-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UnJ2mTQHvIlfVXpOuMD3e6kEvthZdiGI9vN+oVdpe9TRb7SF2cekCJJ/Wjsqtcfv tVTXnwurXQpsVKfGUzOLiQ== 0000890566-99-000446.txt : 19990412 0000890566-99-000446.hdr.sgml : 19990412 ACCESSION NUMBER: 0000890566-99-000446 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 DATE AS OF CHANGE: 19990408 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORNELL CORRECTIONS INC CENTRAL INDEX KEY: 0001016152 STANDARD INDUSTRIAL CLASSIFICATION: 8744 IRS NUMBER: 760433642 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-14472 FILM NUMBER: 99584486 BUSINESS ADDRESS: STREET 1: 1700 WEST LOOP SOUTH STREET 2: STE 1500 CITY: HOUSTON STATE: TX ZIP: 77027 BUSINESS PHONE: 7136230790 MAIL ADDRESS: STREET 1: 4801 WOODWAY STREET 2: STE 400W CITY: HOUSTON STATE: TX ZIP: 77056 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER 1-14472 CORNELL CORRECTIONS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 76-0433642 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 1700 WEST LOOP SOUTH, SUITE 1500, HOUSTON, TEXAS 77027 - - ------------------------------------------------ --------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 623-0790 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock, $.001 par value per share (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ( X ) No ( ) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will be not contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ). At February 26, 1999, Registrant had outstanding 9,552,216 shares of its common stock. The aggregate market value of the Registrant's voting stock held by non-affiliates at this date was approximately $148,951,000 based on the closing price of $16.50 per share as reported on the New York Stock Exchange. For purposes of the foregoing calculation, all directors and officers of the Registrant have been deemed to be affiliates, but the Registrant disclaims that any of such directors or officers is an affiliate. Documents Incorporated by Reference
Portions of the Proxy Statement for 1999 Annual Meeting of Stockholders. Part III
PART I ITEM 1. BUSINESS Cornell Corrections, Inc. (the "Company") is one of the leading providers of privatized correctional, detention and pre-release services in the United States based on total offender capacity. The Company is the successor to entities that began developing secure institutional correctional and detention facilities in 1984, pre-release facilities in 1977 and juvenile facilities in 1973. The Company has significantly expanded its operations through acquisitions and internal growth and is currently operating facilities in 12 states and the District of Columbia. As of December 31, 1998, the Company had contracts to operate 53 facilities with a total offender capacity of 10,525. The Company's residential facilities have a total offender capacity of 9,135 beds, with 51 facilities currently in operation and an existing facility under expansion in Georgia (1,075 beds). The Company provides integrated facility development, design, construction and operational services to governmental agencies within three operating divisions: (i) secure institutional correctional and detention services; (ii) juvenile treatment, educational and detention services and (iii) pre-release correctional services. Secure institutional correctional and detention services consist primarily of the operation of secure adult incarceration facilities. Juvenile services consist of providing residential treatment and educational programs and non-residential community-based programs to juvenile offenders between the ages of 10 and 17 who have either been adjudicated or suffer from behavioral problems. Pre-release correctional services primarily consist of providing pre-release and halfway house programs for adult offenders who are either on probation or serving the last three to six months of their sentences on parole and preparing for re-entry into society. At the secure institutional correctional and detention facilities, the Company generally provides maximum and medium security incarceration and minimum security residential services, institutional food services, certain transportation services, general education programs (such as high school equivalency and English as a second language programs), health care (including medical, dental and psychiatric services), work and recreational programs and chemical dependency and substance abuse programs. Juvenile services provided by the Company include counseling, wilderness, medical and accredited educational programs tailored to meet the special needs of juveniles. Additional services provided in the Company's pre-release facilities typically include life skills and employment training and job placement assistance. The Company derives substantially all its revenues from operating correctional, detention and pre-release facilities for federal, state and local governmental agencies in the United States. For the years ended December 31, 1998, 1997 and 1996, 20.1%, 31.4% and 39.7%, respectively, of the Company's consolidated revenues were derived from contracts with the Federal Bureau of Prisons. HISTORY OF ACQUISITIONS Since 1994, the Company has completed seven acquisitions. In August 1998, the Company acquired substantially all of the Alaskan assets of Allvest, Inc. ("Allvest"), a privately held company based in Anchorage, Alaska. The Allvest acquisition included the operations of five pre-release facilities with an aggregate capacity of 540 beds in Anchorage, Fairbanks and Bethel, Alaska, the real properties of three of the five facilities and assignments of contracts with the Alaska Department of Corrections ("ADC"). The aggregate purchase price for the acquisition was approximately $21.3 million. In January 1998, the Company purchased the Great Plains Correctional Facility ("Great Plains"), an existing 812 bed medium security prison located in Hinton, Oklahoma for approximately $43.8 million. The prison was operated pursuant to a one-year contract with nine one-year renewal options between the Oklahoma Department of Corrections and the Hinton Economic Development Authority ("HEDA"); HEDA in turn subcontracted the daily operations of the prison to another operator. The Company assumed complete operation of Great Plains in July 1998. The Company has a 30-year operating contract with four five-year renewals with HEDA. The purchase included an additional 20 adjacent acres of land for potential future expansion of the facility. - 2 - In September 1997, the Company acquired substantially all of the assets of The Abraxas Group, Inc. and four related entities (collectively, "Abraxas"), a not-for-profit juvenile operator of seven residential facilities and 11 non-residential community-based programs, serving an aggregate capacity of approximately 1,400 juvenile offenders. The aggregate purchase price for the acquisition was approximately $19.2 million. In January 1997, the Company acquired substantially all of the assets of Interventions Co. ("Interventions") for an aggregate purchase price of $6.0 million. The acquisition included the operation of the Dallas County Judicial Center, a 300 bed adult residential pre-release facility in Dallas, Texas and the Griffin Juvenile Facility, a 150 bed capacity residential transitional living center for juveniles in San Antonio, Texas. In July 1996, the Company acquired substantially all the assets of MidTex Detentions, Inc. ("MidTex"), the operator of secure institutional facilities in Big Spring, Texas (the "Big Spring Complex"), for an aggregate purchase price of approximately $23.2 million. The City of Big Spring has an Intergovernmental Agreement (the "IGA") with the Federal Bureau of Prisons ("FBOP") to house the offenders at the Big Spring Complex. As part of the acquisition, MidTex assigned to the Company its rights under an operating agreement with the City of Big Spring (the "Big Spring Operating Agreement") to manage the Big Spring Complex. The Big Spring Operating Agreement has a base term of 20 years from the closing of the acquisition and three five-year renewal options at the discretion of the Company. The IGA has an indefinite term, although it may be terminated or modified by the FBOP upon 90 days written notice. In May 1996, the Company acquired a 310 bed pre-release facility located in Houston, Texas (the "Reid Center"), for approximately $2.0 million. Included in the acquisition was the real and personal property and the assignment of the Reid Center's contract with the Texas Department of Criminal Justice ("TDCJ"). In March 1994, the Company acquired Eclectic Communications, Inc. ("Eclectic"), the operator of 11 privatized secure institutional and pre-release facilities in California with an aggregate offender capacity of 979 beds. Consideration for the acquisition of Eclectic was $10.0 million. INDUSTRY AND MARKET In the United States, there is a growing trend toward privatization of government services and functions, including correctional and detention services, as governments of all types face continuing pressure to control costs and improve the quality of services. According to the Private Adult Correctional Facility Census dated December 31, 1998 ("1998 Facility Census"), the design capacity of privately managed adult secure institutional correctional and detention facilities in operation or under construction worldwide increased from 10,973 beds at December 31, 1989 to 132,572 beds at December 31, 1998, a compound annual growth rate of 32%. In addition, the design capacity of privately managed adult secure institutional correctional and detention facilities increased 24% in the last year. The United States leads the world in private prison management contracts. The 1998 Facility Census reports that at December 31, 1998, there were private adult secure institutional correctional and detention facilities in operation or under construction in 25 states, the District of Columbia and Puerto Rico. According to reports issued by the United States Department of Justice, Bureau of Justice Statistics (the "BJS"), the number of adult offenders housed in United States federal and state prison facilities and in local jails increased from 744,208 at December 31, 1985 to 1,725,842 at June 30, 1997. Management believes that the increase in the demand for privatized adult secure institutional correctional and detention facilities is also a result, in large part, of the general shortage of beds available in United States adult secure institutional correctional and detention facilities. Industry reports also indicate that adult offenders convicted of violent crimes generally serve only - 3 - one-third of their sentence, with the majority of them being repeat offenders. Accordingly, there is a perceived public demand for, among other things, longer prison sentences, as well as prison terms for juvenile offenders, resulting in even more overcrowding in United States correctional and detention facilities. Finally, numerous courts and other government entities in the United States have mandated that additional services offered to offenders be expanded and living conditions be improved. Many governments do not have the readily available resources to make the changes necessary to meet such mandates. Similar to the adult secure institutional correctional and detention industry, the area of pre-release correctional services has experienced substantial growth. The pre-release area primarily comprises individuals who have been granted parole or sentenced to probation. Probationers (individuals sentenced for an offense without incarceration) and parolees (individuals released prior to the completion of their sentence) are typically placed in pre-release settings. These individuals typically spend three to six months in halfway houses until they are prepared to re-enter society. According to the BJS, the number of parolees increased from 220,438 at December 31, 1980 to 690,159 at December 31, 1994, a compound annual growth rate of 8.5%. During the same period, the number of individuals on probation increased from 1.1 million to approximately 3.0 million, a compound annual growth rate of 7.4%. The probation and parole populations represent approximately 71% of the total number of adults under correctional supervision in the United States. The pre-release correctional services industry is extremely fragmented with several thousand providers across the country, most of which are small and operate in a specified geographic area. The juvenile corrections industry has also expanded rapidly in recent years as the need for services for at-risk and adjudicated youth has risen. According to the Criminal Justice Institute, the population in the juvenile correctional system, both residential and non-residential community-based, has increased from 62,268 youths at January 1, 1988 to 102,582 youths at January 1, 1995, a compound annual growth rate of 7.4%. The juvenile corrections industry is also fragmented with several thousand providers across the country, most of which are small and operate in a specific geographic area. OPERATING DIVISIONS SECURE INSTITUTIONAL CORRECTIONAL AND DETENTION SERVICES. At December 31, 1998, the Company operated seven facilities with a total offender capacity of 5,916 beds that provide secure institutional correctional and detention services for incarcerated adults. These facilities consisted of: (i) the 812 bed Great Plains Correctional Facility, a medium security prison operated for HEDA and the Oklahoma Department of Corrections; (ii) the 1,947 bed Big Spring Complex, a minimum to medium security facility operated primarily for the FBOP; (iii) the 302 bed Wyatt Detention Facility, a medium to maximum security facility operated primarily for the United States Marshal Services (the "USMS") in Central Falls, Rhode Island; (iv) two minimum security facilities in California with a total offender capacity of 558 beds operated for the California Department of Corrections (the "CDC"); (v) the Santa Fe County Adult Detention Facility, a 672 bed adult detention facility operated for Santa Fe County and (vi) the 1,625 bed D. Ray James Prison, a minimum to medium security facility operated for the State of Georgia. The Company operates the Big Spring Complex pursuant to the Big Spring Operating Agreement between the Company and the City of Big Spring. The City of Big Spring in turn is a party to the IGA with the FBOP for an indefinite term with respect to the facilities. The Immigration and Naturalization Service (the "INS") and the USMS also use the Big Spring Complex. Offenders include detainees held by the INS, adjudicated offenders held by the INS who will be deported after serving their sentences and adjudicated offenders held for the FBOP. The Big Spring Complex is equipped with an interactive satellite link to INS courtroom facilities and judges which allows for processing of a high volume of INS detainees while -4- reducing the time, effort and expense incurred in transporting offenders to offsite courtrooms. The Company completed a 560 bed expansion at the Big Spring Complex in the fourth quarter of 1998. The Wyatt Detention Facility in Central Falls opened in 1993 and primarily houses federal offenders awaiting adjudication under federal criminal charges. The Leo Chesney Correctional Facility (for females) and the Baker Correctional Facility (for males) are both in California and house offenders sentenced by the State of California, most of whom are non-violent offenders with sentences of up to two years. The Santa Fe County Adult Detention Facility is a 672 bed adult detention facility that houses offenders from Santa Fe County and various surrounding counties. Construction of the new 672 bed adult detention facility was completed in July 1998. Prior to construction of the new facility, the Company operated a 240 bed facility which housed 200 adult and 40 juvenile offenders. The 240 bed facility was renovated to house 115 juveniles exclusively. The D. Ray James Prison began operations during the fourth quarter of 1998 and houses offenders from the State of Georgia. The Company is currently operating 550 beds with a 1,075 bed expansion to be completed in the first quarter of 1999. Under its contracts, the Company provides a variety of programs and services at its secure institutional facilities, including secure incarceration services, institutional food services, certain transportation services, general education programs (such as high school equivalency and English as a second language programs), work and recreational programs and chemical dependency and substance abuse programs. JUVENILE CORRECTIONAL AND DETENTION SERVICES. Under the name "Cornell Abraxas," the Company offers programs to meet the multiple needs of troubled juveniles. At December 31, 1998, the Company operated or had contracts to operate 14 residential facilities and 14 non-residential community-based programs serving an aggregate capacity of 2,636 youths. Juvenile correctional and detention services consist primarily of treatment programs for offenders that are designed to lead to rehabilitation while providing public safety and holding offenders accountable for their decisions and behavior. The Company operates primarily within a restorative justice model. The basic philosophy is that merely serving time in an institution does not relieve juvenile offenders of the obligation to repay their victims and that incarceration alone does not compensate for the societal impact of crimes. The use of a balanced approach gives equal emphasis to accountability, competency development and community protection. The 160 bed Salt Lake Valley Juvenile Detention Facility in Salt Lake City, Utah includes an interactive satellite link to juvenile courtroom facilities and judges, which allows for processing of a high number of juvenile detainees while reducing the time, effort and expense incurred in transporting detainees to offsite courtrooms. The Santa Fe County Juvenile Detention Facility in Santa Fe, New Mexico is a contracted 115 bed facility that houses juvenile offenders for Santa Fe County and various surrounding counties. The facility, which was previously a 240 bed facility that housed 200 adults and 40 juveniles, was renovated to house 115 juveniles. The Griffin Juvenile Facility is a 150 bed capacity transitional living center for juveniles located in San Antonio, Texas. The Company currently has contracts for the housing of adjudicated and certain homeless non-adjudicated juveniles. Generally, Cornell Abraxas programs include education, individual and group counseling, social skills training, physical training, community service and substance abuse treatment. The educational schools -5- within Cornell Abraxas are accredited, whereby graduating juveniles are eligible to receive a full high school diploma as an alternative to the traditional General Educational Development ("G.E.D.") certificate. The three largest facilities operated by Cornell Abraxas include: (i) the Cornell Abraxas 1 program ("A-1"); (ii) the Leadership Development Program (the "LDP") and (iii) Cornell Abraxas of Ohio. A-1's property is comprised of approximately 16 buildings situated on approximately 100 acres with an aggregate offender capacity of 204 beds. Located in the Allegheny National Forest, A-1 operates as an open residential facility for the treatment of delinquent and/or dependent males who have substance abuse problems and/or are involved in the sale of a controlled substance. A-1 also operates a licensed school which offers a full range of educational services and interscholastic sports programs. While at A-1, juvenile offenders may earn a high school diploma, pursue vocational tracks or receive G.E.D. instruction and testing. The LDP is conducted on property leased by the Company, located on approximately 3.5 acres in South Mountain, Pennsylvania. The LDP is a 15-week residential treatment program with a wilderness component. The program includes group counseling, substance abuse treatment and licensed educational programs. Cornell Abraxas of Ohio's facility is located on approximately 80 acres in north central Ohio and has an offender capacity of 108 beds. This residential program offers a comprehensive substance abuse treatment and education program for males. Individuals participate in intensive group curriculum which includes a wide variety of topics such as: stages of denial, self-help tools for recovery, goal setting, values, beliefs and morals, relapse process and prevention and sex education. Individuals may earn a high school diploma, pursue vocational tracks or receive G.E.D. instruction and testing. The non-residential community-based programs transition juvenile offenders from residential placement back to their home communities. The Company provides in-home counseling and intensive case management services while integrating an array of community resources into a comprehensive plan. This dual role of service provider and intermediary serves to bridge the gap between residential facilities and the community. The Company utilizes therapists and consulting psychologists in its multi-level treatment programs. The Company intends to pursue additional contract awards to provide juvenile detention and correctional services, and to continue to increase its number of contracts for specialized rehabilitation programs and services for juvenile offenders such as wilderness programs and secure education and training centers. PRE-RELEASE CORRECTIONAL SERVICES. At December 31, 1998, the Company operated 18 facilities with an aggregate offender capacity of 1,973 beds that provide pre-release correctional services. For a listing of facility locations and the contracting agency, see "Facilities." Most residents of these facilities are or will be serving the last three to six months of their sentences and preparing for re-entry into society. At its pre-release facilities, the Company typically provides minimum security residential services, institutional food services, general education programs, life skills and employment training, job placement assistance and chemical dependency and substance abuse counseling. About 20% of the offenders at the FBOP pre-release facilities in California, Utah and Texas are on home confinement; monitoring is primarily done by required check-ins and by unscheduled visits to places of residence and employment. - 6 - FACILITIES As of December 31, 1998, the Company operated 51 facilities and had been awarded contracts to operate two additional facilities that are currently under construction or renovation. In addition to providing management services, the Company has been involved in the development, design and/or construction of many of these facilities. The facilities currently under development are the Cornell Abraxas Youth Center, which commenced operations during the first quarter of 1999, and the New Morgan Academy scheduled to open in 2000. The following table summarizes certain additional information with respect to contracts and facilities under operation by the Company as of December 31, 1998:
PRINCIPAL COMMENCE- CONTRACTING TOTAL INITIAL MENT COMPANY GOVERNMENT OFFENDER CONTRACT OF CURRENT TERM RENEWAL OWNED/ FACILITY NAME AND LOCATION AGENCY CAPACITY(1) DATE(2) CONTRACT (YEARS)(3) OPTION(4) LEASED - - ---------------------------------------------- ---------- ---------- -------- ---------- --------- -------- ------- SECURE INSTITUTIONAL CORRECTIONAL AND DETENTION FACILITIES: Baker Community Correctional Facility ....... CDC 288 1987 7/97 1 1/2 None Leased Baker, California (5) Big Spring Complex .......................... FBOP(6) 1,947 (6) (6) (6) (6) (7) Big Spring, Texas D. Ray James Prison ......................... State of 1,625(8) 1998 9/98 1 Nine Owned Charlton County, Georgia Georgia One-Year Great Plains Correctional Facility .......... (9) 812 (9) 7/98 (9) (9) (9) Owned Hinton, Oklahoma (5) Chesney Community Correctional Facility ..... CDC 270 1988 4/93 6 1/2 None Leased Live Oak, California (5) Santa Fe County Adult Detention Facility..... Santa Fe 672 1997 7/97 3 Two (11) Santa Fe, New Mexico (10) County One-Year Wyatt Detention Facility .................... USMS(12) 302 1992 11/93 5(12) (12) (11) Central Falls, Rhode Island (5) JUVENILE CORRECTIONAL AND DETENTION FACILITIES: RESIDENTIAL FACILITIES: Cornell Abraxas I ........................... (13) 204 1973 7/98 1 Annual Owned Marienville, Pennsylvania Cornell Abraxas II .......................... (13) 23 1974 7/98 1 Annual Owned Erie, Pennsylvania Cornell Abraxas III ......................... (13) 24 1975 7/98 1 Annual Owned Pittsburgh, Pennsylvania Cornell Abraxas Center for Adolescent Females .................................. (13) 43 1989 7/98 1 Annual Owned Pittsburgh, Pennsylvania Cornell Abraxas of Ohio ..................... (13) 108 1993 7/98 1 Annual Owned Shelby, Ohio Cornell Abraxas Youth Center ................ (13) 70 1999 3/99 1 Annual Leased South Mountain, Pennsylvania Danville Center for Adolescent Females ...... (13) 64 1998 2/98 1 Annual (11) Danville, Pennsylvania Griffin Juvenile Facility ................... Bexar 150 1996 7/98 Annual None Owned San Antonio, Texas County Leadership Development Program .............. (13) 120 1994 7/98 1 Annual Leased South Mountain, Pennsylvania New Morgan Academy .......................... (14) 180 (14) (14) (14) (14) Leased New Morgan, Pennsylvania
(TABLE CONTINUED ON FOLLOWING PAGE) - 7 -
PRINCIPAL COMMENCE- CONTRACTING TOTAL INITIAL MENT COMPANY GOVERNMENT OFFENDER CONTRACT OF CURRENT TERM RENEWAL OWNED/ FACILITY NAME AND LOCATION AGENCY CAPACITY(1) DATE(2) CONTRACT (YEARS)(3) OPTION(4) LEASED - - ----------------------------------------------- ---------- ----------- ------- -------- ---------- --------- ------- RESIDENTIAL FACILITIES: (CONTINUED) Psychosocial Rehabilitation Unit .................... (13) 13 1994 7/98 1 Annual Owned Erie, Pennsylvania Salt Lake Valley Juvenile Detention Facility......... State of 160 1996 6/96 3 None (11) Salt Lake City, Utah Utah (15) Santa Fe County Juvenile Detention Facility ......... Santa Fe 115 1997 7/97 3 Two (11) Santa Fe, New Mexico (10) County One-Year South Mountain Secure Residential Treatment Unit .... (13) 52 1997 10/98 1 Annual (11) South Mountain, Pennsylvania NON-RESIDENTIAL COMMUNITY-BASED CENTERS: Adams County Mental Health .......................... (13) 25 1998 7/98 1 Annual Leased Oxford, Pennsylvania Bensalem School ..................................... (13) 120 1994 7/98 1 Annual Leased Bensalem, Pennsylvania (16) Day Treatment Program ............................... (13) 28 1996 7/98 1 Annual Leased Harrisburg, Pennsylvania Dauphin County Mental Health ........................ (13) 150 1996 7/98 1 Annual Leased Harrisburg, Pennsylvania Erie Mental Health .................................. (13) 30 1997 7/98 1 Annual Leased Erie, Pennsylvania Lycoming County Mental Health ....................... (13) 25 1998 7/98 1 Annual Leased Williamsport, Pennsylvania Mental Health Clinic ................................ (13) 40 1996 7/98 1 Annual Leased Harrisburg, Pennsylvania Non-Residential Care ................................ (13) 20 1991 7/98 1 Annual Leased Pittsburgh, Pennsylvania Philadelphia Family Preservation/SCOH ............... (13) 64 1992 7/98 1 Annual Owned Philadelphia, Pennsylvania Supervised Home Services ............................ (13) 33 1994 7/98 1 Annual Leased Milford, Delaware Supervised Home Services ............................ (13) 25 1992 7/98 1 Annual Leased Lehigh Valley, Pennsylvania Supervised Home Services/Home Detention.............. (13) 50 1993 7/98 1 Annual Leased District of Columbia Workbridge .......................................... (13) 375 1994 7/98 1 Annual Leased Pittsburgh, Pennsylvania Workbridge .......................................... (13) 325 1998 7/98 1 Annual Leased Philadelphia, Pennsylvania PRE-RELEASE CORRECTIONAL FACILITIES: Cordova Center ...................................... ADC 192 1985 12/97 3 None Owned Anchorage, Alaska (5) Dallas County Judicial Center ....................... Dallas 300 1991 9/98 1 None Leased Wilmer, Texas County Durham Center ....................................... NCDC 75 1996 12/96 4 1/2 One Leased Durham, North Carolina Five-Year El Monte Center ..................................... FBOP 52 1993 10/97 1 Four Leased El Monte, California (5) One-Year Inglewood Men's Center .............................. CDC 53 1982 7/94 4 (17) (17) Leased Inglewood, California
