Document/Exhibit Description Pages Size
1: 8-K Prison Realty Trust, Inc 4 15K
2: EX-10.1 First Amendment to Securities Purchase Agreement 4 17K
3: EX-99.1 Letter to Board of Directors 11 41K
4: EX-99.2 Press Release 1 6K
EXHIBIT 99.1
[PACIFIC LIFE LETTERHEAD]
Board of Directors
c/o Mr. Thomas W. Beasley, Chairman
Prison Realty Trust, Inc.
10 Burton Hills Blvd, Suite 100
Nashville, Tennessee 37215
February 22, 2000
Gentlemen:
We own beneficially approximately 5 million shares of Prison
Realty Trust, Inc. (the "Company").
We support the goals of the Board of Directors to strengthen the
financial position of the Company, to simplify its corporate structure and to
create a new management team and Board of Directors. However, we believe those
goals and existing shareholders of the Company would be better served not by the
transaction with Fortress Investment Group LLC, The Blackstone Group and Bank of
America ("Blackstone Proposal"), but rather by acceptance of the proposal
("Shareholder Proposal") we are making. Enclosed is a Shareholder Proposal
Summary ("Summary").
Advantages of Shareholder Proposal
The Shareholder Proposal would provide the Company with
comparable net proceeds, but has the advantages to existing shareholders over
the Blackstone Proposal as shown in the enclosed comparison of the two Proposals
("Comparison"). Let me highlight four advantages in particular:
1. The Shareholder Proposal is designed to encourage 100%
shareholder participation and, if existing shareholders fully
participate, they would be diluted only approximately 10% in our offer
compared to suffering dilution of a minimum of 31% under the Blackstone
Proposal.
-2-
2. Existing shareholders will receive $260 million in Series C
Preferred Stock or $2.20 per share. This upfront value lowers their net
investment and they will own 24% more shares compared to the Blackstone
Proposal. For a shareholder with 100 shares, the shareholder would
invest $65 and own 115 fully diluted shares under Blackstone as compared
to receiving $52 net value and owning 142 fully diluted shares under the
Shareholder Proposal (see Summary).
3. Existing shareholders would receive greater annual returns
under differing scenarios ranging from 9% to 38% in the Shareholder
Proposal compared to (3%) and 23% in the Blackstone Proposal. Unlike the
Blackstone Proposal which would require the Company to pay an 18%
minimum annual return to the Blackstone Group at a considerable cost to
existing shareholders, the Shareholder Proposal does not require any
guaranteed minimum annual return to Pacific Life.
4. The Company would generate substantially higher free cash
flows under the Shareholder Proposal due to lower cash dividends. For
example, over the next five years the Company would retain between $45
and $123 million in additional free cash flow as compared to the
Blackstone Proposal.
Offer
The Shareholder Proposal would build on the work being done
by the Company to (1) refinance its existing debt with up to a new $1.2 billion
term loan and revolving credit facility from Credit Suisse First Boston and/or
Lehman Brothers, and (2) make a rights offering to existing shareholders.
Specifically, our proposal is the following:
1. The Company would retain its REIT status for 1999 and
distribute to all shareholders (to satisfy REIT and other dividend
requirements) a 12% PIK Series C Preferred Stock, callable after 3 years
with mandatory redemption in 10 years. Retaining REIT status for 1999
and paying the dividend in a Series C Preferred Stock would save the
Company more than $140 million in taxes. Our tax advisors confirm that
paying such a dividend would satisfy the REIT dividend requirement.
-3-
2. The Shareholder Proposal intends to match the number of shares
and cash paid to the shareholders of Corrections Corporation of America,
Prison Management Services, Inc., and Juvenile and Jail Facility
Management Services, Inc. as part of the combination with the Company.
3. The Company would make available to all shareholders a $200
million rights offering of its Common Stock at the lower of $4 per share
or 75% of average market stock price. The rights would be transferable
(unlike the Blackstone Proposal) so shareholders who choose not to
exercise the rights may nonetheless realize the value of the rights.
Because existing shareholders can fully participate, the price per share
does not cause dilution in itself.
4. Pacific Life would make a standby commitment for the
unsubscribed portion of the $200 million rights offering and would
receive in exchange 20 million Common Stock Warrants (or if greater,
warrants for 10% of outstanding Common Stock on a fully diluted basis)
with a term of 15 years and with an exercise price set at a 125% premium
to the rights offering price up to a maximum of $5 per share. To the
extent that shares of Common Stock are not subscribed, Pacific Life
would purchase an equal dollar amount of Series B Preferred Stock
convertible at the rights offering price.
