulting from adverse claims experience or a continued increasing cost environment for general liability and other types of insurance could result in increasing expenses in the future.

      During the first quarter of 2001, we hired a General Counsel to manage our existing legal matters and to develop procedures to minimize the incidence of litigation in the future. We have been able to settle numerous cases on terms we believe are favorable. However, variable operating expenses included $4.9 million during 2002, compared with $0.3 million during 2001, for an overall increase in potential exposure for certain legal proceedings, none of which was individually significant. This increase of $4.6 million contributed approximately $0.24 per compensated man-day to the increase in variable expenses per compensated man-day from $9.82 during 2001 to $10.30 during 2002. Further, it is possible that future cash flows and results of operations could be materially affected by changes in our assumptions, new developments, or by the effectiveness of our litigation and settlement strategies.

      The operation of the facilities we own carries a higher degree of risk associated with a management contract than the operation of the facilities we manage but do not own because we incur significant capital expenditures to construct or acquire facilities we own. Additionally, correctional and detention facilities have a limited or no alternative use. Therefore, if a management contract is terminated with respect to a facility we own, we continue to incur certain operating expenses, such as real estate taxes, utilities and insurance, that we would not incur if a management contract was terminated for a managed-only facility. As a result, revenue per compensated man-day is typically higher for facilities we own and manage than

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for managed-only facilities. Because we incur higher expenses, such as repairs and maintenance, real estate taxes and insurance, with respect to the facilities we own and manage, our cost structure for facilities we own and manage is also higher than the cost structure for the managed-only facilities. The following tables display the revenue and expenses per compensated man-day for the facilities we own and manage and for the facilities we manage but do not own:
                   
For the Years
Ended
December 31,

2002 2001


Owned and Managed Facilities:
               
Revenue per compensated man-day
  $ 54.61     $ 53.63  
Operating expenses per compensated man-day:
               
 
Fixed expense
    29.62       29.16  
 
Variable expense
    11.34       11.03  
     
     
 
Total
    40.96       40.19  
     
     
 
Operating margin per compensated man-day
  $ 13.65     $ 13.44  
     
     
 
Operating margin
    25.0 %     25.1 %
     
     
 
Average compensated occupancy
    83.4 %     82.6 %
     
     
 
Managed Only Facilities:
               
Revenue per compensated man-day
  $ 40.98     $ 39.54  
Operating expenses per compensated man-day:
               
 
Fixed expense
    24.72       24.37  
 
Variable expense
    8.67       7.94  
     
     
 
Total
    33.39       32.31  
     
     
 
Operating margin per compensated man-day
  $ 7.59     $ 7.23  
     
     
 
Operating margin
    18.5 %     18.3 %
     
     
 
Average compensated occupancy
    101.4 %     99.4 %
     
     
 

      Owned and Managed Facilities. On May 30, 2002, we were awarded a contract by the BOP to house 1,524 federal detainees at our McRae Correctional Facility located in McRae, Georgia. The three-year contract, awarded as part of the Criminal Alien Requirement Phase II Solicitation, or CAR II, also provides for seven one-year renewals. The contract with the BOP guarantees at least 95% occupancy on a take-or-pay basis, and commenced full operations in December of 2002, resulting in an increase in management and other revenue upon commencement. However, start-up expenses were incurred prior to the commencement of the contract, including but not limited to, salaries, utilities, medical and food supplies and clothing, which resulted in additional operating expenses before any revenue was generated, resulting in a reduction in net income during the third and fourth quarters of 2002.

      During 2001, we provided correctional services for the State of Wisconsin at four of our facilities. During the fourth quarter of 2001, due to a short-term decline in the State of Wisconsin’s inmate population, the State transferred approximately 675 inmates out of our 1,536-bed Whiteville Correctional Facility, located in Whiteville, Tennessee, to the State’s correctional system, reducing the population of Wisconsin inmates in our facilities to approximately 3,400. Although the State of Wisconsin continued transferring inmates out of our facilities during the first quarter of 2002, our population of Wisconsin inmates has gradually increased, primarily at our 1,338-bed Prairie Correctional Facility, located in Appleton, Minnesota. Total management and other revenue at the Whiteville facility decreased $8.9 million, or 39.9%, during 2002 compared with 2001.

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      During September 2002, we announced a contract award from the State of Wisconsin to house up to a total of 5,500 medium security Wisconsin inmates. The new contract replaced the existing contract with the State of Wisconsin on December 22, 2002. As of December 31, 2002, we managed approximately 3,500 Wisconsin inmates under the contract.

      During October 2002, we entered into a new agreement with Hardeman County, Tennessee, with respect to the management of up to 1,536 medium security inmates from the State of Tennessee in the Whiteville Correctional Facility. We have begun to receive Tennessee inmates at the facility, and expect to continue receiving inmates under this contract through the first quarter of 2003. We expect this contract to contribute to an increase in management revenue during 2003.

      Due to an increase in population at our 2,304-bed Central Arizona Detention Center, located in Florence, Arizona, and at our 910-bed Torrance County Detention Facility, located in Estancia, New Mexico, primarily from the USMS and the INS, management and other revenue increased $8.6 million and $6.8 million, respectively, at these facilities during 2002 compared with 2001.

      The acquisition in January 2003 of the Crowley County Correctional Facility, located in Olney Springs, Colorado, is expected to provide favorable investment returns contributing to an increase in our management revenue during 2003, while adding capacity in a state where projections call for significant inmate growth over the next several years.

      During the second quarter of 2001, we were informed that our contract with the District of Columbia to house its inmates in our Northeast Ohio Correctional Center, which expired September 8, 2001, would not be renewed due to a new law that mandated that the BOP assume jurisdiction of all District of Columbia offenders by the end of 2001. The Northeast Ohio Correctional Center is a 2,016-bed medium security prison. The District of Columbia began transferring inmates out of the facility during the second quarter of 2001 and completed the process in July 2001. Total management and other revenue at this facility was approximately $6.4 million during the year ended December 31, 2001. The related operating expenses at this facility were $12.6 million during the year ended December 31, 2001. While no revenue was generated from this facility during 2002, we incurred approximately $2.9 million of operating expenses during the year ended December 31, 2002 for real estate taxes, utilities, insurance and other necessary expenses associated with owning the facility. Overall, our occupancy decreased by approximately 1,300 inmates at our facilities as a result of this mandate. We have engaged in discussions with the BOP regarding a sale of the Northeast Ohio Correctional Center to the BOP, and are also continually exploring opportunities to reopen the facility; however, there can be no assurance that we will be able to reach agreements on a sale or to reopen this facility.

      Managed-Only Facilities. During the fourth quarter of 2001, we committed to a plan to terminate our management contract at the Southwest Indiana Regional Youth Village, a 188-bed juvenile facility located in Vincennes, Indiana. During the first quarter of 2002, we entered into a mutual agreement with Children and Family Services Corporation, or CFSC, to terminate our management contract at the facility, effective April 1, 2002, prior to the contract’s expiration date in 2004. In connection with the mutual agreement to terminate the management contract, CFSC also paid in full an outstanding note receivable totaling approximately $0.7 million, which was previously considered uncollectible and was fully reserved. The termination of this management contract has not had a material impact on our financial statements. Because management committed to the termination of this management contract prior to the effective date of Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” or SFAS 144, the results of operations were not reported in discontinued operations.

      On June 28, 2002, we received notice from the Mississippi Department of Corrections terminating our contract to manage the 1,016-bed Delta Correctional Facility located in Greenwood, Mississippi, due to the non-appropriation of funds. We ceased operations of the facility in October 2002. However, the State of Mississippi agreed to expand the management contract at the Wilkinson County Correctional Facility located in Woodville, Mississippi to accommodate an additional 100 inmates. As a result, the results of operations of the Delta Correctional Facility are not reported in discontinued operations. These events are not expected to have a material impact on our financial statements.

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      During July 2002, we renewed our contract with Tulsa County, Oklahoma, for the management of inmates at the David L. Moss Criminal Justice Center. The contract renewal included an increase in the per diem rate, and also shifted to Tulsa County, the burden of certain utility expenses, resulting in a modest improvement in profitability for the management of this facility during 2002, compared with 2001.

      During the fourth quarter of 2002, we were informed by the State of Florida of its intention to terminate our contract to manage the 96-bed Okeechobee Juvenile Offender Correctional Center located in Okeechobee, Florida, upon the expiration of a short-term extension to the existing management contract, which expired in December 2002. This termination, which occurred February 28, 2003, is not expected to have a material effect on the Company’s financial statements. During 2002, this facility generated total revenue and total operating expenses of $4.8 million and $4.0 million, respectively.

      On March 18, 2003, we were notified by the Department of Corrections of the Commonwealth of Virginia of its intention to terminate our contract to manage the 1,500-bed Lawrenceville Correctional Center located in Lawrenceville, Virginia, upon the expiration of the contract on March 22, 2003. This termination, which occurred on March 22, 2003, is not expected to have a material effect on our financial statements. During 2002, this facility generated total revenue and total operating expenses of $20.3 million and $18.7 million, respectively.

 
Rental revenue

      Rental revenue was $3.7 million for the year ended December 31, 2002, compared with $5.7 million during the year ended December 31, 2001. Rental revenue was generated from leasing correctional and detention facilities to governmental agencies and other private operators. On March 16, 2001, we sold the Mountain View Correctional Facility, and on June 28, 2001, we sold the Pamlico Correctional Facility, two facilities that had been leased to governmental agencies. Therefore, no further rental revenue has been received for these facilities during the year ended December 31, 2002. For the year ended December 31, 2001, rental revenue for these facilities totaled $2.0 million.

 
General and administrative expense

      For the years ended December 31, 2002 and 2001, general and administrative expenses totaled $36.9 million and $34.6 million, respectively. General and administrative expenses consist primarily of corporate management salaries and benefits, professional fees and other administrative expenses, and increased from 2001 primarily due to an increase in professional fees incurred in connection with the implementation of tax strategies to maximize opportunities created by a change in tax law in March 2002 and the aforementioned settlement with the IRS with respect to our predecessor’s 1997 federal income tax return. This increase was partially offset by a reduction in salaries and benefits, including incentive compensation.

 
Depreciation and amortization

      For the years ended December 31, 2002 and 2001, depreciation and amortization expense totaled $51.9 million and $53.3 million, respectively. Amortization expense for the year ended December 31, 2001 included approximately $7.6 million for goodwill and $1.2 million for amortization of workforce values, both of which were established in connection with acquisitions occurring in 2000. Workforce values were reclassified into goodwill and goodwill was no longer subject to amortization effective January 1, 2002, in accordance with a new accounting pronouncement, as further discussed under “Recent Accounting Pronouncements” herein. Amortization expense during the year ended December 31, 2001 is also net of a reduction to amortization expense of $8.5 million for the amortization of a liability relating to contract values established in connection with the mergers completed in 2000. Due to certain of these liabilities becoming fully amortized during 2001, the reduction to amortization expense during the year ended December 31, 2002 was $2.1 million, resulting in a net increase in depreciation and amortization expense of $6.4 million from 2001 to 2002.

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Interest expense, net

      Interest expense, net, is reported net of interest income for the years ended December 31, 2002 and 2001. Gross interest expense was $91.9 million and $133.7 million, respectively, for the years ended December 31, 2002 and 2001. Gross interest expense is based on outstanding convertible subordinated notes payable balances, borrowings under the senior secured credit facility, the Old Senior Bank Credit Facility, the 9.875% notes, the 12% senior unsecured notes due 2006, referred to herein as the 12% Senior Notes, net settlements on an interest rate swap, and amortization of loan costs and unused facility fees. The decrease in gross interest expense from the prior year is primarily attributable to lower average outstanding indebtedness, the comprehensive refinancing completed on May 3, 2002, which decreased the interest rate spread on the senior secured credit facility, the termination of the interest rate swap agreement, lower amortization of loan costs, and a lower interest rate environment. During 2001, we paid-down $189.0 million in total debt through a combination of $138.7 million in cash generated from asset sales and internally generated cash.

      Gross interest income was $4.4 million and $7.5 million, respectively, for years ended December 31, 2002 and 2001. Gross interest income is earned on cash collateral requirements, direct financing leases, notes receivable and investments of cash and cash equivalents. On October 3, 2001, we sold our Southern Nevada Women’s Correctional Facility, which had been accounted for as a direct financing lease. Therefore, no interest income was received on this lease during 2002. For the year ended December 31, 2001, interest income for this lease totaled $0.9 million. Subsequent to the sale, we continue to manage the facility pursuant to a contract with the State of Nevada.

 
Change in fair value of derivative instruments

      In accordance with Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” or SFAS 133, as amended, we have reflected in earnings the change in the estimated fair value of our interest rate swap agreement during the years ended December 31, 2002 and 2001. We estimated the fair value of the interest rate swap agreement using option-pricing models that value the potential for the interest rate swap agreement to become in-the-money through changes in interest rates during the remaining term of the agreement. A negative fair value represented the estimated amount we would have to pay to cancel the contract or transfer it to other parties.

      Our swap agreement fixed LIBOR at 6.51% (prior to the applicable spread) on outstanding balances of at least $325.0 million through its expiration on December 31, 2002. In accordance with SFAS 133, we recorded a $2.2 million non-cash gain and an $11.1 million non-cash charge, respectively, for the change in fair value of the swap agreement for the years ended December 31, 2002 and 2001. These amounts included $2.5 million for amortization of the transition adjustment, or the cumulative reduction in the fair value of the swap from its inception to the date we adopted SFAS 133 on January 1, 2001, during each year. We were no longer required to maintain the existing interest rate swap agreement due to the early extinguishment of the Old Senior Bank Credit Facility. During May 2002, we terminated the swap agreement prior to its expiration at a price of approximately $8.8 million. In accordance with SFAS 133, we continued to amortize the unamortized portion of the transition adjustment as a non-cash expense through December 31, 2002.

      The senior secured credit facility required us to hedge at least $192.0 million of the term loan portions of the facility within 60 days following the closing of the loan. In May 2002, we entered into an interest rate cap agreement to fulfill this requirement, capping LIBOR at 5.0% (prior to the applicable spread) on outstanding balances of $200.0 million through the expiration of the cap agreement on May 20, 2004. We paid a premium of $1.0 million to enter into the interest rate cap agreement. We expect to amortize this premium as the estimated fair values assigned to each of the hedged interest payments expire throughout the term of the cap agreement, amounting to $0.4 million in 2003 and $0.6 million in 2004. We have met the hedge accounting criteria under SFAS 133 and related interpretations in accounting for the interest rate cap agreement. As a result, the estimated fair value of the interest rate cap

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agreement of $36,000 as of December 31, 2002 was included in other assets in the consolidated balance sheet, and the change in the fair value of the interest rate cap agreement of $964,000 during the year ended December 31, 2002 was reported through other comprehensive income in the statement of stockholders’ equity. There can be no assurance that the interest rate cap agreement will be effective in mitigating our exposure to interest rate risk in the future, or that we will be able to continue to meet the hedge accounting criteria under SFAS 133.

      On December 31, 2001, we issued approximately 2.8 million shares of common stock, along with a $26.1 million subordinated promissory note, in conjunction with the final settlement of the federal court portion of our stockholder litigation settlement. Under the terms of the promissory note, the note and accrued interest became extinguished in January 2002 once the average closing price of the common stock exceeded a “termination price” equal to $16.30 per share for fifteen consecutive trading days following the issuance of such note. The terms of the note, which allowed the principal balance to fluctuate dependent on the trading price of our common stock, created a derivative instrument that was valued and accounted for under the provisions of SFAS 133. As a result of the extinguishment, we estimated the fair value of this derivative to approximate the face amount of the note, resulting in an asset being recorded during the fourth quarter of 2001. The derivative asset offsets the face amount of the note in the consolidated balance sheet as of December 31, 2001. Since the estimated fair value of the derivative asset was equal to the face amount of the note as of December 31, 2001, the extinguishment had no financial statement impact in 2002.

      While the state court portion of the stockholder litigation settlement has also been settled, the payment of the settlement proceeds to the state court plaintiffs has not yet been completed; however, the settlement payment is expected to result in the issuance of approximately 0.3 million additional shares of common stock and a $2.9 million subordinated promissory note, which may also be extinguished if the average closing price of our common stock meets or exceeds $16.30 per share for fifteen consecutive trading days following the note’s issuance and prior to its maturity in 2009. Additionally, to the extent our common stock price does not meet the termination price, the note will be reduced by the amount that the shares of common stock issued to the plaintiffs appreciate in value in excess of $4.90 per share, based on the average trading price of the stock following the date of the note’s issuance and prior to the maturity of the note. If the remaining promissory note is issued under the current terms, in accordance with SFAS 133, as amended, we will reflect in earnings the change in the estimated fair value of the written option embedded in the promissory note from quarter to quarter. Since we have reflected the maximum obligation of the contingency associated with the state court portion of the stockholder litigation in the consolidated balance sheet as of December 31, 2002, the issuance of the note is currently expected to have a favorable impact on our consolidated financial position and results of operations initially; thereafter, the financial statement impact will fluctuate based on changes in our stock price. However, the impact cannot be determined until the promissory note is issued and an estimated fair value of the derivative included in the promissory note is determined. The note is currently expected to be issued during 2003.

 
Income tax benefit

      We generated income tax benefits of approximately $63.3 million and $3.4 million for the years ended December 31, 2002 and 2001, respectively. The increase in the income tax benefit during the year ended December 31, 2002, primarily resulted from the Job Creation and Worker Assistance Act of 2002 which was signed into law on March 9, 2002. Among other changes, the tax law extends the net operating loss carryback period to five years from two years for net operating losses arising in tax years ending in 2001 and 2002, and allows use of net operating loss carrybacks and carryforwards to offset 100% of the alternative minimum taxable income. We experienced net operating losses during 2001 resulting primarily from the sale of assets at prices below the tax basis of such assets. Under terms of the new law, we utilized certain of our net operating losses to offset taxable income generated in 1997 and 1996. As a result of this tax law change in 2002, we reported an income tax benefit and claimed a refund of approximately $32.2 million during the first quarter of 2002, which was received in April 2002.

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      On October 24, 2002, we entered into a definitive settlement with the IRS in connection with the IRS’s audit of our predecessor’s 1997 federal income tax return. Under the terms of the settlement, in consideration for the IRS’s final determinations with respect to the 1997 tax year, in December 2002 we paid approximately $52.2 million in cash to satisfy federal and state taxes and interest.

      Due to the change in tax law in March 2002, the settlement created an opportunity to utilize any 2002 tax losses to claim a refund of a portion of the taxes paid. We experienced tax losses during 2002 primarily resulting from a cumulative effect of accounting change in depreciable lives for tax purposes. Under terms of the new law, we utilized our net operating losses to offset taxable income generated in 1997, which was increased substantially in connection with the settlement with the IRS. As a result of the tax law change in 2002, combined with the adoption of an accounting change in the depreciable lives of certain tax assets, we will be due an income tax refund of approximately $32.1 million.

      The cumulative effect of accounting change in tax depreciation resulted in the establishment of a significant deferred tax liability for the tax effect of the book over tax basis of certain assets. The creation of such a deferred tax liability, and the significant improvement in our tax position since the original valuation allowance was established to reserve our deferred tax assets, resulted in the reduction of the valuation allowance, generating an income tax benefit of approximately $30.3 million during the fourth quarter of 2002, as we determined that substantially all of these deferred tax liabilities will be utilized to offset the reversal of deferred tax assets during the net operating loss carryforward periods. We continue to evaluate additional tax strategies to maximize the opportunities created by the new law, which could result in an additional income tax refund and income tax benefits, although we can provide no assurance that any such tax strategies will come to fruition.

      As of December 31, 2002, our gross deferred tax assets totaled approximately $141.4 million. Deferred income taxes reflect the net tax effect 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 our ability to generate taxable income within the net operating loss carryforward period. Since the change in tax status in connection with the restructuring in 2000, and as of December 31, 2002, we have provided a valuation allowance to substantially reserve the deferred tax assets in accordance with SFAS 109. The valuation allowance is recognized based on the weight of available evidence indicating that it is more likely than not that the deferred tax assets will not be realized. This evidence primarily consists of, but is not limited to, recurring operating losses for federal tax purposes.

      Our assessment of the valuation allowance could change in the future based upon our actual and projected taxable income. Removal of the valuation allowance in whole or in part would result in a non-cash reduction in income tax expense during the period of removal. In addition, because a portion of the valuation allowance as of December 31, 2002 was established to reserve certain deferred tax assets upon the acquisitions of PMSI and JJFMSI, in accordance with SFAS 109, removal of the valuation allowance would result in a reduction to any remaining goodwill recorded in connection with such acquisitions to the extent the reversal relates to the valuation allowance applied to deferred tax assets existing at the date PMSI and JJFMSI were acquired. If the valuation allowance as of December 31, 2002 were to be removed in its entirety, the reduction to goodwill would amount to approximately $4.5 million. To the extent no valuation allowance is established for our deferred tax assets, future financial statements would reflect a provision for income taxes at the applicable federal and state tax rates on income before taxes.