(TABLE CONTINUED ON FOLLOWING PAGE) - 8 -
PRINCIPAL COMMENCE- CONTRACTING TOTAL INITIAL MENT COMPANY GOVERNMENT OFFENDER CONTRACT OF CURRENT TERM RENEWAL OWNED/ FACILITY NAME AND LOCATION AGENCY CAPACITY(1) DATE(2) CONTRACT (YEARS)(3) OPTION(4) LEASED - - ----------------------------------------------- ------------ ----------- ------- -------- ---------- --------- -------- PRE-RELEASE CORRECTIONAL FACILITIES: (CONTINUED) Leidel Community Correctional Center ......... FBOP 150 1996 1/96 3 Two Owned Houston, Texas (5) One-Year Marvin Gardens Center ........................ CDC 42 1981 1/99 5 None Leased Los Angeles, California (5) Midtown Center ............................... ADC 32 1998 2/98 3 None Owned Anchorage, Alaska Northstar Center ............................. ADC 105 1990 12/97 3 None Leased Fairbanks, Alaska (5) Oakland Center ............................... FBOP(18) 61 1981 9/98 2 None Leased Oakland, California (5) Parkview Center .............................. ADC 112 1993 11/96 3 None Leased Anchorage, Alaska (5) Reid Community Correctional Center ........... TDCJ 310 1996 9/98 1 None Owned Houston, Texas Salt Lake City Center ........................ FBOP(15) 58 1995 12/95 2 Three Leased Salt Lake City, Utah (5) One-Year San Diego Center ............................. FBOP 50 1984 11/95 2 Three Leased San Diego, California (5) One-Year San Diego Drug Aftercare Program.............. FBOP 80 1998 10/98 2 None Leased San Diego, California Santa Barbara Center ......................... FBOP 25 1996 3/96 2 Three Leased Santa Barbara, California (5) One-Year Taylor Street Center ......................... (19) 177 1984 (19) (19) (19) Leased San Francisco, California (5) Tundra Center ................................ ADC 99 1986 12/97 4 None Owned Bethel, Alaska
- - ---------- (1) Total offender capacity includes design capacity plus the program capacity of the non-residential community-based operations. Design capacity is based on the physical space available presently, or with minimal additional expenditure, for offender or residential beds in compliance with relevant regulations and contract requirements. In certain cases, the management contract for a facility provides for a lower number of beds. (2) Date from which the Company, or its predecessor, has had a contract with the contracting governmental agency on an uninterrupted basis. (3) Substantially all contracts are terminable by the contracting governmental agency for any reason upon the required notice to the Company. (4) Except as otherwise noted, the renewal option, if any, is at the discretion of the contracting governmental agency. (5) Facility is accredited by the American Correctional Association. (6) The City of Big Spring entered into the IGA with the FBOP for an indefinite term (until modified or terminated) with respect to the Big Spring Complex, which began operations during 1989. The Big Spring Operating Agreement has a term of 20 years with three five-year renewal options at the Company's discretion, pursuant to which the Company manages the Big Spring Complex for the City of Big Spring. With respect to the 560 bed expansion of the Big Spring Complex, the portion of the Big Spring Operating Agreement relating to the expansion has a term of 30 years with four five-year renewal options at the Company's discretion. (7) In connection with the acquisition of MidTex, and as part of the purchase price, the Company prepaid a majority of the facility costs related to three of the Big Spring Complex units through at least the year 2030. The Company owns the 560 bed expansion unit constructed in 1998. (8) The Company is currently operating 550 beds and expects to phase-in the remaining 1,075 beds during 1999. (9) The prison is operated pursuant to a one-year contract with nine one-year renewal options between the Oklahoma Department of Corrections and HEDA. HEDA in turn has subcontracted the operations to the Company under a 30-year operating contract with four five-year renewals. (10) The Company took over the operation of an existing 240 bed adult and juvenile facility on July 1, 1997, while beginning construction of a new 672 bed adult detention facility, which was completed in the second quarter of 1998. The offenders housed in the 240 bed facility were transferred to the new 672 bed detention facility and the 240 bed facility was converted into a 115 bed juvenile detention facility. (11) The Company does not incur any facility use costs for these facilities which are owned by a governmental agency or by the contracting agency. (FOOTNOTES CONTINUED ON FOLLOWING PAGE) - 9 - (12) The USMS entered into an intergovernmental agreement with the Central Falls Detention Facility Corporation ("DFC") in August 1991 for an indefinite term (until modified or terminated) with respect to the Wyatt Detention Facility. The DFC, in turn, entered into a Professional Management Agreement with the Company for the Company to operate this facility effective November 1993 for a term of five years. The Company is currently finalizing a contract with a term of three years with one two-year renewal option. (13) The Cornell Abraxas programs/facilities contract with numerous counties throughout Pennsylvania, Ohio, Delaware and with the District of Columbia. (14) The facility is currently under development and construction. The Company anticipates obtaining contracts with various counties when construction is complete in 2000. (15) Utah Department of Human Services, Division of Youth Corrections. (16) Operates within Pennsylvania Youth Department Center/State Facility. (17) The current contract, which expired in July 1998, was extended by the CDC for six months. The contract is currently out for bid. (18) In addition to its contract with the FBOP with respect to these facilities, the Company has contracts with the Administrative Office of the United States Courts, Pretrial Services to provide beds at these facilities. (19) The Company has a contract with the FBOP for 53 beds for the period February 1996 through January 2001 and with the CDC for 40 beds for the period July 1998 through June 2003. The Company also contracts with Pretrial Services for 5 beds. FACILITY MANAGEMENT CONTRACTS The Company is compensated on the basis of the number of offenders held or supervised under each of its facilities' management contracts. The Company's existing facility management contracts generally provide that the Company will be compensated at an occupant per diem rate. Such compensation is invoiced in accordance with applicable law and is typically paid on a monthly basis. Under a per diem rate structure, a decrease in occupancy rates would cause a decrease in revenues and profitability. The Company is, therefore, dependent upon governmental agencies to supply the Company's facilities with a sufficient number of offenders to meet the contract capacities, and in most cases such governmental agencies are under no obligation to do so. Moreover, because certain of the Company's facilities have offenders serving relatively short sentences or only the last three to six months of their sentences, the high turnover rate of offenders requires a constant influx of new offenders from the relevant governmental agencies to provide sufficient occupancies to achieve profitability. Occupancy rates during the start-up phase when facilities are first opened typically result in capacity underutilization for 30 to 90 days. After a management contract has been awarded, the Company incurs facility start-up costs consisting principally of initial employee training, travel and other direct expenses incurred in connection with the contract. These costs vary by contract. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." All the Company's contracts are subject to legislative appropriations. A failure by a governmental agency to receive appropriations could result in termination of the contract by such agency or a reduction of the management fee payable to the Company. To date, the Company has not lost a material contract due to a governmental agency not receiving appropriations, although no assurance can be given that the governmental agencies will continue to receive appropriations in all cases. The Company's contracts generally require the Company to operate each facility in accordance with all applicable laws and regulations. The Company is required by its contracts to maintain certain levels of insurance coverage for general liability, workers' compensation, vehicle liability and property loss or damage. The Company is also required to indemnify the contracting agency for claims and costs arising out of the Company's operations, and in certain cases, to maintain performance bonds. The Company's facility management contracts typically have terms ranging from one to five years and many have one or more renewal options for terms ranging from one to five years. Only the contracting governmental agency may exercise a renewal option. To date, all but one renewal option under the Company's management contracts have been exercised. In connection with the exercise of the renewal option, the contracting governmental agency or the Company typically has requested changes or adjustments to the contract terms. Additionally, the Company's facility management contracts typically allow a contracting governmental agency to terminate a contract without cause by giving the Company written notice ranging from 30 to 180 days. To date, no contracts have been terminated before expiration. - 10 - MARKETING AND DEVELOPMENT The Company's principal customers are federal, state and local governmental agencies responsible for adult and juvenile correctional, detention and pre-release services. These governmental agencies generally procure services from the private sector by issuing a Request for Proposal ("RFP") to which a number of companies may respond. Most of the Company's efforts in securing new business are expected to be in the form of responding to RFPs. As part of the Company's process of responding to RFPs, management of the Company meets with appropriate personnel from the requesting agency to best determine the agency's distinct needs. If the Company believes that the project complies with its business strategy, the Company will submit a written response to the RFP. When responding to RFPs, the Company incurs costs, typically ranging from $10,000 to $75,000 per proposal, to determine the prospective client's distinct needs and prepare a detailed response to the RFP. In addition, the Company may incur substantial costs to acquire options to lease or purchase land for a proposed facility and engage outside consulting and legal expertise related to a particular RFP. The preparation of a response to an RFP typically takes from five to 10 weeks. A typical RFP requires bidders to provide detailed information, including, but not limited to, descriptions of the following: the services to be provided by the bidder, the bidder's experience and qualifications and the price at which the bidder is willing to provide the services requested by the agency (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 proposals received in response to an RFP, the governmental agency will award a contract; however, the governmental agency does not necessarily award a contract to the lowest bidder. In addition to costs, governmental agencies also consider experience and qualifications of bidders in awarding contracts. The development process for obtaining facility management contracts consists of several steps. These include issuance of an RFP by a governmental agency, submission of a response to the RFP by the Company, the award of the contract by a governmental agency and the commencement of construction or operation of the facility. The Company's experience has been that a substantial period of time may elapse from the initial inquiry to receipt of a new contract, although, as the concept of privatization has gained wider acceptance, the length of time from inquiry to the award of contract has shortened. The length of time required to award a contract is also affected, in some cases, by the need to introduce enabling legislation. The bidding and award process for an RFP typically takes from three to nine months. Generally, if the facility for which an award has been made must be constructed, the Company's experience has been that a newly constructed facility typically commences operations between 12 and 24 months after the governmental agency's award. The Company also at times receives inquiries from or on behalf of governmental agencies that are considering privatization of certain facilities or that have already decided to contract with private providers. When such an inquiry is received, the Company determines whether there is a need for the Company's services and whether the legal and political climate in which the governmental agency operates is conducive to serious consideration of privatization. The Company then conducts an initial cost analysis to further determine project feasibility. When a contract requires construction of a new facility, the Company's success depends, in part, upon its ability to acquire real property for its facilities on desirable terms and at satisfactory locations. Management of the Company expects that many such locations will be in or near populous areas and therefore anticipates legal action and other forms of opposition from residents in areas surrounding certain proposed sites. The Company may incur significant expenses in responding to such opposition and there can be no assurance of success. In addition, the Company may choose not to bid in response to an RFP or may determine to withdraw a bid if legal action or other forms of opposition are anticipated. - 11 - OPERATIONS Pursuant to the terms of its management contracts, the Company is responsible for the overall operation of its facilities, including staff recruitment, general administration of the facilities, security and supervision of the offenders and facility maintenance. The Company also provides a variety of rehabilitative and educational programs at many of its facilities. Offenders at most adult facilities managed by the Company may receive basic education through academic programs designed to improve offender literacy levels (including English as a second language programs) and the opportunity to acquire G.E.D. certificates. Programs for offenders at the Company's juvenile facilities typically have an increased emphasis on education and counseling. At many facilities, the Company also offers vocational training to offenders who lack marketable job skills. In addition, the Company offers life skills, transition planning programs that provide offenders job search training and employment skills, health education, financial responsibility training and other skills associated with becoming productive citizens. At several of its facilities, the Company also offers counseling, education and/or treatment to offenders with chemical dependency or substance abuse problems. The Company operates each facility in accordance with Company-wide policies and procedures generally based on the standards and guidelines established by the American Correctional Association ("ACA") Commission on Accreditation and/or the appropriate licensing agencies (collectively "Accreditation Standards"). The ACA is an independent organization comprised of professionals in the corrections industry which establishes guidelines and standards by which a correctional institution may gain accreditation. The Accreditation Standards describe specific objectives to be accomplished and cover such areas as administration, personnel and staff training, security, medical and health care, food service, offender supervision and physical plant requirements. Internal quality control, conducted by senior facility staff and executive officers of the Company, takes the form of periodic operational, programming and fiscal audits; facility inspections; regular review of logs, reports and files; and strict maintenance of personnel standards, including an active training program. Each of the Company's facilities develops its own training plan that is reviewed, evaluated and updated annually. Dedicated space and equipment for training is provided and outside resources such as community colleges are utilized in the training process. All adult correctional officers undergo a minimum 40-hour orientation upon their hiring and receive academy-level training amounting to 120 hours and on-the-job training of up to 80 hours. Each correctional officer also receives up to 40 hours of training and education annually. All juvenile treatment employees undergo a minimum 80-hour orientation upon their hiring and also receive up to 40 hours of training and education annually. Cornell Abraxas has received awards and recognition for its operations and programs, including being recognized (i) in 1995 by the Pennsylvania Juvenile Court Judges' Commission as "Residential Program of the Year" and (ii) in 1994 by the Office of Juvenile Justice and Delinquency Prevention in its Program Report titled "What Works: Promising Interventions in Juvenile Justice." FACILITY DESIGN, CONSTRUCTION AND FINANCE In addition to operating correctional facilities, the Company also provides consultation and management services to governmental agencies with respect to the development, design and construction of new correctional and detention facilities and the redesign and renovation of older facilities. The Company or its predecessors have consulted on and/or managed the development, design and/or construction of a number of facilities in each of its operating divisions. - 12 - During 1998, the Company completed the development, design and construction of: (i) the 560 bed expansion of the Big Spring Complex; (ii) the 672 bed adult detention facility in Santa Fe, New Mexico and (iii) various facility expansions. Additionally, the Company completed a portion (550 beds) of the D. Ray James Prison in Charlton, Georgia in the fourth quarter of 1998. The construction of the remaining 1,075 beds is expected to be completed in the first half of 1999. Currently, the Company operates all of the facilities it has developed, designed and constructed with the exception of the detention center in Plymouth, Massachusetts, which is operated by the Sheriff's Department of the County of Plymouth, Massachusetts. The Company utilizes an experienced team of outside professional architectural consultants as part of the group that participates from conceptual design through final construction of a project. When designing a facility, the Company's outside architects utilize, with appropriate modifications, prototype designs the Company has previously used in developing projects. Management of the Company believes that the use of such proven designs allows the Company to reduce cost overruns and avoid construction delays. Additionally, the Company designs its facilities with the intention to improve security and minimize the personnel needed to properly staff the facility by enabling enhanced visual and electronic surveillance of the facility. The Company may propose various construction financing structures to the contracting governmental agencies. The governmental agency may finance, or the Company may arrange for the financing of, the construction of such facilities through various methods including, but not limited to, the following: (i) a one-time general revenue appropriation by the governmental agency for the cost of the new facility; (ii) general obligation bonds that are secured by either a limited or unlimited tax levy by the issuing governmental entity or (iii) lease revenue bonds or certificates of participation secured by an annual lease payment that is subject to annual or bi-annual legislative appropriations. If the project is financed using project-specific tax-exempt bonds or other obligations, the construction contract is generally subject to the sale of such bonds or obligations. Substantial expenditures for construction will not be made on such a project until the tax-exempt bonds or other obligations are sold. If such bonds or obligations are not sold, construction and management of the facility will be delayed until alternate financing is procured or development of the project will be entirely suspended. When the Company is awarded a facility management contract, appropriations for the first annual or bi-annual period of the contract's term have generally already been approved, and the contract is subject to governmental appropriations for subsequent annual or bi-annual periods. The Company has in the past worked with governmental agencies and placement agents to obtain and structure financing for construction of facilities. In some cases, an unrelated special purpose corporation is established to incur borrowings to finance construction and, in other cases, the Company directly incurs borrowings for construction financing. A growing trend in the privatization industry is the requirement by governmental agencies that private operators make capital investments in new facilities and enter into direct financing arrangements in connection with the development of such facilities. There can be no assurance that the Company will have available capital if and when required to make such an investment to secure a contract for developing a facility. - 13 - COMPETITION The Company competes with a number of companies, including, but not limited to, Corrections Corporation of America, Wackenhut Corrections Corporation, Youth Services International, Inc. and Correctional Services Corporation. The Company also competes in some markets with small local companies that may have better knowledge of local conditions and may be better able to gain political and public acceptance. In addition, the Company may compete in some markets with governmental agencies that operate correctional and detention facilities. EMPLOYEES At December 31, 1998, the Company had approximately 2,333 full-time employees and 621 part-time employees. The Company employs management, administrative and clerical, security, educational and counseling services, health services and general maintenance personnel. Approximately 150 employees at two of the Company's facilities are represented by unions. The Company is currently negotiating over terms for an agreement at a third facility with approximately 35 employees. The Company believes its relations with its employees are good. REGULATIONS The industry in which the Company operates is subject to federal, state and local regulations administered by a variety of regulatory authorities. Generally, prospective providers of correctional, detention and pre-release services must comply with a variety of applicable state and local regulations, including education, healthcare and safety regulations. The Company's contracts frequently include extensive reporting requirements and require supervision with on-site monitoring by representatives of contracting governmental agencies. In addition to regulations requiring certain contracting governmental agencies to enter into a competitive bidding procedure before awarding contracts, the laws of certain jurisdictions may also require the Company to award subcontracts on a competitive basis or to subcontract with businesses owned by women or members of minority groups. INSURANCE The Company maintains a $10 million per occurrence per facility general liability insurance policy for all its operations. The Company also maintains insurance in amounts it deems adequate to cover property and casualty risks, workers' compensation and directors' and officers' liability. The Company's contracts and the statutes of certain states in which the Company operates typically require the maintenance of insurance by the Company. The Company's contracts provide that, in the event the Company does not maintain such insurance, the contracting agency may terminate its agreement with the Company. The Company believes that it is in compliance in all material respects with respect to these requirements. ITEM 2. PROPERTIES The Company leases corporate headquarters office space in Houston, Texas and divisional administrative offices in Ventura, California and Pittsburgh, Pennsylvania. The Company also leases various facilities it is currently operating or developing. For a listing of owned and leased facilities, see "Business - Facilities." - 14 - ITEM 3. LEGAL PROCEEDINGS The Company currently and from time to time is subject to claims and suits arising in the ordinary course of business, including claims for damages for personal injuries or for wrongful restriction of, or interference with, offender privileges and employment matters. In the opinion of management of the Company, the outcome of the proceedings to which the Company is currently a party will not have a material adverse effect upon the Company's operations or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to the Company's security holders during the fourth quarter of 1998. PART II ITEM 5. MARKET FOR CORNELL CORRECTIONS, INC. COMMON STOCK AND RELATED STOCKHOLDER MATTERS The common stock of the Company is currently listed on the New York Stock Exchange ("NYSE") under the symbol "CRN." As of February 26, 1999, there were approximately 47 record holders of common stock. The high and low closing sales prices for the common stock since the common stock began trading on October 3, 1996, are shown below: HIGH LOW ---- --- 1996: Fourth Quarter (from October 3). $12 3/4 $ 8 7/8 1997: First Quarter................... 11 5/8 9 Second Quarter.................. 18 9 Third Quarter................... 16 5/8 14 7/16 Fourth Quarter.................. 20 3/4 15 3/4 1998: First Quarter................... 24 1/2 19 7/16 Second Quarter.................. 25 7/16 18 1/2 Third Quarter................... 21 1/16 8 Fourth Quarter.................. 19 11 1999: First Quarter (through February 26)................... 19 7/8 16 1/4 The Company has never declared or paid cash dividends on its capital stock. The Company currently intends to retain excess cash flow, if any, for use in the operation and expansion of its business and does not anticipate paying cash dividends on the common stock in the foreseeable future. The payment of dividends is within the discretion of the Board of Directors and will be dependent upon, among other factors, the Company's results of operations; financial condition; capital requirements; restrictions, if any, imposed by financing commitments and legal requirements. The Third Amended and Restated Credit Agreement, dated as of December 3, 1998 ("1998 Credit Facility") currently prohibits the payment of dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources". - 15 - ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this report.