5. In the event the Company needs further assistance in its
refinancing efforts, Pacific Life believes that there are alternatives
including securing senior debt from other lenders, high-yield/mezzanine
financing and/or sale of certain assets.
This offer has been approved by all necessary corporate actions
on the part of Pacific Life. We do not need financing. We are prepared to
negotiate and enter into an agreement substantially the same as the Securities
Purchase Agreement dated December 26, 1999 (including the governance provisions)
with only such changes as necessary to reflect the differences in the two
transactions. We are, however, amenable to having the governance provisions
lapse when the Company achieves a minimum level of EBITDA for 6 quarters. We do
not want a cash financing fee, a break-up fee or an annual monitoring fee, only
reimbursement of our reasonable, substantiated out-of-pocket expenses. We would
want an opportunity to review and understand the disclosure schedules.
We have included a copy of our most recent annual report to
demonstrate that we have the financial resources to make this offer. Pacific
Life is one of the largest life insurance companies in the United States, with
total assets at 12/31/99 in excess of $40 billion. We are a highly rated
company, with claim-paying ratings of Aa3 from Moody's and AA+ from Standard &
Poor's and Duff & Phelps.
-4-
We, along with our advisors including Cahill Gordon & Reindel,
are prepared to meet with you and your advisors as soon as you are able to under
the terms of the Securities Purchase Agreement. Quite obviously this is a
written proposal pursuant to which Pacific Life would make a significant equity
investment in the Company and we believe that you should reasonably determine in
good faith that you are required at the least to explore and discuss our offer
with us.
Please feel free to contact at Pacific Life, me (949) 219-3978 or
Sam Tang (949) 219-4523 and at Cahill Gordon, Gerald Tanenbaum (212) 701-3224 or
Les Duffy (212) 701-3840.
Very truly yours,
/s/ LARRY J. CARD
---------------------------------------
Larry J. Card
LJC:ml
COMPARISON BETWEEN
BLACKSTONE AND SHAREHOLDER PROPOSALS
[Enlarge/Download Table]
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TERM BLACKSTONE SHAREHOLDER
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Closing of Stated Transaction Uncertain Highly Certain
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Transaction, Break-up and
Monitoring Fees to Sponsor $16 - $23+MM $0
-------------------------------------------------------------------------------------------------
Warrants 29.6 MM $20 MM
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Guaranteed Minimum Return 18% p.a. with
year 5 put option None
-------------------------------------------------------------------------------------------------
Finite with
Loss of Company Control Indefinite Performance Targets
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Size of Rights Offering to
Existing Shareholders $75 MM $200 MM
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Participation Available to
Existing Shareholders 21% - 24% 100%
-------------------------------------------------------------------------------------------------
Rights Offering Participation
Contingent on Voting for Proposal Yes No
-------------------------------------------------------------------------------------------------
Transferability of Rights (liquidity) None Fully
-------------------------------------------------------------------------------------------------
Pro-forma Ownership: Existing
Shareholders 60% - 69% Up to 90%
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Net Equity Proceeds (after taxes) $174 - $209 MM $200 MM
-------------------------------------------------------------------------------------------------
Value Today to Existing $260 MM in
Shareholders None Series C Preferred
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Gain (Loss) to Existing Shareholders
(Based on 100 shares) at
$ 3 per share ($200) ($22)
$ 5 per share $0 $262
$10 per share $548 $972
-------------------------------------------------------------------------------------------------
Lower Cash Dividends on
Preferred Over Next 5 Years N/A $45 - $123 MM
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SHAREHOLDER PROPOSAL SUMMARY
-----------------------------
INTRODUCTION As one of the larger existing shareholders of
Prison Realty Trust, Inc. ("Company"), Pacific
Life is presenting to the Board of Directors for
its consideration an alternative proposal
("Shareholder Proposal") to the Blackstone
proposal.
The Shareholder Proposal not only delivers
comparable net proceeds but offers the following
advantages:
- No built-in fees to and no conflicts with the
sponsoring group
- Maximizes shareholder participation
- Less dilutive to existing shareholders
- Builds on work being performed on behalf of
Company
- Generates higher free cash flow to Company
- More value today to existing shareholders
- Offers higher future returns to existing
shareholders
-----------------------------
DESCRIPTION Shareholder Proposal requires that the Company
merge with Corrections Corporation of America,
Prison Management Services, Inc. and Juvenile and
Jail Facility Management Services, Inc.
(collectively "Operating Companies") and become a
C-corp effective year 2000.
Shareholder Proposal assumes that the Company can
meet the REIT qualification tests for 1999 and has
the Company declare a subsequent year dividend for
1999 before the due date of its 1999 tax return.