 
Discontinued Operations

      In late 2001 and early 2002, we were provided notice from the Commonwealth of Puerto Rico of its intention to terminate the management contracts at the 500-bed multi-security Ponce Young Adult Correctional Facility and the 1,000-bed medium-security Ponce Adult Correctional Facility, located in Ponce, Puerto Rico, upon the expiration of the management contracts in February 2002. Attempts to negotiate continued operation of these facilities were unsuccessful. As a result, the transition period to transfer operation of the facilities to the Commonwealth of Puerto Rico ended May 4, 2002, at which time

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operation of the facilities was transferred to the Commonwealth of Puerto Rico. During 2002, these facilities generated total revenue of $7.9 million and operating expenses of $7.4 million, respectively. We recorded a non-cash charge as discontinued operations of approximately $1.8 million during the second quarter of 2002 for the write-off of the carrying value of assets associated with these terminated management contracts. During 2001, these facilities generated total revenue of $22.6 million and operating expenses of $19.3 million.

      During the fourth quarter of 2001, we obtained an extension of our management contract with the Commonwealth of Puerto Rico for the operation of the 1,000-bed Guayama Correctional Center located in Guayama, Puerto Rico, through December 2006. However, on May 7, 2002, we received notice from the Commonwealth of Puerto Rico terminating our contract to manage this facility, which occurred on August 6, 2002. During 2002, this facility generated total revenue of $12.3 million and operating expenses of $9.9 million, respectively. During 2001, this facility generated total revenue of $21.1 million and operating expenses of $12.7 million.

      On June 28, 2002, we sold our interest in a juvenile facility located in Dallas, Texas for approximately $4.3 million. The facility, which was designed to accommodate 900 at-risk juveniles, was leased to an independent third party operator pursuant to a lease expiring in 2008. Net proceeds from the sale were used for working capital purposes. This facility generated rental income of $0.4 million and $0.7 million during 2002 and 2001, respectively.

      During 2002, depreciation and amortization, interest income, and income tax expense totaled $2.5 million, $0.6 million, and $0.6 million, respectively, for these facilities. During 2001, depreciation and amortization, interest income, and income tax expense totaled $0.9 million, $0.6 million, and $4.5 million, respectively, for these facilities.

      Due to the sale of the juvenile facility, and due to the termination of the contracts to manage the three facilities in Puerto Rico, in accordance with SFAS 144, the operations of these facilities, net of taxes, were reported as discontinued operations during 2002 and 2001. The reclassification was not made for 2000, however, as the discontinued operations were not material in that year, and because the 2000 financial statements are not comparable to the 2001 and 2002 financial statements, as previously discussed herein.

Year Ended December 31, 2000

 
Management revenue

      Management revenue consisted of revenue earned from the operation and management of adult and juvenile correctional and detention facilities for the year ended December 31, 2000, totaling $182.5 million, which, beginning as of October 1, 2000 and December 1, 2000, included management revenue previously earned by Operating Company and the Service Companies, respectively. Also included was the management revenue earned by the Service Companies from the operation and management of adult prisons and jails and juvenile detention facilities on a combined basis for the period September 1, 2000 through November 30, 2000, totaling $79.3 million.

 
Rental revenue

      Net rental revenue was $40.9 million for the year ended December 31, 2000 and was generated from leasing correctional and detention facilities to Operating Company, governmental agencies and other private operators. For the year ended December 31, 2000, we reserved $213.3 million of the $244.3 million of gross rental revenue due from Operating Company through September 30, 2000 due to the uncertainty regarding the collectibility of the payments. During September 2000, we forgave all unpaid rental payments due from Operating Company as of August 31, 2000 (totaling $190.8 million). The forgiveness did not impact our financial statements at that time as the amounts forgiven had been previously reserved. The remaining $22.5 million in unpaid rentals from Operating Company was fully reserved in September

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2000. The leases with Operating Company were cancelled in connection with the merger acquisition of Operating Company.
 
Licensing fees from affiliates

      Licensing fees from affiliates were $7.6 million for the year ended December 31, 2000. Licensing fees were earned as a result of a trade name use agreement between us and Operating Company, which granted Operating Company the right to use the name “Corrections Corporation of America” and derivatives thereof subject to specified terms and conditions therein. The licensing fee was based upon gross rental revenue of Operating Company, subject to a limitation based on our gross revenue. All licensing fees were collected from Operating Company.

 
Operating expenses

      Operating expenses included the operating expenses of the Service Companies on a combined basis for the period September 1, 2000 through November 30, 2000, totaling $64.5 million. Also included were the operating expenses we incurred for the year ended December 31, 2000, totaling $152.8 million, which, beginning as of October 1, 2000 and December 1, 2000, included the operating expenses incurred by Operating Company and the Service Companies, respectively. Operating expenses consisted of those expenses incurred in the operation and management of prisons and other correctional facilities. Also included in operating expenses were our realized losses on foreign currency transactions of $0.6 million for the year ended December 31, 2000. These losses resulted from a detrimental fluctuation in the foreign currency exchange rate upon the collection of certain receivables denominated in British pounds. See “Unrealized foreign currency transaction loss” for further discussion of these receivables.

 
General and administrative expense

      For the year ended December 31, 2000, general and administrative expense was $45.5 million. During the fourth quarter of 1999, we 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. In April 2000, the securities purchase agreement by and among the parties was terminated when Fortress/ Blackstone elected not to match the terms of a subsequent proposal by Pacific Life Insurance Company. In June 2000, our securities purchase agreement with Pacific Life was mutually terminated by the parties after Pacific Life was unwilling to confirm that the June 2000 waiver and amendment to our Old Senior Bank Credit Facility satisfied the terms of the agreement with Pacific Life. In connection with the proposed restructuring transactions with Fortress/ Blackstone and Pacific Life and the completion of the restructuring, including the Operating Company merger, we terminated the services of one of our financial advisors during the third quarter of 2000. For the year ended December 31, 2000, we accrued expenses of approximately $24.3 million in connection with existing and potential litigation associated with the termination of the aforementioned agreements. All disputes with these parties have since been settled or otherwise resolved.

      General and administrative expenses incurred by the Service Companies on a combined basis for the period September 1, 2000 through November 30, 2000 totaled $0.6 million. Additional general and administrative expenses incurred for the year ended December 31, 2000 totaled $20.6 million, which, beginning as of October 1, 2000 and December 1, 2000, included the general and administrative expenses incurred by Operating Company and the Service Companies, respectively. These additional general and administrative expenses consisted primarily of corporate management salaries and benefits, professional fees and other administrative expenses. Effective October 1, 2000, as a result of the Operating Company merger, corporate management salaries and benefits also contained the former corporate employees of Operating Company. Also included in these additional general and administrative expenses were $2.0 million in severance payments to our former chief executive officer and secretary and $1.3 million in severance payments to various other company employees.

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Depreciation and amortization

      For the year ended December 31, 2000, depreciation and amortization expense was $59.8 million, including depreciation and amortization expense for the Service Companies from the operation and management of adult prisons and jails and juvenile detention facilities on a combined basis for the period September 1, 2000 through November 30, 2000, totaling $3.9 million.

 
License fees to Operating Company

      Licensing fees to Operating Company were recognized under the terms of a trade name use agreement between Operating Company and each of the Service Companies, which were assumed as a result of the Operating Company merger. Under the terms of the trade name use agreement, the Service Companies were required to pay to Operating Company 2.0% of gross management revenue for the use of the Corrections Corporation of America name and derivatives thereof. The Service Companies incurred expenses of $0.5 million under this agreement for the month of September 2000. The October and November expenses incurred under this agreement were eliminated in combination, subsequent to the Operating Company merger. The trade name use agreement was cancelled upon the acquisitions of the Service Companies.

 
Administrative services fee to Operating Company

      Operating Company and each of the Service Companies were parties to an administrative services agreement whereby Operating Company would charge a fee to manage and provide general and administrative services to each of the Service Companies. We assumed this agreement as a result of the Operating Company merger. The Service Companies recognized expenses of $0.9 million under this agreement for the month of September 2000. The October and November expenses incurred under this agreement were eliminated in combination, subsequent to the Operating Company merger. The administrative services agreement was cancelled upon the acquisitions of the Service Companies.

 
Write-off of amounts under lease arrangements

      During 2000, we opened or expanded five facilities that were operated and leased by Operating Company prior to the Operating Company merger. Based on Operating Company’s financial condition, as well as the proposed merger with Operating Company and the proposed termination of the Operating Company leases in connection therewith, we wrote-off the accrued tenant incentive fees due Operating Company in connection with opening or expanding the five facilities, totaling $11.9 million for the year ended December 31, 2000.

 
Impairment losses

      Statement of Financial Accounting Standards No. 121, “Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of,” or SFAS 121, required impairment losses to be recognized for long-lived assets used in operations when indications of impairment were present and the estimate of undiscounted future cash flows was not sufficient to recover asset carrying amounts.

      Following the completion of the Operating Company merger and the acquisitions of PMSI and JJFMSI, during the fourth quarter of 2000, after considering our financial condition, our new management developed a strategic operating plan to improve our financial position, and developed revised projections to evaluate various potential transactions. Management also conducted strategic assessments and evaluated our assets for impairment. Further, management evaluated the utilization of existing facilities, projects under development, excess land parcels, and identified certain of these non-strategic assets for sale.

      In accordance with SFAS 121, we estimated the undiscounted net cash flows for each of our properties and compared the sum of those undiscounted net cash flows to our investment in each property. Through these analyses, we determined that eight of our correctional and detention facilities and the long-lived assets of the transportation business had been impaired. For these properties, we reduced the carrying

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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 $420.5 million.

      During the fourth quarter of 2000, as part of management’s strategic assessment, we committed to a plan of disposal for certain of our long-lived assets. In accordance with SFAS 121, we recorded losses on these assets based on the difference between the carrying value and the estimated net realizable value of the assets. We estimated the net realizable values of certain facilities and direct financing leases held for sale based on outstanding offers to purchase, appraisals, as well as utilizing various financial models, including discounted cash flow analyses, less estimated costs to sell each asset. The resulting impairment loss for these assets totaled $86.1 million.

      Included in property and equipment were costs associated with the development of potential facilities. Based on our strategic assessment during the fourth quarter of 2000, we decided to abandon further development of these projects and expense any amounts previously capitalized. The resulting expense totaled $2.1 million.

      During the third quarter of 2000, we determined either not to pursue further development or to reconsider the use of certain parcels of property in California, Maryland and the District of Columbia. Accordingly, we reduced the carrying values of the land to their estimated net realizable value, resulting in an impairment loss totaling $19.2 million.

 
Equity in loss and amortization of deferred gains, net

      For the year ended December 31, 2000, equity in losses and amortization of deferred gains, net, was $11.6 million. We recognized equity in losses of PMSI and JJFMSI of approximately $12,000 and $870,000, respectively through August 31, 2000. In addition, we recognized equity in losses of Operating Company of approximately $20.6 million. For 2000, the amortization of the deferred gain on the sales of contracts to PMSI and JJFMSI was approximately $6.5 million and $3.3 million, respectively. Deferred gains were generated as a result of the sale of certain management contracts to PMSI and JJFMSI. These deferred gains were to be amortized over a five-year period commencing January 1, 1999, which represented the average remaining lives of the contracts sold to PMSI and JJFMSI, plus any contractual renewal options. Effective with the acquisitions of PMSI and JJFMSI, the unamortized balances of the deferred gains on sales of contracts were applied in accordance with the purchase method of accounting.

 
Interest expense, net

      Interest expense, net, was reported net of interest income and capitalized interest for the year ended December 31, 2000. Gross interest expense was $145.0 million for the year ended December 31, 2000. Gross interest expense was based on outstanding convertible subordinated notes payable balances, borrowings under the Old Senior Bank Credit Facility, the Operating Company revolving credit facility, the 12% Senior Notes, and amortization of loan costs and unused facility fees. Interest expense was reported net of capitalized interest on construction in progress of $8.3 million for the year ended December 31, 2000.

      Gross interest income was $13.5 million for the year ended December 31, 2000. Gross interest income was earned on cash used to collateralize letters of credit for certain construction projects, direct financing leases and investments of cash and cash equivalents.

 
Other income

      Other income for the year ended December 31, 2000 totaled $3.1 million. In September 2000, we received approximately $4.5 million in final settlement of amounts held in escrow related to the 1998 acquisition of the outstanding capital stock of U.S. Corrections Corporation. The $3.1 million represented the proceeds, net of miscellaneous receivables, arising from claims against the escrow.

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Loss on disposals of assets

      We incurred a loss on sales of assets during 2000 of approximately $1.7 million. During the fourth quarter of 2000, JJFMSI sold its 50% interest in CCA Australia resulting in a $3.6 million loss. This loss was offset by a gain of $0.6 million resulting from the sale of a correctional facility located in Kentucky, a gain of $1.6 million on the sale of JJFMSI’s 50% interest in U.K. Detention Services Limited and a loss of $0.3 million resulting from the abandonment of a project under development.

 
Unrealized foreign currency transaction loss

      In connection with the construction and development of the Agecroft facility, located in Salford, England, we extended a working capital loan to the operator of the facility. This loan, along with various other short-term receivables, are denominated in British pounds; consequently, we adjust these receivables to the current exchange rate at each balance sheet date, and recognize the currency gain or loss in current period earnings. Due to negative fluctuations in foreign currency exchange rates between the British pound and the U.S. dollar, we recognized net unrealized foreign currency transaction losses of $8.1 million for the year ended December 31, 2000.

 
Stockholder litigation settlement

      In February 2001, we received court approval of the revised terms of the definitive settlement agreements regarding the settlement of all outstanding stockholder litigation against us and certain of our existing and former directors and executive officers. Pursuant to the terms of the settlement, we agreed to issue to the plaintiffs an aggregate of 4.7 million shares of common stock and a subordinated promissory note in the aggregate principal amount of $29.0 million.

      As of December 31, 2000, we had accrued the estimated obligation of the contingency associated with the stockholder litigation, amounting to approximately $75.4 million.

 
Income taxes

      In connection with the corporate restructuring in 2000, on September 12, 2000, our stockholders approved an amendment to our charter to remove provisions that required us to elect to qualify and be taxed as a real estate investment trust for federal income tax purposes effective January 1, 2000. As a result of the amendment to our charter, we have been taxed as a taxable subchapter C corporation beginning with our taxable year ended December 31, 2000. In accordance with the provisions of SFAS 109, we were required to establish current and deferred tax assets and liabilities in our financial statements in the period in which a change of tax status occurred. As such, our benefit for income taxes for the year ended December 31, 2000 included the provision associated with establishing the deferred tax assets and liabilities in connection with the change in tax status during the third quarter of 2000, net of a valuation allowance applied to certain deferred tax assets.

Liquidity and Capital Resources

      Our principal capital requirements are for working capital, capital expenditures and debt service payments. Capital requirements may also include cash expenditures associated with our outstanding commitments and contingencies, as further described in the notes to our financial statements. In addition, we may incur capital expenditures to expand the design capacity of our facilities in order to retain management contracts, or when the economics of an expansion are compelling. In addition, with lender consent, we may acquire additional correctional facilities that we believe have favorable investment returns and increase value to our stockholders. We have financed, and intend to continue to finance, the working capital and capital expenditure requirements with existing cash balances and net cash provided by operations, although we may also utilize our senior secured credit facility, as further described below. We may also sell non-strategic assets and apply the net proceeds to pay-down our outstanding indebtedness.

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      As of December 31, 2002, our liquidity was provided by cash on hand of approximately $65.4 million and $58.0 million available under the $75.0 million revolving portion of our senior secured credit facility. During the year ended December 31, 2002, we generated $101.4 million in cash through operating activities, and as of December 31, 2002, we had net working capital of $68.4 million, including an income tax refund receivable of $32.1 million, which we expect to receive during the second quarter of 2003. We currently expect to be able to meet our cash expenditure requirements for the next year.

      During the fourth quarter of 2000, as a result of our financial condition existing at that time, including: (i) the pending maturity of the loans under the Old Senior Bank Credit Facility; (ii) our negative working capital position; and (iii) our highly leveraged capital structure, our new management conducted strategic assessments; developed revised financial projections; evaluated the utilization of existing facilities, projects under development and excess land parcels; identified certain of these non-strategic assets for sale; and identified various potential transactions that could improve our financial position.

      During 2001, we were successful in repositioning our capital structure for a comprehensive refinancing of our senior indebtedness, including primarily the Old Senior Bank Credit Facility. We paid-down $189.0 million in total debt through a combination of $138.7 million in cash generated from asset sales and internally generated cash. We improved operating margins, increased occupancy rates, and settled a number of significant outstanding legal matters on terms we believe were favorable.

      In May 2001, we completed a one-for-ten reverse stock split of our common stock, which satisfied a condition of continued listing of our common stock on the NYSE. During December 2001, we completed an amendment and restatement of our Old Senior Bank Credit Facility. As part of the December 2001 amendment and restatement, the existing $269.4 million revolving portion of the Old Senior Bank Credit Facility, which was to mature on January 1, 2002, was replaced with a term loan of the same amount maturing on December 31, 2002, to coincide with the maturity of the other loans under the Old Senior Bank Credit Facility. Pursuant to terms of the December 2001 amendment and restatement, all loans under the Old Senior Bank Credit Facility accrued interest at a variable rate of 5.5% over LIBOR, or 4.5% over the base rate, at our option.

      As a result of the December 2001 amendment and restatement, certain financial and non-financial covenants of the Old Senior Bank Credit Facility were amended, including the removal of prior restrictions on our ability to pay cash dividends on shares of our series A preferred stock. Under the terms of the December 2001 amendment and restatement, we were permitted to pay quarterly dividends, if and when declared by the board of directors, on the shares of series A preferred stock, including all dividends in arrears. On December 13, 2001, our board of directors declared a cash dividend on the shares of series A preferred stock for the fourth quarter of 2001, and for all five quarters then unpaid and in arrears, payable on January 15, 2002 to the holders of record of series A preferred stock on December 31, 2001. As a result of the board’s declaration, we paid an aggregate of $12.9 million to holders of the series A preferred stock in January 2002.

      We believed, and continue to believe, that a short-term extension of the revolving portion of our Old Senior Bank Credit Facility was in our best interest for a longer-term financing strategy, particularly due to difficult market conditions for the issuance of debt securities following the terrorist attacks on September 11, 2001, and during the fourth quarter of 2001. Additionally, we believed that certain terms of the December 2001 amendment and restatement, including primarily the removal of prior restrictions to pay cash dividends on our shares of series A preferred stock, including all dividends in arrears, would result in an improvement to our credit ratings, thereby enhancing the terms of a more comprehensive refinancing.

      After completing the amendment and restatement of the Old Senior Bank Credit Facility in December 2001, Moody’s Investors Service upgraded the rating on our senior secured debt to “B2” from “B3”, our senior unsecured debt to “B3” from “Caa1”, and our preferred stock to “Caa2” from “Ca”.

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      On May 3, 2002, we completed a comprehensive refinancing of our senior indebtedness through the refinancing of our Old Senior Bank Credit Facility and the sale and issuance of $250.0 million aggregate principal amount of 9.875% notes. The proceeds from the sale of the 9.875% notes were used to repay a portion of amounts outstanding under the Old Senior Bank Credit Facility, to redeem approximately $89.2 million of our existing $100.0 million 12% Senior Notes, referred to herein as the 12% Senior Notes, pursuant to a tender offer and consent solicitation, and to pay related fees and expenses. Upon the completion of the refinancing, Moody’s Investors Service upgraded its rating of our senior secured debt to “B1” from “B2”, our senior unsecured debt to “B2” from “B3”, and our preferred stock to “Caa1” from “Caa2”, and Standard & Poor’s upgraded our corporate credit rating and its rating of our senior secured debt to “B+” from “B” and our senior unsecured debt to “B-” from “CCC+”.

      Interest on the 9.875% notes accrues at the stated rate, and is payable semi-annually in arrears on May 1 and November 1 of each year. The 9.875% notes mature on May 1, 2009. At any time before May 1, 2005, we may redeem up to 35% of the notes with the net proceeds of certain equity offerings, as long as 65% of the aggregate principal amount of the notes remains outstanding after the redemption. We may redeem all or a portion of the 9.875% notes on or after May 1, 2006. Redemption prices are set forth in the indenture governing the 9.875% notes. The 9.875% notes are guaranteed on an unsecured basis by all of our domestic subsidiaries (other than our Puerto Rican subsidiary).