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------- 1998 (1) 1997 (2) 1996 (3) 1995 1994 (4) --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues .................................................. $ 123,119 $ 70,302 $ 32,327 $ 20,692 $ 15,689 Operating expenses ........................................ 98,721 57,047 26,038 16,351 12,315 Depreciation and amortization ............................. 4,228 2,231 1,390 820 758 General and administrative expenses ....................... 7,581 5,394 4,560 3,531 2,959 --------- --------- --------- --------- --------- Income (loss) from operations ............................. 12,589 5,630 339 (10) (343) Interest expense (5) ...................................... 2,601 491 2,810 1,115 294 Interest income ........................................... (116) (414) (167) (136) (138) --------- --------- --------- --------- --------- Income (loss) before income taxes ......................... 10,104 5,553 (2,304) (989) (499) Provision for income taxes ................................ 4,042 1,999 75 -- 101 --------- --------- --------- --------- --------- Net income (loss) ......................................... $ 6,062 $ 3,554 $ (2,379) $ (989) $ (600) ========= ========= ========= ========= ========= Earnings (loss) per share: - Basic .............................................. $ .64 $ .48 $ (.65) $ (.32) $ (.21) - Diluted ............................................ $ .62 $ .46 $ (.65) $ (.32) $ (.21) Number of shares used to compute EPS (in thousands) (6): - Basic .............................................. 9,442 7,350 3,673 3,095 2,923 - Diluted ............................................ 9,772 7,740 3,673 3,095 2,923 OPERATING DATA: Total offender capacity: Residential ............................................... 9,135 6,172 3,577 1,640 1,281 Non-residential community-based ........................... 1,390 900 -- -- -- Total .................................................. 10,525 7,072 3,577 1,640 1,281 Contracted offender capacity in operation (end of period) ........................................... 8,700 5,061 2,899 1,135 1,155 Contracted beds in operation (end of period) (7) ............. 7,310 4,161 2,899 1,135 1,155 Average occupancy based on contracted beds in operation (7) (8) ................................. 93.8% 97.6% 97.0% 98.9% 92.1% BALANCE SHEET DATA: Working capital ........................................... $ 16,828 $ 26,220 $ 7,747 $ 1,525 $ 2,015 Total assets .............................................. 212,695 104,109 46,824 14,184 13,095 Long-term debt ............................................ 98,480 432 745 7,649 3,447 Stockholders' equity ...................................... 91,500 86,730 41,051 3,053 6,631
- - ---------- (1) Includes the operations of the Great Plains Correctional Facility acquired in January 1998 and the Alaska facilities purchased from Allvest in August 1998. (2) Includes the operations of Interventions and Abraxas acquired in January 1997 and September 1997, respectively. (3) Includes the operations of the Big Spring Complex and the Reid Center acquired in July 1996 and May 1996, respectively. (4) Includes the operations of Eclectic purchased by the Company on March 31, 1994. (5) Interest expense for 1996 includes a $1.3 million non-recurring charge ($726,000 of which was non-cash) to expense deferred financing costs associated with the early retirement of debt. (6) Prior to March 31, 1994, the Company was organized as a partnership. For purposes of computing average shares outstanding for the period prior to March 31, 1994, the partnership units were converted to common shares using a one-to-one unit-to-share conversion ratio. (7) Occupancy percentages are based on contracted offender capacity of residential facilities in operation. Since certain facilities have offender capacities that exceed contracted capacities, occupancy percentages can exceed 100% of contracted capacity. (8) For any applicable facilities, includes reduced occupancy during the start-up phase. - 16 - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company provides integrated facility development, design, construction and operational services to governmental agencies within three operating divisions: (i) secure institutional correctional and detention services; (ii) juvenile treatmen, educational and detention services and (iii) pre-release correctional services. The following table sets forth total offender capacity, the contracted offender capacity and beds in operation at the end of the periods shown, and the average occupancy percentage for the year then ended. DECEMBER 31, ----------------------- 1998 1997 1996 ------ ------ ----- Total offender capacity: Residential..................................... 9,135 6,172 3,577 Non-residential community-based................. 1,390 900 -- Total......................................... 10,525 7,072 3,577 Contracted offender capacity in operation (end of period)............................... 8,700 5,061 2,899 Contracted beds in operation (end of period) (1)... 7,310 4,161 2,899 Average occupancy based on contracted beds in operation (1) (2)............................. 93.8% 97.6% 97.0% - - ----------- (1) Occupancy percentages are based on contracted offender capacity of residential facilities in operation. Since certain facilities have offender capacities that exceed contracted capacities, occupancy percentages can exceed 100% of contracted capacity. (2) For any applicable facilities, includes reduced occupancy during the start-up phase. The Company derives substantially all its revenues from operating correctional, detention and pre-release facilities for federal, state and local governmental agencies in the United States. Revenues for operation of correctional, detention and pre-release facilities are generally recognized on a per diem rate based upon the number of occupant days for the period. Factors which the Company considers in determining the per diem rate to charge include: (i) the programs specified by the contract and the related staffing levels; (ii) wage levels customary in the respective geographic areas; (iii) whether the proposed facility is to be leased or purchased and (iv) the anticipated average occupancy levels which the Company believes could reasonably be maintained. The Company's operating margins generally vary from facility to facility (regardless of whether the facility is secure institutional, juvenile or pre-release) based on the level of competition for the contract award, the proposed length of the contract, the occupancy levels for a facility, the level of capital commitment required with respect to a facility and the anticipated changes in operating costs, if any, over the term of the contract. The Company is responsible for all facility operating expenses, except for certain debt service and lease payments with respect to facilities for which the Company has only a management contract (six facilities in operation at December 31, 1998). - 17 - A majority of the Company's facility operating expenses consist of fixed costs. These fixed costs include lease and rental expense, insurance, utilities and depreciation. As a result, when the Company commences operation of new or expanded facilities, fixed operating expenses increase. The amount of the Company's variable operating expenses, including food, medical services, supplies and clothing, depend on occupancy levels at the facilities operated by the Company. The Company's largest single operating expense, facility payroll expense and related employment taxes and costs, has both a fixed and a variable component. The Company can adjust the staffing and payroll to a certain extent based on occupancy at a facility, but a minimum fixed number of employees is required to operate and maintain any facility regardless of occupancy levels. General and administrative expenses consist primarily of salaries of the Company's corporate and administrative personnel who provide senior management, accounting, finance, human resources, payroll, information systems and other services, and costs of business development. Newly opened facilities are staffed according to contract requirements when the Company begins receiving offenders. Offenders are typically assigned to a newly opened facility on a phased-in basis over a one- to three-month period. The Company may incur start-up operating losses at new facilities until break-even occupancy levels are reached. Quarterly results can be substantially affected by the timing of the commencement of operations as well as development and construction of new facilities. Working capital requirements generally increase immediately prior to the Company's commencing management of a new facility as the Company incurs start-up costs and purchases necessary equipment and supplies before facility management revenue is realized. RESULTS OF OPERATIONS The Company's historical operating results reflect a significant expansion of the Company's business since 1996. Material fluctuations in the Company's results of operations are principally the result of the timing and effect of acquisitions, the level of development activity conducted by the Company, and occupancy rates at Company-operated facilities. The Company's acquisitions to date have been accounted for using the purchase method of accounting, whereby the operating results of the acquired businesses have been reported in the Company's operating results since the date of acquisition. The Company's income from operations as a percentage of revenues fluctuates depending on the relative mix of operating contracts among the Company's three operating divisions. The following table sets forth for the periods indicated the percentages of revenues represented by certain items in the Company's historical consolidated statements of operations. YEAR ENDED DECEMBER 31, ----------------------- 1998 1997 1996 ------ ------ ----- Revenues............................................. 100.0% 100.0% 100.0% Operating expenses................................... 80.2 81.1 80.5 Depreciation and amortization........................ 3.4 3.2 4.3 General and administrative expenses.................. 6.2 7.7 14.1 ----- ----- ----- Income from operations............................... 10.2 8.0 1.1 Interest expense, net................................ 2.0 0.1 8.2 ----- ----- ----- Income (loss) before income taxes.................... 8.2 7.9 (7.1) Provision for income taxes........................... 3.3 2.8 0.2 ----- ----- ----- Net income (loss).................................... 4.9% 5.1% (7.3)% ===== ===== ===== - 18 - YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 REVENUES. Revenues increased by 75.1% to $123.1 million for the year ended December 31, 1998, from $70.3 million for the year ended December 31, 1997. Secure institutional division revenues increased 63.0% to $52.6 million in 1998 from $32.3 million in 1997, due principally to the purchase of the Great Plains Correctional Facility in January 1998; a full year of operations at the Santa Fe County Adult Detention Facility, which commenced in July 1997; and the 560 bed expansion unit at the Big Spring Complex and the opening of the D. Ray James Prison, both of which began operations in the fourth quarter of 1998. Juvenile division revenues increased 153.7 % to $47.0 million in 1998 from $18.5 million in 1997, due principally to a full year of results from the Abraxas acquisition in September 1997, additional programs which began in 1998 and expansions of various facilities. Pre-release division revenues increased 20.4% to $23.5 million in 1998 from $19.5 million in 1997, due principally to the acquisition of Allvest in August 1998. OPERATING EXPENSES. Operating expenses increased 73.1% to $98.7 million for the year ended December 31, 1998, from $57.0 million for the year ended December 31, 1997. Secure institutional division operating expenses increased 51.0% to $37.8 million in 1998 from $25.1 million in 1997, due principally to the purchase of the Great Plains Correctional Facility in January 1998; a full year of operations at the Santa Fe County Adult Detention Facility, which commenced in July 1997; and the 560 bed expansion unit at the Big Spring Complex and the opening of the D. Ray James Prison, both of which began operations in the fourth quarter of 1998. As a percentage of revenues, secure institutional division operating expenses were 71.9% in 1998 and 77.6% in 1997. The higher operating margin in 1998 versus 1997 was due principally to a greater mix of owned versus leased facilities, including the Great Plains Correctional Facility, offset in part by lower operating margins at start-up facilities such as the expansion unit at the Big Spring Complex, the D. Ray James Prison and the Santa Fe County Adult Detention Facility. Juvenile division operating expenses increased 159.1% to $41.2 million in 1998 from $15.9 million in 1997, due principally to a full year of results from the Abraxas acquisition in September 1997, additional programs which began in 1998 and expansions of various facilities. As a percentage of revenues, juvenile division operating expenses were 87.7% in 1998 and 85.9% in 1997. The lower operating margin in 1998 versus 1997 was due principally to an increase in juvenile programs which are funded on a cost-plus basis and the results of the Griffin Juvenile Facility, which has experienced lower occupancy in 1998. Pre-release division operating expenses increased 17.5% to $18.7 million in 1998 from $15.9 million in 1997, due principally to the acquisition of Allvest in August 1998. As a percentage of revenues, pre-release division operating expenses were 79.8% in 1998 and 81.8% in 1997. The higher operating margin in 1998 versus 1997 was due principally to a greater mix of owned versus leased facilities, including those acquired as part of the Allvest acquisition. DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased 89.5% to $4.2 million for the year ended December 31, 1998, from $2.2 million for the year ended December 31, 1997, due principally to depreciation of buildings and equipment acquired from Abraxas in September 1997, the Great Plains Correctional Facility purchased in January 1998, the 560 bed expansion unit at the Big Spring Complex, the opening of the D. Ray James Prison and various facility expansions and related equipment. - 19 - GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased 40.5% to $7.6 million for the year ended December 31, 1998, from $5.4 million for the year ended December 31, 1997. The increase in general and administrative expenses resulted from additional corporate, business development and administrative personnel needed to manage the increased business of the Company and for development of new contracts. As a percentage of revenues, general and administrative expenses decreased to 6.2% from 7.7%, due principally to spreading the costs over a larger revenue base. INTEREST. Interest expense, net of interest income, increased to $2.5 million for the year ended December 31, 1998, from $77,000 for the year ended December 31, 1997. The increase in net interest expense was principally due to borrowings under the Company's 1997 Credit Facility for the purchase of the Great Plains Correctional Facility in January 1998, for the acquisition of Allvest in August 1998 and for working capital for various new programs and facility expansions. For the year ended December 31, 1998, the Company capitalized interest totaling $2.3 million related to costs of facilities under construction and development, including the 560 bed Big Spring Complex expansion and the 1,625 bed D. Ray James Prison. INCOME TAXES. For the year ended December 31, 1998, the Company recognized a provision for income taxes at an estimated effective annual rate of 40%, compared to 36% for the year ended December 31, 1997. The effective income tax rate applied in 1997 included a benefit for the reversal of previously reserved deferred tax assets resulting from prior net operating losses. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 REVENUES. Revenues increased 117.5% to $70.3 million for the year ended December 31, 1997, from $32.3 million for the year ended December 31, 1996. Secure institutional division revenues increased 51.0% to $32.3 million in 1997 from $21.4 million in 1996, due principally to a full year of operations from the July 1996 acquisition of the Big Spring Complex (formerly MidTex) and assuming the operation of the Santa Fe County Adult Detention Facility, which commenced in July 1997. Juvenile division revenues were $18.5 million in 1997 due to the September 1997 acquisition of Abraxas, the opening of the Salt Lake Valley Juvenile Detention Center in the first quarter of 1997 and the acquisition of the Griffin Juvenile Facility in January 1997. The Company did not operate any juvenile facilities in 1996. Pre-release division revenues increased 78.0% to $19.5 million in 1997 from $10.9 million in 1996, due principally to the January 1997 acquisition of the Dallas County Judicial Center (formerly part of Interventions), a full year of operations of the Reid Community Correctional Center acquired in May 1996 and the opening of the Durham Center in the first quarter of 1997. OPERATING EXPENSES. Operating expenses increased 119.1% to $57.0 million for the year ended December 31, 1997, from $26.0 million for the year ended December 31, 1996. Secure institutional division operating expenses increased 45.6% to $25.1 million in 1997 from $17.2 million in 1996, due principally to a full year of operations from the July 1996 acquisition of the Big Spring Complex and assuming the operation of the Santa Fe County Adult Detention Facility, which commenced in July 1997. As a percentage of revenues, secure institutional division operating expenses were 77.6% in 1997 and 80.5% in 1996. The higher operating margin in 1997 versus 1996 for the secure institutional division was due principally to a full year of results of the Big Spring Complex acquired in July 1996. Juvenile division operating expenses were $15.9 million in 1997, due to the September 1997 acquisition of Abraxas, the opening of the Salt Lake Valley Juvenile Detention Center in the first quarter of 1997 and the January 1997 acquisition of the Griffin Juvenile Facility. The Company did not operate any juvenile facilities in 1996. As a percentage of revenues, juvenile division operating expenses were 85.9% in 1997. - 20 - Pre-release division operating expenses increased 81.0% to $15.9 million in 1997 from $8.8 million in 1996 due principally to the January 1997 acquisition of the Dallas County Judicial Center, a full year of operations of the Reid Community Correctional Center acquired in May 1996 and the opening of the Durham Center in the first quarter of 1997. As a percentage of revenues, pre-release division operating expenses were 81.8% in 1997 and 80.5% in 1996. DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased 60.5% to $2.2 million for the year ended December 31, 1997, from $1.4 million for the year ended December 31, 1996. The increase was due principally to a full year of amortization of prepaid facility use costs of the Big Spring Complex acquired in July 1996, depreciation of the Griffin Juvenile Facility and related assets acquired in the January 1997 acquisition of Interventions, depreciation and amortization of assets acquired in the September 1997 Abraxas acquisition and depreciation and amortization of deferred start-up costs for the three new facilities which began operations during 1997. In addition, amortization costs for 1997 included approximately $187,000 to expense start-up costs related to the non-renewal of a 120 bed juvenile contract as of June 1997. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased 18.3% to $5.4 million for the year ended December 31, 1997, from $4.6 million for the year ended December 31, 1996. General and administrative expenses for the year ended December 31, 1996, included a non-recurring, non-cash charge of $870,000 in connection with options to purchase shares of common stock granted in July 1996 to certain officers of the Company. Excluding the non-recurring charge, general and administrative expenses increased $1.7 million, or 46.2%, as a result of adding corporate and administrative personnel, including a new chief operating officer, to manage the increased business of the Company, and from additional costs of administering the Company since the initial public offering in the fourth quarter of 1996 ("IPO"). As a percentage of revenues, general and administrative expenses decreased to 7.7% from 11.4%, excluding the non-recurring charge, due principally to spreading fixed costs over a larger revenue base. INTEREST. Interest expense, net of interest income, decreased to $77,000 for the year ended December 31, 1997, from $2.6 million for the year ended December 31, 1996. The decrease in net interest expense was principally due to a $1.3 million non-recurring charge ($726,000 of which was non-cash) in the third quarter of 1996 to expense deferred financing costs associated with the early retirement of a significant portion of the 1996 Credit Facility using the proceeds of the IPO. Excluding the non-recurring charge, interest expense decreased approximately $1.0 million, or 67.9%, as a result of lower outstanding borrowings under the 1996 and 1997 Credit Facilities for the respective periods. During 1997, the Company capitalized interest totaling $151,000 related to the construction and development of facilities. In addition, 1997 interest income increased $247,000, or 147.9%, as a result of interest earned on the investment of a portion of the proceeds from the Company's stock offering in October 1997. INCOME TAXES. For the year ended December 31, 1997, the Company recognized a provision for income taxes at an estimated effective rate of 36%, compared to no provision for federal income taxes for the year ended December 31, 1996, due to a taxable loss. The effective income tax rate applied in 1997 includes a benefit for the reversal of reserves for deferred tax assets resulting from prior net operating losses which were utilized in 1997 and 1998. LIQUIDITY AND CAPITAL RESOURCES GENERAL. The Company's primary capital requirements are for acquisitions; construction of new facilities; expansions of existing facilities; working capital; start-up costs related to new operating contracts; and furniture, fixtures and equipment. Working capital requirements generally increase immediately prior to the Company commencing management of a new facility as the Company incurs start-up costs and purchases necessary equipment and supplies before facility management revenue (through occupancy fees) is realized. Some of the Company's management contracts have required the Company to make substantial - 21 - initial expenditures of cash in connection with the opening or renovating of a facility. Substantially all these start-up expenditures are fully or partially recoverable as pass-through costs or are reimbursable from the contracting governmental agency over the term of the contract. WORKING CAPITAL. The Company's working capital was $16.8 million at December 31, 1998, and $26.2 million at December 31, 1997. This decrease was principally due to the use of cash to fund a portion of the Great Plains Correctional Facility purchase in January 1998. CASH PROVIDED BY OPERATING ACTIVITIES. The Company had net cash provided by operating activities of $1.4 million for the year ended December 31, 1998. Significant sources of cash include $10.3 million of net income plus depreciation and amortization and an increase in accounts payable and accrued liabilities. Significant uses of operating cash during the year included start-up costs for facilities under development, including the Big Spring Complex expansion and the D. Ray James Prison, and an increase in accounts receivable due to the opening and the timing of receivable collections of various facilities. EXISTING CREDIT FACILITY. In December 1998, the Company amended and restated its existing credit agreement with a financial institution (the "1998 Credit Facility" and previously the "1997 Credit Facility"). The 1998 Credit Facility provides for borrowings of up to $60.0 million under a revolving line of credit, the availability of which is determined by the Company's projected pro forma cash flow. The 1998 Credit Facility matures in March 2003 and bears interest, at the election of the Company, at either the prime rate plus a margin of 0% to 0.5% or a rate which is 1.75% to 2.50% above the applicable LIBOR-rate. Interest is payable monthly with respect to prime-rate loans and at the expiration of the applicable LIBOR period for LIBOR-based loans. Commitment fees equal to 0.375% per annum are payable on the unused portion of the facility. The 1998 Credit Facility is secured by all of the Company's assets, including the stock of all the Company's subsidiaries, does not permit the payment of cash dividends and requires the Company to comply with certain earnings, net worth and debt service covenants. Additionally, the 1998 Credit Facility provides the Company with the ability to enter into future operating lease agreements that provide for residual value guarantees. See Note 7 - Commitments and Contingencies. As of December 31, 1998, the Company had borrowings of $48.4 million outstanding under the 1998 Credit Facility. On July 15, 1998, the Company completed a private placement of $50.0 million of Senior Secured Notes ("Senior Notes"), of which $25.0 million was issued in July 1998 and $25.0 million in August 1998. The Senior Notes, which bear interest at a fixed rate of 7.74%, mature on July 15, 2010. Under the Senior Notes purchase agreements, the Company is required to make eight annual principal payments of $6.25 million beginning on July 15, 2003. Earlier payments of principal are allowed subject to certain prepayment provisions. Interest is payable semi annually. The principal amount of $50.0 million was used by the Company to repay outstanding borrowings under the 1997 Credit Facility. The holders of the Senior Notes and the lender under the 1998 Credit Facility have a collateral-sharing agreement whereby both sets of creditors have an equal security interest in all the assets of the Company. CAPITAL EXPENDITURES. Capital expenditures for the year ended December 31, 1998, were $49.5 million and related principally to construction of the 560 bed expansion of the Big Spring Complex and the 1,625 bed D. Ray James Prison, and other facility expansions and improvements. The Company is committed to spending an additional $3.5 million through 1999 to complete construction of the D. Ray James Prison. TREASURY STOCK. During the year ended December 31, 1998, the Company repurchased 142,100 shares of common stock on the open market under a share repurchase program at an aggregate cost of $1,646,000. ACQUISITIONS. In January 1998, the Company acquired the Great Plains Correctional Facility. The Company financed the $43.8 million purchase price with a combination of $18.8 million in borrowings under -22- the 1997 Credit Facility and the proceeds from the October 1997 stock offering and cash generated from operations. In August 1998, the Company acquired substantially all of the Alaskan assets of Allvest, a privately held company based in Anchorage, Alaska. The Company financed the $21.3 million purchase price with borrowings under the 1997 Credit Facility. The acquisition included the operations of five pre-release facilities with an aggregate capacity of 540 beds in Anchorage, Fairbanks and Bethel, Alaska, and the real properties of three of the five facilities. In addition, the Company and Allvest agreed to enter into a cooperative venture to jointly pursue the development of a private prison in Delta Junction, Alaska. Management of the Company believes that the cash flows generated from operations, together with the credit available under the 1998 Credit Facility and operating lease capacity thereunder, will provide sufficient liquidity to meet the Company's committed capital and working capital requirements for the near term. It is not anticipated that the 1998 Credit Facility will provide sufficient financing to fund construction costs related to future secure institutional contract awards, expansions or significant future acquisitions. The Company anticipates obtaining additional sources of financing to fund such activities. YEAR 2000 ISSUES The Company continues to identify, evaluate and implement modifications to its business systems in order to achieve Year 2000 date conversion compliance. The Company's business systems are comprised of third-party vendor systems and certain internally developed systems that vary greatly in size, complexity and technical architecture. As a part of the Company's ongoing business plan, the Company continues to install new applications and upgrade existing ones in order to bring applications for its various locations into compliance. The majority of information technology systems readiness efforts and critical-systems testing are scheduled to be completed by the middle of 1999. The remaining systems are