Shareholder Proposal essentially substitutes for
Blackstone's equity (a) new equity from existing
shareholders via a Rights Offering of Common Stock
which will be back stopped 100% by Pacific Life
and (b) savings in taxes.
-----------------------------
RIGHTS OFFERING Rights Offering will be made 100% available to
existing shareholders equal to their proportionate
ownership interest. Existing shareholders will
receive transferable rights to purchase up to $200
million of Common Stock.
Page -1-
The Rights Offering exercise price will be the
lower of $4.00 per share and 75% of the average
closing market stock price for a specified number
of trading days prior to the commencement of
Rights Offering. The minimum number of shares of
Common Stock to be issued will be 50 million
shares ($200 million / $4.00 per share).
-----------------------------
BACKSTOP Pacific Life will provide a 100% backstop (up to
$200 million) to the Company for any unexercised
rights. For providing this commitment, Pacific
Life will receive 15-year Warrants to purchase up
to the greater of 20 million shares and 10% of
Common Stock on a fully diluted basis.
The Warrant exercise price will be set at 125% of
the Rights Offering exercise price or up to $5.00
per share (125% premium x $4.00 per share Rights
Offering exercise price).
In the event there are unexercised rights, Pacific
Life will make an investment in Series B Preferred
Stock ("Preferred B") equal to the difference
between $200 million and the gross proceeds
received under the Rights Offering.
Pacific Life will exercise all of the rights it
receives, subject to a minimum investment in
Series B Preferred.
-----------------------------
SERIES B PREFERRED Preferred B will be 6% cash pay and 4% PIK per
annum over the first three years and 10% cash pay
per annum thereafter, payable quarterly in
arrears. There is no 18% guaranteed minimum return
at the end of 5 years.
Preferred B will rank on a pari passu basis with
outstanding Preferred A. Preferred B will be
convertible into Common Stock at a conversion
price equal to the Rights Offering exercise price.
-----------------------------
MANAGEMENT As part of Pacific Life's investment in Preferred
B, an investment committee will be established
similar to the one required under the Blackstone
Proposal. However, if the Company meets certain
EBITDA performance targets over 6 consecutive
quarters, the investment committee will be
dissolved.
Page -2-
BOARD OF DIRECTORS
Shareholder Proposal is the same as Blackstone
reducing the board from 12 to 10. Pacific Life
will designate 4 directors.
INVESTMENT COMMITTEE
Investment Committee will be comprised of 7
directors with 4 Pacific Life designated
directors, 1 non-executive director member, 1
executive director member and 1 outside member
jointly selected by Board of Directors and Pacific
Life.
MANAGEMENT
Investment Committee to approve new CEO and CFO.
STOCK OPTION PLAN
If not already in process, Investment Committee to
hire an outside consultant to recommend a stock
option plan to attract and retain senior
management.
-----------------------------
1999 DIVIDEND To meet the remaining portion of earnings and
profits distribution for the acquisition of
Corrections Corp. and/or the mandatory minimum
dividend required to qualify as a REIT for 1999,
the Shareholder Proposal requires that the Company
issue to existing shareholders Series C Preferred
in lieu of cash.
The amount of Series C Preferred is dependent on
the cash amount needed to meet both the special
and mandatory minimum dividends, and the fair
market value of Series C Preferred as required by
the Internal Revenue Service to qualify as a REIT
for 1999. For modeling purposes, the Shareholder
Proposal assumes that the issuance of $260 million
Series C Preferred meets these criteria.
-----------------------------
SERIES C PREFERRED Preferred C will be 12% PIK per annum over the
first three years and 12% cash pay thereafter,
payable quarterly in arrears. Preferred C will not
be convertible into Common Stock.
At the Company's option, Preferred C can be called
after 3 years at par and has a mandatory
redemption at the end of 10 years at par.
-----------------------------
NO FEES AND NO CONFLICTS There will be no transaction, break-up and/or
monitoring fees due to or payable to Pacific Life
under the Shareholder Proposal. Pacific Life will
be reimbursed for expenses including outside
Page -3-
legal counsel, accountants, financial advisors and
consultants.
There will be no 18% guaranteed minimum return
that causes conflicts of interest between the
existing shareholders and Blackstone, especially
under more conservative operating scenarios.
-----------------------
MAXIMIZE PARTICIPATION The Rights Offering exercise price will be set at
a discount to the market price of the Common
Stock. This discount will encourage existing
shareholders to participate in the Rights
Offering.
-----------------------
LESS DILUTION Assuming 100% participation in the Rights,
existing shareholders will experience only
approximately 10% dilution. The discounted Rights
Offering exercise price itself will not cause
dilution because all existing shareholder can
participate proportionately. This proposal allows
existing shareholders to capture almost all of the
enterprise value created going forward.