      The indenture governing the 9.875% notes contains certain customary covenants that, subject to certain exceptions and qualifications, restrict our ability to, among other things: make restricted payments; incur additional debt or issue certain types of preferred stock; create or permit to exist certain liens; consolidate, merge or transfer all or substantially all of our assets; and enter into transactions with affiliates. In addition, if we sell certain assets (and generally do not use the proceeds of such sales for certain specified purposes) or experience specific kinds of changes in control, we must offer to repurchase all or a portion of the 9.875% notes. The offer price for the 9.875% notes in connection with an asset sale would be equal to 100% of the aggregate principal amount of the notes repurchased plus accrued and unpaid interest and liquidated damages, if any, on the notes repurchased to the date of purchase. The offer price for the 9.875% notes in connection with a change in control would be 101% of the aggregate principal amount of the notes repurchased plus accrued and unpaid interest and liquidated damages, if any, on the notes repurchased to the date of purchase. The 9.875% notes are also subject to certain cross-default provisions with the terms of our other indebtedness.

      As part of the refinancing, we obtained a new $715.0 million senior secured credit facility, referred to herein as the senior secured credit facility, which replaced the Old Senior Bank Credit Facility. Lehman Commercial Paper Inc. serves as administrative agent under the new facility, which is comprised of a $75.0 million revolving loan with a term of approximately four years, referred to herein as the Revolving Loan, a $75.0 million term loan with a term of approximately four years, referred to herein as the Term Loan A Facility, and a $565.0 million term loan with a term of approximately six years, referred to herein as the Term Loan B Facility. All borrowings under the senior secured credit facility initially bear interest at a base rate plus 2.5%, or LIBOR plus 3.5%, at our option. The applicable margin for the Revolving Loan and the Term Loan A Facility is subject to adjustment based on our leverage ratio. We are also required to pay a commitment fee on the difference between committed amounts and amounts actually utilized under the Revolving Loan equal to 0.50% per year subject to adjustment based on our leverage ratio.

      The Term Loan A Facility is repayable in quarterly installments, which commenced on June 30, 2002, in an aggregate principal amount for each year as follows: $15.0 million in year one, $18.0 million in year two, $21.0 million in year three, and $21.0 million in year four. The Term Loan B Facility is repayable in nominal quarterly installments of approximately $1.4 million, which commenced on June 30, 2002, for the first five years and in substantial quarterly installments during the final year.

      On January 17, 2003, after obtaining consent of the lenders under the senior secured credit facility, we purchased the Crowley County Correctional Facility, a 1,200-bed medium security adult male prison facility located in Olney Springs, Colorado, for a purchase price of approximately $47.5 million. We

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financed the purchase price through $30.0 million in borrowings under the senior secured credit facility pursuant to an expansion of the Term Loan B Facility, with the balance of the purchase price satisfied with cash on hand. As a result of the expansion of the Term Loan B Facility, the quarterly principal installments required under its terms were increased by $75,000, with the remaining balance due in the final year.

      Prepayments of loans outstanding under the senior secured credit facility are permitted at any time without premium or penalty, upon the giving of proper notice. In addition, we are required to prepay amounts outstanding under the senior secured credit facility in an amount equal to: (i) 50% of the net cash proceeds from any sale or issuance of our equity securities or any equity securities of our subsidiaries, subject to certain exceptions; (ii) 100% of the net cash proceeds from any incurrence of additional indebtedness (excluding certain permitted debt), subject to certain exceptions; (iii) 100% of the net cash proceeds from any sale or other disposition by us, or any of our subsidiaries, of any assets, subject to certain exclusions and reinvestment provisions and excluding certain dispositions in the ordinary course of business; and (iv) 50% of our “excess cash flow” (as such term is defined in the senior secured credit facility) for each fiscal year.

      The credit agreement governing the senior secured credit facility requires us to meet certain financial covenants, including, without limitation, a minimum fixed charge coverage ratio, a maximum leverage ratio and a minimum interest coverage ratio. In addition, the senior secured credit facility contains certain covenants which, among other things, limit the incurrence of additional indebtedness, investments, payment of dividends, transactions with affiliates, asset sales, acquisitions, capital expenditures, mergers and consolidations, prepayments and modifications of other indebtedness, liens and encumbrances and other matters customarily restricted in such agreements. In addition, the senior secured credit facility contains cross-default provisions with our other indebtedness.

      The loans and other obligations under the senior secured credit facility are guaranteed by each of our domestic subsidiaries. Our obligations under the senior secured credit facility and the guarantees are secured by: (i) a perfected first priority security interest in substantially all of our tangible and intangible assets and substantially all of the tangible and intangible assets of our subsidiaries; and (ii) a pledge of all of the capital stock of our domestic subsidiaries and 65% of the capital stock of certain of our foreign subsidiaries.

      Pursuant to the terms of the aforementioned tender offer and consent solicitation which expired on May 16, 2002, in connection with the refinancing, in May 2002, we redeemed approximately $89.2 million in aggregate principal amount of our 12% Senior Notes with proceeds from the issuance of the 9.875% notes. The notes were redeemed at a price of 110% of par, which included a 3% consent payment, plus accrued and unpaid interest to the payment date. In connection with the tender offer and consent solicitation, we received sufficient consents and amended the indenture governing the 12% Senior Notes to delete substantially all of the restrictive covenants and events of default contained therein.

      We are required to pay interest and principal upon maturity on the remaining 12% Senior Notes outstanding, in accordance with the original terms of such notes.

      In connection with the refinancing, we also terminated an interest rate swap agreement at a price of approximately $8.8 million. The swap agreement, which fixed LIBOR at 6.51% on outstanding balances of $325.0 million through its expiration on December 31, 2002, had been entered into in order to satisfy a requirement of the Old Senior Bank Credit Facility. In addition, in order to satisfy a requirement of the senior secured credit facility, we purchased an interest rate cap agreement, capping LIBOR at 5.0% on outstanding balances of $200.0 million through the expiration of the cap agreement on May 20, 2004, for a price of $1.0 million. The termination of the swap agreement and the purchase of the cap agreement were funded with cash on hand.

      As a result of the early extinguishment of the Old Senior Bank Credit Facility and the redemption of substantially all of our 12% Senior Notes, we recorded an extraordinary loss of approximately $36.7 million during the second quarter of 2002, which included the write-off of existing deferred loan costs, certain

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bank fees paid, premiums paid to redeem the 12% Senior Notes, and certain other costs associated with the refinancing.
 
Operating Activities

      Our net cash provided by operating activities for the year ended December 31, 2002, was $101.4 million, compared with $92.8 million for the same period in the prior year. (As further discussed under “Results of Operations”, we do not believe the cash flows for the year ended December 31, 2000, are comparable to the cash flows for the years ended December 31, 2001 or 2002.) Cash provided by operating activities represents the year to date net income or loss plus depreciation and amortization, changes in various components of working capital, adjustments for various non-cash charges, including primarily the cumulative effect of accounting change in 2002 and the change in fair value of the interest rate swap agreement, and the extraordinary charge related to the comprehensive refinancing completed on May 3, 2002. Income tax refunds of $30.6 million during the first quarter of 2001 and $32.2 million during the second quarter of 2002 contributed to the cash generated from operating activities in both years. As previously described herein, we also expect to receive an additional income tax refund of approximately $32.1 million during the second quarter of 2003. The increase in cash provided by operating activities was also due to a significant reduction in interest, primarily resulting from the pay-down of debt balances, the successful refinancing completed in May 2002, and due to lower market interest rates. These increases in cash provided by operating activities were partially offset by the payment of $52.2 million during the fourth quarter of 2002 in full satisfaction of the aforementioned settlement with the IRS with respect to our predecessor’s 1997 federal income tax return.

 
Investing Activities

      Our cash flow used in investing activities was $9.7 million for the year ended December 31, 2002, and was primarily attributable to capital expenditures during the period of $17.1 million, net of proceeds received from the sale of our interest in a juvenile facility located in Dallas, Texas, on June 28, 2002, for $4.3 million. Capital expenditures during 2002 included $4.8 million for development and redevelopment activities, including primarily expenditures for our McRae Correctional Facility to meet specifications required by the BOP in connection with a new contract award, and $12.3 million for maintenance capital expenditures incurred for the betterment, renewal or significant repairs that extended the useful life of our correctional facilities, or for new furniture, fixtures and equipment. In addition, we received refunds of restricted cash totaling approximately $5.2 million primarily used as collateral for workers’ compensation claims. We elected to post letters of credit from the sub-facility under the revolving portion of our senior secured credit facility to replace the cash collateral on such claims. Our cash flow provided by investing activities was $130.9 million for the year ended December 31, 2001, and was primarily attributable to the proceeds received from the sales of our Mountain View Correctional Facility, located in Spruce Pine, North Carolina, on March 16, 2001, our Agecroft facility, located in Salford, England, on April 10, 2001, our Pamlico Correctional Facility, located in Bayboro, North Carolina, on June 28, 2001, and our Southern Nevada Women’s Correctional Center, located in Las Vegas, Nevada, on October 3, 2001.

 
Financing Activities

      Our cash flow used in financing activities was $72.6 million for the year ended December 31, 2002, compared with $198.3 million for the same period in the prior year. Proceeds from the issuance on May 3, 2002 of the 9.875% notes and the senior secured credit facility were largely offset by the repayment of the Old Senior Bank Credit Facility and the redemption of substantially all of the 12% Senior Notes. However, we also paid debt issuance costs of $37.5 million in connection with this comprehensive refinancing, and an additional $8.8 million to terminate the interest rate swap agreement. Further, during the first quarter of 2002, we paid cash dividends of $12.9 million on our series A preferred stock for the fourth quarter of 2001 and for all five quarters then in arrears, as permitted under the terms of an amendment to our Old Senior Bank Credit Facility obtained in December 2001. Additionally, we paid $2.2 million in cash dividends on our series A preferred stock during each of the second, third and fourth

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quarters of 2002. Net payments on debt during 2001 totaled $189.0 million and primarily consisted of the net cash proceeds received from the sale of the Mountain View Correctional Facility, the Agecroft facility, the Pamlico Correctional Facility, and the Southern Nevada Women’s Correctional Center that were immediately applied to amounts outstanding under the Old Senior Bank Credit Facility. Net payments on debt also included a lump sum payment of $35.0 million on the Old Senior Bank Credit Facility with cash on hand.

Contractual Obligations

The following schedule summarizes our contractual cash obligations by the indicated period as of December 31, 2002 (in thousands):

                                                         
Payments Due by Year Ended December 31,

2003 2004 2005 2006 2007 Thereafter Total







Long-term debt
  $ 23,054     $ 26,068     $ 56,834     $ 21,841     $ 377,138     $ 451,024     $ 955,959  
Contingent interest
    17,064                               16,726       33,790  
Operating leases
    1,260       638       91                         1,989  
     
     
     
     
     
     
     
 
Total Contractual Cash Obligations
  $ 41,378     $ 26,706     $ 56,925     $ 21,841     $ 377,138     $ 467,750     $ 991,738  
     
     
     
     
     
     
     
 

      As the result of a default during 2000 under the terms of our $40.0 million 10% convertible subordinated notes, we are required to pay the holders of the notes contingent interest sufficient to permit the holders to receive a 15.5% rate of return on such notes, retroactive to the date of issuance of the notes. The contingent interest is payable upon each of December 31, 2003 and upon repayment of the notes, unless the holders of the notes elect to convert the notes into common stock under the terms of the note purchase agreement or unless the price of our common stock meets or exceed a “target price” as defined in the note purchase agreement. As contemplated hereby, the holders of the $40.0 million 10% convertible subordinated notes will convert the notes into 3,362,899 shares of common stock which will be purchased by us. See “The Transactions — Purchase of Shares of Common Stock Issuable Upon Conversion of the MDP Notes.”

      We had $17.3 million of letters of credit outstanding at December 31, 2002 primarily to support our requirement to repay fees under our workers’ compensation plan in the event we do not repay the fees due in accordance with the terms of the plan. The letters of credit are renewable annually. The Company did not have any draws under any outstanding letters of credit during 2002, 2001 or 2000.

Recent Accounting Pronouncements

      Effective January 1, 2002, we adopted SFAS 142, which establishes new accounting and reporting requirements for goodwill and other intangible assets. Under SFAS 142, all goodwill amortization ceased effective January 1, 2002 and goodwill attributable to each of our reporting units was tested for impairment by comparing the fair value of each reporting unit with its carrying value. Fair value was determined using a collaboration of various common valuation techniques, including market multiples, discounted cash flows, and replacement cost methods. These impairment tests are required to be performed at adoption of SFAS 142 and at least annually thereafter. On an ongoing basis (absent any impairment indicators), we expect to perform our impairment tests during our fourth quarter, in connection with our annual budgeting process.

      Based on our initial impairment tests, we recognized an impairment of $80.3 million to write-off the carrying value of goodwill associated with our locations included in the owned and managed facilities during the first quarter of 2002. This goodwill was established in connection with the acquisition of Operating Company. The remaining goodwill, which is associated with the facilities we manage but do not own, was deemed to be not impaired, and remains recorded on the balance sheet. This remaining goodwill was established in connection with the acquisitions of PMSI and JJFMSI. The implied fair value of

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goodwill of the locations included in the owned and managed reporting segment did not support the carrying value of any goodwill, primarily due to the highly leveraged capital structure. No impairment of goodwill allocated to the locations included in the managed-only reporting segment was deemed necessary, primarily because of the relatively minimal capital expenditure requirements, and therefore indebtedness, in connection with obtaining such management contracts. Under SFAS 142, the impairment recognized at adoption of the new rules was reflected as a cumulative effect of accounting change in our statement of operations for the first quarter of 2002. Impairment adjustments recognized after adoption, if any, are required to be recognized as operating expenses.

      In August 2001, the Financial Accounting Standards Board, or FASB, issued SFAS 144. SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS 121, and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring Events and Transactions,” or APB 30, for the disposal of a segment of a business (as previously defined in that Opinion). SFAS 144 retains the fundamental provisions of SFAS 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with SFAS 121. Unlike SFAS 121, however, an impairment assessment under SFAS 144 will never result in a write-down of goodwill. Rather, goodwill is evaluated for impairment under SFAS 142. SFAS 144 also broadens the scope of defining discontinued operations. The provisions of SFAS 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. Under the provisions of SFAS 144, the identification and classification of a facility as held for sale, or the termination of any of our management contracts for a managed-only facility, by expiration or otherwise, would result in the classification of the operating results of such facility, net of taxes, as a discontinued operation, so long as the financial results can be clearly identified, and so long as we do not have any significant continuing involvement in the operations of the component after the disposal or termination transaction. We adopted SFAS 144 on January 1, 2002.

      Due to the sale of our interest in a juvenile facility during the second quarter of 2002, as well as the termination of our management contracts during the second quarter of 2002 for the Ponce Young Adult Correctional Facility and the Ponce Adult Correctional Facility and the termination of our management contract during the third quarter of 2002 for the Guayama Correctional Center, in accordance with SFAS 144, the operations of these facilities, net of taxes, have been reported as discontinued operations on our statements of operations for the years ended December 31, 2002 and 2001. The reclassification was not made to the statement of operations for the year ended December 31, 2000, as the discontinued operations are not material in that year, and because the 2000 financial statements are not comparable to the 2001 and 2002 financial statements, as previously discussed under “Results of Operations” herein.

      In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,” or SFAS 145. SFAS 145 rescinds Statement of Financial Accounting Standards No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. As a result, the criteria in APB 30 will now be used to classify those gains and losses. SFAS 145 amends Statement of Financial Accounting Standards No. 13, “Accounting for Leases,” to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. SFAS 145 also makes technical corrections to existing pronouncements. While those corrections are not substantive in nature, in some instances, they may change accounting practice. The provisions of SFAS 145 are effective for financial statements issued for fiscal years beginning after May 15, 2002, and interim periods within those fiscal years.

      During the second quarter of 2002, prior to the required adoption of SFAS 145, we reported an extraordinary charge of approximately $36.7 million associated with the refinancing of our senior debt in

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May 2002. Under SFAS 145, any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods that does not meet the criteria in APB 30 for classification as an extraordinary item shall be reclassified. We plan to adopt SFAS 145 on January 1, 2003. Accordingly, in financial reporting periods after adoption, the extraordinary charge reported in the second quarter of 2002 will be reclassified.

      In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” or SFAS 146. SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring),” or Issue 94-3. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as generally defined in Issue 94-3 was recognized at the date of an entity’s commitment to an exit plan. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. Adoption of SFAS 146 is not expected to have a material impact on our financial statements.

      In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” or FIN 45. FIN 45 requires that the guarantor recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing such guarantees. FIN 45 also requires additional disclosure requirements about the guarantor’s obligations under certain guarantees that it has issued. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002 and the disclosure requirements are effective for financial statement periods ending after December 15, 2002. Through December 31, 2002, adoption of FIN 45 has not had a material effect on our financial statements. The future effect of FIN 45 on our financial statements will depend on whether we enter into new, or modify existing, guarantees.

      On December 31, 2002, the FASB issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” or SFAS 148. SFAS 148 amends FASB Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” or SFAS 123, to provide alternative methods of transition to SFAS 123’s fair value method of accounting for stock-based employee compensation. SFAS 148 also amends the disclosure provisions of SFAS 123 and Accounting Principles Board, or APB, Opinion No. 28, “Interim Financial Reporting,” to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. While SFAS 148 does not amend SFAS 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of SFAS 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of SFAS 123 or the intrinsic value method of APB No. 25, “Accounting for Stock Issued to Employees.”

Inflation

      We do not believe that inflation has had or will have a direct adverse effect on our operations. Many of our management contracts include provisions for inflationary indexing, which mitigates an adverse impact of inflation on net income. However, a substantial increase in personnel costs, workers’ compensation or food and medical expenses could have an adverse impact on our results of operations in the future to the extent that these expenses increase at a faster pace than the per diem or fixed rates we receive for our management services.

Quantitative and Qualitative Disclosures About Market Risk

      Our primary market risk exposures are to changes in U.S. interest rates and fluctuations in foreign currency exchange rates between the U.S. dollar and the British pound. We are exposed to market risk

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related to our senior secured credit facility and certain other indebtedness. The interest on the senior secured credit facility and such other indebtedness is subject to fluctuations in the market. We were also exposed to market risk related to our Old Senior Bank Credit Facility prior to its refinancing in May 2002. If the interest rate for our outstanding indebtedness under the Old Senior Bank Credit Facility and the senior secured credit facility was 100 basis points higher or lower during the years ended December 31, 2002, 2001 and 2000, our interest expense, net of amounts capitalized, would have been increased or decreased by approximately $5.9 million, $5.5 million and $6.0 million, respectively, including the effects of our interest rate swap arrangements discussed below.

      As of December 31, 2002, we had outstanding $250.0 million of senior notes with a fixed interest rate of 9.875%, $10.8 million of senior notes with a fixed interest rate of 12%, $40.0 million of convertible subordinated notes with a fixed interest rate of 10%, $30.0 million of convertible subordinated notes with a fixed interest rate of 8%, $107.5 million of series A preferred stock with a fixed dividend rate of 8% and $107.8 million of series B preferred stock with a fixed dividend rate of 12%. Because the interest and dividend rates with respect to these instruments are fixed, a hypothetical 10% increase or decrease in market interest rates would not have a material impact on our financial statements.

      The Old Senior Bank Credit Facility required us to hedge $325.0 million of our floating rate debt. We entered into certain swap arrangements fixing LIBOR at 6.51% (prior to the applicable spread) on outstanding balances of at least $325.0 million through December 31, 2002. The difference between the floating rate and the swap rate was recognized in interest expense each period. Effective January 1, 2001, the change in the fair value of the swap agreement from period to period was reflected in earnings and was largely due to changing interest rates and the reduction in the remaining life of the swap during the reporting period.

      In May 2002, we terminated the interest rate swap agreement at a price of approximately $8.8 million. In addition, in order to satisfy a requirement of the senior secured credit facility we purchased an interest rate cap agreement, capping LIBOR at 5.0% (prior to the applicable spread) on outstanding balances of $200.0 million through the expiration of the cap agreement on May 20, 2004, for a price of $1.0 million.

      We may, from time to time, invest our 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 twelve months. While these investments are subject to interest rate risk and will decline in value if market interest rates increase, a hypothetical 10% increase or decrease in market interest rates would not materially affect the value of these investments.

      Our exposure to foreign currency exchange rate risk relates to our construction, development and leasing of our Agecroft facility located in Salford, England, which was sold in April 2001. We extended a working capital loan to the operator of this facility. Such payments to us are denominated in British pounds rather than the U.S. dollar. As a result, we bear the risk of fluctuations in the relative exchange rate between the British pound and the U.S. dollar. At December 31, 2002, the receivables due us and denominated in British pounds totaled 4.3 million British pounds. A hypothetical 10% increase in the relative exchange rate would have resulted in an increase of $0.7 million in the value of these receivables and a corresponding unrealized foreign currency transaction gain, and a hypothetical 10% decrease in the relative exchange rate would have resulted in a decrease of $0.7 million in the value of these receivables and a corresponding unrealized foreign currency transaction loss.