to be completed by the fourth quarter of 1999. The Company is in the process of receiving responses from third-party software vendors. Preliminary indications are that they will be Year 2000 ready and will provide updated software on a timely basis. The majority of the non-information technology ("non-IT") systems are scheduled to be inventoried by the second quarter of 1999. All non-IT systems are scheduled to be ready by the end of the third quarter of 1999, with minor exceptions. Normal maintenance schedules for the fourth quarter of 1999 will allow the Company to complete any final readiness efforts. Contacts are currently being made with all critical third parties, such as governmental agencies, financial institutions, suppliers and vendors, to determine if they will be Year 2000 compliant. An aggressive follow-up will be implemented with those third parties not responding or those returning an unacceptable response. If it is determined that there is a significant risk, an effort will be made to work with this third party. If this is not successful, a new provider of the same services will be found. The Company still has not yet determined the complete status of Year 2000 compliance of its third parties or what additional costs, if any, might be required by the Company. The Company is currently implementing a broad information systems upgrade. The estimated costs associated with upgrading hardware and software associated with Year 2000 readiness are approximately $1.8 million and include efforts which were accelerated due to Year 2000 compliance. Total costs incurred as of December 31, 1998, for Year 2000 readiness have not been material. As Year 2000 impact assessment nears completion and the renovation planning, readiness implementation and testing evolve, the estimated costs may change. The most reasonably likely worst-case Year 2000 scenarios would be the inability of third-party suppliers, such as utility providers, telecommunication companies, and other critical suppliers, such as food -23- service suppliers and health care suppliers, to continue providing their products and services or the inability of the Company's contracting governmental agencies to timely pay the Company for its services. These pose the most material operational, safety and/or financial risks to the Company. In addition, the Company may not obtain accurate and timely Year 2000 date impact information from suppliers of automation and process control systems and processes. Without quality information from suppliers, specifically on embedded chip technology, some Year 2000 problems could go undetected until after January 1, 2000. The Company has localized contingency plans already in place and is currently working to develop a corporate-wide contingency plan format. This format includes a template and other guidelines to help develop a plan that will cover the Year 2000 areas of concern. These plans are to be completed and tested, when practicable, by the fourth quarter of 1999. The foregoing Year 2000 discussion includes forward-looking statements of the Company's efforts and management's expectations relating to Year 2000 readiness. The Company's ability to achieve Year 2000 readiness, and the level of costs associated therewith, could be adversely impacted by, among other things, the availability and cost of programming and testing resources, vendors' ability to install or modify proprietary hardware and software, and unanticipated problems identified in the ongoing Year 2000 readiness review. NEW ACCOUNTING STANDARD In April 1998, Statement of Position 98-5, Reporting on the Costs of Start-Up Activities ("SOP 98-5") was issued. SOP 98-5 requires entities to expense start-up costs as incurred and to expense previously capitalized start-up costs as a cumulative effect of a change in accounting principle in the year adopted. SOP 98-5 is effective for fiscal years beginning after December 15, 1998. At December 31, 1998, the Company's unamortized start-up costs were approximately $4.9 million. In January 1999, the Company adopted SOP 98-5 and recorded a net-of-tax charge of approximately $3.0 million for the cumulative effect of a change in accounting principle. INFLATION Management of the Company believes that inflation has not had a material effect on the Company's results of operations during the past three years. However, most of the Company's facility management contracts provide for payments to the Company of either fixed per diem fees or per diem fees that increase by only small amounts during the terms of the contracts. Inflation could substantially increase the Company's personnel costs (the largest component of facility management expense) or other operating expenses at rates faster than any increases in occupancy fees. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the normal course of business, the Company is exposed to market risk, primarily from changes in interest rates. The Company continually monitors exposure to market risk and develops appropriate strategies to manage this risk. The Company is not exposed to any other significant market risks, including commodity price risk, foreign currency exchange risk or interest rate risks from the use of derivative financial instruments. Management does not use derivative financial instruments for trading or to speculate on changes in interest rates or commodity prices. - 24 - INTEREST RATE EXPOSURE The Company's exposure to changes in interest rates primarily results from its long-term debt with both fixed and floating interest rates. The Company's debt with fixed interest rates consists of the Senior Notes. The Company's debt with variable interest is its revolving line of credit. At December 31, 1998, approximately 49.2% ($48.4 million) of the long-term debt was subject to variable interest rates. The detrimental effect of a hypothetical 100 basis point increase in interest rates would be to reduce income before provision for income taxes by approximately $200,000 for the year ended December 31, 1998. At December 31, 1998, the fair value of the Company's fixed rate debt approximated carrying value based upon discounted future cash flows using current market prices. - 25 - REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Cornell Corrections, Inc.: We have audited the accompanying consolidated balance sheets of Cornell Corrections, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cornell Corrections, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Houston, Texas February 25, 1999 - 26 - ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CORNELL CORRECTIONS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, 1998 1997 --------- --------- ASSETS CURRENT ASSETS: Cash and cash equivalents .............................................. $ 2,519 $ 18,968 Accounts receivable (net of allowance for doubtful accounts of $3,141 and $2,644, respectively) .................................. 27,564 20,137 Deferred tax asset ..................................................... 1,209 604 Prepaids and other ..................................................... 2,203 1,366 Restricted assets ...................................................... 2,613 1,564 --------- --------- Total current assets ................................................ 36,108 42,639 PROPERTY AND EQUIPMENT, net ............................................... 159,219 52,516 OTHER ASSETS: Intangible assets, net ................................................. 9,935 6,104 Deferred costs and other ............................................... 7,433 2,850 --------- --------- Total assets ........................................................ $ 212,695 $ 104,109 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued liabilities ............................... $ 17,838 $ 13,576 Deferred revenues ...................................................... 1,369 2,549 Current portion of long-term debt ...................................... 73 294 --------- --------- Total current liabilities ........................................... 19,280 16,419 LONG-TERM DEBT, net of current portion .................................... 98,407 138 DEFERRED TAX LIABILITIES .................................................. 2,769 58 OTHER LONG-TERM LIABILITIES ............................................... 739 764 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $.001 par value, 10,000,000 shares authorized, none outstanding ..................................................... -- -- Common stock, $.001 par value, 30,000,000 shares authorized, 10,105,916 and 9,945,904 shares issued and outstanding, respectively . 10 10 Additional paid-in capital ............................................. 90,038 89,684 Stock option loans ..................................................... (455) (455) Retained earnings (deficit) ............................................ 5,906 (156) Treasury stock (697,100 and 555,000 shares of common stock, respectively, at cost) ............................................... (3,999) (2,353) Total stockholders' equity .......................................... 91,500 86,730 --------- --------- Total liabilities and stockholders' equity .......................... $ 212,695 $ 104,109 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. - 27 - CORNELL CORRECTIONS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ----------------------------------- 1998 1997 1996 --------- --------- --------- REVENUES ...................................... $ 123,119 $ 70,302 $ 32,327 OPERATING EXPENSES ............................ 98,721 57,047 26,038 DEPRECIATION AND AMORTIZATION ................. 4,228 2,231 1,390 GENERAL AND ADMINISTRATIVE EXPENSES ........... 7,581 5,394 4,560 --------- --------- --------- INCOME FROM OPERATIONS ........................ 12,589 5,630 339 INTEREST EXPENSE .............................. 2,601 491 2,810 INTEREST INCOME ............................... (116) (414) (167) --------- --------- --------- INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 10,104 5,553 (2,304) PROVISION FOR INCOME TAXES .................... 4,042 1,999 75 --------- --------- --------- NET INCOME (LOSS) ............................. $ 6,062 $ 3,554 $ (2,379) ========= ========= ========= NET EARNINGS (LOSS) PER SHARE: BASIC ...................................... $ .64 $ .48 $ (.65) DILUTED .................................... $ .62 $ .46 $ (.65) NUMBER OF SHARES USED IN PER SHARE COMPUTATION: BASIC ...................................... 9,442 7,350 3,673 DILUTED .................................... 9,772 7,740 3,673
The accompanying notes are an integral part of these consolidated financial statements. - 28 - CORNELL CORRECTIONS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
ADDITIONAL STOCK RETAINED COMMON STOCK PAID-IN OPTION EARNINGS TREASURY SHARES AMOUNT CAPITAL LOANS (DEFICIT) STOCK ----------- ------- --------- -------- --------- --------- BALANCES AT DECEMBER 31, 1995............................ 3,189,385 $ 32 $ 6,955 $ -- $ (1,331) $ (2,603) CONVERSION OF PAR VALUE FROM $.01 to $.001.................................... -- (29) 29 -- -- -- ISSUANCES OF COMMON STOCK................................ 3,618,091 3 37,670 -- -- -- EXERCISE OF STOCK OPTIONS AND WARRANTS.......................................... 512,922 1 1,140 (455) -- -- INCOME TAX BENEFITS FROM STOCK OPTIONS EXERCISED..................................... -- -- 172 -- -- -- STOCK-BASED COMPENSATION................................. -- -- 1,596 -- -- -- REVERSAL OF PUT RIGHT COST............................... -- -- -- -- -- 250 NET LOSS................................................. -- -- -- -- (2,379) -- ----------- ------- --------- -------- --------- --------- BALANCES AT DECEMBER 31, 1996............................ 7,320,398 7 47,562 (455) (3,710) (2,353) ISSUANCE OF COMMON STOCK................................. 2,250,000 2 41,098 -- -- -- EXERCISE OF STOCK OPTIONS................................ 375,506 1 948 -- -- -- STOCK-BASED COMPENSATION................................. -- -- 76 -- -- -- NET INCOME............................................... -- -- -- -- 3,554 -- ----------- ------- --------- -------- --------- --------- BALANCES AT DECEMBER 31, 1997............................ 9,945,904 $ 10 $ 89,684 $ (455) $ (156) $ (2,353) EXERCISE OF STOCK OPTIONS................................ 160,012 -- 176 -- -- -- INCOME TAX BENEFITS FROM STOCK OPTIONS EXERCISED..................................... -- -- 178 -- -- -- PURCHASE OF TREASURY STOCK (142,100 SHARES, AT COST)............................. -- -- -- -- -- (1,646) NET INCOME............................................... -- -- -- -- 6,062 -- ----------- ------- --------- -------- --------- --------- BALANCES AT DECEMBER 31, 1998............................ 10,105,916 $ 10 $ 90,038 $ (455) $ 5,906 $ (3,999) ========== ======= ========= ======== ========= =========
The accompanying notes are an integral part of these consolidated financial statements. - 29 - CORNELL CORRECTIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ----------------------------------- 1998 1997 1996 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) .................................................. $ 6,062 $ 3,554 $ (2,379) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities -- Depreciation .................................................... 2,880 928 498 Amortization .................................................... 1,348 1,303 892 Deferred income taxes ........................................... 2,106 62 (172) Non-cash stock-based compensation and financing charges ......... -- -- 1,596 Change in assets and liabilities, net of effects from acquisition of businesses -- Accounts receivable ........................................ (7,427) (4,880) 1,090 Restricted assets .......................................... (1,049) (440) (233) Other assets ............................................... (5,590) (1,291) (1,765) Accounts payable and accrued liabilities ................... 4,249 4,332 (88) Deferred revenues and other liabilities .................... (1,205) 2,051 21 --------- --------- --------- Net cash provided by (used in) operating activities ............. 1,374 5,619 (540) --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ............................................... (49,483) (9,640) (1,256) Acquisition of businesses, less cash acquired ...................... (65,096) (23,621) (25,174) --------- --------- --------- Net cash used in investing activities ........................... (114,579) (33,261) (26,430) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt ....................................... 176,379 29,500 40,841 Payments on long-term debt ......................................... (78,331) (29,813) (47,745) Proceeds from issuance of common stock ............................. -- 41,100 37,673 Proceeds from exercise of stock options and warrants ............... 354 949 685 Purchases of treasury stock ........................................ (1,646) -- -- --------- --------- --------- Net cash provided by financing activities ....................... 96,756 41,736 31,454 --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .................. (16,449) 14,094 4,484 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ...................... 18,968 4,874 390 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................ $ 2,519 $ 18,968 $ 4,874 ========= ========= ========= SUPPLEMENTAL CASH FLOW DISCLOSURE: Interest paid, net of amounts capitalized .......................... $ 765 $ 720 $ 1,454 ========= ========= ========= Income taxes paid .................................................. $ 3,341 $ 1,000 $ 75 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. - 30 - CORNELL CORRECTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cornell Corrections, Inc. (collectively with its subsidiaries, the "Company"), a Delaware corporation, provides to governmental agencies the integrated development, design, construction and management of facilities within three operating divisions: (i) secure institutional correctional and detention services, (ii) juvenile correctional and detention services and (iii) pre-release correctional services. CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. RESTRICTED ASSETS For certain facilities, the Company maintains bank accounts for restricted cash belonging to offenders or residents, commissary operations, an equipment replacement fund used in state programs and a restoration fund for certain facilities. These bank accounts and commissary inventories are collectively referred to as "restricted assets" in the accompanying financial statements. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Ordinary maintenance and repair costs are expensed, while renewal and betterment costs are capitalized. Prepaid facility use cost, which resulted from the July 1996 acquisition of the Big Spring Complex, is being amortized over 35 years using the straight-line method. Buildings and improvements are depreciated over their estimated useful lives of 30 to 40 years using the straight-line method. Furniture and equipment are depreciated over their estimated useful lives of 3 to 10 years using the straight-line method. Amortization of leasehold improvements is computed on the straight-line method based upon the shorter of the life of the asset or the term of the respective lease. CAPITALIZED INTEREST The Company capitalizes interest in accordance with Statement of Financial Accounting Standards ("SFAS") No. 34, "Capitalization of Interest Costs," on facilities under development and construction. Interest capitalized during 1998 and 1997 was $2,293,000 and $151,000, respectively. INTANGIBLE ASSETS Goodwill represents the excess of the cost of acquired businesses over the fair market value of their net tangible and identified intangible assets. Goodwill is being amortized on a straight-line basis over 20 years, which represents management's estimation of the related benefit to be derived from the acquired business. Under Accounting Principles Board ("APB") Opinion No. 17 and SFAS No. 121, the Company periodically evaluates whether events and circumstances after the acquisition date indicate that the remaining balance of goodwill may not be recoverable. If factors indicate that goodwill should be evaluated for possible impairment, the Company would compare estimated undiscounted future cash flow from the related operations to the carrying amount of goodwill. If the carrying amount of goodwill were greater than undiscounted future cash flow, an impairment loss would be recognized. Any impairment loss would be - 31 - CORNELL CORRECTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) computed as the excess of the carrying amount of goodwill over the estimated fair value of the goodwill (calculated based on discounting estimated future cash flows). Accumulated amortization of goodwill was $1,694,000 and $1,279,000 as of December 31, 1998 and 1997, respectively. A non-compete agreement was entered into with the President of Abraxas Group, Inc. ("Abraxas") in conjunction with the acquisition of Abraxas in September 1997. The agreement is being amortized over ten years using the straight-line method. Accumulated amortization was $80,000 and $20,000 at December 31, 1998 and 1997, respectively. Intangible assets at December 31, 1998 and 1997, were as follows (in thousands): 1998 1997 -------- -------- Goodwill ............... $ 11,109 $ 6,803 Non-compete agreement .. 600 600 -------- -------- 11,709 7,403 Accumulated amortization (1,774) (1,299) -------- -------- $ 9,935 $ 6,104 ======== ======== DEFERRED COSTS Facility start-up costs, which include costs of initial employee training, travel and other direct expenses incurred in connection with the opening of new facilities or initiating new services or programs in existing facilities, are capitalized and generally amortized on a straight-line basis over the lesser of the initial term of the contract plus renewals or five years. Direct incremental development costs paid to unrelated third parties incurred in securing new facilities, including certain costs of responding to requests for proposal ("RFPs"), are capitalized as deferred costs and amortized as part of start-up costs. Internal payroll and other costs incurred in securing new facilities are expensed to general and administrative expenses. Deferred development costs are charged to general and administrative expenses when the success of obtaining a new facility project is considered doubtful. In April 1998, the American Institute of Certified Public Accountants issued SOP 98-5, "Reporting on the Costs of Start-Up Activities," which requires entities to expense start-up costs as incurred and to expense previously capitalized start-up costs as a cumulative effect of a change in accounting principle in the year adopted. SOP 98-5 is effective for fiscal years beginning after December 15, 1998. At December 31, 1998, unamortized start-up costs were $4,923,000. In January 1999, the Company adopted SOP 98-5 and recorded a net of tax charge of $2,954,000 for the cumulative effect of a change in accounting principle. Costs incurred related to obtaining long-term debt financing are capitalized and amortized over the term of the related indebtedness. At December 31, 1998, the Company had recorded net deferred debt issuance costs of approximately $1,718,000 related to obtaining the 1997 Credit Facility and the Senior Secured Notes. See Note 6 to Consolidated Financial Statements. REALIZATION OF LONG-LIVED ASSETS SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of, " requires that long-lived assets be probable of future recovery in their respective carrying amounts as of each balance sheet date. The Company adopted SFAS No. 121 effective January 1, 1996. Management believes its long-lived assets are realizable and that no impairment allowance is necessary pursuant to the provisions of SFAS No. 121 as of December 31, 1998. - 32 - CORNELL CORRECTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) REVENUE RECOGNITION Substantially all revenues are derived from contracts with federal, state and local government agencies, which pay either per diem rates based upon the number of occupant days for the period or cost-plus reimbursement. Revenues are recognized as services are provided. Deferred revenues result from advances or prepayments from agencies for future services to be provided. Included in accounts receivable at December 31, 1998 and 1997, was approximately $2,003,000 and $1,756,000, respectively, of net receivables from the Pennsylvania Department of Education related to Abraxas' school programs. The Company is reimbursed for these programs by the Department of Education based upon its actual direct costs plus a percentage for allowable indirect costs. Historically, the Department of Education has disallowed certain costs in connection with its annual audit. The Company has fully reserved for its estimate of such disallowances. The Company has filed appeals with the Department of Education for each year audited, which includes each school year in the period from July 1, 1989, through June 30, 1996. The ultimate outcome of these appeals is uncertain; however, in the opinion of management, such resolution will not have a materially adverse effect on the Company's results of operations. INCOME TAXES The Company utilizes the liability method of accounting for income taxes as required by SFAS No. 109, "Accounting for Income Taxes." Under the liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying values of existing assets and liabilities and their respective tax bases based on enacted tax rates. USE OF ESTIMATES The Company's financial statements are prepared in accordance with generally accepted accounting principles ("GAAP"). Financial statements prepared in accordance with GAAP require the use of management estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Additionally, management estimates affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The significant estimates made by management in the accompanying financial statements include the allowance for doubtful accounts, including the portion related to the accounts receivable from Abraxas' school programs. BUSINESS CONCENTRATION Contracts with federal, state and local governmental agencies account for nearly all of the Company's revenues. The loss of or a significant decrease in business from one or more of these governmental agencies could have a material adverse effect on the Company's financial condition and results of operations. For the years ended December 31, 1998, 1997 and 1996, 20.1%, 31.4% and 39.7%, respectively, of the Company's consolidated revenues were derived from contracts with the Federal Bureau of Prisons. FINANCIAL INSTRUMENTS The Company considers the fair value of all financial instruments not to be materially different from their carrying values at the end of each fiscal year based on management's estimate of the Company's ability to borrow funds under terms and conditions similar to those of the Company's existing debt. - 33 - CORNELL CORRECTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ACCOUNTING FOR STOCK-BASED COMPENSATION The Company accounts for its stock-based compensation plans under APB Opinion No. 25, "Accounting for Stock Issued to Employees." In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," certain pro forma disclosures are provided in Note 8. EARNINGS PER SHARE Basic earnings per share ("EPS") is computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted EPS is computed in the same manner as fully diluted EPS, except that, among other changes, the average share price for the period is used in all cases when applying the treasury stock method to potentially dilutive outstanding options. 2. ACQUISITIONS In January 1998, the Company purchased the Great Plains Correctional Facility, a secure institutional facility in Hinton, Oklahoma, with a capacity of 812 beds. In August 1998, the Company acquired substantially all of the Alaskan assets of Allvest, Inc. ("Allvest"), a privately held company based in Anchorage, Alaska. The Allvest acquisition included the operations of five pre-release facilities with an aggregate capacity of 540 beds in Anchorage, Fairbanks and Bethel, Alaska, and the real properties of three of the five facilities. Total consideration for these acquisitions was approximately $65.1 million. The acquisitions were financed through borrowings under the 1997 Credit Facility, proceeds from the 1997 stock offering and cash generated from operations. The acquisition costs and the estimated fair market value of the assets acquired and liabilities assumed associated with the above-mentioned acquisitions were as follows (in thousands): GREAT PLAINS ALLVEST ------- ------- Cash paid.................................. $43,000 $20,399 Transaction costs.......................... 750 947 ------- ------- Total purchase price.................... $43,750 $21,346 ======= ======= Net assets acquired -- Current assets........................... $ -- $ 39 Property and equipment................... 43,750 17,014 Goodwill................................. -- 4,306 Accounts payable and accrued liabilities. -- (13) ------- ------- $43,750 $21,346 ======= ======= In January 1997, the Company acquired substantially all the assets of Interventions Co. ("Interventions"), a non-profit operator of a 300 bed adult residential pre-release facility in Dallas, Texas, and 150 bed residential transitional living center for juveniles in San Antonio, Texas. In September 1997, the Company acquired substantially all of the assets of the Abraxas and four related entities (collectively, "Abraxas"), a provider of residential and non-residential community-based juvenile programs, serving approximately 1,400 juvenile offenders throughout Pennsylvania, Ohio, Delaware and the District of Columbia. The acquisitions were financed primarily through borrowings under the 1997 and 1996 Credit Facilities (see Note 6). - 34 - CORNELL CORRECTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The acquisition costs and the estimated fair market value of the assets acquired and liabilities assumed associated with the above-mentioned acquisitions were as follows (in thousands): INTERVENTIONS ABRAXAS Cash paid.................................. $5,773 $18,593 Transaction costs.......................... 230 600 ------ ------- Total purchase price.................... $6,003 $19,193 ====== ======= Net assets acquired -- Cash..................................... $ 409 $ 489 Receivables, net......................... 1,509 8,551 Other current assets..................... 54 107 Property and equipment.................. 4,577 12,528 Other assets............................. -- 605 Accounts payable and accrued liabilities. (546) (3,087) ------ ------- $6,003 $19,193 ====== ======= The 1998 and 1997 acquisitions have been accounted for as purchases; therefore, the accompanying statements of operations reflect the results of operations since their respective acquisition dates. The unaudited consolidated results of operations on a pro forma basis as though the 1998 and 1997 acquisitions had occurred as of the beginning of the Company's fiscal year 1997 were as follows (amounts in thousands, except per share data): YEAR ENDED DECEMBER 31, ------------------------- 1998 1997 ----------- ----------- Total revenues ....... $ 128,981 $ 115,798 Net income ........... 