In contrast, the Blackstone proposal will result
in a minimum of 31% dilution assuming full
participation by existing shareholders and up to
40% assuming no existing shareholder participation
on a fully diluted basis.
-----------------------
BUILDS ON WORK SENIOR DEBT
Shareholder Proposal is the same as Blackstone
where the Company refinances its existing debt
with up to a $1.2 billion term loan and revolving
credit facility from either existing and/or new
lenders.
In the event the Company is unsuccessful in its
refinancing efforts, Pacific Life is in
discussions with other lenders who would refinance
the Company's existing $1 billion bank facility.
If there is any shortfall, Pacific Life believes
that high yield/mezzanine financing and/or the
sale of certain assets could fill this gap.
SUBORDINATED DEBT
Pacific Life is both a general partner and limited
partner of PMI Mezzanine Fund, L.P. ("PMI") which
owns $30 million in subordinated debt. Under the
Blackstone proposal, this debt will need to be
repaid.
Page -4-
However, under the Shareholder Proposal, PMI has
indicated that it would look favorably to either
extending the maturity of the debt and/or
exchanging it for a security similar to Preferred
B.
OPERATING COMPANIES
The Shareholder Proposal intends to match the
number of shares and cash paid to the shareholders
of the Operating Companies.
-----------------------
COMPARABLE NET PROCEEDS The uses under the Shareholder Proposal are
estimated to be lower by at least $141 million due
to no tax reserves and payments for 1999.
Shareholder Proposal will provide roughly the same
net proceeds to the Company by injecting $200
million in equity compared to between $174 and
$209 million under the Blackstone proposal ($315
and $350 million Blackstone equity - $141 million
taxes).
-----------------------
HIGHER FREE CASH FLOW The Company will generate higher cash available to
Common Stock under Shareholder Proposal because of
the lower cash dividend requirements as compared
to Blackstone.
Depending on the participation level of the Rights
Offering, the Shareholder Proposal should generate
between $45 and $123 million more cash available
to Common Stock than Blackstone proposal over the
next five years. This additional cash could be
utilized by the Company to fund its external
growth plans.
Note - Under the Blackstone Proposal, the $350
million Preferred B/C has an 18% minimum return
resulting in 6% (18% - 12%) additional annual
yield.
-----------------------
MORE VALUE TODAY Under the Shareholder Proposal, existing
shareholders will receive $260 million Series C
Preferred or $2.20 per share. This upfront receipt
of value will lower the existing shareholders' net
investment and they will own more shares as
compared to the Blackstone Proposal.
The following table presents a simplified example
for an existing shareholder who owns 100 shares of
Common Stock and participates to the maximum
extent possible under both proposals.
Page -5-
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[Download Table]
Blackstone Shareholder
---------------------- ---------------------
Shares(1) $ Shares(1) $
--------- -------- --------- -------
INVESTMENT
Old Common @ $5.00 100 500 100 500
New Common @ $4.00 - - 42 168
Preferred C @ $6.50 10 65 - -
Preferred C - - - (220)
Warrants @ $7.50 5 - - -
------ ------ ------ ------
115 565 142 448
IMMEDIATE VALUE (2)
$3.00 365 426
$5.00 565 710
$7.50 825 1,065
$10.00 1,113 1,420
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(1) Gives effect to issuable on conversion and
exercise of securities purchased in
Blackstone's rights offering.
(2) Higher of face or converted value for
Preferred and net value for Warrants. Excludes
dividends.
The Shareholder Proposal shows higher immediate
value to existing shareholders at all common price
per share scenarios.
-----------------------
MORE VALUE TODAY Shareholder Proposal generates higher returns to
existing shareholders than Blackstone proposal
under differing operating scenarios. The projected
annual IRRs to existing shareholders are
summarized below:
Case Blackstone Shareholder
---- ---------- -----------
Low -2.8% 9.3%
High 22.5% 38.2%
Note: Assumes Same Multiple under Both Proposals
In the low case, Blackstone's 18% guaranteed
minimum return causes negative returns to existing
shareholders.
Under the Shareholder Proposal, the Company's
Common Stock is expected to trade at higher
multiples because of the discount associated with
vulture investor-led deals. A higher multiple
would increase the returns to existing
shareholders even more.
Page -6-
Dates Referenced Herein
| Referenced-On Page |
|---|
| This ‘8-K’ Filing | | Date | | First | | Last | | | Other Filings |
|---|
| |  |
| Filed as of: | | 3/1/00 | | | | | | | None on these Dates |
| Filed on: | | 2/29/00 |
| For Period End: | | 2/23/00 |
| | 2/22/00 | | 1 |
| | 12/26/99 | | 3 |
| List all Filings |
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