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BUSINESS

General

      We are the nation’s largest owner and operator of privatized correctional and detention facilities and one of the largest prison operators in the United States behind only the federal government and four states. We own 41 correctional, detention and juvenile facilities, three of which we lease to other operators, and one additional facility which is not yet in operation. We currently operate 59 facilities including 38 facilities that we own, with a total design capacity of approximately 59,000 beds in 20 states and the District of Columbia.

      We specialize in owning, operating and managing prisons and other correctional facilities and providing inmate residential and prisoner transaction services for governmental agencies. In addition to providing the fundamental residential services relating to inmates, our facilities offer a variety of rehabilitation and educational programs, including basic education, religious services, life skills and employment training and substance abuse treatment. These services are intended to help reduce recidivism and to prepare inmates for their successful reentry into society upon their release. We also provide health care (including medical, dental and psychiatric services), food services and work and recreational programs.

Operations

Management and Operation of Facilities

      Our customers consist of local, state and federal correctional and detention authorities. For the year ended December 31, 2002, federal correctional and detention authorities represented approximately 32% of our total revenue. Federal correctional and detention authorities consist of the BOP, the USMS, and the INS. Effective March 1, 2003, the INS was integrated with the Department of Homeland Security, and is now known as the Bureau of Immigration and Customs Enforcement.

      Our management services contracts typically have terms of one to five years, and contain multiple renewal options. Most of our facility contracts also contain clauses that allow the government agency to terminate the contract at any time without cause, and our contracts are generally subject to annual or bi-annual legislative appropriation of funds.

      We are compensated for operating and managing facilities at an inmate per diem rate based upon actual or minimum guaranteed occupancy levels. Occupancy rates for a particular facility are typically low when first opened or when expansions are first available. However, beyond the start-up period, which typically ranges from 90 to 180 days, the occupancy rate tends to stabilize. For 2002 and 2001, the average compensated occupancy, based on rated capacity, of our facilities was 89.6% and 88.4% respectively, for all of the facilities we owned or managed exclusively of those discontinued. From a capacity perspective, we currently have two facilities that are substantially vacant and provide us with approximately 3,000 available beds. These beds can be brought on-line with only minimal capital outlays.

      Our contracts generally require us to operate each facility in accordance with all applicable laws and regulations. We are required by our contracts to maintain certain levels of insurance coverage for general liability, workers’ compensation, vehicle liability and property loss or damage. We are also required to indemnify the contracting agencies for claims and costs arising out of our operations and, in certain cases, to maintain performance bonds and other collateral requirements. Approximately 80% of the facilities we operate are accredited by the American Correctional Association Commission on Accreditation. The American Correctional Association, or the ACA, is an independent organization comprised of professionals in the corrections industry that establish standards by which a correctional institution may gain accreditation.

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Operating Procedures

      Pursuant to the terms of our management contracts, we are responsible for the overall operation of our facilities, including staff recruitment, general administration of the facilities, facility maintenance, security and supervision of the offenders. We also provide a variety of rehabilitative and educational programs at our facilities. Inmates at most facilities we manage may receive basic education through academic programs designed to improve inmate literacy levels and the opportunity to acquire General Education Development, or GED, certificates. We also offer vocational training to inmates who lack marketable job skills. In addition, we offer life skills transition planning programs that provide inmates with job search skills, health education, financial responsibility training, parenting and other skills associated with becoming productive citizens. At several of our facilities, we also offer counseling, education and/or treatment to inmates with alcohol and drug abuse problems through our LifeLineSM program. We believe these programs reduce recidivism.

      We operate each facility in accordance with company-wide policies and procedures and the standards and guidelines established by the ACA. The ACA believes its standards safeguard the life, health and safety of offenders and personnel and, accordingly, these standards are the basis of the accreditation process and define policies and procedures for operating programs. The ACA standards, which are the industry’s most widely accepted correctional standards, describe specific objectives to be accomplished and cover such areas as administration, personnel and staff training, security, medical and health care, food services, inmate supervision and physical plant requirements. We have sought and received ACA accreditation for 47 of the facilities we currently manage, and we intend to apply for ACA accreditation for all of our eligible facilities. The accreditation process is usually completed 18 to 24 months after a facility is opened.

      We devote considerable resources to monitoring compliance with contractual and other requirements and to maintain a high level of quality assurance at each facility through a system of formal reporting, corporate oversight, site reviews and inspection by on-site facility administrators.

      Under our management contracts, we usually provide the contracting government agency with the services, personnel and material necessary for the operation, maintenance and security of the facility and the custody of inmates. We offer full logistical support to the facilities we manage, including security, health care services, transportation, building and ground maintenance, education, treatment and counseling services and food services.

      Our operations department, in conjunction with our legal department, supervises compliance of each facility with operational standards contained in the various management contracts as well as those of professional and government agencies. These responsibilities include developing specific policies and procedures manuals, monitoring all management contracts, ensuring compliance with applicable labor and affirmative action standards, training and administration of personnel, purchasing supplies and developing educational, vocational, counseling and life skills inmate programs. We provide meals for inmates at the facilities we operate in accordance with regulatory, client and nutritional requirements. These catering responsibilities include hiring and training staff, monitoring food operations, purchasing food and supplies, and maintaining equipment, as well as adhering to all applicable safety and nutritional standards and codes.

Facility Portfolio

General

      Our facilities 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. Multi-security facilities are facilities with various areas encompassing either minimum, medium or maximum security. Non-secure facilities are

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juvenile facilities having open housing that inhibit movement by their design. Secure facilities are juvenile facilities having cells, rooms, or dormitories, a secure perimeter and some form of external patrol.

      Our facilities can also be classified according to their primary function. The primary functional categories are:

  •  Correctional Facilities. Correctional facilities house and provide contractually agreed upon programs and services to sentenced adult prisoners, typically prisoners on whom a sentence in excess of one year has been imposed.
 
  •  Detention Facilities. Detention facilities house and provide contractually agreed upon programs and services to prisoners being detained by the INS, prisoners who are awaiting trial who have been charged with violations of federal criminal law who are in the custody of the USMS or state criminal law, and prisoners who have been convicted of crimes and on whom a sentence of one year or less has been imposed.
 
  •  Juvenile Facilities. Juvenile facilities house and provide contractually agreed upon programs and services to juveniles, typically defined by applicable federal or state law as being persons below the age of 18, who have been determined to be delinquents by a juvenile court and who have been committed for an indeterminate period of time but who typically remain confined for a period of six months or less.
 
  •  Leased Facilities. Leased facilities are facilities that are within one of the above categories and that we own but do not manage.

Facilities and Facility Management Contracts

      We own 41 correctional, detention and juvenile facilities in 14 states and the District of Columbia, three of which we lease to other operators, and one additional facility which is not yet in operation. We also own two corporate office buildings. We have pledged each of the properties we own to secure borrowings under our senior secured credit facility. We lease one of these facilities to a government agency and two of these facilities to private operators. Additionally, we currently manage 21 correctional and detention facilities owned by government agencies. The following table sets forth all of the facilities which we currently (i) own and manage, (ii) own, but are leased to another operator, and (iii) manage but are owned by a government authority. The table includes certain information regarding each facility, including the term of the primary management contract related to such facility, or, in the case of facilities we own but lease to another operator, the term of such lease. We have a number of management contracts and leases that expire in 2003 (or have expired) with no remaining renewal options. We continue to operate, and expect to continue to manage or lease these facilities, although we can provide no assurance that we will maintain our contracts to manage or lease these facilities.

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Remaining
Design Renewal
Primary Capacity Security Facility Options
Facility Name Customer (A) Level Type(B) Term (C)

Owned and Managed Facilities:
                                       

Central Arizona Detention Center Florence, Arizona
  USMS     2,304       Multi       Detention     May 2003      

Eloy Detention Center
Eloy, Arizona
  BOP, INS     1,500       Medium       Detention     February 2004     (5) 1 year  

Florence Correctional Center
Florence, Arizona
  State of Alaska     1,600       Medium       Correctional     June 2003      

California Correctional Center
California City, California
  BOP     2,304       Medium       Correctional     September 2003     (7) 1 year  

San Diego Correctional Facility(D)
San Diego, California
  INS     1,232     Minimum/ Medium     Detention     December 2003     (1) 1 year  

Bent County Correctional Facility
Las Animas, Colorado
  State of Colorado     700       Medium       Correctional     June 2003     (1) 1 year  

Crowley County Correctional Facility
Olney Springs, Colorado
  State of Colorado     1,200       Medium       Correctional     June 2003     (1) 1 year  

Huerfano County Correctional Center(E)
Walsenburg, Colorado
  State of Colorado     752       Medium       Correctional     June 2003     (1) 1 year  

Kit Carson Correctional Center
Burlington, Colorado
  State of Colorado     768       Medium       Correctional     June 2003     (1) 1 year  

Coffee Correctional Facility(F)
Nicholls, Georgia
  State of Georgia     1,524       Medium       Correctional     June 2003     (16) 1  year  

McRae Correctional Facility
McRae, Georgia
  BOP     1,524       Minimum       Correctional     December 2005     (7) 1 year  

Wheeler Correctional Facility(F)
Alamo, Georgia
  State of Georgia     1,524       Medium       Correctional     June 2003     (16) 1  year  

Leavenworth Detention Center
Leavenworth, Kansas
  USMS     483       Maximum       Detention     December 2003      

Lee Adjustment Center
Beattyville, Kentucky
  Commonwealth of Kentucky     748     Minimum/ Medium     Correctional     May 2003     (3) 2 year  

Marion Adjustment Center
St. Mary, Kentucky
  Commonwealth of Kentucky     790       Minimum       Correctional     December 2003      

Otter Creek Correctional Center
Wheelwright, Kentucky
  State of Indiana     656     Minimum/ Medium     Correctional     January 2003      

Prairie Correctional Facility
Appleton, Minnesota
  State of Wisconsin     1,338       Medium       Correctional     December 2005     (2) 1 year  

Tallahatchie County Correctional Facility(G)
Tutweiler, Mississippi
  Tallahatchie County, Mississippi     1,104       Medium       Correctional     May 2003     3 year  

Crossroads Correctional Center(H)
Shelby, Montana
  State of Montana     512       Multi       Correctional     August 2003     (8) 2 year  

Cibola County Corrections Center
Milan, New Mexico
  BOP     1,072       Medium       Correctional     September 2003     (7) 1 year  

New Mexico Women’s Correctional Facility
Grants, New Mexico
  State of
New Mexico
    596       Multi       Correctional     June 2003     (2) 1 year  

Torrance County Detention Facility
Estancia, New Mexico
  USMS     910       Multi       Detention     Indefinite      

Northeast Ohio Correctional Center(I) Youngstown, Ohio
      2,016       Medium       Correctional          

Cimarron Correctional Facility(J)
Cushing, Oklahoma
  State of Oklahoma     960       Medium       Correctional     June 2003      

Davis Correctional Facility(J)
Holdenville, Oklahoma
  State of Oklahoma     960       Medium       Correctional     June 2003      

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Remaining
Design Renewal
Primary Capacity Security Facility Options
Facility Name Customer (A) Level Type(B) Term (C)

Diamondback Correctional Facility
Watonga, Oklahoma
  State of Oklahoma     2,160       Medium       Correctional     June 2003      

North Fork Correctional Facility
Sayre, Oklahoma
  State of Wisconsin     1,440       Medium       Correctional     December 2005     (2) 1 year  

West Tennessee Detention Facility
Mason, Tennessee
  USMS     600       Multi       Detention     February 2004     (3) 1 year  

Shelby Training Center(K)
Memphis, Tennessee
  Shelby County, Tennessee     200       Secure       Juvenile     April 2015      

Whiteville Correctional Facility(L)
Whiteville, Tennessee
  State of Wisconsin     1,536       Medium       Correctional     December 2005     (2) 1 year  

Bridgeport Pre-Parole Transfer Facility
Bridgeport, Texas
  State of Texas     200       Medium       Correctional     August 2003      

Eden Detention Center
Eden, Texas
  BOP     1,225       Medium       Correctional     April 2004      

Houston Processing Center
Houston, Texas
  INS     411       Medium       Detention     September 2003      

Laredo Processing Center
Laredo, Texas
  INS     258     Minimum/ Medium     Detention     March 2004     (2) 3 month  

Webb County Detention Center
Laredo, Texas
  USMS     480       Medium       Detention     August 2003      

Mineral Wells Pre-Parole Transfer Facility
Mineral Wells, Texas
  State of Texas     2,103       Minimum       Correctional     August 2003      

T. Don Hutto Correctional Center
Taylor, Texas
  Williamson County, Texas     480       Medium       Correctional     May 2003     (1) 2 year  

D.C. Correctional Treatment Facility(M)
Washington, D.C.
  District of Columbia     866       Medium       Detention     March 2017      

Managed Only Facilities:
                                       

Bay Correctional Facility
Panama City, Florida
  State of Florida     750       Medium       Correctional     June 2003     (1) 2 year  

Bay County Jail and Annex
Panama City, Florida
  Bay County, Florida     677       Multi       Detention     September 2006      

Citrus County Detention Facility
Lecanto, Florida
  Citrus County, Florida     400       Multi       Detention     September 2005     (1) 5 year  

Gadsden Correctional Institution
Quincy, Florida
  State of Florida     896     Minimum/ Medium     Correctional     June 2003      

Hernando County Jail
Brooksville, Florida
  Hernando County, Florida     302       Multi       Detention     October 2010      

Lake City Correctional Facility
Lake City, Florida
  State of Florida     350       Secure       Correctional     June 2003     (1) 2 year  

Idaho Correctional Center
Boise, Idaho
  State of Idaho     1,270     Minimum/ Medium     Correctional     June 2005      

Marion County Jail
Indianapolis, Indiana
  Marion County, Indiana     670       Multi       Detention     November 2004      

Winn Correctional Center
Winnfield, Louisiana
  State of Louisiana     1,538     Medium/ Maximum     Correctional     June 2003     (1) 2 year  

Wilkinson County Correctional Facility Woodville, Mississippi
  State of Mississippi     1,000       Medium       Correctional     January 2004     (1) 2 year  

Southern Nevada Women’s Correctional Center
Las Vegas, Nevada
  State of Nevada     500       Multi       Correctional     October 2004   3 year indefinite

Elizabeth Detention Center
Elizabeth, New Jersey
  INS     300       Minimum       Detention     January 2004     (1) 1 year  

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Remaining
Design Renewal
Primary Capacity Security Facility Options
Facility Name Customer (A) Level Type(B) Term (C)

David L. Moss Criminal Justice Center
Tulsa, Oklahoma
  Tulsa County, Oklahoma     1,440       Multi       Detention     June 2005     (2) 1 year  

Silverdale Facilities
Chattanooga, Tennessee
  Hamilton County, Tennessee     576       Multi       Detention     September 2004     (3) 4 year  

South Central Correctional Center
Clifton, Tennessee
  State of Tennessee     1,506       Medium       Correctional     June 2005     (1) 2 year  

Tall Trees
Memphis, Tennessee
  State of Tennessee     63       Non-secure       Juvenile     June 2003      

Metro-Davidson County Detention Facility
Nashville, Tennessee
  Davidson County, Tennessee     1,092       Multi       Detention     June 2003      

Hardeman County Correctional Facility Whiteville, Tennessee
  State of Tennessee     2,016       Medium       Correctional     July 2005     (1) 2 year  

Bartlett State Jail
Bartlett, Texas
  State of Texas     962     Minimum/ Medium     Correctional     August 2003      

Liberty County Jail/ Juvenile Center
Liberty, Texas
  USMS     380       Multi       Detention     January 2005     (2) 1 year  

Sanders Estes Unit
Venus, Texas
  State of Texas     1,000     Minimum/ Medium     Correctional     August 2003      

Leased Facilities:
                                       

Leo Chesney Correctional Center
Live Oak, California
  Cornell Corrections     240       Minimum       Owned/ Leased     June 2003      

Queensgate Correctional Facility
Cincinnati, Ohio
  Hamilton County, Ohio     850       Medium       Owned/ Leased     February 2004     (3) 1 year  

Community Education Partners(N)
Houston, Texas
  Community Education Partners           Non-secure       Owned/ Leased     June 2008     (3) 5 year  

 
(A) Design capacity measures the number of beds, and accordingly, the number of inmates each facility is designed to accommodate. Facilities housing detainees on a short term basis may exceed the original intended design capacity for sentenced inmates due to the lower level of services required by detainees in custody for a brief period. We believe design capacity is an appropriate measure for evaluating prison operations, because the revenue generated by each facility is based on a per diem or monthly rate per inmate housed at the facility paid by the corresponding contracting governmental entity.
 
(B) We manage numerous facilities that have more than a single function (e.g., housing both long-term sentenced adult prisoners and pre-trial detainees). The primary functional categories into which facility types are identified was determined by the relative size of prisoner populations in a particular facility on December 31, 2002. If, for example, a 1,000-bed facility housed 900 adult prisoners with sentences in excess of one year and 100 pre-trial detainees, the primary functional category to which it would be assigned would be that of correctional facilities and not detention facilities. It should be understood that the primary functional category to which multi-user facilities are assigned may change from time to time.
 
(C) Remaining renewal options represents the number of renewal options, if applicable, and the remaining term of each option renewal.
 
(D) The facility is subject to a ground lease with the County of San Diego whereby the initial lease term is 18 years from the commencement of the contract, as defined. The County has the right to buy out all, or designated portions of, the premises at various times prior to the expiration of the term at a price generally equal to the cost of the premises, or the designated portion of the premises, less an allowance for amortization over a 20-year period. Upon expiration of the lease, ownership of the facility automatically reverts to the County of San Diego.

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(E) 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 contract at a price generally equal to the cost of the facility plus 80% of the percentage increase in the Consumer Price Index, cumulated annually.
 
(F) The facility is subject to a purchase option held by the Georgia Department of Corrections, or 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 contract between us and the GDOC.
 
(G) The facility is subject to a purchase option held by the Tallahatchie County Correctional Authority which grants Tallahatchie County Correctional Authority the right to purchase the facility at any time during the contract at a price generally equal to the cost of the premises less an allowance for amortization over a 20-year period. This facility is substantially vacant.
 
(H) The State of Montana has an option to purchase the facility at fair market value generally at any time during the term of the contract with us.
 
(I) All inmates were transferred out of this facility during 2001 due to a new law that mandated that the BOP assume jurisdiction of all District of Columbia offenders under the custody of the BOP by the end of 2001.
 
(J) The facility is subject to a purchase option held by the Oklahoma Department of Corrections, or ODC, which grants the ODC the right to purchase the facility at its fair market value at any time.
 
(K) Upon the conclusion of the thirty-year lease with Shelby County, Tennessee, the facility will become the property of Shelby County. Prior to such time, if the County terminates the lease without cause, breaches the lease or the State fails to fund the contract, we may purchase the property for $150,000. If we terminate the lease without cause, or breach the contract, we will be required to purchase the property for its fair market value as agreed to by the County and us.
 
(L) The State of Tennessee has the option to purchase the facility in the event of our bankruptcy, or upon an operational breach, as defined, at a price equal to the book value of the facility, as defined.
 
(M) The District of Columbia has the right to purchase the facility at any time during the term of the contract at a price generally equal to the present value of the remaining lease payments for the premises. Upon expiration of the lease, ownership of the facility automatically reverts to the District of Columbia.
 
(N) The 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.

Facility under Construction or Development

      In addition to owning and/or managing the facilities listed in the preceding table, we own the Stewart County Detention Center located in Stewart County, Georgia. The 297,550 square foot medium security facility will have a design capacity of 1,524 beds and is partially complete. We estimate that the facility could be completed with approximately $20.0 million of capital expenditures. At this time, there are no plans to complete this project.

Business Development

General

      We are currently the nation’s largest provider of outsourced correctional management services. We manage approximately 50% of all beds under contract with private operators of correctional and detention facilities in the United States.

      Under the direction of our business development department and our senior management and with the aid, where appropriate, of certain independent consultants, we market our services to government agencies responsible for federal, state and local correctional facilities in the United States. Recently, the industry

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has experienced greater opportunities at the federal level, as needs are increasing within the BOP, the USMS and the INS. The BOP and USMS were our only customers that accounted for 10.0% or more of our total revenue in 2002, generating 14% and 11%, respectively, of total revenue in 2002 and 13% and 9%, respectively in 2001. Contracts at the federal level generally offer more favorable contract terms. For example, many federal contracts contain “take-or-pay” clauses that guarantee us a certain percentage of management revenue, regardless of occupancy levels.

      We believe that we can further develop our business by, among other things:

  •  maintaining our existing customer relationships and continuing to fill existing beds within our facilities;
 
  •  enhancing the terms of our existing contracts; and
 
  •  establishing relationships with new customers who have either previously not outsourced their correctional management needs or have utilized other private enterprises.

      We generally receive inquiries from or on behalf of government agencies that are considering outsourcing the management of certain facilities or that have already decided to contract with private enterprise. When we receive such an inquiry, we determine whether there is an existing need for our services and whether the legal and political climate in which the inquiring party operates is conducive to serious consideration of outsourcing. Based on the findings, an initial cost analysis is conducted to further determine project feasibility.