6,568 4,860 Net earnings per share - Basic ............. .70 .66 - Diluted ........... .67 .63 3. PROPERTY AND EQUIPMENT Property and equipment were as follows (in thousands): DECEMBER 31, ---------------------- 1998 1997 --------- --------- Land ............................................... $ 14,030 $ 4,346 Prepaid facility use ............................... 21,637 21,637 Buildings and improvements ......................... 101,549 17,168 Furniture and equipment ............................ 7,880 2,770 Construction in progress ........................... 20,457 9,374 --------- --------- 165,553 55,295 Accumulated depreciation and amortization .......... (6,334) (2,779) --------- --------- $159,219 $ 52,516 ========= ========= - 35 - CORNELL CORRECTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Construction in progress at December 31, 1998, consists primarily of construction and costs attributable to that portion of the 1,625 bed D. Ray James Prison which is not yet complete. The Company is committed to spending an additional $3.5 million through early 1999 to complete construction of the D. Ray James Prison. 4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities consisted of the following (in thousands): DECEMBER 31, ----------------- 1998 1997 ------- ------- Accounts payable ........... $ 5,780 $ 4,257 Accrued compensation expense 3,969 3,055 Accrued interest payable ... 1,852 16 Due to escrow .............. -- 1,000 Other ...................... 6,237 5,248 ------- ------- $17,838 $13,576 ======= ======= Due to escrow represents an amount payable related to the purchase of Abraxas which was outstanding at December 31, 1997. 5. INCOME TAXES The following is an analysis of the Company's deferred tax assets (liabilities) (in thousands): DECEMBER 31, --------------- 1998 1997 ------ ------ Deferred tax assets: Net operating loss carryforwards.........$ -- $ 522 Depreciation and amortization............ 147 368 Accrued expenses......................... 1,511 986 Deferred compensation.................... 331 331 Other.................................... 165 252 ------ ------ 2,154 2,459 ------ ------ Deferred tax liabilities: Start-up costs amortization.............. 1,877 493 Prepaid facility use amortization........ 682 438 Prepaid expenses......................... 328 201 Other.................................... 827 361 ------ ------ 3,714 1,493 ------ ------ Net deferred tax asset (liability) before valuation allowance..................... (1,560) 966 Valuation allowance........................ -- (420) ------ ------ Net deferred tax asset (liability).......$(1,560) $ 546 ====== ====== - 36 - CORNELL CORRECTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The components of the Company's income tax provision were as follows (in thousands): YEAR ENDED DECEMBER 31, ------------------------- 1998 1997 1996 ------------------------- Current provision................. $1,936 $1,937 $ 247 Deferred provision (benefit)...... 2,106 62 (172) ------ ------ ------ Tax provision................... $4,042 $1,999 $ 75 ====== ====== ====== A reconciliation of taxes at the federal statutory rate with the income taxes recorded by the Company is presented below (in thousands): YEAR ENDED DECEMBER 31, ----------------------------- 1998 1997 1996 ------- ------- ------- Computed taxes at statutory rate of 34 percent $ 3,435 $ 1,888 $ (783) Amortization of non-deductible intangibles ... 116 116 186 State income taxes, net of federal benefit ... 499 229 (39) Changes in valuation allowance ............... (420) (484) 629 Other ........................................ 412 250 82 ------- ------- ------- $ 4,042 $ 1,999 $ 75 ======= ======= ======= The Company's income tax provision for the year ended December 31, 1998, included a benefit for the reversal of the valuation allowance resulting from the utilization of prior net operating losses. 6. LONG-TERM DEBT The Company's long-term debt consisted of the following (in thousands): DECEMBER 31, -------------------- 1998 1997 -------- -------- Revolving Line of Credit due March 2003 with an interest rate of prime plus 0% to 0.5% or LIBOR plus 1.75% to 2.50% .................. $ 48,400 $ -- Senior Secured Notes due July 2010 with an interest rate of 7.74% ............. 50,000 -- Notes Payable, interest at 4.8% to 7.15% ..... 80 432 -------- -------- Total debt ................................... 98,480 432 Less: current maturities ..................... (73) (294) -------- -------- Long-term debt ............................... $ 98,407 $ 138 ======== ======== On December 3, 1998, the Company formalized terms under an amended and restated credit agreement with a financial institution (the "1998 Credit Facility" and previously the "1997 Credit Facility"). The 1998 Credit Facility provides for borrowings up to $60.0 million under a revolving line of credit, the availability of which is determined by the Company's projected pro forma cash flow. The 1998 Credit Facility matures in March 2003 and bears interest, at the election of the Company, at either the prime rate plus a margin of 0% to 0.5% or a rate which is 1.75% to 2.50% above the applicable LIBOR rate. Interest is payable monthly - 37 - CORNELL CORRECTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) with respect to prime rate loans and at the expiration of the applicable LIBOR period for LIBOR based loans. Commitment fees equal to 0.375% per annum are payable on the unused portion of the facility. The 1998 Credit Facility is secured by all of the Company's assets, including the stock of all the Company's subsidiaries, does not permit the payment of cash dividends and requires the Company to comply with certain earnings, net worth and debt service covenants. Additionally, the 1998 Credit Facility provides the Company with the ability to enter into future operating lease agreements that provide for residual value guarantees. See Note 7 - Commitments and Contingencies. On July 15, 1998, the Company completed a private placement of $50.0 million of Senior Secured Notes ("Senior Notes"), of which $25.0 million was issued in July 1998 and $25.0 million in August 1998. The Senior Notes, which bear interest at a fixed rate of 7.74%, mature on July 15, 2010. Under the Senior Notes purchase agreements, the Company is required to make eight annual principal payments of $6.25 million beginning on July 15, 2003 and comply with certain financial covenants. Earlier payments of principal are allowed subject to certain prepayment provisions. Interest is payable semi annually. The holders of the Senior Notes and the lender under the 1998 Credit Facility have a collateral-sharing agreement whereby both sets of creditors have an equal security interest in all the assets of the Company. Notes payable pertain to financed insurance premiums and various vehicle notes. Scheduled maturities of long-term debt were as follows (in thousands): For the year ending December 31 -- 1999................................... $ 73 2000................................... 7 2001................................... -- 2002................................... -- 2003................................... 48,400 Thereafter............................. 50,000 ------ Total.............................. $98,480 ======= 7. COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company leases office space and certain facilities under long-term operating leases. Rent expense for all operating leases for the years ended December 31, 1998, 1997 and 1996, was approximately $4,490,000, $3,583,000 and $2,358,000, respectively. Under the 1998 Credit Facility, the Company is allowed to enter into future operating lease agreements for the acquisition or development of operating facilities at a cost not to exceed $40 million. The lease(s) under this arrangement will have a term of five years, will include purchase and renewal options and will provide for a substantial residual value guarantee (approximately 85% of the total cost) by the Company which would be due upon termination of the lease(s). Upon termination of a lease, the Company could either exercise a purchase option, or the facilities could be sold to a third party. The Company expects the fair market value of the leased facilities to substantially reduce or eliminate the Company's payment under the residual value guarantee. At December 31, 1998, there are no operating leases under this arrangement; however, the table of future minimum lease payments below includes the residual value guarantee related to projects currently in process for which the Company will enter into lease arrangements at construction completion. As of December 31, 1998, the Company had the following rental commitments under noncancelable operating leases and residual value guarantees (in thousands): - 38 - CORNELL CORRECTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) For the year ending December 31 -- 1999................................... $3,053 2000................................... 2,439 2001................................... 2,049 2002................................... 877 2003................................... 594 Thereafter............................. 6,224 ------ Total $15,236 ======= 401(K) PLAN The Company has a defined contribution 401(k) plan. The Company's matching contribution currently represents 50 percent of a participant's contribution, up to the first six percent of the participant's salary. For the years ended December 31, 1998, 1997 and 1996, the Company recorded $611,000, $514,000 and $210,000, respectively, of contribution expense. OTHER The Company is currently negotiating with union representatives over terms for agreements covering an employee group at one of its facilities. The estimated costs associated with Year 2000 readiness are approximately $1.8 million including various hardware and software. As Year 2000 impact assessment nears completion and the renovation planning, readiness implementation and testing evolve, the estimated costs may change. The Company is subject to certain claims and disputes arising in the normal course of the Company's business. In the opinion of the Company's management, uninsured losses, if any, resulting from the ultimate resolution of these matters will not have a material adverse impact on the Company's financial position or results of operations. 8. STOCKHOLDERS' EQUITY STOCKHOLDER RIGHTS PLAN On May 1, 1998, the Company adopted a stockholder rights plan. Under the plan, each stockholder of record at the close of the business day on May 11, 1998, received one Preferred Stock Purchase Right ("Right") for each share of common stock held. The Rights expire on May 1, 2008. Each Right initially entitles the stockholder to purchase one one-thousandth of a Series A Junior Participating Preferred Share for $120.00. Each Preferred Share has terms designed to make it economically equivalent to one thousand common shares. The Rights will become exercisable only in the event a person or group acquires 15% or more of the Company's common stock or commences a tender or exchange offer which, if consummated, would result in that person or group owning 15% or more of the Company's common stock. If a person or group acquires a 15% or more position in the Company, each Right (except those held by the acquiring party) will then entitle its holder to purchase, at the exercise price, common stock of the Company having a value of twice the exercise price. The effect will be to entitle the holder to buy the common stock at 50% of the market price. Also, if following an acquisition of 15% or more of the Company's common stock, the Company is acquired by that person or group in a merger or other business combination transaction, each Right would then entitle its holder to purchase common stock of the acquiring company having a value of twice the exercise price. The effect will be to entitle the Company's stockholder to buy stock in the acquiring company at 50% of the market price. The Company may redeem the Rights at $0.01 per Right at any time prior to the acquisition of 15% or more of its common stock by a person or group. - 39 - CORNELL CORRECTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) STOCK OFFERINGS On October 17, 1997, the Company completed an offering of its common stock. Net proceeds to the Company from the sale of the 2,250,000 shares of newly issued common stock were approximately $41.1 million. Proceeds from the offering were used to repay indebtedness of $18.0 million under the 1997 Credit Facility, with the remainder used for 1998 acquisitions. On October 3, 1996, the Company completed an initial public offering of its common stock ("IPO"). Net proceeds to the Company from the sale of the 3,523,103 shares of newly issued common stock were approximately $37.4 million. PREFERRED STOCK Preferred stock may be issued from time to time by the Board of Directors of the Company, which is responsible for determining the voting, dividend, redemption, conversion and liquidation features of any preferred stock. OPTIONS In May 1996, the Company adopted the 1996 Stock Option Plan and amended and restated the plan in April 1998 ("1996 Plan"). Pursuant to the 1996 Plan, the Company may grant non-qualified and incentive stock options. The Compensation Committee of the Board of Directors is responsible for determining the exercise price and vesting terms for the options. Additionally, prior to the IPO, the Company made various grants of options to purchase the Company's common stock. Under the 1996 Plan, the Company may grant options for up to the greater of 1,500,000 shares or 15% of the aggregate number of shares of common stock outstanding. Including options granted from forteitures and cancellations, the Company has granted options on 1,757,230 shares through December 31, 1998, under the 1996 Plan. The 1996 Plan option exercise price can be no less than the market price of the Company's common stock on the date of grant. The 1996 Plan options vest up to seven years and expire seven to ten years from the grant date. A summary of the status of the Company's 1996 Plan and other options at December 31, 1998, 1997 and 1996, and changes during the years then ended is presented in the tables below:
1998 1997 1996 --------------------- ---------------------- ---------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE --------- ------ --------- ------ ---------- ------ Outstanding at beginning of year 854,454 $ 6.60 1,078,109 $ 4.32 814,562 $ 2.12 Granted ........................ 932,872 22.83 161,000 12.57 776,469 5.24 Exercised ...................... (177,187) 2.94 (375,505) 2.55 (512,922) 2.22 Forfeited or canceled .......... (271,300) 19.76 (9,150) 9.67 -- -- --------- ------ --------- ------ ---------- ------ Outstanding at end of year ..... 1,338,839 15.73 854,454 6.60 1,078,109 4.32 ========= ========= ========== Exercisable at end of year ..... 487,557 5.84 613,604 4.64 930,609 3.46 Weighted average fair value of options granted at market .. -- $16.41 -- $ 9.42 -- $ 4.10
- 40 - CORNELL CORRECTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In connection with the acquisition of Abraxas in September 1997, the Company granted options to purchase 10,000 shares of common stock at an exercise price of $7.59, which was equal to 50% of the fair market value of the Company's common stock. The fair value of these options, which were not granted under the 1996 Plan, was $12.57 per share. In July 1996, the Company recorded compensation expense of $870,000 related to options granted to certain officers of the Company. The following table summarizes information about stock options outstanding at December 31, 1998:
WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE NUMBER REMAINING EXERCISE NUMBER EXERCISE RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE ------------------------- ------------- -------- ---------- ------------- ---------- $ 2.00 to $ 2.50............. 103,919 6.7 $ 2.07 103,919 $ 2.07 3.75 to 7.59............. 297,248 7.5 4.95 280,498 4.88 10.375 to 15.81............. 295,005 8.6 13.65 103,140 12.24 19.875 to 24.375............. 642,667 9.3 23.88 -- -- ------------- -------- ---------- ------------- ---------- 1,338,839 8.5 $ 15.73 487,557 $ 5.84 ============= ======== ========== ============= ==========
Had compensation cost for the stock option grants under the 1996 Plan and other stock options and warrants been determined under SFAS No. 123, the Company's net income (loss) and diluted net earnings (loss) per share would have been the following pro forma amounts (in thousands, except per share amounts):
YEAR ENDED DECEMBER 31, 1998 1997 1996 ----------- ------------ ----------- Net income (loss): As reported............. $ 6,062 $ 3,554 $ (2,379) Pro forma .............. 4,380 3,177 (3,503) Earnings (loss) per share (diluted): As reported............. .62 .46 (.65) Pro forma .............. .45 .41 (.95)
Because SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. Under SFAS No. 123, the fair value of each option grant was estimated on the date of grant using the minimum value calculation prior to the IPO and the Black-Scholes option pricing model subsequent to the IPO. The following weighted average assumptions were used for grants in 1998, 1997 and 1996, respectively: risk-free interest rates of 5.8%, 6.5% and 6.8%; dividend rates of $0, $0 and $0; expected lives of 10.0, 10.0 and 7.5 years; expected volatility of 54.70% for 1998, 54.79% for 1997 and 32.5% since the Company's stock began trading in October 1996. - 41 - CORNELL CORRECTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Black-Scholes option pricing model and other existing models were developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferrable. In addition, option valuation models require the input of and are highly sensitive to subjective assumptions including the expected stock price volatility. The Company's employee stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate. On July 8, 1996, the Chairman of the Board and the former Chief Financial Officer of the Company exercised options to purchase 137,110 and 82,750 shares of Class A Common Stock and Class B Common Stock at an aggregate price of $274,220 and $180,638, respectively. In connection with the exercise, each officer entered into a promissory note with the Company for the respective aggregate exercise amounts. The promissory notes bear interest at the applicable short-term federal rate as prescribed by Internal Revenue Service regulations, mature in four years, are full recourse and are collateralized by shares of common stock exercised. TREASURY STOCK During the year ended December 31, 1998, the Company repurchased 142,100 shares of common stock on the open market under a share repurchase program at an aggregate cost of $1,646,000. In November 1995, the Company repurchased 555,000 shares of common stock from a former officer of the Company. 9. SEGMENT DISCLOSURE In July 1997, SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," was issued. SFAS No. 131 requires certain financial and supplementary information to be disclosed on an annual and interim basis for each reportable segment of an enterprise. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. The Company's three operating divisions are its reportable segments. The secure institutional segment consists of the operation of secure adult incarceration facilities. The juvenile segment consists of providing residential treatment and educational programs and non-residential community-based programs to juveniles between the ages of 10 and 17 who either have been adjudicated or suffer from behavioral problems. The pre-release segment consists of providing pre-release and halfway house programs for adult offenders who are either on probation or serving the last three to six months of their sentences on parole and preparing for re-entry into society at large. The Company's reportable segments are managed separately because each business has different contractual requirements and needs specific to the respective offenders or residents. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Intangible assets are not included in each segment's reportable assets, and the amortization of intangible assets is not included in the determination of a segment's operating income or loss. The Company evaluates performance based on income or loss from operations before general and administrative expenses, incentive bonuses, amortization of intangibles, interest and income taxes. - 42 - CORNELL CORRECTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The only significant noncash item reported in the respective segments' income or loss from operations is depreciation and amortization (excluding intangibles): (IN THOUSANDS) YEAR ENDED DECEMBER 31, ---------------------------------- 1998 1997 1996 --------- --------- -------- Revenues Secure institutional .................. $ 52,630 $ 32,283 $ 21,390 Juvenile .............................. 47,032 18,536 -- Pre-release ........................... 23,457 19,483 10,937 --------- --------- -------- Total revenues ........................... $ 123,119 $ 70,302 $ 32,327 ========= ========= ======== Depreciation and amortization Secure institutional .................. $ 2,145 $ 693 $ 358 Juvenile .............................. 739 493 -- Pre-release ........................... 685 613 464 Amortization of intangibles ........... 415 340 546 Corporate and other ................... 244 92 22 --------- --------- -------- Total depreciation and amortization ...... $ 4,228 $ 2,231 $ 1,390 ========= ========= ======== Income (loss) from operations Secure institutional .................. $ 12,638 $ 6,532 $ 3,823 Juvenile .............................. 5,058 2,128 -- Pre-release ........................... 4,043 2,930 1,664 General and administrative expense .... (7,581) (5,394) (4,560) Incentive bonuses ..................... (803) (50) -- Amortization of intangibles ........... (415) (340) (546) Corporate and other ................... (351) (176) (42) --------- --------- -------- Total income from operations ............. $ 12,589 $ 5,630 $ 339 ========= ========= ======== Assets Secure institutional .................. $ 127,774 $ 38,495 $ 26,119 Juvenile .............................. 37,917 27,779 -- Pre-release ........................... 28,815 8,469 7,030 Intangible assets, net ................ 9,935 6,104 5,864 Corporate and other ................... 8,254 23,262 7,811 --------- --------- -------- Total assets ............................. $ 212,695 $ 104,109 $ 46,824 ========= ========= ======== Capital expenditures Secure institutional .................. $ 22,484 $ 7,872 $ 33 Juvenile .............................. 5,927 272 -- Pre-release ........................... 19,947 966 1,222 Corporate and other ................... 1,125 530 1 --------- --------- -------- Total capital expenditures ............... $ 49,483 $ 9,640 $ 1,256 ========= ========= ======== - 43 - ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III Items 10, 11, 12 and 13 of Part III have been omitted from this report because the Company will file with the Securities and Exchange Commission, not later than 120 days after the close of its fiscal year, a definitive proxy statement. The information required by Items 10, 11, 12 and 13 of this report, which will appear in the definitive proxy statement, is incorporated by reference into Part III of this report. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS 1. Financial statements and reports of Arthur Andersen LLP Report of Independent Public Accountants Consolidated Balance Sheets - December 31, 1998 and 1997 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements 2. Financial statement schedules All schedules are omitted because they are not applicable or because the required information is included in the financial statements or notes thereto. 3. Exhibits
EXHIBIT NO. DESCRIPTION INCORPORATED BY REFERENCE - - ------- ------------------------------------------------------------------------------------------------ 3.1 Restated Certificate of Incorporation of the Company. 1 3.2 Amended and Restated Bylaws of the Company. 4.1 Certificate representing Common Stock. 2 4.2 Registration Rights Agreement dated as of March 31, 1994, as amended, 2 among the Company and the stockholders listed on the signature pages thereto. 4.3 Rights Agreement dated as of May 1, 1998 between the Company and 9 American Securities Transfer & Trust, Inc. as Rights Agent. 9.1 Stock Transfer and Voting Agreement dated November 23, 1994 between 2 David M. Cornell and Jane B. Cornell. 10.1 Cornell Corrections, Inc. Amended and Restated 1996 Stock Option 3 Plan. 10.2 Employment Agreement dated as of September 9, 1997 between Abraxas 4 Group, Inc. and Arlene R. Lissner. 10.3 Covenant Not to Compete Agreement dated as of September 9, 2997 by 4 and between the Company and Arlene R. Lissner. 10.4 Form of Indemnification Agreement between the Company and each of its 2 directors and executive officers.
- 44 -
EXHIBIT NO. DESCRIPTION INCORPORATED BY REFERENCE - - ------- ------------------------------------------------------------------------------------------------ 10.5 Stockholders Agreement among certain stockholders named therein dated 4 September 15, 1997. 10.6 Contract between CCCI and the CDC (No. 92.401) for the Baker, 2 California Facility dated June 25, 1992, as amended. 10.7 Professional Management Agreement between the Company and Central 2 Falls Detention Facility Corporation dated July 15, 1992. 10.8 Operating Agreement by and between each of MidTex Detentions, Inc., 2 the City of Big Spring, Texas ("Big Spring") and Cornell Corrections of Texas, Inc. ("CCTI") dated as of July 1, 1996 and related Assignment and Assumption of Operating Agreement. 10.9 Contract between CCCI and the CDC (No. R92.132) for the Live Oak, 2 California Facility dated March 1, 1993, as amended. 10.10 Asset Purchase Agreement dated as of January 31, 1997 by and between 5 Cornell Corrections of Texas, Inc. and Interventions Co. 10.11 Asset Purchase Agreement dated as of August 14, 1997 by and between 4 Cornell Corrections, Inc. and Abraxas Group, Inc., Foundation for Abraxas, Inc., Abraxas Foundation, Inc., Abraxas Foundation of Ohio and Abraxas, Inc. 10.12 Contract between Texas Alcoholism Foundation, Inc. and the Texas 2 Department of Criminal Justice, Parole Division for the Reid Facility dated January 31, 1996, as amended. 10.13 Form of Contract between CCCI and the Utah State Department of 2 Human Services, Division of Youth Corrections for the Salt Lake City, Utah Juvenile Facility. 10.14 Asset Purchase Agreement among CCTI, Texas Alcoholism Foundation, 2 Inc. and the Texas House Foundation, Inc. dated May 14, 1996. 10.15 Asset Purchase Agreement among CCTI, the Company, Ed Davenport, 2 Johnny Rutherford and MidTex Detentions, Inc. dated May 22, 1996. 10.16 Lease Agreement between CCCI and Baker Housing Company dated 2 August 1, 1987 for the Baker, California facility. 10.17 Lease Agreement between CCCI and Sun Belt Properties dated as of May 2 23, 1988, as amended for the Live Oak, California facility. 10.18 Lease Agreement between Big Spring and Ed Davenport dated as of July 2 1, 1996 for the Interstate Unit and related Assignment and Assumption of Leases. 10.19 Secondary Sublease Agreement between Big Spring and Ed Davenport 2 dated as of July 1, 1996 for the Airpark Unit and related Assignment and Assumption of Leases. 10.20 Secondary Sublease Agreement between Big Spring and Ed Davenport 2 dated as of July 1, 1996 for the Flightline Unit and related Assignment and Assumption of Leases. 10.21 Stock Option Agreement between the Company and CEP II dated July 9, 2 1996. 10.22 Form of Option Agreement between the Company and the Optionholder 2 listed therein dated as of November 1, 1995. 10.23 Third Amended and Restated Credit Agreement among the Company, Subsidiaries of the Company, the Lenders and ING, as agent to the Lenders dated as of December 3, 1998 10.24 Senior Note Agreement by and between the Company and the Note 6 Purchasers, dated July 15, 1998. 10.25 Asset Purchase Agreement dated as of November 17, 1997 by and 7 between Foresite Capital Facilities Corporation and the Hinton Economic Development Authority. -45- 10.26 Amendment dated December 10, 1997 to Asset Purchase Agreement 7 dated as of November 17, 1997. 10.27 Amendment No. 2 dated January 6, 1998 to Asset Purchase Agreement 7 dated as of November 17, 1997. 10.28 Assignment of Agreement of Purchase and Sale dated as of January 5, 7 1998 by and between Foresite Capital Facilities Corporation and Cornell Corrections of Oklahoma, Inc. 10.29 Allvest Asset Purchase Agreement dated as of June 20, 1998 by and 8 between the Company and Allvest, Inc., St. John Investments, and William C. Weimar. 11.1 Computation of Per Share Earnings. 21.1 Subsidiaries of the Company. 23.1 Consent of Arthur Andersen LLP. 24.1 Powers of Attorney. 27.1 Financial Data Schedule.