      We pursue our business opportunities primarily through RFPs, and Request for Qualifications, or RFQs. RFPs and RFQs are issued by government agencies and are solicited for bid.

      Generally, government agencies responsible for correctional and detention services procure goods and services through RFPs and RFQs. Most of our activities in the area of securing new business are in the form of responding to RFPs. As part of our process of responding to RFPs, members of our management team meet with the appropriate personnel from the agency making the request to best determine the agency’s needs. If the project fits within our strategy, we submit a written response to the RFP. A typical RFP requires bidders to provide detailed information, including, but not limited to, the service to be provided by the bidder, its experience and qualifications, and the price at which the bidder is willing to provide the services (which services may include the renovation, improvement or expansion of an existing facility or the planning, design and construction of a new facility). Based on the proposals received in response to an RFP, the agency will award a contract to the successful bidder. In addition to issuing formal RFPs, local jurisdictions may issue an RFQ. In the RFQ process, the requesting agency selects a firm believed to be most qualified to provide the requested services and then negotiates the terms of the contract with that firm, including the price at which its services are to be provided.

      In January 2003, we announced the hiring of Kenneth A. Bouldin as our chief development officer and an executive vice president. In his capacity as chief development officer, Mr. Bouldin will oversee all business development activities, including oversight of existing federal, state and local government corrections contracts. He will also lead efforts to expand our corrections management services, including our newly formed local customer relations department, which will target expanding business opportunities in the local jail markets, in addition to overseeing our federal customer relations, state customer relations, and marketing and communications departments. Mr. Bouldin’s background is further described under “Management” herein.

Competitive Strengths

      We believe that we have and will benefit from the following competitive business and operating strengths:

      We are the largest and most recognized private prison operator. As the owner of 41 correctional, detention and juvenile facilities and the manager of 59 facilities throughout the United States, we are the largest and the most recognized private prison operator in the United States. We manage approximately

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50% of all privately managed prison beds in the United States. We pioneered modern-day private prisons with a list of notable accomplishments, including being the first company to design, build and operate a private prison and the first company to manage a private maximum-security facility under a direct contract with the federal government.

      Available beds within our existing facilities provide us the opportunity to increase cash flow. We currently have two facilities, our Northeast Ohio Correctional Center and Tallahatchie County Correctional Facility, that are substantially vacant and provide us with approximately 3,000 available beds. We believe, depending on the customers’ needs, we can put these beds in operation with modest capital outlays. We also have an additional facility located in Stewart County, Georgia, which is partially complete. This facility could bring approximately 1,500 additional beds on-line with approximately $20.0 million of additional capital expenditures. As an alternative to filling these beds, we would consider selling these facilities. In addition to these three facilities, as of March 1, 2003, we had a total of nine facilities that had 200 or more beds available at each facility, which we believe provides further potential for increased cash flow.

      Our facilities generate revenues from a diverse, high quality customer base. We provide services under management contracts with a diverse base of state and federal agencies that generally have credit ratings of single-A or better. In addition, we have management contracts with approximately 50 different customers, with only two customers, the BOP and USMS, accounting for more than 10% of our total revenues during 2002. In addition, with average lengths of stay between three and five years, prison occupancy is relatively predictable and stable.

      Proven senior management team. Beginning in August 2000, we appointed a new senior management team. Our senior management team has accomplished a number of high priority company initiatives, including: (1) completing a restructuring of the company during the fourth quarter of 2000 in which we converted from a real estate investment trust to an operating company; (2) reducing our senior debt by over $189.0 million during 2001 and refinancing our senior indebtedness during the second quarter of 2002; (3) securing 3,300-bed contracts with the BOP at our California City, California and Cibola County, New Mexico facilities, and the 1,500-bed CAR II contract with the BOP, the three largest contracts in our history; (4) selling four assets for proceeds of $138.7 million; (5) settling all of our pending stockholder litigation, as well as several other material contingencies, including a dispute with the IRS regarding our predecessor’s 1997 federal income tax return; and (6) acquiring a 1,200-bed correctional facility in Olney Springs, Colorado, which expanded our bed capacity in a state with anticipated inmate growth over the next several years.

Business Strategy

      Our primary business strategy is to provide quality corrections services, increase occupancy and revenue, control operating costs and continue to reduce our debt, while maintaining our position as the leading owner, operator and manager of privatized correctional and detention facilities. We will also consider opportunities for growth, including potential acquisitions of businesses within our line of business and those that provide complementary services, provided we believe such opportunities will broaden our market and/or increase the services we can provide to our customers.

      We own and operate high quality correctional and detention facilities. Approximately 80% of our facilities are accredited by the ACA. The quality of our operations is further illustrated by the fact that for the three years ended December 31, 2001, we had an escape ratio at our adult prison facilities that was less than two-thirds of the national average for adult prisons (according to The 2001 Corrections Yearbook published by Criminal Justice Institute). We have experienced wardens managing our facilities, with an average of over 23 years of corrections experience and an average tenure of almost eight years with us.

      We are focused on increasing our occupancy rate. We are typically compensated based on the number of inmates held in our facilities. We are pursuing a number of initiatives intended to increase occupancy. We are in discussions with the federal government and a number of states, including states that have not previously outsourced their correctional management services, regarding the placement of

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additional inmates in our facilities. We also are focused on renewing and enhancing the terms of our existing contracts. Given our significant number of available beds, we believe we can increase operating cash flow from increased occupancy without incurring significant capital expenditures. Our primary goal is to obtain contracts to fill our existing inventory of vacant beds.

      In addition, with lender consent, we will consider the expansion of existing facilities or the development or purchase of new prison facilities that we believe have favorable investment returns and increase value to our stockholders. In considering the decision to add additional capacity, we consider a number of factors including the targeted customer’s inmate populations versus capacity and projections for future inmate growth. Our goal is to have a contract in place prior to commitment for the construction or purchase of additional beds.

      We intend to maintain effective cost controls. An important component of our strategy is to position our company as a cost effective, high quality provider of corrections management services. We are focused on improving operating performance and efficiency through the following key operating initiatives: (1) standardizing supply and service purchasing practices and usage; (2) outsourcing the purchase of food products and services nationwide; (3) improving inmate management, resource consumption and reporting procedures through the utilization of numerous technology initiatives; and (4) improving productivity and reducing employee turnover. We intend to continue to implement a wide variety of specialized services that address the unique needs of various segments of the inmate population. Because the facilities we operate differ with respect to security levels, ages, genders and cultures of inmates, we focus on the particular needs of an inmate population and tailor our services based on local conditions and our ability to provide services on a cost-effective basis.

      We intend to continue to improve our capital structure. In 2001, we reduced indebtedness by $189.0 million, and in 2002 we were able to reduce our cost of capital by refinancing our senior secured credit facility. The transactions contemplated in this prospectus supplement are intended to continue this effort by significantly reducing the after-tax dividend and interest obligations associated with our outstanding preferred stock and our 10% convertible subordinated notes, respectively. We believe our anticipated capital expenditures and the benefit of our net operating loss carryforwards will allow us to generate free cash flow that will enable us to continue reducing our debt.

The Corrections and Detention Industry

      Growth of the United States Prison Population. According to the Bureau of Justice Statistics, or the BJS, the United States prison population, along with incarceration rates, has increased since 1925, independent of economic cycles. The number of inmates housed in United States federal and state prisons and local jail facilities increased from 1,148,702 at December 31, 1990 to 2,019,234 at June 30, 2002. The average annual growth rate was 2.8% between June 2001 and June 2002. In this period, the average annual growth rate for the federal inmate population was 5.7%, while the average annual growth rates for state and local inmate populations were 1.0% and 5.4%, respectively.

      The average annual growth rate of the prison population in the United States between December 1995 and June 2002 was 3.8%. During this time period federal, state, and local inmate populations increased 8.1%, 3.0% and 4.3%, respectively. Federal agencies are collectively our largest customer and accounted for approximately 33% of our management revenues (when aggregating all of our federal contracts) for the year ended December 31, 2002.

      Prison Overcrowding. The significant growth of the prison population in the United States has led to overcrowding in the state and federal prison systems. At least 22 states and the federal prison system reported operating at 100% or more of their highest capacity in 2001, with the federal prison system operating at 31% above capacity at December 31, 2001.

      Further, we believe the moderation in growth rates for state and local inmate populations represent short-term declines resulting from budget difficulties currently experienced by state and local governments, which have utilized alternative sentencing, such as early release programs, parole and half-way houses, in

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an attempt to manage their budget constraints. However, we do not believe these temporary decisions represent long-term solutions to the prison overcrowding problem.

      Benefits of Privatization. The prisoner population housed in privately managed facilities in the United States at the end of June 2002 was 86,626. At June 30, 2002, 12.6% of all federal inmates and 5.2% of all state inmates were held in private facilities. Seven states and the District of Columbia, all of which are our customers, housed at least 20% of their prison population in private facilities as of June 30, 2002 — New Mexico (43%), the District of Columbia (27%), Montana (31%), Alaska (29%), Oklahoma (29%), Wyoming (28%), Hawaii (22%) and Idaho (22%).

      We believe the outsourcing of prison management services to private operators allows governments to manage increasing inmate populations while simultaneously controlling correctional costs and improving correctional services. The use of facilities owned and managed by private operators allows governments to expand prison capacity without incurring large capital commitments required to increase correctional capacity. In addition, contracting with a private operator allows governmental agencies to add beds without making significant capital investment or incurring new debt. We believe these advantages translate into significant cost savings for the government agencies.

      Continued Demand for Our Services. Despite the slower growth rate of the overall prison population and the state prison population in recent years, we believe that a number of factors will cause this growth rate, and the demand for private prison beds, to increase. As described above, there is a general shortage of available beds in United States correctional and detention facilities, particularly in the federal system. We expect this overcrowding to continue in the future as a result of stricter sentencing guidelines, longer prison sentences and prison terms for juvenile offenders, as well as demographic changes. In addition, state budgeting problems can be expected to result in a curtailment of the construction of new facilities, restricting the public supply of available beds. Industry reports indicate that inmates convicted of violent crimes generally serve approximately one-half of their sentence, with the majority of them being repeat offenders. In addition, the U.S. Census Bureau now projects a steady rise in the number of males between the ages of 18 and 24 years of age. Males between 18 and 24 years of age have demonstrated the highest propensity for criminal behavior and the highest rates of arrest, conviction and incarceration.

      As the result of the events of September 11, 2001, the protection and security of the United States has become a priority for the federal government. As a result, we believe that recently proposed initiatives by the federal government in connection with homeland security should cause the demand for prison beds, including privately managed beds, to increase. The final funding levels for the President’s fiscal 2003 budget included an increase of $27.5 million, or 4.1%, for the USMS, and more than $1.4 billion, or 29.7%, for the INS, two of our largest customers. The President’s budget for fiscal year 2004 includes a proposal for $35 billion for homeland security, excluding the Department of Defense, an increase of $2.5 billion, or 7.6%. If enacted at these levels, spending would have more than doubled from pre-September 11, 2001 levels. This proposed funding is intended to support the agencies’ efforts to prevent illegal entry into the United States and target persons that are a threat to homeland security. We believe that these efforts will likely result in more incarceration and detention, particularly of illegal immigrants, and increased supervision of persons on probation and parole.

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, we have been subject to these laws, rules, ordinances and regulations. In addition, we are also subject to these laws, ordinances and regulations as the result of our, and our subsidiaries’, operation and management of correctional and detention facilities. The

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cost of complying with environmental laws could materially adversely affect our financial condition and results of operations.

      Phase I environmental assessments have been obtained on substantially all of the facilities we currently own. The purpose of a Phase I environmental assessment is to identify potential environmental contamination that is made apparent from historical reviews of such facilities, review of certain public records, visual investigations of the sites and surrounding properties, toxic substances and underground storage tanks. The Phase I environmental assessment reports do not reveal any environmental contamination that we believe would have a material adverse effect on our business, assets, results of operations or liquidity, nor are we 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 we are unaware. In addition, environmental conditions on properties we own may affect the operation or expansion of facilities located on the properties.

 
Business Regulations

      The industry in which we operate is subject to extensive federal, state and local regulations, including educational, health care and safety regulations, which are administered by many regulatory authorities. Some of the regulations are unique to the corrections industry, and the combination of regulations we face is unique. Facility management contracts typically include reporting requirements, supervision and on-site monitoring by representatives of the contracting governmental agencies. Corrections officers and juvenile care workers are customarily required to meet certain training standards and, in some instances, facility personnel are required to be licensed and subject to background investigation. Certain jurisdictions also require us to award subcontracts on a competitive basis or to subcontract with businesses owned by members of minority groups. Our facilities are also subject to operational and financial audits by the governmental agencies with which we have contracts. We may not always successfully comply with these regulations, and failure to comply can result in material penalties or non-renewal or termination of facility management contracts.

      In addition, private prison managers are increasingly subject to government legislation and regulation attempting to restrict the ability of private prison managers to house certain types of inmates. Legislation has been enacted in several states, and has previously been proposed in the United States House of Representatives, containing such restrictions. Although we do not believe that existing legislation will have a material adverse effect on us, there can be no assurance that future legislation would not have such an effect.

 
Americans with Disabilities Act

      The correctional and detention facilities we operate and manage are subject to the Americans with Disabilities Act of 1990, as amended. The Americans with Disabilities Act, or 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. We continue to monitor our facilities for compliance with the ADA in order to conform to its requirements. Compliance with the ADA requirements could require removal of access barriers and other modifications or capital improvements at the facilities. Noncompliance could result in the imposition of fines or an award of damages to private litigants. Although we believe we are in compliance, any additional expenditures incurred in order to comply with the ADA at our facilities, if required, would not have a material adverse effect on our business and operations.

 
Health Insurance Portability and Accountability Act of 1996

      In 1996, Congress enacted the Health Insurance Portability and Accountability Act of 1996, or HIPAA. HIPAA is designed to improve the portability and continuity of health insurance coverage and simplify the administration of health insurance. Certain regulations promulgated by HIPAA become

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effective in April 2003 and require health care providers to institute physical and procedural safeguards to protect the health records of patients and insureds. Examples of mandated safeguards include requirements that notices of the entity’s privacy practices be sent and that patients and insureds be given the right to access and request amendments to their records. Authorizations are required before a provider, insurer or clearinghouse can use health information for marketing and certain other purposes. Additionally, health plans are required to electronically transmit and receive standardized healthcare information. These regulations will require the implementation of compliance training and awareness programs for our healthcare service providers associated with healthcare we provide to inmates, and selected other employees primarily associated with our employee medical plans.

Insurance

      We maintain a general liability insurance policy of $5.0 million for each facility we operate, as well as insurance in amounts we deem adequate to cover property and casualty risks, workers’ compensation and directors and officers liability. In addition, each of our leases with third-parties 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) workers’ compensation. Under each of these leases, we have the right to periodically review our lessees’ insurance coverage and provide input with respect thereto.

      Insurance expense represents a significant component of our operating expenses. Each of our management contracts and the statutes of certain states require the maintenance of insurance. We maintain various insurance policies including employee health, workers’ compensation, automobile liability and general liability insurance. Because we are significantly self-insured for employee health, workers’ compensation, and automobile liability insurance, the amount of our insurance expense is dependent on claims experience, and our ability to control our claims experience. Our insurance policies contain various deductibles and stop-loss amounts intended to limit our exposure for individually significant occurrences. However, the nature of our self-insurance policies provides little protection for a deterioration in overall claims experience. We continue to incur increasing insurance expense due to adverse claims experience. We are developing a strategy to improve the management of our future loss claims but can provide no assurance that this strategy will be successful. Additionally, general liability insurance costs have risen substantially since the terrorist attacks on September 11, 2001. Unanticipated additional insurance expenses resulting from adverse claims experience or a continued increasing cost environment for general liability and other types of insurance could adversely impact our results of operations and cash flows. See “Risk Factors — Risks Related to Our Business — We are subject to necessary insurance costs.”

Employees

      As of March 1, 2003, we employed 13,700 employees. Of such employees, 210 were employed at our corporate offices and 13,490 were employed at our facilities and in our inmate transportation business. We employ 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.

      Each of the correctional and detention facilities we currently operate is managed as a separate operational unit by the facility administrator or warden. All of these facilities follow a standardized code of policies and procedures.

      We have not experienced a strike or work stoppage at any of our facilities. Approximately 1,100 employees at seven of our facilities are represented by labor unions. This number includes approximately 200 employees at one facility who, during the first half of 2002 elected to be represented by a union. At this time, negotiations with this union is ongoing. In the opinion of management, overall employee relations are generally considered good.

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Competition

      The correctional and detention facilities we operate and manage, as well as those facilities we own and are managed by other operators, are subject to competition for inmates from other private prison managers. We compete primarily on the basis of the quality and range of services offered, our experience in the operation and management of correctional and detention facilities and our reputation. We compete with government agencies that are responsible for correctional facilities and a number of privatized correctional service companies, including, but not limited to, Wackenhut Corrections Corporation, Correctional Services Corporation and Cornell Companies, Inc. Other potential competitors may in the future enter into businesses competitive with us without a substantial capital investment or prior experience. Competition by other companies may adversely affect the number of inmates at our facilities, which could have a material adverse effect on the operating revenue of our facilities. In addition, revenue derived from our facilities will be affected by a number of factors, including the demand for inmate beds, general economic conditions and the age of the general population.

Legal Proceedings and Income Tax Matters and Contingencies

 
General

      The nature of our business results in claims and litigation alleging that we are liable for damages arising from the conduct of our employees or others. In the opinion of management, other than the litigation matters set forth below, there are no pending legal proceedings that would have a material effect on our consolidated financial position or results of operations for which we have not established adequate reserves. Adversarial proceedings and litigation are, however, subject to inherent uncertainties, and unfavorable decisions and rulings could occur which could have a material adverse impact on our consolidated financial position, results of operations or cash flows for a period in which such decisions and rulings occur, or future periods. See “Risk Factors — Risks Related to Our Business — We are subject to legal proceedings associated with owning and managing correctional and detention facilities.”

 
Pending Litigation

      During the second quarter of 2002, we completed the settlement of certain claims made against us as the successor to U.S. Corrections Corporation, or USCC, a privately-held owner and operator of correctional and detention facilities which was acquired by a predecessor of ours in April 1998, by participants in USCC’s Employee Stock Ownership Plan, referred to herein as the ESOP. As a result of the settlement, we made a cash payment of $575,000 to the plaintiffs in the action. As described below, we are currently in litigation with USCC’s insurer seeking to recover all or a portion of this settlement amount. The USCC ESOP litigation, entitled Horn v. McQueen, continued to proceed, however, against two other defendants, Milton Thompson and Robert McQueen, both of whom were stockholders and executive officers of USCC and trustees of the ESOP prior to our acquisition of USCC. In the Horn litigation, the ESOP participants allege numerous violations of the Employee Retirement Income Security Act, including breaches of fiduciary duties to the ESOP by causing the ESOP to overpay for employer securities. The plaintiffs in the action are seeking damages in excess of $30.0 million plus prejudgment interest and attorneys’ fees, although expert testimony in the litigation has indicated actual damages of significantly less than that. On July 29, 2002, the United States District Court for the Western District of Kentucky found that McQueen and Thompson had breached their fiduciary duties to the ESOP, but made no determination as to the amount of any damages. It is not known when the Court will make a finding with respect to damages.

      In or about the second quarter of 2001, Northfield Insurance Co., the issuer of the liability insurance policy to USCC and its directors and officers (“Northfield”), filed suit against McQueen, Thompson and us seeking a declaration that it did not owe coverage under the policy for any liabilities arising from the Horn litigation. Among other things, Northfield claimed that it did not receive timely notice of the litigation under the terms of the policy. McQueen and Thompson subsequently filed a cross-claim in the Northfield litigation against us, claiming that, as the result of our failure to timely notify the insurance

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carrier of the Horn case on their behalf, they were entitled to indemnification for contribution from us for any loss incurred by them as a result of the Horn litigation if there were no insurance available to cover the loss, if any. On September 30, 2002, the Court in the Northfield litigation found that Northfield was not obligated to cover McQueen and Thompson or us. Though it did not resolve the cross-claim, the Court did note that there was no basis for excusing McQueen and Thompson from their obligation to provide timely notice to the carrier because of our alleged failure to provide timely notice to the carrier. Upon the entry of a final order by the Court, we intend to appeal the Court’s decision that Northfield is not obligated to provide coverage, and we intend to continue to defend our position that coverage is required.

      We cannot currently predict whether or not we will be successful in recovering all or a portion of the amount we have paid in settlement of the Horn litigation. With respect to the cross-claim of McQueen and Thompson, we believe that such cross-claim is without merit and that we will be able to defend ourselves successfully against such claim and/or any additional claim of such nature that may be brought in the future. No assurance can be given, however, that McQueen and Thompson will not prevail in any such claims.