(1) Annual Report on Form 10-K of the Company for the year ended December 31, 1996. (2) Registration Statement on Form S-1 of the Company (Registration No. 333-08243). (3) Definitive Proxy Statement dated March 9, 1998. (4) Registration Statement on Form S-1 of the Company (Registration No. 333-35807). (5) Current Report on Form 8-K of the Company dated January 31, 1997 (File No. 1-14472). (6) Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 1998. (7) Current Report on Form 8-K of the Company dated January 6, 1998. (8) Current Report on Form 8-K of the Company dated August 13, 1998. (9) Registration Statement on Form 8-A of the Company filed May 11, 1998. (b) REPORTS ON FORM 8-K On November 13, 1998, the Company filed Amendment No. 2 to Form 8-K dated August 13, 1998 reporting the acquisition of Allvest, Inc. - 46 - SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized. CORNELL CORRECTIONS, INC. Dated: March 31, 1999 By: /s/ DAVID M. CORNELL -------------------- David M. Cornell Chairman of the Board, President and Chief Executive Officer
SIGNATURE TITLE DATE - - --------- ----- ---- /s/ DAVID M. CORNELL Chairman of the Board, President March 31, 1999 David M. Cornell and Chief Executive Officer (Principal Executive Officer) /s/ BRIAN E. BERGERON Chief Financial Officer March 31, 1999 Brian E. Bergeron and Treasurer (Principal Financial Officer and Principal Accounting Officer) /s/ CAMPBELL A. GRIFFIN, JR.* Director March 31, 1999 Campbell A. Griffin, Jr. /s/ PETER A. LEIDEL* Director March 31, 1999 Peter A. Leidel /s/ ARLENE R. LISSNER * Director March 31, 1999 Arlene R. Lissner /s/ TUCKER TAYLOR* Director March 31, 1999 Tucker Taylor * By: DAVID M. CORNELL David M. Cornell Attorney-in-Fact
- 47 - EX-3.2 2 EXHIBIT 3.2 AMENDED AND RESTATED BYLAWS OF CORNELL CORRECTIONS, INC. ADOPTED FEBRUARY 23, 1998 AMENDED AND RESTATED BYLAWS OF CORNELL CORRECTIONS, INC. Table of Contents ARTICLE I OFFICES................................................................1 1.1 REGISTERED OFFICE................................................1 1.2 OTHER OFFICES....................................................1 ARTICLE II MEETINGS OF STOCKHOLDERS...............................................1 2.1 PLACE OF MEETINGS................................................1 2.2 ANNUAL MEETINGS..................................................1 2.3 SPECIAL MEETINGS.................................................1 2.4 NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS...................2 2.5 REGISTERED HOLDERS OF SHARES; CLOSING OF SHARE TRANSFER RECORDS; AND RECORD DATE.............3 2.6 QUORUM...........................................................4 2.7 VOTING BY STOCKHOLDERS...........................................4 2.8 PROXIES..........................................................5 2.9 NO SHAREHOLDER ACTION WITHOUT MEETING............................5 ARTICLE III DIRECTORS..............................................................5 3.1 DUTIES AND POWERS................................................5 3.2 NUMBER AND ELECTION OF DIRECTORS.................................6 3.3 VACANCIES........................................................6 3.4 RESIGNATIONS.....................................................6 3.5 MEETINGS.........................................................6 3.6 QUORUM...........................................................6 3.7 ACTIONS WITHOUT A MEETING........................................6 3.8 TELEPHONIC MEETINGS..............................................6 3.9 COMMITTEES.......................................................7 3.10 REIMBURSEMENT OF EXPENSES........................................7 3.11 PROTECTION FOR RELIANCE..........................................7 3.12 CONSIDERATION OF SOCIAL, ECONOMIC AND OTHER FACTORS IN EVALUATING A BID..............................7 i ARTICLE IV OFFICERS...............................................................8 4.1 GENERAL..........................................................8 4.2 ELECTION.........................................................8 4.3 DUTIES...........................................................8 4.4 CHAIRMAN.........................................................8 4.5 PRESIDENT........................................................8 4.6 VICE PRESIDENTS..................................................9 4.7 SECRETARY AND ASSISTANT SECRETARIES..............................9 4.8 TREASURER AND ASSISTANT TREASURERS...............................9 4.9 REMOVAL..........................................................9 4.10 VOTING SECURITIES OWNED BY THE CORPORATION......................10 ARTICLE V STOCK.................................................................10 5.1 FORM OF CERTIFICATES............................................10 5.2 SIGNATURES......................................................10 5.3 LOST CERTIFICATES...............................................10 5.4 TRANSFERS.......................................................10 5.5 BENEFICIAL OWNERSHIP............................................11 5.6 DIVIDENDS.......................................................11 ARTICLE VI INDEMNIFICATION.......................................................11 6.1 GENERAL.........................................................11 6.2 EXPENSES........................................................11 6.3 ADVANCES........................................................12 6.4 REQUEST FOR INDEMNIFICATION.....................................12 6.5 NONEXCLUSIVITY OF RIGHTS........................................12 6.6 INSURANCE AND SUBROGATION.......................................12 6.7 SEVERABILITY....................................................13 6.8 CERTAIN PERSONS NOT ENTITLED TO INDEMNIFICATION.................13 6.9 DEFINITIONS.....................................................13 ARTICLE VII NOTICES...............................................................14 7.1 NOTICES.........................................................14 7.2 WAIVER OF NOTICE................................................14 ii ARTICLE VIII MISCELLANEOUS.........................................................14 8.1 FISCAL YEAR.....................................................14 8.2 AMENDMENTS......................................................14 iii AMENDED AND RESTATED BYLAWS OF CORNELL CORRECTIONS, INC. ARTICLE I OFFICES 1.1 REGISTERED OFFICE. The registered office of Cornell Corrections, Inc., a Delaware corporation (the "Corporation"), is The Corporation Trust Company, 1209 Orange Street, in the City of Wilmington, County of New Castle, State of Delaware, 19801. 1.2 OTHER OFFICES. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors of the Corporation (the "Board of Directors") may from time to time determine. ARTICLE II MEETINGS OF STOCKHOLDERS 2.1 PLACE OF MEETINGS. Annual or special meetings of the stockholders for the election of directors or for any other purpose shall be held at such time and place, either within or without the State of Delaware, as may be designated from time to time by the Board of Directors and stated in the notice of the meeting or in a duly executed waiver of notice thereof. If not so designated or stated, such meeting shall be held at the registered office of the Corporation. 2.2 ANNUAL MEETINGS. The annual meeting of stockholders shall be held on such date and at such time as may be designated from time to time by the Board of Directors and stated in the notice of such meeting. At the annual meeting, the stockholders shall elect by a plurality vote a Board of Directors and transact such other business as may properly be brought before the meeting. Written notice of the annual meeting of stockholders of the Corporation stating the place, date and hour of the meeting shall be sent to each stockholder entitled to vote at such meeting not less than 10 nor more than 60 days before the date of the meeting. Failure to hold the annual meeting shall not work a forfeiture or dissolution of the Corporation or affect otherwise valid corporate acts. 2.3 SPECIAL MEETINGS. Unless otherwise prescribed by the Delaware General Corporation Law ("DGCL") or by the Certificate of Incorporation of the Corporation (as amended or restated from time to time, the "Certificate of Incorporation"), special meetings of stockholders of the Corporation for any purpose or purposes may be called at any time by the Chairman of the Board of Directors or by any two or more directors of the Corporation. Written notice of the special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called shall be given not less 10 nor more than 60 days before the date of the meeting to each stockholder entitled to vote at such meeting. 2.4 NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS. (a) NOMINATION OF DIRECTORS. Only persons who are nominated in accordance with the following procedures shall be eligible to serve as directors. Nominations of persons for election to the Board of Directors of the Corporation at a meeting of stockholders may be made (i) by or at the direction of the Board of Directors, or (ii) by any stockholder of the Corporation entitled to vote in the election of directors at the meeting who complies with the notice procedures set forth in this Section 2.4(a). Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered to, or mailed and received by, the Secretary of the Corporation at the principal executive offices of the Corporation not less than ninety (90) days prior to the first anniversary of the date of the previous year's annual meeting of stockholders; provided, however, that if no annual meeting of stockholders was held in the previous year or if the date of the annual meeting is advanced by more than thirty (30) days prior to, or delayed by more than sixty (60) days after, such anniversary date, notice by the stockholder to be timely must be so delivered, or mailed and received, not later than the close of business on the tenth (10th) day following the day on which the date of such meeting has been first "publicly disclosed" (in the manner provided in the last sentence of this Section 2.4(a) by the Corporation). Any stockholder's notice pursuant to this Section 2.4(a) shall set forth (i) as to each person whom the stockholder proposes to nominate for election or re-election as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serving as director if elected); and (ii) as to the stockholder giving notice (A) the name and address, as they appear on the Corporation's books, of such stockholder and (B) the class and number of shares of the Corporation which are beneficially owned by such stockholder. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. No person shall be eligible to serve as a director of the Corporation unless nominated in accordance with the procedures set forth herein. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not properly brought before the meeting and in accordance with the provisions of these Amended and Restated Bylaws (these "Bylaws"), and if he should so determine, he shall so declare to the meeting and any such nomination not properly brought before the meeting shall be disregarded. For purposes of these Bylaws, "publicly disclosed" or "public disclosure" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or a comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission. (b) NOTICE OF BUSINESS. Except as set forth in Section 2.4(a), at any meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting (a) by or at the direction of the Board of Directors or (b) by any -2- stockholder of the Corporation who shall be entitled to vote at such meeting and who complies with the notice procedures set forth in this Section 2.4(b). For business to be properly brought before a stockholder meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered to, or mailed and received at, the principal executive offices of the Corporation not less than 50 days prior to the meeting; provided, however, that in the event that less than 55 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be received no later than the close of business on the tenth (10th) day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the meeting (a) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (b) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (c) the class and number of shares of the Corporation which are beneficially owned by the stockholder, and (d) any material interest of the stockholder in such business. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at a stockholder meeting except (i) in accordance with the procedures set forth in this Section 2.4(b) or (ii) with respect to nominations of persons for election as directors of the Corporation, in accordance with the provisions of Section 2.4(a) hereof. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of these Bylaws, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing provisions of this Section 2.4(b), a stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Section. 2.5 REGISTERED HOLDERS OF SHARES; CLOSING OF SHARE TRANSFER RECORDS; AND RECORD DATE. (a) REGISTERED HOLDERS AS OWNERS. Unless otherwise provided under Delaware law, the Corporation may regard the person in whose name any shares issued by the Corporation are registered in the stock transfer records of the Corporation at any particular time (including, without limitation, as of a record date fixed pursuant to paragraph (b) of this Section 2.4) as the owner of those shares at that time for purposes of voting those shares, receiving distributions thereon or notices in respect thereof, transferring those shares, exercising rights of dissent with respect to those shares, entering into agreements with respect to those shares, or giving proxies with respect to those shares; and neither the Corporation nor any of its officers, directors, employees or agents shall be liable for regarding that person as the owner of those shares at that time for those purposes, regardless of whether that person possesses a certificate for those shares. -3- (b) RECORD DATE. For the purpose of determining stockholders of the Corporation entitled to notice of or to vote at any meeting of stockholders of the Corporation or any adjournment thereof, or entitled to receive a distribution by the Corporation (other than a distribution involving a purchase or redemption by the Corporation of any of its own shares) or a share dividend, or in order to make a determination of stockholders of the Corporation for any other proper purpose, the Board of Directors may fix in advance a date as the record date for any such determination of stockholders of the Corporation, such date in any case to be not more than 60 days and, in the case of a meeting of stockholders, not less than 10 days, prior to the date on which the particular action requiring such determination of stockholders of the Corporation is to be taken. The Board of Directors shall not close the books of the Corporation against transfers of shares during the whole or any part of such period. If the Board of Directors does not fix a record date for any meeting of the stockholders of the Corporation, the record date for determining stockholders of the Corporation entitled to notice of or to vote at such meeting shall be at the close of business on the day next preceding the day on which notice is given, or, if in accordance with Section 7.2 of these Bylaws notice is waived, at the close of business on the day next preceding the day on which the meeting is held. 2.6 QUORUM. Except as otherwise provided by law or by the Certificate of Incorporation, the holders of a majority of the capital stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders of the Corporation for the transaction of business. If, however, such quorum shall not be present or represented at any meeting of the stockholders of the Corporation, the stockholders of the Corporation entitled to vote at such meeting, present in person or represented by proxy, shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder entitled to vote at the meeting. 2.7 VOTING BY STOCKHOLDERS. (a) VOTING ON MATTERS OTHER THAN THE ELECTION OF DIRECTORS. With respect to any matters as to which no other voting requirement is specified by the DGCL, the Certificate of Incorporation or these Bylaws, the affirmative vote required for stockholder action shall be that of a majority of the shares present in person or represented by proxy at the meeting (as counted for purposes of determining the existence of a quorum at the meeting). In the case of a matter submitted for a vote of the stockholders of the Corporation as to which a stockholder approval requirement is applicable under the stockholder approval policy of any stock exchange or quotation system on which the capital stock of the Corporation is traded or quoted, the requirements under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any provision of the Internal Revenue Code, in each case for which no higher voting requirement is specified by the DGCL, the -4- Restated Certificate of Incorporation or these Bylaws, the vote required for approval shall be the requisite vote specified in such stockholder approval policy, the Exchange Act or Internal Revenue Code provision, as the case may be (or the highest such requirement if more than one is applicable). For the approval of the appointment of independent public accountants (if submitted for a vote of the stockholders of the Corporation), the vote required for approval shall be a majority of the votes cast on the matter. (b) VOTING IN THE ELECTION OF DIRECTORS. Unless otherwise provided in the Certificate of Incorporation or these Bylaws in accordance with the DGCL, directors shall be elected by a plurality of the votes cast by the holders of outstanding shares of capital stock of the Corporation entitled to vote in the election of directors at a meeting of stockholders at which a quorum is present. (c) OTHER. The Board of Directors, in its discretion, or the officer of the Corporation presiding at a meeting of stockholders of the Corporation, in his discretion, may require that any votes cast at such meeting shall be cast by written ballot. 2.8 PROXIES. Each stockholder of the Corporation entitled to vote at a meeting of stockholders of the Corporation may authorize another person or persons to act for him by proxy. Proxies for use at any meeting of stockholders of the Corporation shall be filed with the Secretary, or such other officer as the Board of Directors may from time to time determine by resolution, before or at the time of the meeting. All proxies shall be received and taken charge of and all ballots shall be received and canvassed by the secretary of the meeting who shall decide all questions relating to the qualification of voters, the validity of the proxies and the acceptance or rejection of votes, unless an inspector or inspectors shall have been appointed by the chairman of the meeting, in which event such inspector or inspectors shall decide all such questions. 2.9 NO SHAREHOLDER ACTION WITHOUT MEETING. From and after the first date as of which the Corporation has a class or series of capital stock registered under the Exchange Act, no action required to be taken or that may be taken at any annual or special meeting of the stockholders of the Corporation may be taken without a meeting, and the power of the stockholders of the Corporation of the Corporation to consent in writing to the taking of any action by written consent without a meeting is specifically denied, except for action by unanimous written consent, which is expressly allowed. ARTICLE III DIRECTORS 3.1 DUTIES AND POWERS. The business, affairs and property of the Corporation shall be managed by or under the directorship of the Board of Directors, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by law, the Certificate of Incorporation or these Bylaws authorized or required to be exercised or done by the stockholders of the Corporation. -5- 3.2 NUMBER AND ELECTION OF DIRECTORS. The number of directors of the Corporation shall be determined in the manner provided in the Corporation's Certificate of Incorporation. Directors shall be elected by class for three (3) year or other terms as specified in the Corporation's Certificate of Incorporation, and each director elected shall hold office during the term for which he or she is elected and until his or her successor is elected and qualified, subject, however, to his or her prior death, resignation, retirement or removal for cause from office. 3.3 VACANCIES. Any vacancies occurring in the Board of Directors and newly created directorships shall be filled in the manner provided in the Corporation's Certificate of Incorporation. 3.4 RESIGNATIONS. Any director of the Corporation may resign at any time upon written notice to the Corporation. To be effective, such notice of resignation need not be formally accepted by the Board of Directors. A director of the Corporation need not be a stockholder of the Corporation or a resident of the State of Delaware. 3.5 MEETINGS. The Board of Directors of the Corporation may hold meetings, both regular and special, either within or without the State of Delaware. Regular meetings of the Board of Directors may be held without notice at such time and at such place as may from time to time be determined by the Board of Directors. Special meetings of the Board of Directors may be called by the Chairman, if there be one, or by the President or by any two or more directors of the Corporation. Notice thereof stating the place, date and hour of the meeting shall be given to each director either by mail not less than 48 hours before the date of the meeting, by telephone, telegram or facsimile on 24 hours' notice or on such shorter notice as the person or persons calling such meeting may deem necessary or appropriate in the circumstances. Unless otherwise required by law, neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. 3.6 QUORUM. Except as may be otherwise specifically provided by law, the Certificate of Incorporation or these Bylaws, at all meetings of the Board of Directors, a majority of the entire Board of Directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. 3.7 ACTIONS WITHOUT A MEETING. Unless otherwise provided by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all the members of the Board of Directors or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. 3.8 TELEPHONIC MEETINGS. Unless otherwise provided by the Certificate of Incorporation or these Bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors or such committee by means of a conference telephone or similar communications equipment by means of which all -6- persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 3.7 shall constitute presence in person at such meeting. 3.9 COMMITTEES. The Board of Directors may, by resolution passed by a majority of the entire Board of Directors, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors of the Corporation as alternate members of any committee, who may replace any absent or disqualified member at any meeting of any such committee. In the absence or disqualification of a member of a committee, and in the absence of a designation by the Board of Directors of an alternate member to replace the absent or disqualified member, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in place of any absent or disqualified member. Any committee, to the extent allowed by law and provided in the resolution establishing such committee, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation. Each committee shall keep regular minutes and report to the Board of Directors when required. 3.10 REIMBURSEMENT OF EXPENSES. The directors of the Corporation shall be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary or other consideration as director. No such reimbursement shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees shall be allowed like reimbursement for attending committee meetings. 3.11 PROTECTION FOR RELIANCE. Any member of the Board of Directors, or any member of any committee designated by the Board of Directors, shall, in the performance of his duties, be fully protected in relying in good faith upon the records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of the Corporation's officers or employees, or committees of the Board of Directors, or by any other person as to matters the member reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation. 3.12 CONSIDERATION OF SOCIAL, ECONOMIC AND OTHER FACTORS IN EVALUATING A BID. The Board of Directors of the Corporation, when evaluating any offer of another party to (a) purchase or exchange any securities or property for any outstanding equity securities of the Corporation, (b) merge or consolidate the Corporation with another corporation, or (c) purchase or otherwise acquire all or substantially all of the properties and assets of the Corporation, shall, in connection with the exercise of its judgment in determining what is in the best interests of the Corporation and its stockholders, give due consideration not only to the price or other consideration being offered but also to all other relevant factors, including without limitation (i) the financial and managerial resources and future prospects of the party, (ii) the possible effects on the business of the Corporation and its subsidiaries and on the employees, customers, suppliers and creditors of the Corporation and its subsidiaries, and (iii) the effects on the communities in which the Corporation's facilities are located. -7- ARTICLE IV OFFICERS 4.1 GENERAL. The officers of the Corporation shall be chosen by the Board of Directors and shall be a President and a Secretary. The Board of Directors, in its discretion, may also choose a Chairman of the Board of Directors, a Chief Financial Officer, a Treasurer and one or more Vice Presidents, Assistant Secretaries, Assistant Treasurers and other officers. Any number of offices may be held by the same person, unless otherwise prohibited by law, the Certificate of Incorporation or these Bylaws. The officers of the Corporation need not be stockholders of the Corporation nor, except in the case of the Chairman of the Board of Directors, need such officers be directors of the Corporation. 4.2 ELECTION. The Board of Directors shall elect or appoint the officers of the Corporation who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors; and all officers of the Corporation shall hold office until their successors are elected and qualified, or until the earlier of their resignation or removal. Any officer elected by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. Any vacancy occurring in any office of the Corporation may be filled by the Board of Directors. 4.3 DUTIES. The officers of the Corporation shall have such powers and duties as generally pertain to their offices, except as modified herein or by the Board of Directors, as well as such powers and duties as from time to time may be conferred by the Board of Directors. 4.4 CHAIRMAN. The Chairman of the Board of Directors shall be the Chief Executive Officer of the Corporation and, subject to the control of the Board of Directors, shall have general supervision and control of the business, affairs and properties of the Corporation and its general officers. The Chairman shall possess the same power as the President to sign all contracts, certificates and other instruments of the Corporation which may be authorized by the Board of Directors. The Chairman shall also perform such other duties and may exercise such other powers as from time to time may be assigned to him by the Board of Directors. 4.5 PRESIDENT. The President shall, subject to the control of the Board of Directors, have general supervision of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. If there is no Chairman of the Board, the President shall be the Chief Executive Officer of the Corporation; otherwise, he shall be the Chief Operating Officer of the Corporation and shall execute all bonds, mortgages, contracts and other instruments of the Corporation, except where required or permitted by law to be otherwise signed and executed and except that the other officers of the Corporation may sign and execute documents when so authorized by these Bylaws, the Board of Directors, the Chairman of the Board or the President. The President shall preside at all meetings of the stockholders of the Corporation and the Board of Directors, unless the Board of Directors has appointed a Chairman of the Board, who -8- would preside at all such meetings. The President shall also perform such other duties and may exercise such other powers as from time to time may be assigned to him by these Bylaws or by the Board of Directors. 4.6 VICE PRESIDENTS. At the request of the President or in his absence or in the event of his inability or refusal to act, any Vice President may perform the duties of the President and, when so acting, such officer shall have all the powers of and be subject to all the restrictions upon the President. Each Vice President shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. If there is no Vice President, the Board of Directors shall designate the officer of the Corporation who, in the absence of the President or in the event of the inability or refusal of the President to act, shall perform the duties of the President and, when so acting, such officer shall have all the powers of and be subject to all the restrictions upon the President. 4.7 SECRETARY AND ASSISTANT SECRETARIES. The Secretary or an Assistant Secretary shall attend all meetings of the Board of Directors and all meetings of stockholders of the Corporation and record all the proceedings at such meetings in a book or books to be kept for that purpose, and the Secretary or an Assistant Secretary shall also perform similar duties for the standing committees when required. The Secretary or an Assistant Secretary shall give, or cause to be given, notice of all meetings of the stockholders of the Corporation and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors, the Chairman of the Board, the President or any Vice President. If a Secretary or Assistant Secretary shall be unable or shall refuse to cause to be given notice of any meeting of the stockholders of the Corporation or any special meeting of the Board of Directors, then either the Board of Directors, the Chairman of the Board, the President or any Vice President may choose another officer to cause such notice to be given. The Secretary or an Assistant Secretary shall see that all corporate books, reports, statements, certificates and other documents and records required by law to be kept or filed are properly kept or filed, as the case may be. 4.8 TREASURER AND ASSISTANT TREASURERS. The Treasurer or an Assistant Treasurer shall have custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors, the Chairman of the Board, the President or any Vice President. The Treasurer or an Assistant Treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the Chairman of the Board, the President and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as Treasurer or Assistant Treasurer and of the financial condition of the Corporation. 