 
Income Tax Contingencies

      In connection with the merger with Old CCA on December 31, 1998, we assumed the tax obligations of Old CCA. The Internal Revenue Service has completed field audits of Old CCA’s federal tax returns for the taxable years ended December 31, 1998 and 1997, and has also completed auditing our federal tax return for the taxable years ended December 31, 2000 and 1999. In addition, the IRS has recently commenced an audit of our federal tax return for the taxable year ended December 31, 2001.

      The IRS agent’s report related to 1998 and 1997 included a determination by the IRS to increase taxable income by approximately $120.0 million. We appealed the IRS’s findings with the Appeals Office of the IRS. On October 24, 2002 we entered into a definitive settlement agreement with the IRS in connection with the IRS’s audit of old CCA’s 1997 federal income tax return. Under the terms of the settlement, in consideration for the IRS’s final determinations with respect to the 1997 tax year, in December 2002 we paid $52.2 million in cash to satisfy federal and state taxes and interest.

      Pursuant to the terms of the settlement, the audit adjustments agreed to for the 1997 tax year will not trigger any additional distribution requirements in order to preserve our status as a REIT for federal income tax purposes for 1999. The adjustments will, however, serve to increase our accumulated earnings and profits in 2002 and therefore will affect the taxability of dividends paid on our series A and series B preferred stock in 2002 and later years.

      We are continuing to appeal the IRS’s findings with respect to the IRS’s audit of Old CCA’s 1998 federal income tax return. Although we can provide no assurance, we do not currently expect that the resolution of the 1998 audit will have a material adverse effect on our liquidity or results of operations.

      In connection with the IRS’s audit of our 2000 federal tax return, the IRS has proposed the disallowance of a loss we claimed as the result of our forgiveness in September 2000 of certain indebtedness of one of our former operating companies. This finding is currently being protested with the Appeals Office of the IRS. In the event that, after we seek all available remedies, the IRS prevails, we would be required to pay the IRS in excess of $56.0 million in cash plus penalties and interest. In addition, this adjustment would also substantially eliminate our net operating loss carryforward, and would result in increased cash tax liabilities on taxable income thereafter. We believe that we have meritorious defenses of our positions. We have not established a reserve for this matter. However, the IRS may make such an assessment and prevail in any such claim against us.

      Because the audit of our federal tax return for the taxable year ended December 31, 2001 has only recently commenced, it is too early to predict the outcome of such audit.

      In addition, although the IRS has concluded its audit of our federal tax return for the taxable year ended December 31, 1999, the statute of limitations for such taxable year still has not expired. Thus, our election of REIT status for 1999 remains subject to review by the IRS generally until expiration of three

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years from the date of filing of our 1999 federal tax return. While we believe that we met the qualifications as a REIT for 1999, qualification as a REIT involves the application of highly technical and complex provisions of the Code for which there is only limited judicial and administrative interpretations. Should the IRS subsequently disallow our election to be taxed as a REIT for the 1999 taxable year, we would be subject to income taxes and interest on our 1999 taxable income and possibly could be subject to penalties, which would have an adverse impact on our financial position, results of operations and cash flows.

MANAGEMENT

Directors and Executive Officers

      The following table sets forth certain information concerning our directors and executive officers as of March 31, 2003.

             
Name Age Position



William F. Andrews(1)
    71     Director, Chairman of the Board of Directors
John D. Ferguson(1)
    57     Director, Vice-Chairman of the Board of Directors, Chief Executive Officer and President
Lucius E. Burch, III(1)(2)
    61     Director
John D. Correnti(3)
    55     Director
John R. Horne(3)
    65     Director
C. Michael Jacobi(2)
    61     Director
Thurgood Marshall, Jr.(4)
    46     Director
Charles L. Overby(2)(4)
    56     Director
John R. Prann, Jr.(3)
    52     Director
Joseph V. Russell(1)(3)(4)
    62     Director
Henri L. Wedell(2)
    61     Director
James A. Seaton
    53     Executive Vice President, Chief Operating Officer
Irving E. Lingo, Jr. 
    51     Executive Vice President, Chief Financial Officer and Asst. Secretary
G. A. Puryear IV
    34     Executive Vice President, General Counsel and Secretary
Kenneth A. Bouldin
    60     Executive Vice President, Chief Development Officer
David M. Garfinkle
    35     Vice President, Finance
Todd J. Mullenger
    44     Vice President, Treasurer
Jimmy Turner
    44     Vice President, Operations


(1)  Member of the Executive Committee of the Board of Directors
 
(2)  Member of the Audit Committee of the Board of Directors
 
(3)  Member of the Compensation Committee of the Board of Directors
 
(4)  Member of the Nominating and Corporate Governance Committee of the Board of Directors

      William F. Andrews currently serves as a director of the Company and as the Chairman of its board of directors (the “Board”), positions he has held since August 2000. Mr. Andrews also serves as a member of the Executive Committee of the Board. Mr. Andrews has been a principal of Kohlberg & Company, a private equity firm specializing in middle market investing, since 1995 and is currently the chairman of the board of directors of Katy Industries, Inc., a publicly-traded manufacturer and distributor

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of consumer electric corded products and maintenance cleaning products, among other product lines. Mr. Andrews served as a director of JJFMSI from its formation in 1998 to July 2000 and served as a member of the board of directors of Old CCA from 1986 to May 1998. Mr. Andrews has served as the chairman of Scovill Fasteners Inc., a manufacturing company, from 1995 to 2001 and has served as the chairman of Northwestern Steel and Wire Company, a manufacturing company, from 1998 to 2001. From 1995 to 1998, Mr. Andrews served as chairman of Schrader-Bridgeport International, Inc. and has also served as a member of the board of directors of Navistar International Corporation. Mr. Andrews also currently serves as a director of Black Box Corporation and Trex Corporation. Mr. Andrews is a graduate of the University of Maryland and received a Masters of Business Administration from Seton Hall University.

      John D. Ferguson currently serves as a director of the Company and as our Chief Executive Officer, President and Vice-Chairman of the Board, positions he has held since August 2000. Mr. Ferguson also serves as the Chairman of the Executive Committee of the Company’s Board of Directors. Prior to joining the Company, Mr. Ferguson served as the Commissioner of Finance for the State of Tennessee from June 1996 to July 2000. As Commissioner of Finance, Mr. Ferguson served as the State’s chief corporate officer and was responsible for directing the preparation and implementation of the State’s $17.2 billion budget. From 1990 to February 1995, Mr. Ferguson served as the chairman and chief executive officer of Community Bancshares, Inc., the parent corporation of The Community Bank of Germantown (Tennessee). Mr. Ferguson is a former member of the State of Tennessee Board of Education and served on the Governor’s Commission on Practical Government for the State of Tennessee. Mr. Ferguson graduated from Mississippi State University in 1967.

      Lucius E. Burch, III currently serves as a director of the Company and as a member of the Audit Committee of the Board, positions he has held since December 2000. Mr. Burch also serves as a member of the Executive Committee of the Board. Mr. Burch currently serves as chairman and chief executive officer of Burch Investment Group, a private venture capital firm located in Nashville, Tennessee, formerly known as Massey Burch Investment Group, Inc., a position he has held since October 1989. Mr. Burch served as a member of the board of directors of Old CCA from May 1998 through the completion of its merger with the Company, and as the chairman of the board of directors of the Operating Company from January 1999 through the completion of the Company’s restructuring. Mr. Burch has served on a number of public and private boards of directors, including seven NYSE-listed companies. Mr. Burch graduated from the University of North Carolina where he received a B.A. degree in 1963.

      John D. Correnti currently serves as a director of the Company and as a member of the Compensation Committee of the Board, positions he has held since December 2000. From December 1999 through December 2002, Mr. Correnti served as the chairman of the board of directors and as the chief executive officer of Birmingham Steel Corporation, a publicly-traded steel manufacturing company acquired by Nucor Corporation, a publicly-traded mini-mill manufacturer of steel products, in December 2002. Mr. Correnti served as the president, chief executive officer and vice chairman of Nucor Corporation from 1996 to 1999 and as its president and chief operating officer from 1991 to 1996. Mr. Correnti also serves as a director of Navistar International Corporation. Mr. Correnti holds a B.S. degree in civil engineering from Clarkson University.

      John R. Horne currently serves as a director of the Company, a position he has held since December 2001. Since February 2002, Mr. Horne has also served as a member of the Compensation Committee of the Board. Mr. Horne also currently serves as chairman of Navistar International Corporation, a publicly-traded truck and engine manufacturer, a position he has held since April 1996. From March 1995 to February 2003, Mr. Horne also served as Navistar’s President and chief executive officer after having served as the company’s chief operating officer for more than four years. Mr. Horne also currently serves on the board of directors of Intermet Corporation, the National Association of Manufacturers and Junior Achievement of Chicago, as well as the board of trustees of Manufacturer’s Alliance/ MAPI. Mr. Horne received his M.S. degree in mechanical engineering from Bradley University in 1964, a B.S. degree in mechanical engineering from Purdue University in 1960, which also awarded him an Honorary Doctor of

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Engineering degree on May 17, 1998, and is a graduate of the management program at Harvard Graduate School of Business Administration.

      C. Michael Jacobi currently serves as a director of the Company and as the Chairman of the Audit Committee of the Board, positions he has held since December 2000. Mr. Jacobi is currently the president, chief executive officer and board member of Katy Industries, Inc., a publicly-traded manufacturer and distributor of consumer electric corded products and maintenance cleaning products, among other product lines. Mr. Jacobi currently serves as a member of the board of directors of Webster Financial Corporation, a publicly-held bank headquartered in Waterbury, Connecticut and as a member of the board of directors of Innotek, Inc., a privately-held company located in Garrett, Indiana engaged in the manufacture of electronic pet containment systems. Mr. Jacobi served as the president and chief executive officer of Timex Corporation from December 1993 to August 1999 and as a member of its board of directors from 1992 to 2000. Mr. Jacobi is a certified public accountant and holds a B.S. degree from the University of Connecticut.

      Thurgood Marshall, Jr. currently serves as a director of the Company, a position he has held since December 2002. Mr. Marshall also serves as a member of the Nominating and Corporate Governance Committee of the Board. Mr. Marshall is a partner in the law firm of Swidler Berlin Shereff Friedman LLP in Washington, D.C. Previously, he has held political appointments in each branch of the federal government, including Cabinet Secretary to President Clinton, and Director of Legislative Affairs and Deputy Counsel to Vice President Al Gore. In his role under President Clinton, Mr. Marshall was the chief liaison between the President and the agencies of the Executive Branch. In his current legal career, he practices in the firm’s Government Affairs Group and represents clients appearing before federal agencies and Congress. Mr. Marshall, the son of the late Supreme Court Justice Thurgood Marshall, earned a B.A. in 1978 and a J.D. in 1981 from the University of Virginia, after which he clerked for United States District Judge Barrington D. Parker. He chairs the American Bar Association Election Law Committee, and serves as a board member of the National Fish & Wildlife Foundation and the Supreme Court Historical Society. He also serves as the Vice Chair of the Ethics Oversight Committee of the United States Olympic Committee.

      Charles L. Overby currently serves as a director of the Company, a position he has held since December 2001. Since February 2002, Mr. Overby has also served as a member of the Audit Committee of the Board. Mr. Overby has also served as the Chairman of the Board’s Nominating and Corporate Governance Committee since the Committee’s establishment in December 2002. Mr. Overby also serves as chairman and chief executive officer of The Freedom Forum, an independent, non-partisan foundation dedicated to the First Amendment and media issues, and two of the foundation’s affiliate organizations: the Newseum and The Freedom Forum First Amendment Center. Mr. Overby is a former Pulitzer Prize-winning editor in Jackson, Mississippi. He worked for 16 years as reporter, editor and corporate executive for Gannett Company, the nation’s largest newspaper company. He was vice president for news and communications for Gannett and served on the management committees of Gannett and USA TODAY. Mr. Overby serves on the board of the Committee to Protect Journalists, the Board of Regents of Baylor University and the board of the National Collegiate Athletic Association Foundation. Mr. Overby attended the University of Mississippi and is a member of its foundation board.

      John R. Prann, Jr. currently serves as a director of the Company and as a member of the Compensation Committee of the Board, positions he has held since December 2000. Mr. Prann served as the president and chief executive officer of Katy Industries, Inc. from 1993 to February 2001. From 1991 to 1995, Mr. Prann served as the president and chief executive officer of CRL, Inc., an equity and real estate investment company that held a 25% interest in Katy Industries, Inc. A former partner with the accounting firm of Deloitte & Touche, Mr. Prann graduated from the University of California, Riverside in 1974 and obtained his M.B.A. from the University of Chicago in 1979.

      Joseph V. Russell currently serves as a director of the Company, a position he has held since the Company’s merger with Old Prison Realty and Old CCA. Mr. Russell also serves as the Chairman of the Compensation Committee of the Board, as a member of the Executive Committee and of the Nominating

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and Corporate Governance Committee of the Board. Prior to the Company’s merger with Old Prison Realty and Old CCA, Mr. Russell served as an independent trustee of Old Prison Realty. Mr. Russell is the president and chief financial officer of Elan-Polo, Inc., a Nashville-based, privately held world-wide 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.

      Henri L. Wedell currently serves as a director of the Company and as a member of the Audit Committee of the Board, positions he has held since December 2000. Mr. Wedell currently is a private investor in Memphis, Tennessee. Prior to Mr. Wedell’s retirement in 1999, he served as the senior vice president of sales of The Robinson Humphrey Co., a wholly owned subsidiary of Smith-Barney, Inc., an investment banking company with which he was employed for over 24 years. From 1990 to 1996, he served as a member of the board of directors of Community Bancshares, Inc., the parent corporation to The Community Bank of Germantown (Tennessee). Mr. Wedell graduated from the Tulane University Business School, where he received a B.B.A. in 1963.

      James A. Seaton currently serves as an Executive Vice President and as the Chief Operating Officer of the Company, positions he has held since July 2002. Prior to joining the Company, Mr. Seaton managed his own consulting/contracting CEO firm, serving as Interim Presidents for AMCAS (a subsidiary of Questcom, Inc.), Treats and Eats, and APT Image. From 1998 to 2000, Mr. Seaton served as President-School Services Division of Sodexho Marriott Services, based in Maryland, where he was responsible for management and growth of the $420 million division and 8,500 associates. From 1972 to 1998, he served in various leadership roles for Marriott International in Washington, D.C., including Senior Vice President-Corporate Services. He is a graduate of New Mexico State University.

      Irving E. Lingo, Jr. currently serves as an Executive Vice President and as the Chief Financial Officer and Assistant Secretary of the Company, positions he has held since December 2000. Prior to joining the Company, Mr. Lingo was chief financial officer for Bradley Real Estate, Inc., an NYSE-listed REIT headquartered in Chicago, Illinois, where he was responsible for financial accounting and reporting, including SEC compliance, capital markets and mergers and acquisitions from September 1995 to September 2000. Prior to joining Bradley Real Estate, Inc., Mr. Lingo held positions as chief financial officer, chief operating officer and vice president, finance for several public and private companies, including Lingerfelt Industrial Properties, CSX Corporation and Goodman Segar Hogan, Inc. In addition, he was previously an audit manager at Ernst & Young LLP. Mr. Lingo graduated summa cum laude from Old Dominion University where he received a B.S. degree in Business Administration.

      G. A. Puryear IV currently serves as an Executive Vice President and as the General Counsel and Secretary of the Company, positions he has held since January 2001. Prior to joining the Company, from 1998 to 2001 Mr. Puryear served as legislative director and counsel for U.S. Senator Bill Frist, where he worked on legislation and other policy matters. During that time, he also took a leave of absence to serve as a debate advisor to Vice President Richard B. Cheney. In addition, from 1997 to 1998, Mr. Puryear was counsel to the special investigation of campaign finance abuses during the 1996 elections conducted by the U.S. Senate Committee on Governmental Affairs, which was chaired by U.S. Senator Fred Thompson. Prior to his career on Capitol Hill, Mr. Puryear practiced law with Farris, Warfield & Kanaday, PLC (now Stites & Harbison, PLLC) in Nashville in the commercial litigation section. Mr. Puryear graduated from Emory University with a major in Political Science in 1990 and received his J.D. from the University of North Carolina in 1993.

      Kenneth A. Bouldin currently serves as an Executive Vice President and as the Chief Development Officer of the Company. Prior to joining the Company, Mr. Bouldin was the President of KAB Associates, Inc., a management consulting company. Mr. Bouldin established Econotech, an information technology staffing firm, in 1995, which achieved revenues of $15 million per annum and was sold in 2000. Mr. Bouldin served as vice president of Comdisco, Inc. and manager of its Federal Marketing Group from

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1993 to 1995. Mr. Bouldin also served as president and chief operating officer of the Computer Dealers and Lessors Association, which he had previously helped form and served as chairman of its board of directors. Mr. Bouldin also co-founded Econocom, a business that sold and leased new and used data processing equipment. Mr. Bouldin has also had a lengthy military career, rising to the rank of Major General and serving as a commanding general of the 125th Army Reserve Command during Desert Storm. Mr. Bouldin graduated cum laude from the University of Tennessee with a B.S. degree in electrical engineering.

      David M. Garfinkle currently serves as the Vice President, Finance of the Company, a position he has held since February 2001. Prior to joining the Company, Mr. Garfinkle was the vice president and controller for Bradley Real Estate, Inc. since 1996. Prior to joining Bradley Real Estate, Inc., Mr. Garfinkle was a senior audit manager at KPMG Peat Marwick LLP. Mr. Garfinkle graduated summa cum laude from St. Bonaventure University in 1989 with a B.B.A. degree.

      Todd J. Mullenger currently serves as the Vice President, Treasurer of the Company, a position he has held since January 2001. Mr. Mullenger served as the Vice President, Finance of the Company from August 2000 to January 2001. Mr. Mullenger served as vice president, finance of Operating Company from January 1, 1999 through the completion of the Company’s restructuring. Mr. Mullenger also previously served as the vice president of Old CCA from August 1998 until the completion of its merger with the Company. From September 1996 to July 1998, Mr. Mullenger served as assistant vice president-finance of Service Merchandise Company, Inc., a former publicly traded retailer headquartered in Brentwood, Tennessee. Prior to September 1996, Mr. Mullenger served as an audit manager with Arthur Andersen LLP. Mr. Mullenger graduated from the University of Iowa in 1981 with a B.B.A. degree. He also received an M.B.A. from Middle Tennessee State University.

      Jimmy Turner currently serves as the Vice President, Operations of the Company, a position he has held since the completion of the Company’s restructuring. From August 1999 through the completion of the Company’s restructuring, Mr. Turner served as vice president of operations of the Operating Company. A 22-year corrections professional, Mr. Turner served as warden of the Company’s Northeast Ohio Correctional Center in Youngstown, Ohio from March 1998 to his promotion to vice president of Operating Company in 1999. Mr. Turner joined Old CCA in 1989 as assistant warden of the Company’s Silverdale Facilities in Chattanooga, Tennessee. He also served as assistant warden at the Company’s Winn Correctional Center in Winnfield, Louisiana and the Company’s Metro-Davidson County Detention Facility in Nashville, Tennessee, where he ultimately was promoted to warden. Mr. Turner also served as a senior divisional director of Old CCA. Mr. Turner attended Sam Houston State University in Huntsville, Texas from 1980 to 1982.

Additional Information

      The following information supersedes the information set forth in the Company’s Proxy Statement filed with the Commission on April 11, 2003: (a) the following are salary amounts for 2001: John D. Ferguson, $350,000; J. Michael Quinlan, $308,000; Irving E. Lingo, Jr., $275,000; G.A. Puryear IV, $151,154; and Jimmy Turner, $180,000; and (b) as of December 31, 2002, approximately 149,000 shares of Series B Preferred Stock remained subject to vesting under the Company’s Series B Restricted Stock Plans.

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PRINCIPAL AND SELLING STOCKHOLDERS

      The following table sets forth, as of March 31, 2003, and as adjusted to reflect the sale of the shares of common stock in the common stock offering and the consummation of all of the other transactions contemplated in “The Transactions,” certain information with respect to beneficial ownership of the common stock by (i) each person or entity known by us to own beneficially more than 5% of our outstanding common stock, (ii) each of our directors and executive officers, (iii) all of our executive officers and directors as a group and (iv) the selling stockholder. Except as indicated by footnote, the persons or entities named in the table below have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. Unless otherwise indicated, the address of each beneficial owner listed is c/o Corrections Corporation of America, 10 Burton Hills Boulevard, Nashville, Tennessee 37215.

                                         
Beneficial Ownership Beneficial Ownership
Prior to Offering After Offering

Number of
Number of Shares Number of
Name Shares Percent Being Offered Shares Percent






Directors, Executive Officers, and 5% Beneficial Owners
                                       
FMR Corp.
82 Devonshire St.
Boston, MA 02109(1)
    3,072,665       10.9 %     0       3,072,665       8.9 %
Christopher M. Jeffries
Brian J. Collins
Steven L. Hoffman
c/o Millennium Partners
1995 Broadway
New York, NY 10023(2)
    3,391,536       10.8       0       28,637       *  
Pacific Mezzanine Fund, L.P.
610 Newport Center Drive, Suite 1100
Newport Beach, California 92660(3)
    3,518,379       11.1       0       3,518,379       9.3  
William F. Andrews(4)
    132,087       *       0       132,087       *  
John D. Ferguson(5)
    655,394       2.3       0       655,394       1.9  
Lucius E. Burch(6)
    421,974       1.5       0       421,974       1.2  
John D. Correnti(7)
    12,500       *       0       12,500       *  
John R. Horne(8)
    5,666       *       0       5,666       *  
C. Michael Jacobi(9)
    28,000       *       0       28,000       *  
Thurgood Marshall, Jr.(10)
    1,666       *       0       1,666       *  
Charles L. Overby(11)
    5,666       *       0       5,666       *  
John R. Prann, Jr.(12)
    12,400       *       0       12,400       *  
Joseph V. Russell(13)
    71,470       *       0       71,470       *  
Henri L. Wedell(14)
    651,208       2.3       0       651,208       1.9  
Irving E. Lingo, Jr.(15)
    136,459       *       0       136,459       *  
G. A. Puryear IV(16)
    69,229       *       0       69,229       *  
Todd J. Mullenger(17)
    47,439       *       0       47,439       *  
David M. Garfinkle(18)
    13,062       *       0       13,062       *  
Jimmy Turner(19)
    31,235       *       0       31,235       *  
Kenneth A. Bouldin
    0       *       0       0       *  
James A. Seaton
    0       *       0       0       *  
All Directors and Executive Officers as a group (18 persons) (20)
    2,295,455       7.9 %     0       2,295,445       6.7 %

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Beneficial Ownership Beneficial Ownership
Prior to Offering After Offering

Number of
Number of Shares Number of
Name Shares Percent Being Offered Shares Percent






Selling Stockholder
                                       
Rolaco Holding S.A.(21)
c/o Oryx Finance Limited
104 Lancaster Gate
London W23 NT
England
    2,341,789       8.3 %     1,200,000       1,141,789       3.3 %


  Less than 1% of the outstanding shares of common stock

  (1)  This beneficial ownership information is based upon information contained in a Schedule 13G dated February 14, 2003 and filed with the Commission on February 13, 2003 by FMR Corp. jointly with its affiliates, Edward C. Johnson, III, Abigail P. Johnson, Fidelity Management & Research Company and Fidelity Small Cap Independence, and on behalf of Fidelity International Limited. FMR Corp. and/or its affiliates have sole voting and investment power over 136,315 shares of common stock and sole investment power over 3,072,665 shares obtained from the MDP Group (as defined below) and of common stock.
 
  (2)  This beneficial ownership information is based upon information obtained from the MDP Group (as defined below) and contained in: (i) Amendment No. 1 to Schedule 13G dated February 20, 2003 and filed with the Securities and Exchange Commission on February 20, 2003 jointly by Christopher M. Jeffries (“Jeffries”), Brian J. Collins (“Collins”), Steven L. Hoffman (“Hoffman”) Income Opportunity Fund I LLC (“IOF”), MDP Ventures II, LLC (“MDP Ventures”), Millennium Development Partners II LLC (“MDP II”) Millennium Development Partners V LLC (“MDP V”), Millennium Holdings II LLC (“MH II”) and Millennium Holdings III LLC (“MH III” and, collectively with Jeffries, Collins, Hoffman, MDP Ventures, MDP II, MDP V, and MHII, the “MDP Group”); and (ii) the Forms 3 and 4 filed with the Commission by the MDP Affiliates (the Schedule 13G and the Forms 3 and 4 referenced in the previous sentence known collectively as the “Commission Filings”). Jeffries is also the controlling member of MDP V, MH II and MH III. MDPII is the managing member of MDP Ventures and MDP V is the managing member of IOF. According to the Securities and Exchange Commission Filings (“Commission Filings”), MHII is the holder of an amount of MDP Notes convertible into approximately 840,724 shares of common stock. According to the Commission Filings, each of IOF and MH III hold an amount of the Company’s 10% convertible subordinated notes due December 31, 2008 (the “MDP Notes”) convertible into approximately 1,261,087 shares of common stock at any time prior to December 31, 2008. Also, according to the Commission Filings, MDP Ventures is the holder of 28,587 shares of common stock, Collins is the trustee of a trust that holds 36 shares of common stock and Hoffman is the holder of 14 shares of common stock. MDP has agreed to convert the MDP Notes into common stock and sell their shares to the Company as part of the transactions.
 
  (3)  This beneficial ownership information is based on the terms of the Company’s $30.0 million 8% convertible subordinated notes due February 28, 2005 and the beneficial ownership of 148,780 shares of outstanding common stock. The holder of the notes may convert the notes into shares of common stock at a current conversion rate of 11.232 per $100 of the notes (as adjusted to reflect the full issuance of shares in connection with the Company’s stockholder litigation settlement). The current conversion rate of the notes is subject to adjustment upon the occurrence of future events. Pacific Mezzanine Investors, LLC is the general partner of Pacific Mezzanine Fund, L.P. Pacific Mezzanine Investors, LLC is managed by a management board consisting of Bob Bartholomew and Schuyler Lance, as Principals of its managing member, who jointly have power to vote shares on routine matters, and Sam Tang and Ronn Cornelius. The agreement of both Principals and one other member of the management board is required for disposition of shares or votes on non-routine matters. Therefore, the named members of the management board may be deemed to beneficially own such shares. Each member of the management board disclaims beneficial ownership except to the extent of any pecuniary interest in Pacific Mezzanine Fund L.P. and its general partner.

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  (4)  Includes 50,686 shares of common stock owned directly by Mr. Andrews. Also includes 81,401 shares of common stock issuable upon the exercise of exercisable options (or options that will become exercisable within 60 days) to purchase shares of common stock.
 
  (5)  Includes: (i) 30,340 shares of common stock owned directly by Mr. Ferguson; and (ii) 1,165 shares of common stock held in the Company’s 401(k) Plan. Also includes 623,889 shares of common stock issuable upon the exercise of exercisable options (or options that will become exercisable within 60 days) to purchase shares of common stock.
 
  (6)  Includes: (i) 382,110 shares of common stock owned directly by Mr. Burch; (ii) 23,776 shares of common stock owned by the Lucius Burch Family Foundation; and (iii) 792 shares of common stock owned by Lucius Burch Sheffield Partners. Also includes 15,296 shares of common stock issuable upon the exercise of exercisable options to purchase shares of common stock.
 
  (7)  Includes 500 shares of common stock owned directly by Mr. Correnti. Also includes 12,000 shares of common stock issuable upon the exercise of exercisable options to purchase shares of common stock.
 
  (8)  Consists of 5,666 shares of common stock issuable upon the exercise of exercisable options to purchase shares of common stock.
 
  (9)  Includes: (i) 10,000 shares of common stock owned directly by Mr. Jacobi; and (ii) 6,000 shares of common stock held in an IRA. Also includes 12,000 shares of common stock issuable upon the exercise of exercisable options to purchase shares of common stock.

(10)  Consists of 1,666 shares of common stock issuable upon the exercise of exercisable options to purchase shares of common stock.
 
(11)  Consists of 5,666 shares of common stock issuable upon the exercise of exercisable options to purchase shares of common stock.
 
(12)  Includes 400 shares of common stock owned directly by Mr. Prann. Also includes 12,000 shares of common stock issuable upon the exercise of exercisable options to purchase shares of common stock.
 
(13)  Includes 54,450 shares of common stock owned directly by Mr. Russell or jointly with his wife. Also includes 17,020 shares of common stock issuable upon the exercise of exercisable options to purchase shares of common stock.
 
(14)  Includes: (i) 61,537 shares of common stock owned directly by Mr. Wedell; (ii) 313,719 shares of common stock owned by Mr. Wedell’s wife; (iii) 138,463 shares of common stock held in an IRA; (iv) 102,489 shares of common stock held by the Wedell Spendthrift Trust; and (v) 23,000 shares of common stock held by The Miller Trust. Also includes 12,000 shares of common stock issuable upon the exercise of exercisable options to purchase shares of common stock. Does not include shares of common stock held by Mr. Wedell’s daughter, of which Mr. Wedell disclaims beneficial ownership.
 
(15)  Consists of 136,459 shares of common stock issuable upon the exercise of certain options to purchase shares of common stock.
 
(16)  Includes 1,000 shares of common stock owned directly by Mr. Puryear. Consists of 68,229 shares of common stock issuable upon the exercise of exercisable options to purchase shares of common stock.
 
(17)  Includes 34,377 shares of common stock owned directly by Mr. Mullenger. Also includes 13,062 shares of common stock issuable upon the exercise of exercisable options to purchase shares of common stock.
 
(18)  Consists of 13,062 shares of common stock issuable upon the exercise of exercisable options (or options that will become exercisable within 60 days) to purchase shares of common stock.
 
(19)  Includes: (i) 18,425 shares of common stock held directly by Mr. Turner; and (ii) 1,346 shares of common stock held in the Company’s 401(k) Plan. Also includes 11,464 shares of common stock issuable upon the exercise of exercisable options (or options that will become exercisable within 60 days) to purchase shares of common stock. Mr. Turner does not currently have investment power with respect to 5,305 shares of common stock held pursuant to the terms of a restricted stock plan.

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(20)  Consists of 1,040,880 shares of common stock issuable upon the exercise of exercisable options (or options that will become exercisable within 60 days) to purchase shares of common stock.
 
(21)  The number of shares of common stock beneficially owned is based on information provided by Rolaco Holding S.A. (“Rolaco”). In addition, Rolaco has granted to underwriters the over-allotment option with respect to 1,140,000 shares. Rolaco’s interest in us is held indirectly through Latonia International Limited, a company incorporated under the laws of the British Virgin Islands.

  Rolaco purchased its shares in a privately negotiated transaction from another stockholder of the Company in mid-2001 as part of the other stockholder’s termination of its interest in the Company. At the time, the Company made a public announcement of the completion of the transaction and entered into an agreement with Latonia International Limited pursuant to which Latonia International Limited agreed not to purchase additional shares of our common stock or otherwise attempt to acquire the Company. Mr. Abdulaziz A. Al-Sulaiman is the chairman of Rolaco and Mr. Paul Jeanbart is the managing director of Rolaco. By virtue of their relationships with Rolaco, Messrs Al-Sulaiman and Jeanbart may be deemed to share beneficial ownership of the shares of common stock held by Rolaco. Messrs Al-Sulaiman and Jeanbart disclaim such beneficial ownership except to the extent of their pecuniary interest in Rolaco.

DESCRIPTION OF CAPITAL STOCK

      Our authorized capital stock consists of 80 million shares of common stock and 50 million shares of preferred stock.

Common Stock

      As of March 31, 2003, we have:

  •  28,103,360 shares of common stock issued and outstanding;
 
  •  2,171,678 shares of common stock reserved for issuance and available for grant under our stock option and other employee benefit plans as of March 31, 2003 (this figure includes an additional 1,500,000 shares to be authorized and reserved for issuance under our 2000 Stock Incentive Plan and an additional 75,000 shares authorized and reserved for issuance under our Non-Employee Directors’ Compensation Plan, subject to approval by stockholders at the 2003 Annual Meeting);
 
  •  outstanding options for the purchase of 3,713,307 shares of common stock as of March 31, 2003;
 
  •  6,732,498 shares of common stock reserved for issuance pursuant to the conversion of our 10% convertible subordinated notes due December 31, 2008 (including shares issuable upon conversion of the MDP Notes) and our 8% convertible subordinated notes due February 28, 2005;
 
  •  warrants for the purchase of 287,835 shares of our common stock as of March 31, 2003; and
 
  •  309,823 shares of common stock to be issued in connection with stockholders litigation settled in the first quarter of 2001.

American Stock Transfer & Trust Company is the transfer agent and registrar for our common stock and our series A and series B preferred stock.

Preferred Stock

 
Series A Preferred Stock

      We currently have 4.3 million shares of our series A preferred stock issued and outstanding. The series A preferred stock provides for the payment of quarterly cash dividends when and as declared by our board of directors at a rate of 8% per year, based on a liquidation price of $25.00 per share. Unpaid dividends accrue without interest. We intend to redeem approximately 4.0 million outstanding shares of our series A preferred stock upon completion of the transactions and currently intend to redeem the remaining outstanding shares as soon as practicable thereafter, at $25.00 per share, plus dividends accrued and unpaid to the redemption date. See “The Transactions.”

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Series B Preferred Stock

      We currently have 12.0 million shares of series B preferred stock authorized, of which approximately 4.7 million shares of our series B preferred stock are issued and outstanding as of March 31, 2003. The shares of our series B preferred stock currently outstanding provide for cumulative dividends payable at a rate of 12% per year of the stock’s stated value of $24.46. The dividends are payable quarterly, in arrears, in additional shares of series B preferred stock through the third quarter of 2003, and in cash thereafter, provided that all unpaid cash dividends have been made on our series A preferred stock. The shares of series B preferred stock are callable by us, at a price per share equal to the stated value of $24.46, plus any accrued dividends, no earlier than three years and six months following the date of issuance, and our ability to call the series B preferred stock may be otherwise restricted by our outstanding indebtedness. The series B preferred stock has no mandatory redemption, sinking fund provision or stated maturity and is not convertible into any other security. The series A preferred stock ranks senior to the series B preferred stock as to dividend distributions and distributions upon liquidation, winding up and dissolution. Under the terms of our charter, in the event dividends are undeclared, unpaid and in arrears for six or more quarterly periods, the holders of the shares of our series B preferred stock will have the right to elect two additional directors to our board of directors. We have offered to purchase up to 4.2 million shares of our series B preferred stock at a purchase price of $26.00. See “The Transactions.”

      You should carefully review the summary description of selected provisions of our charter, common stock, and preferred stock, which appears in the accompanying prospectus under “Description of Common Stock” and “Description of Preferred Stock.”

DESCRIPTION OF CERTAIN EXISTING INDEBTEDNESS

 
Senior Secured Credit Facility

      General. Concurrently with the closing of the offering of the 9.875% notes in May 2002, we obtained a new senior secured credit facility with a syndicate of financial institutions and institutional lenders through the amendment and restatement of our then existing senior secured credit facility. Lehman Commercial Paper Inc. serves as administrative agent under our new facility.

      As of March 31, 2003, our senior secured credit facility is in the aggregate principal amount of $745 million, consisting of:

  •  an approximate four-year revolving credit facility of up to $75 million in revolving credit loans and letters of credit;
 
  •  an approximate four-year Term Loan A Facility of $75 million in term loans; and
 
  •  an approximate six-year Term Loan B Facility of $595 million in term loans.

      The revolving credit facility will be used for working capital and general corporate needs. Set forth below is a summary of the material terms of the senior secured credit facility.

      Collateral and Guarantees. The loans and other obligations under the senior secured credit facility are guaranteed by each of our domestic subsidiaries.

      Our obligations under the senior secured credit facility and the guarantees are secured by:

  •  a perfected first priority security interest in all of our tangible and intangible assets and all of the tangible and intangible assets of our subsidiaries, subject to certain customary exceptions; and
 
  •  a pledge of all of the capital stock of our domestic subsidiaries and 65% of the capital stock of our foreign subsidiaries.

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      Interest and Fees. Our borrowings under the senior secured credit facility bear interest at a rate which, at our option, can be either:

  •  a base rate generally defined as the sum of (i) the higher of (x) the prime rate (as quoted on the British Banking Association Telerate Page 5) and (y) the federal funds effective rate plus one-half percent (0.50%) per annum and (ii) an applicable margin; or
 
  •  a LIBOR rate generally defined as the sum of (i) the rate at which eurodollar deposits for one, two, three or six months (as selected by us) are offered in the interbank eurodollar market and (ii) an applicable margin.

      The initial applicable margin for the base rate loans is 2.50%, and the applicable margin for the eurodollar loans is 3.50%. Commencing on the date of delivery of our financial statements occurring after the completion of two full fiscal quarters following the closing of the senior secured credit facility, the applicable margin for the revolving loans and term loan A will be subject to adjustment based on our leverage ratio.

      Interest on our borrowings is payable quarterly in arrears for base rate loans and at the end of each interest rate period (but not less often than quarterly) for LIBOR rate based loans.

      We are also required to pay a commitment fee on the difference between committed amounts and amounts actually utilized under the revolving credit facility, which will be 0.50% per annum subject to adjustment based on our leverage ratio.

      Repayments; Prepayments. The Term Loan A Facility and Term Loan B Facility require quarterly installments in an aggregate principal amount for each year as set forth in the table below as of March 1, 2003 (in thousands):

                         
Term Loan A Term Loan B
Facility Facility Total



2003
  $ 17,250     $ 5,950     $ 23,200  
2004
    20,250       5,950       26,200  
2005
    21,000       5,950       26,950  
2006
    5,250       5,950       11,200  
2007
          397,320       397,320  
2008
          169,643       169,643  
     
     
     
 
TOTAL
  $ 63,750     $ 590,763     $ 654,513  
     
     
     
 

      Prepayments of loans outstanding are permitted at any time without premium or penalty, upon the giving of proper notice. In addition, we are required to prepay amounts outstanding under the new senior secured credit facility in an amount equal to:

  •  50% of the net cash proceeds from any sale or issuance of equity by us or any of our subsidiaries, subject to certain exceptions;
 
  •  100% of the net cash proceeds from any incurrence of additional indebtedness (excluding certain permitted debt), subject to certain exceptions;
 
  •  100% of the net cash proceeds from any sale or other disposition by us, or any of our subsidiaries, of any assets, subject to certain exclusions and reinvestment provisions and excluding certain dispositions in the ordinary course; and
 
  •  50% of excess cash flow for each fiscal year.

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      Certain Covenants. The senior secured credit facility requires us to meet certain financial tests, including, without limitation:

  •  a minimum fixed charge coverage ratio requiring that at the end of each fiscal quarter, our Consolidated EBITDA, as defined under the facility, be no less than a range of percentages (ranging from 100% to 115% over the six year term of the senior secured credit facility) of our Consolidated Fixed Charges, as defined under the facility, (minus the aggregate amount actually paid by us or any of our subsidiaries in cash during such period on account of capital expenditures) for the most recent four fiscal quarters;
 
  •  a maximum leverage ratio requiring that at the end of each fiscal quarter, our Consolidated Debt as defined under the facility be no greater than a range of percentages (ranging from 590% to 350% over the six year term of the senior secured credit facility) of our Consolidated EBITDA, as defined under the facility, for the most recent four fiscal quarters; and
 
  •  a minimum interest coverage ratio requiring that at the end of each fiscal quarter, our Consolidated EBITDA, as defined therein, (including the interest component of all payments associated with capital lease obligations) be no less than a range of percentages (generally ranging from 150% to 250% over the six year term of the senior secured credit facility) of our Consolidated Interest Expense, as defined under the facility, for the most recent four fiscal quarters.

As of December 31, 2002, we were in compliance with the foregoing covenants, and we believe that we are currently in compliance with these covenants. In addition, the senior secured credit facility contains certain covenants which, among other things, limit the incurrence of additional indebtedness, investments, dividends, transactions with affiliates, assets sales, acquisitions, capital expenditures, mergers and consolidations, prepayments of other indebtedness, liens and encumbrances and other matters customarily restricted in such agreements.

      Events of Default. The senior secured credit facility contains customary events of default, including, without limitation, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to certain other material indebtedness in excess of specified amounts, certain events of bankruptcy and insolvency, certain ERISA events, judgment defaults in excess of specified amounts, termination or amendment of certain material agreements if such termination or amendment could reasonably be expected to be materially adverse to the lenders or otherwise have a material adverse effect and change in control.

 
9.875% Senior Notes

      General. We currently have $250.0 million in aggregate principal amount of 9.875% senior unsecured notes outstanding. These notes mature on May 1, 2009 and bear interest at 9.875% per annum. Payments of accrued but unpaid interest on these notes are due on May 1 and November 1 of each year, beginning on November 1, 2002. The notes are guaranteed by all of our domestic subsidiaries (other than our Puerto Rican subsidiary). The notes and subsidiary guarantees are senior obligations of ours and our subsidiary guarantors. Accordingly, they rank:

  •  equally with all of our and our subsidiary guarantors’ existing and future unsecured senior debt;
 
  •  ahead of any of our and our subsidiary guarantors’ future debt that expressly provides for subordination to the notes or the guarantees; and
 
  •  subordinated to any of our and our subsidiary guarantors’ secured indebtedness to the extent of the value of the security for that indebtedness.

      The indenture governing the notes permits us and the guarantors to incur substantial additional senior indebtedness. Our ability to incur any additional indebtedness is limited by the specific terms of the indenture governing the notes.