4.9 REMOVAL. Any officer may be removed, with or without cause, by the Board of Directors. Any such removal shall be without prejudice to any rights such officer may have pursuant to any employment contract he may have with the Corporation. Any vacancy in an office may be filled by the Board of Directors. -9- 4.10 VOTING SECURITIES OWNED BY THE CORPORATION. Powers of attorney, proxies, waivers of notice of meeting, consents and other instruments relating to securities owned by the Corporation may be executed in the name and on behalf of the Corporation by the Chairman of the Board, the President or any Vice President, and any such officer may, in the name of and on behalf of the Corporation, take all such action as any such officer may deem advisable to vote in person or by proxy at any meeting of security holders of any corporation in which the Corporation may own securities and at any such meeting shall possess and may exercise any and all rights and powers incident to the ownership of such securities and which, as the owner thereof, the Corporation might have exercised and possessed if present. The Board of Directors may, by resolution, from time to time, confer like powers upon any other person or persons. ARTICLE V STOCK 5.1 FORM OF CERTIFICATES. The shares of stock of the Corporation shall be represented by certificates of stock, signed in the name of the Corporation (i) by the Chairman of the Board, the President or a Vice President and (ii) by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, of the Corporation, certifying the number of shares of stock in the Corporation owned by the holder named in the certificate. 5.2 SIGNATURES. Where a certificate is countersigned by (i) a transfer agent other than the Corporation or its employee or (ii) a registrar other than the Corporation or its employee, any other signature on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. 5.3 LOST CERTIFICATES. The Board of Directors may direct a new certificate to be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the delivery to the Secretary of the Corporation of an affidavit of the fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate, or his legal representative, to advertise the same in such manner as the Board of Directors shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. 5.4 TRANSFERS. Stock of the Corporation shall be transferable in the manner prescribed by law and in these Bylaws. Transfers of stock shall be made on the books of the Corporation only by the person named in the certificate or by his attorney lawfully constituted in writing and upon the surrender of the certificate therefor, which shall be canceled before a new certificate shall be issued. -10- 5.5 BENEFICIAL OWNERSHIP. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. 5.6 DIVIDENDS. Dividends upon the capital stock of the Corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting thereof, and may be paid in cash, in property or in shares of capital stock of the Corporation. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors from time to time, in its absolute discretion, deems proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for any proper purpose, and the Board of Directors may modify or abolish any such reserve. ARTICLE VI INDEMNIFICATION 6.1 GENERAL. The Corporation shall indemnify and hold harmless an Indemnitee (as this and all other capitalized words used in this Article VI not previously defined in these Bylaws are defined in Section 6.6 hereof) from and against any and all judgments, penalties, fines (including excise taxes), amounts paid in settlement and, subject to Section 6.2, Expenses (including all interest, assessments and other charges paid or payable in connection with or in respect of such judgments, fines, penalties, amounts paid in settlement or Expenses) arising out of any event or occurrence related to the fact that Indemnitee is or was a director or officer of the Corporation. The Corporation may, but shall not be required to, indemnify and hold harmless an Indemnitee from and against any and all judgments, penalties, fines (including excise taxes), amounts paid in settlement and, subject to Section 6.2, Expenses (including all interest, assessments and other charges paid or payable in connection with or in respect of such judgments, fines, penalties, amounts paid in settlement or Expenses) arising out of any event or occurrence related to the fact that Indemnitee is or was an employee or agent of the Corporation or is or was serving in another Corporate Status. 6.2 EXPENSES. If Indemnitee is, by reason of his serving as a director, officer, employee or agent of the Corporation, a party to and is successful, on the merits or otherwise, in any Proceeding, the Corporation shall indemnify him against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to any Matter in such Proceeding, the Corporation shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him or on his behalf relating to such Matter. The termination of any Matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such Matter. If Indemnitee is, by reason of any Corporate Status other than his serving as a director, officer, employee or agent of the Corporation, a party to and is successful, on the merits or otherwise, in any Proceeding, the Corporation may, but shall not be required to, indemnify him against all Expenses -11- actually and reasonably incurred by him or on his behalf in connection therewith. To the extent that the Indemnitee is, by reason of his Corporate Status, a witness in any Proceeding, the Corporation may, but shall not be required to, indemnify him against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. 6.3 ADVANCES. In the event of any threatened or pending Proceeding in which Indemnitee is a party or is involved and that may give rise to a right of indemnification under this Article VI, following written request to the Corporation by Indemnitee, the Corporation may, but shall not be required to, pay to Indemnitee amounts to cover Expenses reasonably incurred by Indemnitee in such Proceeding in advance of its final disposition upon the receipt by the Corporation of (i) a written undertaking executed by or on behalf of Indemnitee providing that Indemnitee will repay the advance if it shall ultimately be determined that Indemnitee is not entitled to be indemnified by the Corporation as provided in these Bylaws and (ii) satisfactory evidence as to the amount of such Expenses. 6.4 REQUEST FOR INDEMNIFICATION. To request indemnification, Indemnitee shall submit to the Secretary of the Corporation a written claim or request. Such written claim or request shall contain sufficient information to reasonably inform the Corporation about the nature and extent of the indemnification or advance sought by Indemnitee. The Secretary of the Corporation shall promptly advise the Board of Directors of such request. 6.5 NONEXCLUSIVITY OF RIGHTS. This Article VI shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled to under applicable law, the Restated Certificate of Incorporation, these Bylaws, any agreement, a vote of stockholders or a resolution of directors of the Corporation, or otherwise. No amendment, alteration or repeal of this Article VI or any provision hereof shall be effective as to any Indemnitee for acts, events and circumstances that occurred, in whole or in part, before such amendment, alteration or repeal. The provisions of this Article VI shall continue as to an Indemnitee whose Corporate Status has ceased for any reason and shall inure to the benefit of his heirs, executors and administrators. Neither the provisions of this Article VI nor those of any agreement to which the Corporation is a party shall be deemed to preclude the indemnification of any person who is not specified in this Article VI as having the potential to receive indemnification or is not a party to any such agreement, but whom the Corporation has the power or obligation to indemnify under the provisions of the DGCL. 6.6 INSURANCE AND SUBROGATION. To the extent the Corporation maintains an insurance policy or policies providing liability insurance for directors or officers of the Corporation, an Indemnitee who is a director or officer of the Corporation shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of coverage available for any such director or officer under such policy or policies. In the event of any payment hereunder, the Corporation shall be subrogated to the extent of such payment to all the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Corporation to bring suit to enforce such rights. The Corporation shall not be liable under this Article VI to make any payment of amounts otherwise indemnifiable hereunder if, and to the extent that, Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise. -12- 6.7 SEVERABILITY. If any provision or provisions of this Article VI shall be held to be invalid, illegal or unenforceable for any reason whatsoever, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby; and, to the fullest extent possible, the provisions of this Article VI shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. 6.8 CERTAIN PERSONS NOT ENTITLED TO INDEMNIFICATION. Notwithstanding any other provision of this Article VI, no person shall be entitled to indemnification or advancement of Expenses under this Article VI with respect to any Proceeding, or any Matter therein, brought or made by such person against the Corporation. 6.9 DEFINITIONS. For purposes of this Article VI: (a) "CORPORATE STATUS" describes the status of a person who is or was a director, officer, employee or agent of the Corporation or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person is or was serving at the written request of the Corporation. For purposes of this Agreement, "serving at the written request of the Corporation" includes any service by Indemnitee which imposes duties on, or involves services by, Indemnitee with respect to any employee benefit plan or its participants or beneficiaries. (b) "EXPENSES" shall include all reasonable attorneys' fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, or being or preparing to be a witness in a Proceeding. (c) "INDEMNITEE" includes any person who is, or is threatened to be made, a witness in or a party to any Proceeding as described in Section 6.1 or 6.2 hereof by reason of his Corporate Status. (d) "MATTER" is a claim, a material issue or a substantial request for relief. (e) "PROCEEDING" includes any action, suit, alternate dispute resolution mechanism, hearing or any other proceeding, whether civil, criminal, administrative, arbitrative, investigative or mediative, any appeal in any such action, suit, alternate dispute resolution mechanism, hearing or other proceeding and any inquiry or investigation that could lead to any such action, suit, alternate dispute resolution mechanism, hearing or other proceeding, except one initiated by an Indemnitee to enforce his rights under this Article VI. -13- ARTICLE VII NOTICES 7.1 NOTICES. Whenever written notice is required by law, the Certificate of Incorporation or these Bylaws to be given to any director, member of a committee or stockholder, such notice may be given by mail, addressed to such director, member of a committee or stockholder at his address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Written notice may also be given personally or by telegram, telex, facsimile or cable. 7.2 WAIVER OF NOTICE. Whenever any notice is required by law, the Certificate of Incorporation or these Bylaws to be given to any director, member of a committee or stockholder of the Corporation, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE VIII MISCELLANEOUS 8.1 FISCAL YEAR. The fiscal year of the Corporation shall end on December 31 of each year. 8.2 AMENDMENTS. These Bylaws may be altered, amended or repealed or new bylaws may be adopted only in the manner provided in the Corporation's Certificate of Incorporation. Adopted February 23, 1998 -14- EX-10.23 3 EXHIBIT 10.23 EXECUTION COPY ************************************************************ CORNELL CORRECTIONS, INC. and SUBSIDIARY GUARANTORS ATLANTIC FINANCIAL GROUP, LTD. ----------------------------- THIRD AMENDED AND RESTATED CREDIT AGREEMENT Dated as of December 3, 1998 ------------------------------ ING (U.S.) CAPITAL CORPORATION, as Agent ************************************************************ TABLE OF CONTENTS This Table of Contents is not part of the Agreement to which it is attached but is inserted for convenience of reference only. PAGE Section 1. DEFINITIONS AND ACCOUNTING MATTERS 1 1.01 CERTAIN DEFINED TERMS 1 1.02 ACCOUNTING TERMS AND DETERMINATIONS 16 1.03 CLASSES AND TYPES OF LOANS 16 Section 2. COMMITMENTS, LOANS, NOTES AND PREPAYMENTS 17 2.01 LOANS 17 2.02 BORROWINGS OF LOANS 17 2.03 CHANGES OF COMMITMENTS 18 2.04 COMMITMENT FEE 18 2.05 LENDING OFFICES 18 2.06 SEVERAL OBLIGATIONS; REMEDIES INDEPENDENT 18 2.07 NOTES 18 2.08 OPTIONAL PREPAYMENTS AND CONVERSIONS OR CONTINUATIONS OF LOANS 19 2.09 MANDATORY PREPAYMENTS 19 2.10 LETTERS OF CREDIT 21 Section 3. PAYMENTS OF PRINCIPAL AND INTEREST 24 3.01 REPAYMENT OF LOANS 24 3.02 INTEREST 24 Section 4. PAYMENTS; PRO RATA TREATMENT; COMPUTATIONS; ETC. 25 4.01 PAYMENTS 25 4.02 PRO RATA TREATMENT 26 4.03 COMPUTATIONS 26 4.04 MINIMUM AMOUNTS 26 4.05 CERTAIN NOTICES 26 4.06 NON-RECEIPT OF FUNDS BY THE AGENT 27 4.07 SHARING OF PAYMENTS, ETC. 28 Section 5. YIELD PROTECTION, ETC. 28 5.01 ADDITIONAL COSTS 28 5.02 LIMITATION ON TYPES OF LOANS 30 5.03 ILLEGALITY 31 5.04 TREATMENT OF EURODOLLAR LOANS 31 5.05 COMPENSATION 31 5.06 SUBSTITUTION OF LENDERS 32 5.07 ADDITIONAL COSTS IN RESPECT OF LETTERS OF CREDIT 32 Section 6. GUARANTEE 33 6.01 THE GUARANTEE 33 6.02 OBLIGATIONS UNCONDITIONAL 33 6.03 REINSTATEMENT 33 6.04 SUBROGATION 34 6.05 REMEDIES 34 6.06 INSTRUMENT FOR THE PAYMENT OF MONEY 34 6.07 CONTINUING GUARANTEE 34 6.08 RIGHTS OF CONTRIBUTION 34 -i- PAGE 6.09 GENERAL LIMITATION ON GUARANTEE OBLIGATIONS 35 Section 7. CONDITIONS PRECEDENT 35 7.01 EFFECTIVENESS OF THIRD AMENDMENT AND RESTATEMENT 35 7.02 CAPITAL EXPENDITURES; ELIGIBLE ACQUISITIONS 36 7.03 SYNTHETIC LEASE LOANS 38 7.04 INITIAL AND SUBSEQUENT EXTENSIONS OF CREDIT 39 Section 8. REPRESENTATIONS AND WARRANTIES 39 8.01 CORPORATE EXISTENCE 39 8.02 FINANCIAL CONDITION 39 8.03 LITIGATION 39 8.04 NO BREACH 39 8.05 ACTION 40 8.06 APPROVALS 40 8.07 USE OF CREDIT 40 8.08 ERISA 40 8.09 TAXES 40 8.10 INVESTMENT COMPANY ACT 40 8.11 PUBLIC UTILITY HOLDING COMPANY ACT 40 8.12 MATERIAL AGREEMENTS AND LIENS 41 8.13 ENVIRONMENTAL MATTERS 41 8.14 CAPITALIZATION 42 8.15 SUBSIDIARIES, ETC. 43 8.16 TITLE TO ASSETS 43 8.17 TRUE AND COMPLETE DISCLOSURE 43 8.18 REAL PROPERTY 43 Section 9. COVENANTS OF THE COMPANY 44 9.01 FINANCIAL STATEMENTS; ETC. 44 9.02 LITIGATION 46 9.03 EXISTENCE, ETC. 46 9.04 INSURANCE 47 9.05 PROHIBITION OF FUNDAMENTAL CHANGES 48 9.06 LIMITATION ON LIENS 49 9.07 INDEBTEDNESS 50 9.08 INVESTMENTS 50 9.09 DIVIDEND PAYMENTS 51 9.10 EBITDA RATIO I 51 9.11 EBITDA RATIO I I 51 9.12 NET WORTH 52 9.13 INTEREST COVERAGE RATIO 52 9.14 FIXED CHARGES RATIO 52 9.15 CAPITAL EXPENDITURES 53 9.16 THE CORNELL COX GROUP, L.P. 53 9.17 SALE LEASE-BACK TRANSACTIONS 53 9.18 DISCOUNT OF ACCOUNTS 53 9.19 INTEREST RATE PROTECTION AGREEMENTS 53 9.20 LINES OF BUSINESS 53 9.21 TRANSACTIONS WITH AFFILIATES 53 9.22 USE OF PROCEEDS 54 9.23 CERTAIN OBLIGATIONS RESPECTING SUBSIDIARIES 54 9.24 MODIFICATIONS OF CERTAIN DOCUMENTS 55 9.25 POST-CLOSING REAL PROPERTY 55 PAGE Section 10. THE LESSOR; EXERCISE OF REMEDIES UNDER LEASE 55 10.01 COVENANTS OF LESSOR 55 10.02 LESSOR OBLIGATIONS NONRECOURSE; PAYMENT FROM CERTAIN LEASE OBLIGATIONS AND CERTAIN PROCEEDS OF LEASED PROPERTY ONLY 56 10.03 EXERCISE OF REMEDIES UNDER THE LEASE 56 Section 11. EVENTS OF DEFAULT 57 11.01 EVENTS OF DEFAULT 57 11.02 LEASE-RELATED EVENTS OF DEFAULT 60 Section 12. THE AGENT 61 12.01 APPOINTMENT, POWERS AND IMMUNITIES 61 12.02 RELIANCE BY AGENT 62 12.03 DEFAULTS 62 12.04 RIGHTS AS A LENDER 62 12.05 INDEMNIFICATION 62 12.06 NON-RELIANCE ON AGENT AND OTHER LENDERS 62 12.07 FAILURE TO ACT 63 12.08 RESIGNATION OR REMOVAL OF AGENT 63 12.09 CONSENTS UNDER OTHER BASIC DOCUMENTS 63 Section 13. MISCELLANEOUS 63 13.01 WAIVER 63 13.02 NOTICES 64 13.03 EXPENSES, ETC. 64 13.04 AMENDMENTS, ETC. 65 13.05 SUCCESSORS AND ASSIGNS 65 13.06 ASSIGNMENTS AND PARTICIPATIONS 65 13.07 SURVIVAL 66 13.08 CAPTIONS 66 13.09 COUNTERPARTS 66 13.10 GOVERNING LAW; SUBMISSION TO JURISDICTION 66 13.11 WAIVER OF JURY TRIAL 67 13.12 CONFIDENTIALITY67 SCHEDULE I - Material Agreements and Liens SCHEDULE II - Environmental Matters SCHEDULE III - Subsidiaries and Investments SCHEDULE IV - Real Property SCHEDULE V - Capital Stock, Equity Rights and Registration Rights SCHEDULE VI - Existing Property, Indebtedness and Liabilities of The Cornell Cox Group, L.P. SCHEDULE VII - Loans to David Cornell EXHIBIT A-1 - Form of Company Note EXHIBIT A-2 - Form of Lessor Note EXHIBIT B-1 - Form of Opinion of Texas Counsel to the Obligors EXHIBIT B-2 - Form of Opinion of New York Counsel to ING EXHIBIT C - Form of Amendment to Security Agreement EXHIBIT D - Form of Confidentiality Agreement EXHIBIT E - Form of Assignment Agreement EXHIBIT F - Form of Master Agreement THIRD AMENDED AND RESTATED CREDIT AGREEMENT dated as of December 3, 1998 (as further amended, supplemented or modified from time to time, this "AGREEMENT") among: CORNELL CORRECTIONS, INC., a corporation duly organized and validly existing under the laws of the State of Delaware (the "COMPANY"); each of the Subsidiaries of the Company identified under the caption "SUBSIDIARY GUARANTORS" on the signature pages hereto (individually, a "SUBSIDIARY GUARANTOR" and, collectively, the "SUBSIDIARY GUARANTORS"; and the Subsidiary Guarantors collectively with the Company, the "OBLIGORS"); ATLANTIC FINANCIAL GROUP, LTD., a Texas limited partnership (the "LESSOR"); each of the lenders that is a signatory hereto identified under the caption "LENDERS" on the signature pages hereto or that, pursuant to Section 13.06(b) hereof, shall become a "Lender" hereunder (individually, a "LENDER" and, collectively, the "LENDERS"); and ING (U.S.) CAPITAL CORPORATION, a Delaware corporation, as agent for the Lenders (in such capacity, together with its successors in such capacity, the "AGENT"). The Company, the Agent and the Lenders are parties to a Second Amended and Restated Credit Agreement, dated as of October 31, 1997 (as amended and in effect immediately prior to the date hereof, the "SECOND AMENDED AND RESTATED CREDIT AGREEMENT"), and the Company, the Agent and the Lenders wish to amend and restate the Second Amended and Restated Credit Agreement in its entirety, and the Lessor wishes to become a party to this Agreement. Accordingly, the Company, the Subsidiary Guarantors, the Lessor, the Agent and the Lenders agree that, subject to the terms and conditions of this Agreement, the Second Amended and Restated Credit Agreement is hereby amended and restated in its entirety to read as follows: Section 1. DEFINITIONS AND ACCOUNTING MATTERS 1.01. CERTAIN DEFINED TERMS. As used herein, the following terms shall have the following meanings (all terms defined in this Section 1.01 or in other provisions of this Agreement in the singular to have the same meanings when used in the plural and VICE VERSA): "A COLLATERAL CONTRIBUTION" shall have the meaning given to that term in clause (d) of the definition of "Synthetic Leasing Financing" in this Section 1.01. "A LENDER" shall have the meaning given to that term in clause (b) of the definition of "Synthetic Lease Financing" in this Section 1.01. "A PERCENTAGE" shall have the meaning given to that term in the Master Agreement. "AFFILIATE" shall mean any Person that directly or indirectly controls, or is under common control with, or is controlled by, the Company and, if such Person is an individual, any member of the immediate family (including parents, spouse, children and siblings) of such individual and any trust whose principal beneficiary is such individual or one or more members of such immediate family and any Person who is controlled by any such member or trust. As used in this definition, "CONTROL" (including, with its correlative meanings, "CONTROLLED BY" and "UNDER COMMON CONTROL WITH") shall mean possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise). Notwithstanding the foregoing, (a) no individual shall be an Affiliate solely by reason of his or her being a director, officer or employee of the Company or any of its Subsidiaries, (b) none of the Wholly Owned Subsidiaries of the Company shall be Affiliates and (c) neither the Agent, the Lessor, nor any of the Lenders shall be an Affiliate. "APPLICABLE LENDING OFFICE" shall mean, for each Lender and for each Type of Loan, the "Lending Office" of such Lender (or of an affiliate of such Lender) designated for such Type of Loan on the signature pages hereof or such other office of such Lender (or of an affiliate of such Lender) as such Lender may from time to time specify to the Agent and the Company as the office by which its Loans of such Type are to be made and maintained. "APPLICABLE MARGIN" shall mean 0.50% for Base Rate Loans and 2.50% for Eurodollar Loans; PROVIDED that if EBITDA Ratio II as at the last day of any fiscal quarter of the Company shall fall within any of the ranges set forth in Schedule A below then, subject to the delivery to the Agent of a certificate of a senior financial officer of the Company demonstrating such fact, the "Applicable Margin" shall be reduced to the applicable percentage set forth in Schedule A below opposite such range (where "x" is EBITDA Ratio II) as of the fifth Business Day following delivery of such certificate through the fifth Business Day following the date of delivery of such a certificate with respect to the next succeeding fiscal quarter (except that notwithstanding the foregoing, the Applicable Margin shall not as a consequence of this PROVISO be reduced at any time during which a Default shall have occurred and be continuing): Schedule A APPLICABLE MARGIN APPLICABLE MARGIN FOR FOR LOANS THAT ARE LOANS THAT ARE EBITDA RATIO II BASE RATE LOANS EURODOLLAR LOANS ------------------- --------------------- --------------------- x < 2.00 0.00% 1.75% 2.00 < x less than or = to 2.75 0.00% 2.00% 2.75 < x less than or = to 3.25 0.25% 2.25% 3.25 < x 0.50% 2.50% "B AND C COLLATERAL CONTRIBUTION" shall have the meaning given to that term in clause (e) of the definition of "Synthetic Leasing Financing" in this Section 1.01. "B LOAN" shall have the meaning given to that term in the Master Agreement. "BANKRUPTCY CODE" shall mean the Federal Bankruptcy Code of 1978, as amended from time to time. "BASE RATE" shall mean, for any day, a rate per annum equal to the higher of (a) the Federal Funds Rate for such day plus 1/2 of 1% and (b) the Prime Rate for such day. Each change in any interest rate provided for herein based upon the Base Rate resulting from a change in the Base Rate shall take effect at the time of such change in the Base Rate. "BASE RATE LOANS" shall mean Loans that bear interest at rates based upon the Base Rate. "BASIC DOCUMENTS" shall mean, collectively, this Agreement, the Notes, the Guaranty Agreement, the Security Documents and the Letter of Credit Documents. "BUILDINGS" shall have the meaning given to that term in the Master Lease. "BUSINESS DAY" shall mean (a) any day on which commercial banks are not authorized or required to close in New York City or Houston, Texas and (b) if such day relates to a borrowing of, a payment or prepayment of principal of or interest on, a Conversion of or into, or an Interest Period for, a Eurodollar Loan or a notice by the Company with respect to any such borrowing, payment, prepayment, Conversion or Interest Period, any day on which dealings in Dollar deposits are carried out in the London interbank market. "CAPITAL EXPENDITURES" shall mean, for any period, expenditures (including, without limitation, the aggregate amount of Capital Lease Obligations incurred during such period) made by the Company or any of its Subsidiaries to acquire or construct fixed assets, plant, furniture, fixtures and equipment (including renewals, improvements and replacements thereof, but excluding repairs made in the ordinary course of business) during such period computed in accordance with GAAP. "CAPITAL LEASE OBLIGATIONS" shall mean, for any Person, all obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) Property to the extent such obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP, and, for purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP. "CASUALTY EVENT" shall mean, with respect to any Property of any Person, any loss of or damage to, or any condemnation or other taking of, such Property for which such Person or any of its Subsidiaries receives insurance proceeds, or proceeds of a condemnation award or other compensation. "CLOSING DATE" shall mean the date hereof. "CODE" shall mean the Internal Revenue Code of 1986, as amended from time to time. "COLLATERAL ACCOUNT" shall have the meaning assigned to such term in Section 4.1 of the Security Agreement. "COLLATERAL SHARING DOCUMENTATION" shall mean the Intercreditor and Collateral Agency Agreement, dated as of July 15, 1998, among ING, as Collateral Agent, the Agent and the holders of the Senior Notes, as the same shall be modified and supplemented and in effect from time to time. "COLLATERAL SHARING DOCUMENTATION AMENDMENT" shall mean an amendment or other modification to the Collateral Sharing Documentation, in form and substance satisfactory to the Agent, providing that, irrespective of the respective priorities of the Liens of the Agent, the Lenders and the holders of the Senior Notes in the Property of the Company and its Subsidiaries, (x) subject to the A Collateral Contribution, the Liens of the Agent, the Lenders, the holders of the Senior Notes and the A Lenders in such Property shall, as between the Agent, the Lenders, the holders of the Senior Notes and the A Lenders, rank PARI PASSU, and (y) subject to the B and C Collateral Contribution, the Liens of the Agent, the Lenders, the holders of the Senior Notes and the B Lenders, and the interest of the Lessor, in such Property shall, as between the Agent, the Lenders, the holders of the Senior Notes, the B Lenders and the Lessor, rank PARI PASSU. "COMMITMENTS" shall mean the Revolving Credit Commitments and the Synthetic Lease Loan Commitments. "COMPLETION DATE" shall have the meaning given to that term in the Master Agreement. "CONSTRUCTION" shall have the meaning given to that term in the Master Agreement. "CONSTRUCTION AGENCY AGREEMENT" shall have the meaning given to that term in the Master Agreement. "CONSTRUCTION FAILURE PAYMENT" shall have the meaning given to that term in the Master Agreement. "CONSTRUCTION LAND INTEREST" shall have the meaning given to that term in the Master Agreement. "CONSTRUCTION TERM" shall have the meaning given to that term in the Master Agreement. "CONSTRUCTION TERM EXPIRATION DATE" shall have the meaning given to that term in the Master Agreement. "CONTINUE", "CONTINUATION" and "CONTINUED" shall refer to the continuation pursuant to Section 2.08 hereof of a Eurodollar Loan from one Interest Period to the next Interest Period. "CONVERT", "CONVERSION" and "CONVERTED" shall refer to a conversion pursuant to Section 2.08 hereof of one Type of Loan into another Type of Loan, which may be accompanied by the transfer by a Lender (at its sole discretion) of a Loan from one Applicable Lending Office to another. "CORRECTIONAL AND DETENTION FACILITY CONTRACT" shall mean any contract with a municipal, state or federal government, or agency, instrumentality or political subdivision thereof, relating to the management by the Company or its Subsidiaries of a correctional and/or detention facility or to other related lines of business, as amended or modified from time to time. "DEBT SERVICE" shall mean, for any period, the sum, for the Company and its Subsidiaries, other than any Designated Subsidiaries (determined on a consolidated basis without duplication in accordance with GAAP), of the following: (a) all payments of principal of Indebtedness (including, without limitation, the principal component of any payments in respect of Capital Lease Obligations) scheduled to be made during such period PLUS (b) all Interest Expense for such period. "DEFAULT" shall mean an Event of Default or an event that with notice or lapse of time or both would become an Event of Default. "DESIGNATED SUBSIDIARY" shall mean one or more newly-created Subsidiaries of the Company, designated by the Company to the Agent in writing, which are organized for the sole purpose of constructing and operating (a) a 512-bed addition to the Company's prison complex located in Big Spring, Texas and (b) a 550-bed prison in Charlton County, Georgia. "DISPOSITION" shall mean any sale, assignment, transfer or other disposition of any Property (whether now owned or hereafter acquired) by the Company or any of its Subsidiaries (other than any Designated Subsidiary) to any other Person excluding any sale, assignment, transfer or other disposition of any Property sold or disposed of in the ordinary course of business and on commercially reasonable terms. "DIVIDEND PAYMENT" shall mean dividends (in cash, Property or obligations) on, or other payments or distributions on account of, or the setting apart of money for a sinking or other analogous fund for, or the purchase, redemption, retirement or other acquisition of, any shares of any class of stock of the Company or of any warrants, options or other rights to acquire the same (or to make any payments to any Person, such as "phantom stock" payments, where the amount thereof is calculated with reference to the fair market or equity value of the Company or any of its Subsidiaries), but excluding dividends payable solely in shares of common stock of the Company. "DOLLARS" and "$" shall mean lawful money of the United States of America. "EBITDA" means, for any