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      Optional Redemption. At any time on or prior to May 1, 2005, we may on any one or more occasions redeem up to 35% of the aggregate principal amount of outstanding notes at a redemption price of 109.875% of the principal amount, plus accrued and unpaid interest and liquidated damages, if any, to the redemption date, with the net cash proceeds of one or more equity offerings; provided that:

  •  at least 65% of the aggregate principal amount of notes issued under the indenture remains outstanding immediately after the occurrence of such redemption (excluding notes held by us and our subsidiary); and
 
  •  the redemption occurs within 90 days of the date of the closing of such equity offering.

      Except pursuant to the preceding paragraph, the notes will not be redeemable at our option prior to May 1, 2006.

      Beginning May 1, 2006, we may, at our option, redeem all or a part of the notes upon not less than 30 nor more than 60 days’ notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest and liquidated damages, if any, on the notes redeemed, to the applicable redemption date, if redeemed during the 12-month period beginning on May 1 of the years indicated below:

         
Year Percentage


2006
    104.938 %
2007
    102.469 %
2008 and thereafter
    100.000 %

      Mandatory Offer to Repurchase. If we sell certain assets or experience specific kinds of changes in control, we must offer to repurchase the notes at the prices, plus accrued and unpaid interest and liquidated damages, if any, to the date of redemption, listed in the indenture. Sufficient funds may not be available to us, however, at the time of any change of control event to repurchase all or a portion of notes tendered pursuant to this requirement.

      Certain Covenants. Covenants in the indenture restrict our ability and the ability of our subsidiaries, with exceptions, to, among other things, pay dividends, incur additional debt or issue preferred stock, create or permit to exist certain liens, incur restrictions on the ability of certain of our subsidiaries to pay dividends or other payments, consolidate, merge or transfer all or substantially all of our assets and enter into transactions with affiliates. These covenants are subject to a number of important exceptions and qualifications.

      Events of Default. Each of the following is an event of default:

  •  default for 30 days in the payment when due of interest on, or liquidated damages with respect to, the notes;
 
  •  default in payment when due of the principal of, or premium, if any, on the notes;
 
  •  failure by us or any of our subsidiaries to comply with our obligation to repurchase the notes upon a change of control or sale of assets;
 
  •  failure by us or any subsidiary guarantor for 60 consecutive days after notice to comply with any of the other agreements in the indenture;
 
  •  default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any indebtedness if that default:

  (a)  is caused by a failure to pay principal of, or interest or premium, if any, on such indebtedness prior to the expiration of the grace period; or
 
  (b)  results in the acceleration of such indebtedness prior to its express maturity, and, in each case, the principal amount of any such indebtedness, together with the principal amount of any other

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  such indebtedness under which there has been a default or the maturity of which has been so accelerated, aggregates $25.0 million or more;

  •  failure by us or any subsidiaries to pay final judgments aggregating in excess of $25.0 million, which judgments are not paid, discharged or stayed for a period of 60 days;
 
  •  except as permitted by the indenture, any subsidiary guarantor shall be held in any judicial proceeding to be unenforceable or invalid or shall cease for any reason to be in full force and effect or any guarantor, or any person acting on behalf of any guarantor, shall deny or disaffirm its obligations under its subsidiary guarantee; and
 
  •  certain events of bankruptcy or insolvency described in the indenture with respect to us or any of our subsidiaries.
 
12% Senior Notes

      We currently have approximately $10.8 million aggregate principal amount of 12% Senior Notes outstanding. These notes mature on June 1, 2006 and bear interest at 12% per annum. Payments of accrued but unpaid interest on these notes are due on June 1 and December 1 of each year.

      On May 16, 2002, we completed an offer to purchase all these notes and a consent solicitation designed to remove, following the purchase of these notes, substantially all of the restrictive covenants and a number of the events of default that currently apply to the notes. Pursuant to the terms of the offer to purchase and consent solicitation, holders of approximately $89.2 million aggregate principal amount of the notes tendered their notes and received $1,100 plus accrued and unpaid interest on such principal amount of notes for each $1,000 principal amount of notes tendered.

      As a result of this tender offer and consent solicitation, we have amended the indenture governing the notes to remove substantially all of the covenants and events of default. Such amendment became operative upon our purchase of the notes tendered in connection with the consent.

 
New Senior Notes

      Concurrently with the common stock offering, we are offering $250.0 million aggregate principal amount of our new senior notes due 2011. We anticipate that the covenants governing these notes will be substantially similar to those governing our 9.875% notes described above.

 
           $40 Million Convertible Subordinated Notes

      We currently have outstanding the MDP Notes, an aggregate of $40.0 million of 10% convertible subordinated notes due December 31, 2008. The conversion price for the notes, which are convertible into shares of our common stock, has been established at $11.90, subject to adjustment in the future upon the occurrence of certain events. At an adjusted conversion price of $11.90, the $40.0 million convertible subordinated notes are currently convertible into 3,362,899 shares of our common stock. We have agreed to repurchase the common stock issuable upon conversion of these notes and pay all accrued interest upon consummation of the common stock offering and receipt of the lender consent.

 
           $30 Million Convertible Subordinated Notes

      We currently have outstanding an aggregate of $30.0 million of 8% convertible subordinated notes due February 28, 2005, subject to extension of such maturity until February 28, 2006 or February 28, 2007 by the holder. The Company and the holder have agreed to amend these notes to bear interest at 4% per year to a maturity date of February 28, 2005, expected to be effective contemporaneously with the closing of the common stock offering. The conversion price for the notes, which are convertible into shares of our common stock, has been established at $8.90, subject to adjustment in the future upon the occurrence of certain events. We currently estimate that the $30.0 million convertible subordinated notes will be convertible into approximately 3.4 million shares of our common stock once all of the shares under the

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stockholder litigation settlement have been issued. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Year Ended December 31, 2000 — Stockholder litigation settlement.”

      All or a portion of the notes may be converted by the holder at any time prior to the maturity date of the notes, or if the notes are subject to mandatory conversion, at any time prior to the third business day prior to the date of such conversion. At any time after February 28, 2004 (to be amended to February 28, 2005 effective contemporaneously with the closing of the common stock offering), we may generally require the holder to convert all or a portion of the notes if the average market price of our common stock meets or exceeds 150% of the notes’ conversion price, as may be adjusted. We may not prepay the indebtedness evidenced by the notes at any time prior to their maturity; provided, however, that in the event of a change of control or other similar event, the notes are subject to mandatory prepayment in full at the option of the holder. The current terms of our senior indebtedness, however, would prevent such a prepayment.

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UNDERWRITING

      Under the terms of an underwriting agreement, each of the underwriters named below, for whom Lehman Brothers is acting as representative, has severally agreed to purchase from us and the selling stockholder the respective number of shares of common stock opposite its name below:

           
Number of
Underwriters Shares


Lehman Brothers Inc. 
    3,744,000  
UBS Warburg LLC
    1,835,000  
SG Cowen Securities Corporation
    734,000  
First Analysis Securities Corporation
    367,000  
BB&T Capital Markets, a division of Scott & Stringfellow, Inc. 
    367,000  
Morgan Joseph & Co. Inc. 
    293,000  
A.G. Edwards & Sons, Inc. 
    70,000  
Fidelity Capital Markets, a division of National Financial Services, LLC
    70,000  
Avondale Partners LLC
    30,000  
Chatsworth Securities LLC
    30,000  
Fahnestock & Co. Inc. 
    30,000  
C.L. King & Associates, Inc. 
    30,000  
     
 
 
Total
    7,600,000  
     
 

The underwriting agreement provides that the underwriters are obligated to purchase, subject to certain conditions, all of the shares of common stock in the offering if any are purchased, other than those covered by the over-allotment option described below.

      The conditions contained in the underwriting agreement include the requirements that:

  •  the representations made by us to the underwriters are true;
 
  •  there is no material change in the financial markets; and
 
  •  we deliver to the underwriters customary closing documents.

Over-Allotment Option

      The selling stockholder has granted to the underwriters a 30-day option after the date of this prospectus supplement to purchase, from time to time, in whole or in part, up to an aggregate of an additional 1,140,000 shares at the public offering price less underwriting discounts and commissions. This option may be exercised to cover over-allotments, if any, made in connection with the offering. To the extent this option is exercised, each underwriter will be obligated, subject to certain conditions, to purchase its pro-rata portion of these additional shares based on the underwriter’s percentage underwriting commitment in the offering as indicated on the preceding table, and the selling stockholder will be obligated under the over-allotment option, to sell the additional shares of common stock to the underwriters.

Commissions and Expenses

      The representatives of the underwriters have advised us that the underwriters initially propose to offer shares of common stock directly to the public at the public offering price on the cover of this prospectus supplement and to selected dealers, who may include the underwriters, at such offering price less a selling concession not in excess of $0.585 per share. The underwriters may allow, and the selected dealers may re-allow, a discount from the concession not in excess of $0.10 per share to other dealers. After the initial offering, the underwriters may change the public offering price and other offering terms.

      The following table summarizes the underwriting discounts and commissions we and the selling stockholder will pay to the underwriters. These amounts are shown assuming both no exercise and full exercise of the underwriters’ over-allotment option to purchase up to 1,140,000 additional shares from the

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selling stockholder. The underwriting fee is the difference between the initial price to the public and the amount the underwriters pay for the shares.
                                 
Amount the Company Amount the Selling
Will Pay Stockholder Will Pay


No Exercise Full Exercise No Exercise Full Exercise




Per Share
  $ 0.975     $ 0.975     $ 0.975     $ 0.975  
Total
  $ 6,240,000     $ 6,240,000     $ 1,170,000     $ 2,281,500  

The expenses of this offering, excluding underwriting discounts and commissions summarized in the table above, that are payable by us, are estimated to be $1.2 million.

Short Positions and Penalty Bids

      The underwriters may engage in over-allotment, stabilizing transactions, syndicate covering transactions and penalty bids or purchases for the purpose of pegging, fixing or maintaining the price of the common stock, in accordance with Regulation M of the Exchange Act.

  •  Over-allotment involves sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriters is not greater than the number of shares that they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriters may close out any short position by either exercising their over-allotment option and/or purchasing shares in the open market.
 
  •  Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum.
 
  •  Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price at which they may purchase shares through their over-allotment option. If the underwriters sell more shares than could be covered by their over-allotment option, which is called a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering.
 
  •  Penalty bids permit the representative to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.

      These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of our common stock. As a result, the price of the common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on the NYSE or otherwise and, if commenced, may be discontinued at any time.

      Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the common stock. In addition, neither we nor any of the underwriters make a representation that the underwriters will engage in these stabilizing transactions or that any transaction, once commenced, will not be discontinued without notice.

      We and our directors and officers are also subject to restrictions on our ability to purchase common stock during the restricted period described in Regulation M, and we will not make any prohibited

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purchases. The series B preferred stock being purchased by us is not convertible into common stock. We entered into our agreement to purchase MDP’s common stock on March 28, 2003, prior to the beginning of the applicable restricted period and will consummate that purchase after the applicable restricted period. MDP has agreed not to purchase any common stock through the date of consummation of the purchase of its shares. In addition, the selling stockholder will agree in the underwriting agreement not to take any action to stabilize or manipulate the price of the common stock.

Lock-Up Agreements

      In connection with the offering, we and certain of our executive officers and directors and the selling stockholder have agreed that they will not, subject to certain limited exceptions, directly or indirectly, offer, sell, pledge or otherwise dispose of any shares of common stock or any securities convertible into or exchangeable or exercisable for common stock or enter into any swap or other derivative transaction with similar effect as a sale of common stock, for a period of 90 days from the date of this prospectus supplement without the prior written consent of Lehman Brothers Inc. The restrictions in this paragraph do not apply to:

  •  the sale of common stock to the underwriters in this offering, including shares sold pursuant to the over-allotment option, or
 
  •  the issuance by us of options under any of our currently effective stock option or incentive plans or of shares of common stock upon the exercise of a currently outstanding option, warrant or right or the conversion of a security outstanding on the date of this prospectus supplement.

Indemnification

      We and the selling stockholder have agreed to indemnify, under certain circumstances, the underwriters against liabilities relating to the offering, including liabilities under the Securities Act and liabilities arising from breaches of the respective representations and warranties contained in the underwriting agreement, and to contribute, under certain circumstances, to payments that the underwriters may be required to make for these liabilities.

Offers and Sales in Canada

Resale Restrictions

      The distribution of the common stock in Canada is being made only on a private placement basis exempt from the requirement that we prepare and file a prospectus with the securities regulatory authorities in each province where trades of common stock are made. Any resale of the common stock in Canada must be made under applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made under available statutory exemptions or under a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the common stock in Canada.

Representations of Purchasers

      By purchasing common stock in Canada and accepting a purchase confirmation a purchaser is representing to us and the dealer from whom the purchase confirmation is received that:

  •  the purchaser is entitled under applicable provincial securities laws to purchase the common stock without the benefit of a prospectus qualified under those securities laws;
 
  •  where required by law, that the purchaser is purchasing as principal and not as agent; and
 
  •  the purchaser has reviewed the text above under Resale Restrictions.

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Rights of Action — Ontario Purchasers

      Under Ontario securities legislation, a purchaser who purchases a security offered by this prospectus supplement during the period of distribution will have a statutory right of action for damages, or while still the owner of the shares, for rescission against us in the event that this prospectus supplement contains a misrepresentation. A purchaser will be deemed to have relied on the misrepresentation. The right of action for damages is exercisable not later than the earlier of 180 days from the date the purchaser first had knowledge of the facts giving rise to the cause of action and three years from the date on which payment is made for the shares. The right of action for rescission is exercisable not later than 180 days from the date on which payment is made for the common stock. If a purchaser elects to exercise the right of action for rescission, the purchaser will have no right of action for damages against us. In no case will the amount recoverable in any action exceed the price at which the common stock was offered to the purchaser and if the purchaser is shown to have purchased the common stock with knowledge of the misrepresentation, we will have no liability. In the case of an action for damages, we will not be liable for all or any portion of the damages that are proven to not represent the depreciation in value of the common stock as a result of the misrepresentation relied upon. These rights are in addition to, and without derogation from, any other rights or remedies available at law to an Ontario purchaser. The foregoing is a summary of the rights available to an Ontario purchaser. Ontario purchasers should refer to the complete text of the relevant statutory provisions.

Enforcement of Legal Rights

      All of our directors and officers as well as the experts named herein may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon us or those persons. All or a substantial portion of our assets and the assets of those persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against us or those persons in Canada or to enforce a judgment obtained in Canadian courts against us or those persons outside of Canada.

Taxation and Eligibility for Investment

      Canadian purchasers of common stock should consult their own legal and tax advisors with respect to the tax consequences of an investment in the common stock in their particular circumstances.

Stamp Taxes

      Purchasers of the shares of common stock may be required to pay stamp taxes and other charges under the laws and practices of the country of purchase, in addition to the offering price on the cover of this prospectus supplement.

Directed Share Program

      At our request, the underwriters have reserved up to 530,000 shares or 7% of the common stock offered by this prospectus, for sale under a directed share program to specified officers and directors of the company. All of the persons purchasing the reserved shares must commit to purchase no later than the close of business on the day following the date of this prospectus. The number of shares available for sale to the general public will be reduced to the extent these persons purchase the reserved shares. Shares committed to be purchased by directed share participants which are not so purchased will be reallocated for sale to the general public in the offering. All sales of shares pursuant to the directed share program will be made at the public offering price set forth on the cover page of this prospectus.

Electronic Distribution

      This prospectus supplement and accompanying prospectus in electronic format may be made available on the Lehman Brothers Inc. Internet site or through other online services maintained by Lehman Brothers Inc. or by its affiliates. Prospective investors may view offering terms online and may be allowed

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to place orders online. The underwriters may agree with us to allocate a specific number of shares for sale to online brokerage account holders. Any such allocation for online distributions will be made on the same basis as other allocations.

      Other than the prospectus supplement and accompanying prospectus in electronic format, the information on the Lehman Brothers Inc. web site and any information contained in any other web site maintained by Lehman Brothers Inc. or its affiliates is not part of the prospectus supplement, the accompanying prospectus or the registration statement of which this prospectus supplement and accompanying prospectus form a part, has not been approved or endorsed by us or Lehman Brothers Inc. and should not be relied upon by investors.

Relationships

      In the ordinary course of its business, the underwriters and their respective affiliates have engaged, and may in the future engage, in commercial banking and/or investment banking transactions with us and our affiliates. They have received, and expect to receive, customary fees and commissions for these transactions. Lehman Brothers Inc. is the sole lead arranger, Lehman Commercial Paper Inc., an affiliate of Lehman Brothers Inc., is administrative agent, and affiliates of Lehman Brothers Inc. are lenders under our senior secured credit facility. Lehman Brothers Inc. was also sole book-running manager for our offering of 9.875% notes in May 2002. Lehman Brothers Inc. was also the dealer-manager for the tender offer and consent solicitation for our 12% Senior Notes in May 2002 and is the dealer-manager for our offer to purchase up to 90% of our outstanding series B preferred stock. Lehman Brothers Inc. is also the sole book-running manager for our concurrent offering of new senior notes due 2011. Société Générale, an affiliate of SG Cowen Securities Corporation, is a lender under our senior secured credit facility.

      Under Rule 2710 of the Conduct Rules of the National Association of Securities Dealers, Inc. (the “NASD”), certain underwriters in this offering may be considered to have a “conflict of interest” because a portion of the net proceeds to us from this offering may be paid to affiliates of certain of the underwriters, other than Lehman Brothers Inc., to repay our existing term loans as described under “Use of Proceeds.” Therefore, this offering is being conducted in accordance with Rule 2710(c)(8) and Rule 2720 of the NASD Conduct Rules.

Discretionary Sales

      The underwriters have informed us that they will not confirm sales to accounts over which they exercise discretionary authority without the prior written approval of the customer.

LEGAL MATTERS

      The legality of the securities offered by this prospectus supplement will be passed upon for Corrections Corporation of America and the selling stockholder by Bass, Berry & Sims PLC, Nashville, Tennessee. Latham & Watkins LLP New York, New York will act as counsel for the underwriters. Bass, Berry & Sims PLC will rely upon Miles & Stockbridge P.C. as to all matters of Maryland law.

EXPERTS

      The 2002 and 2001 consolidated financial statements of Corrections Corporation of America and Subsidiaries as of and for the years ended December 31, 2002 and 2001 appearing in this prospectus supplement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and have been included herein in reliance upon such report given on the authority of said firm as experts in auditing and accounting. Ernst & Young LLP’s report contains explanatory paragraphs describing (1) Corrections Corporation of America’s adoption of certain new accounting standards effective January 1, 2002 and 2001 and (2) Ernst & Young LLP’s audit procedures with respect to transitional disclosures related to the 2000 combined and consolidated financial statements required by Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible

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Assets.” Ernst & Young LLP was not engaged to audit, review, or apply any procedures to the 2000 financial statements other than with respect to the certain transitional disclosures and, accordingly, has not expressed an opinion or any other form of assurance on the 2000 financial statements.

      The combined and consolidated financial statements for the year ended December 31, 2000 have been included herein in reliance on the report of Arthur Andersen LLP, independent certified public accountants, given on the authority of said firm as experts in auditing and accounting. Arthur Andersen LLP has not consented to the inclusion of their report herein, and we have dispensed with the requirement to file Arthur Andersen LLP’s consent in reliance on Rule 437a under the Securities Act. Because Arthur Andersen LLP has not consented to the inclusion of their report in this prospectus supplement you may not be able to recover against Arthur Andersen LLP under Section 11 of the Securities Act for any untrue statement of a material fact contained in the financial statements audited by Arthur Andersen LLP or any omissions to state a material fact required to be stated in those financial statements.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

      Reference is made to the information under “Incorporation of Information by Reference” in the accompanying prospectus.

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INDEX TO FINANCIAL STATEMENTS

COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS OF CORRECTIONS

CORPORATION OF AMERICA AND SUBSIDIARIES
     
Report of Independent Auditors
  F-2
Report of Independent Public Accountants
  F-4
Consolidated Balance Sheets as of December 31, 2002 and 2001
  F-5
Combined and Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000
  F-6
Combined and Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000
  F-8
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2002, 2001 and 2000
  F-13
Notes to Combined and Consolidated Financial Statements
  F-15

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REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of

Corrections Corporation of America:

      We have audited the accompanying consolidated balance sheets of Corrections Corporation of America and Subsidiaries as of December 31, 2002 and 2001 and the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audits. The combined and consolidated statements of operations, cash flows and stockholders’ equity of Corrections Corporation of America for the year ended December 31, 2000 were audited by other auditors, who have ceased operations. Those auditors expressed an unqualified opinion, including an emphasis-of-matter paragraph referring to the Company’s near-term debt maturities and management’s plans to address the Company’s liquidity concerns and an explanatory paragraph that disclosed the change in the Company’s method of accounting for derivative financial instruments, on those financial statements in their report dated February 11, 2002, except with respect to the matter discussed in the last paragraph of Note 16 of those financial statements, as to which the date was Ma