period, the sum of the following for the Company and its Subsidiaries, other than any Designated Subsidiaries (determined without duplication in accordance with GAAP): (a) net income for such period, LESS extraordinary gains for such period to the extent included in net income for such period, PLUS (b) Interest Expense for such period, PLUS (c) provisions for federal, state, local and foreign income taxes (other than taxes on extraordinary gains), whether paid or deferred, made during such period, to the extent deducted in determining net income for such period, PLUS (d) the aggregate amount of depreciation and amortization expense for such period, to the extend deducted in determining net income for such period, PLUS (e) the aggregate amount of (i) accretion expense with respect to options or rights to acquire the Company's common stock and (ii) any write-off of expenses arising in connection with the Loans, in each case to the extent deducted in determining net income for such period, PLUS (f) the net income of any Period that is accounted for by the equity method of accounting, but only to the extent of dividends paid to the Company or any of its Subsidiaries, PLUS (g) the aggregate amount of non-cash expense for such period associated with the closure and post-closure reserves of a plant or facility owned by the Company or any of its Subsidiaries, PLUS (h) the aggregate amount of all other non-cash expenses for such period, to the extent not specifically described above in this definition; PROVIDED, that with respect to: (i) any Eligible Acquisition made during such period, "EBITDA" shall include the actual EBITDA attributable to the business acquired in such Eligible Acquisition for the 12 month period ending on the last day of such period, including, if necessary, EBITDA prior to consummation of such Eligible Acquisition (and may reflect Pro Forma Adjustments); and (ii) any Eligible New Contract entered into by the Company or any of its Subsidiaries (other than any Designated Subsidiary) during such period, "EBITDA" shall including the following: (x) if the Company or such Subsidiary has provided services pursuant to such Eligible New Contract for less than three calendar months, an amount equal to the estimated "EBITDA" attributable to the operations resulting from such Eligible New Contract (and may reflect Pro Forma Adjustments) for the 12-month period beginning on the date on which the Company or such Subsidiary began providing services pursuant to such Eligible New Contract, or (y) if the Company or such Subsidiary has provided services pursuant to such Eligible New Contract for three calendar months or more, an amount equal to actual EBITDA attributable to the operations resulting from such Eligible New Contract for each complete month that has elapsed since the date such Eligible New Contract was entered into (such amount to be annualized so that it represents the equivalent of 12 months of EBITDA). "EBITDA RATIO I" shall mean, at any date, the ratio of the following: (a) all Indebtedness of the Obligors on such date (other than (x) Indebtedness of any Designated Subsidiary that is an Obligor, and (y) additional Indebtedness incurred in connection with an Eligible Acquisition (except for any Indebtedness hereunder) to the extent that the Majority Lenders have consented to the incurrence of such Indebtedness), to (b) EBITDA for the period of 12 consecutive months ending on or most recently ended prior to such date. "EBITDA RATIO II" shall mean, at any date, the ratio of the following: (a) all Indebtedness of the Obligors on such date (other than Indebtedness of any Designated Subsidiary that is an Obligor), to (b) EBITDA for the period of 12 consecutive months ending on or most recently ended prior to such date. "ELIGIBLE ACQUISITION" shall mean any acquisition by any Obligor (regardless of the structure of the transaction) of the capital stock of, or all or substantially all of the assets of, any Person (or of a line of business or business segment of any Person) that was, immediately prior to such acquisition, engaged primarily in the business of operating correctional and/or detention facilities, substance abuse rehabilitation facilities or related lines of business. "ELIGIBLE NEW CONTRACT" shall mean any acquired (or to be acquired) Correctional and Detention Facility Contract, a newly executed Correctional and Detention Facility Contract, an amendment to an existing Correctional and Detention Facility Contract or an expansion under an existing Correctional and Detention Facility Contract. "ENVIRONMENTAL CLAIM" shall mean, with respect to any Person, any written or oral notice, claim, demand or other communication (collectively, a "CLAIM") by any other Person alleging or asserting such Person's liability for investigatory costs, cleanup costs, governmental response costs, damages to natural resources or other Property, personal injuries, fines or penalties arising out of, based on or resulting from (i) the presence, or Release into the environment, of any Hazardous Material at any location, whether or not owned by such Person, or (ii) circumstances forming the basis of any violation, or alleged violation, of any Environmental Law. The term "Environmental Claim" shall include, without limitation, any claim by any governmental authority for enforcement, cleanup, removal, response, remedial or other actions or damages pursuant to any applicable Environmental Law, and any claim by any third party seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief resulting from the presence of Hazardous Materials or arising from alleged injury or threat of injury to health, safety or the environment. "ENVIRONMENTAL LAWS" shall mean any and all applicable, currently published and enforceable Federal, state, local and foreign laws, codes, rules or regulations, and any orders, decrees, judgments or injunctions binding upon Obligors, relating to the regulation or protection of human health, worker safety and protection or the environment or to emissions, discharges, releases or threatened releases of Hazardous Materials into the indoor or outdoor environment, including, without limitation, ambient air, soil, surface water, ground water, wetlands, land or subsurface strata, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials. "EQUITY ISSUANCE" shall mean (a) any issuance or sale by the Company or any of its Subsidiaries after the date of the Second Amended and Restated Credit Agreement of (i) any capital stock, (ii) any warrants or options exercisable in respect of capital stock (other than any warrants or options issued to directors, officers or employees of the Company or any of its Subsidiaries pursuant to the Incentive Compensation Plan and any capital stock of the Company issued upon the exercise of such warrants or options or (iii) any other security or instrument representing an equity interest (or the right to obtain any equity interest) in the Company or any of its Subsidiaries or (b) the receipt by the Company or any of its Subsidiaries after the date of the Second Amended and Restated Credit Agreement of any capital contribution (whether or not evidenced by any equity security issued by the recipient of such contribution); PROVIDED that Equity Issuance shall not include (A) any such issuance or sale by any Subsidiary of the Company to the Company or any Wholly Owned Subsidiary of the Company, or (B) any capital contribution by the Company or any Wholly Owned Subsidiary of the Company to any Subsidiary of the Company. "EQUITY RIGHTS" shall mean, with respect to any Person, any subscriptions, options, warrants, commitments, preemptive rights or agreements of any kind (including, without limitation, any stockholders' or voting trust agreements) for the issuance, sale, registration or voting of, or securities convertible into, any additional shares of capital stock of any class, or partnership or other ownership interests of any type in, such Person. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA AFFILIATE" shall mean any corporation or trade or business that is a member of any group of organizations (i) described in Section 414(b) or (c) of the Code of which the Company is a member and (ii) solely for purposes of potential liability under Section 302(c)(11) of ERISA and Section 412(c)(11) of the Code and the lien created under Section 302(f) of ERISA and Section 412(n) of the Code, described in Section 414(m) or (o) of the Code of which the Company is a member. "EURODOLLAR LOANS" shall mean Loans that bear interest at rates based on rates referred to in the definition of "Eurodollar Rate" in this Section 1.01. "EURODOLLAR RATE" shall mean, with respect to any Eurodollar Loan for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%), reported, at 11:00 a.m. (London time) on the date two Business Days prior to the first day of such Interest Period, on Telerate Access Service Page 3750 (British Bankers Association Settlement Rate) as the London Interbank Offered Rate for Dollar deposits having a term comparable to such Interest Period and in an amount equal to or greater than $1,000,000. "EVENT OF DEFAULT" shall have the meaning assigned to such term in Section 11.01 hereof. "EXCESS CASH FLOW" shall mean, for any period, the excess of: (a) the sum of the following (without duplication): (i) EBITDA for such period (calculated without reference to the PROVISO at the end of the definition thereof in Section 1.01 hereof), PLUS (ii) proceeds of business interruption or similar insurance received during such period, PLUS (iii) decreases in Working Capital of the Obligors for such period, PLUS (iv) all tax refunds received by the Obligors in cash during such period, OVER (b) the sum of the following (without duplication): (i) Debt Service for such period, PLUS (ii) Capital Expenditures made during such period, PLUS (iii) increases in Working Capital of the Obligors for such period, PLUS (iv) the aggregate amount of cash taxes actually paid by the Obligors during such period. For purposes of this definition of "Excess Cash Flow," "WORKING CAPITAL" shall have the meaning given to that term by GAAP, PROVIDED that Working Capital shall not include any Loans or any current maturities of any long-term debt. "FEDERAL FUNDS RATE" shall mean, for any day, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day, PROVIDED that (a) if the day for which such rate is to be determined is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day and (b) if such rate is not so published for any Business Day, the Federal Funds Rate for such Business Day shall be the average of quotations for such day on transactions, received by the Agent (or any of its Affiliates) from three federal funds brokers of recognized standing selected by it. "FIXED CHARGES RATIO" shall mean, as at any date, the ratio of: (a) the sum of (i) EBITDA for the period of 12-consecutive months ending on or most recently ended prior to such date, MINUS (ii) Capital Expenditures made by the Company and its Subsidiaries during such period to the extent not financed with the proceeds of Loans, MINUS (iii) taxes paid in cash during such period, TO (b) Debt Service for such period. "FUNDING PARTIES" shall have the meaning given to that term in the Master Agreement. "FUTURE SYNTHETIC LEASE FINANCING" shall mean one or more Synthetic Lease Transactions entered into after the date of this Agreement. "GAAP" shall mean generally accepted accounting principles applied on a basis consistent with those that, in accordance with the last sentence of Section 1.02(a) hereof, are to be used in making the calculations for purposes of determining compliance with this Agreement. "GUARANTEE" shall mean a guarantee, an endorsement, a contingent agreement to purchase or to furnish funds for the payment or maintenance of, or otherwise to be or become contingently liable under or with respect to, the Indebtedness, other obligations, net worth, working capital or earnings of any Person, or a guarantee of the payment of dividends or other distributions upon the stock or equity interests of any Person, or an agreement to purchase, sell or lease (as lessee or lessor) Property, products, materials, supplies or services primarily for the purpose of enabling a debtor to make payment of such debtor's obligations or an agreement to assure a creditor against loss, and including, without limitation, causing a bank or other financial institution to issue a letter of credit or other similar instrument for the benefit of another Person, but excluding endorsements for collection or deposit in the ordinary course of business. The terms "GUARANTEE" and "GUARANTEED" used as a verb shall have a correlative meaning. "GUARANTY AGREEMENT" shall have the meaning given to that term in the Master Agreement. "HAZARDOUS MATERIAL" shall mean, collectively, (a) any petroleum or petroleum products, flammable materials, explosives, radioactive materials, asbestos, urea formaldehyde foam insulation, and polychlorinated biphenyls ("PCB'S") and (b) any chemicals or other materials or substances that are defined as or included in the definition of "hazardous substances", "hazardous wastes", "hazardous materials", "extremely hazardous wastes", "restricted hazardous wastes", "toxic substances", "toxic pollutants", or any similar denomination intended to classify substances by reason of toxicity, carcinogenicity, ignitability, corrosivity or reactivity; but shall not include naturally occurring materials existing in background conditions. "IMPERMISSIBLE QUALIFICATION" shall mean any qualification, exception or other statement in any opinion or certification of any independent public accounts which either (a) is of a "going concern" or similar nature; or (b) relates to the limited scope of examination of matters relevant to the financial statements referred to in such opinion or certification. "INCENTIVE COMPENSATION PLAN" shall mean a plan established by the Company for the benefit of certain of its employees, or any other written agreement to which the Company is a party, providing for the issuance to employees of warrants or options in respect of the Company's capital stock, PROVIDED that (a) the aggregate amount of capital stock that such warrants and options would represent if exercised cannot exceed 20% of aggregate amount of the Company's capital stock that would then be outstanding and (b) all other terms and conditions of such plan or other written agreement shall be satisfactory to the Majority Lenders. "INDEBTEDNESS" shall mean, for any Person: (a) obligations created, issued or incurred by such Person for borrowed money (whether by loan, the issuance and sale of debt securities or the sale of Property to another Person subject to an understanding or agreement, contingent or otherwise, to repurchase such Property from such Person); (b) obligations of such Person to pay the deferred purchase or acquisition price of Property or services, other than trade accounts payable (other than for borrowed money) arising, and accrued expenses incurred, in the ordinary course of business so long as such trade accounts payable are payable within 90 days of the date the respective goods are delivered or the respective services are rendered; (c) Indebtedness of others secured by a Lien on the Property of such Person, whether or not the respective indebtedness so secured has been assumed by such Person; (d) obligations of such Person in respect of letters of credit or similar instruments issued or accepted by banks and other financial institutions for account of such Person; (e) Capital Lease Obligations of such Person; and (f) Indebtedness of others Guaranteed by such Person. For the avoidance of doubt, the principal components of the A Guarantee, the B Guarantee and the C Investment (including, without limitation, the principal components of the 1998 Synthetic Lease Financing and any Future Synthetic Lease Financing) shall constitute "Indebtedness." "ING" shall mean ING (U.S.) Capital Corporation. "INTEREST COVERAGE RATIO" shall mean, as of any date, the ratio of (a) EBITDA for the period of 12 consecutive months ending on or most recently ended prior to such date to (b) Interest Expense for such period. "INTEREST EXPENSE" shall mean, for any period, the sum, for the Company and its Subsidiaries, other than any Designated Subsidiaries (determined on a consolidated basis without duplication in accordance with GAAP), of the following: (a) all interest in respect of Indebtedness (including, without limitation, the interest component of any payments in respect of Capital Lease Obligations) accrued or capitalized during such period (whether or not actually paid during such period), PLUS (b) the net amount payable (or minus the net amount receivable) under Interest Rate Protection Agreements during such period (whether or not actually paid or received during such period), MINUS (c) direct reimbursements received by an Obligor during such period by a party to a Correctional and Detention Facility Agreement, to the extent that such reimbursements relate to interest expense of the Company or one of its Subsidiaries (other than a Designated Subsidiary), plus (d) the interest component of any payments in respect of the 1998 Synthetic Lease Financing and any Future Synthetic Lease Financing accrued or capitalized during such period (whether or not actually paid during such period). "INTEREST PERIOD" shall mean, with respect to any Eurodollar Loan, each period commencing on the date such Eurodollar Loan is made or Converted from a Base Rate Loan or the last day of the immediately preceding Interest Period for such Loan and ending on the numerically corresponding day in the first, second, third or sixth month thereafter, as the Company may select as provided in Section 4.05 hereof (or such longer period as may be requested by the Company and agreed to by all of the Lenders), except that each Interest Period that commences on the last Business Day of a calendar month (or on any day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall end on the last Business Day of the appropriate subsequent calendar month. Notwithstanding the foregoing: (i) if any Interest Period for any Revolving Credit Loan would otherwise end after the Revolving Credit Commitment Termination Date, such Interest Period shall not be available; (ii) if any Interest Period for any Synthetic Lease Loan would end after the Synthetic Lease Loan Principal Payment Date, such Interest Period shall not be available; (iii) no Interest Period may commence before and end after any Revolving Credit Commitment Reduction Date unless, after giving effect thereto, the aggregate principal amount of Revolving Credit Loans having Interest Periods that end after such Revolving Credit Commitment Reduction Date shall be equal to or less than the aggregate principal amount of Revolving Credit Loans scheduled be outstanding after giving effect to the payments of principal required to be made on such Revolving Credit Commitment Reduction Date, and (iv) each Interest Period that would otherwise end on a day that is not a Business Day shall end on the next succeeding Business Day (or, if such next succeeding Business Day falls in the next succeeding calendar month, on the next preceding Business Day). "INTEREST RATE PROTECTION AGREEMENT" shall mean, for any Person, an interest rate swap, cap or collar agreement or similar arrangement between such Person and one or more financial institutions providing for the transfer or mitigation of interest risks either generally or under specific contingencies. "INVESTMENT" shall mean, for any Person: (a) the acquisition (whether for cash, Property, services or securities or otherwise) of capital stock, bonds, notes, debentures, partnership or other ownership interests or other securities of any other Person or any agreement to make any such acquisition (including, without limitation, any "short sale" or any sale of any securities at a time when such securities are not owned by the Person entering into such sale); (b) the making of any deposit with, or advance, loan or other extension of credit to, any other Person (including the purchase of Property from another Person subject to an understanding or agreement, contingent or otherwise, to resell such Property to such Person), but excluding any such advance, loan or extension of credit having a term not exceeding 90 days representing the purchase price of inventory or supplies sold by such Person in the ordinary course of business); (c) the entering into of any Guarantee of, or other contingent obligation with respect to, Indebtedness or other liability of any other Person and (without duplication) any amount committed to be advanced, lent or extended to such Person; or (d) the entering into of any Interest Rate Protection Agreement. "LAND" shall have the meaning given to that term in the Master Agreement. "LEASE" shall have the meaning given to that term in the Master Agreement. "LEASE-RELATED EVENT OF DEFAULT" shall have the meaning given to that term in Section 11.02 hereof. "LEASE BALANCE" shall have the meaning given to that term in the Master Agreement. "LEASED PROPERTY" shall have the meaning given to that term in the Master Agreement. "LEASED PROPERTY BALANCE" shall have the meaning given to that term in the Master Agreement. "LESSEE" shall have the meaning given to that term in the Master Agreement. "LETTER OF CREDIT" shall have the meaning assigned to such term in Section 2.10 hereof. "LETTER OF CREDIT DOCUMENTS" shall mean, with respect to any Letter of Credit, collectively, any application therefor, any other agreements, instruments, guarantees or other documents (whether general in application or applicable only to such Letter of Credit) governing or providing for (a) the rights and obligations of the parties concerned or at risk with respect to such Letter of Credit or (b) any collateral security for any of such obligations, each as the same may be modified and supplemented and in effect from time to time. "LETTER OF CREDIT INTEREST" shall mean, for each Revolving Credit Lender, such Lender's participation interest (or, in the case of the Letter of Credit Issuer, its retained interest) in the Letter of Credit Issuer's liability under Letters of Credit and such Lender's rights and interests in Reimbursement Obligations and fees, interest and other amounts payable in connection with Letters of Credit and Reimbursement Obligations. "LETTER OF CREDIT ISSUER" shall mean ING as the issuer of Letters of Credit under Section 2.10 hereof, together with its successors in such capacity. "LETTER OF CREDIT LIABILITY" shall mean, without duplication, at any time and in respect of any Letter of Credit, the sum of (a) the undrawn face amount of such Letter of Credit, PLUS (b) the aggregate unpaid principal amount of all Reimbursement Obligations of the Company at such time due and payable in respect of all drawings made under such Letter of Credit. For purposes of this Agreement, a Revolving Credit Lender (other than the Letter of Credit Issuer) shall be deemed to hold a Letter of Credit Liability in an amount equal to its participation interest in the related Letter of Credit under Section 2.10 hereof, and the Letter of Credit Issuer shall be deemed to hold a Letter of Credit Liability in an amount equal to its retained interest in the related Letter of Credit after giving effect to the acquisition by the Revolving Credit Lenders other than the Letter of Credit Issuer of their participation interests under said Section 2.10. "LIEN" shall mean, with respect to any Property, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such Property. For purposes of this Agreement and the other Basic Documents, a Person shall be deemed to own subject to a Lien any Property that it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement (other than an operating lease) relating to such Property. "LOAN AGREEMENT" shall have the meaning given to that term in the Master Agreement. "LOANS" shall mean, collectively, Revolving Credit Loans and Synthetic Lease Loans. "MAJORITY LENDERS" shall mean Lenders holding at least 51% of the sum of the following: (a) the Revolving Credit Commitments (or, if the Revolving Credit Commitments shall have terminated or expired, at least 51% of the aggregate unpaid principal amount of Revolving Credit Loans), PLUS (b) the Synthetic Lease Loan Commitments (or, if the Synthetic Lease Loan Commitments shall have terminated or expired, at least 51% of the aggregate unpaid principal amount of Synthetic Lease Loans). "MAJORITY REVOLVING CREDIT LENDERS" shall mean Revolving Credit Lenders holding at least 51% of the aggregate amount of the Revolving Credit Commitments (or, if the Revolving Credit Commitments shall have terminated or expired, at least 51% of the aggregate unpaid principal amount of Revolving Credit Loans). "MAJORITY SYNTHETIC LEASE A LENDERS" shall mean Synthetic Lease Loan Lenders holding at least 51% of the Synthetic Lease Loan Commitments (or, if the Synthetic Lease Loan Commitments shall have terminated or expired, at least 51% of the aggregate unpaid principal amount of Synthetic Lease Loans). "MAJORITY SYNTHETIC LEASE B LENDERS" shall mean the "Required Lenders," as that term is defined in the Master Agreement. "MAJORITY SYNTHETIC LEASE A AND B LENDERS" shall mean Synthetic Lease Loan Lenders and holders of B Loans holding at least 51% of the Synthetic Lease Loan Commitments and "B Loan Commitments" (as defined in the Master Agreement), or, if the Synthetic Lease Loan Commitments and the "B Loan Commitments" shall have terminated or expired, at least 51% of the aggregate unpaid principal amount of Synthetic Lease Loans and B Loans) "MAJORITY SYNTHETIC LEASE LENDERS" shall mean the "Required Funding Parties," as that term is defined in the Master Agreement. "MARGIN STOCK" shall mean "margin stock" within the meaning of Regulations U and X. "MASTER AGREEMENT" shall mean the Master Agreement, dated as of December 3, 1998, among the Company, the Subsidiary Guarantors, the Lessor, certain lenders and ING, as agent, as the same shall be modified and supplemented and in effect from time to time. "MATERIAL ADVERSE EFFECT" shall mean a material adverse effect on (a) the Property, business, operations, financial condition, prospects, liabilities or capitalization of the Company and its Subsidiaries taken as a whole, (b) the ability of any Obligor to perform its obligations under any of the Basic Documents to which it is a party or any of the Operative Documents to which it is a party, (c) the validity or enforceability of any of the Basic Documents or any of the Operative Documents, (d) the rights and remedies of the Lenders and the Agent under any of the Basic Documents or any of the Operative Documents or (e) the timely payment of the principal of or interest on the Loans, Reimbursement Obligations or other amounts payable in connection therewith. "MONTHLY DATE" shall mean the last Business Day of each calendar month. "MORTGAGE" shall mean, in connection with any interest in real property (whether a fee or a leasehold estate) acquired by any Obligor, an Indenture or Instrument of Mortgage, Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing executed by such Obligor in favor of the Agent and the Lenders (or, if applicable, in favor of a Trustee, for the benefit of the Agent and the Lenders), in each case in form and substance satisfactory to the Majority Lenders and covering such interest in real property, as said instrument shall be modified and supplemented and in effect from time to time. "MULTIEMPLOYER PLAN" shall mean a multiemployer plan defined as such in Section 3(37) of ERISA to which contributions have been made by the Company or any ERISA Affiliate and that is covered by Title IV of ERISA. "NET AVAILABLE PROCEEDS" shall mean: (i) in the case of any Disposition, the amount of Net Cash Payments received in connection with such Disposition; (ii) in the case of any Casualty Event, the aggregate amount of proceeds of insurance, condemnation awards and other compensation received by the Company and its Subsidiaries in respect of such Casualty Event net of (A) reasonable expenses incurred by the Company and its Subsidiaries in connection therewith and (B) contractually required repayments of Indebtedness to the extent secured by a Lien on such Property and any income and transfer taxes payable by the Company or any of its Subsidiaries in respect of such Casualty Event; (iii) in the case of any incurrence of Indebtedness, the aggregate amount of all cash received by the Company and its Subsidiaries in respect of such incurrence net of fees and expenses incurred by Company and its Subsidiaries in connection therewith; and (iv) in the case of any Equity Issuance, the aggregate amount of all cash received by the Company and its Subsidiaries in respect of such Equity Issuance net of fees and expenses incurred by the Company and its Subsidiaries in connection therewith. "NET CASH PAYMENTS" shall mean, with respect to any Disposition, the aggregate amount of all cash payments, and the fair market value of any non-cash consideration, received by the Company and its Subsidiaries directly or indirectly in connection with such Disposition; PROVIDED that (a) Net Cash Payments shall be net of (i) the amount of any legal, title and recording tax expenses, commissions and other fees and expenses paid by the Company and its Subsidiaries in connection with such Disposition and (ii) any federal, state, local and foreign taxes estimated to be payable by the Company and its Subsidiaries as a result of such Disposition (but only to the extent that such estimated taxes are in fact paid to the relevant Federal, state or local governmental authority within three months of the date of such Disposition), (b) Net Cash Payments shall be net of any repayments by the Company or any of its Subsidiaries of Indebtedness to the extent that (i) such Indebtedness is secured by a Lien on the Property that is the subject of such Disposition and (ii) the transferee of (or holder of a Lien on) such Property requires that such Indebtedness be repaid as a condition to the purchase of such Property and (c) Net Cash Payments shall exclude the amount of any reasonable reserves established by the Company or such Subsidiary, in accordance with GAAP, against any liabilities retained by the Company or its Subsidiaries, which liabilities are associated with the Property that is the subject of such Disposition (but only during such period as such reserves are actually maintained), including (without limitation) any indemnification obligations, pension and other post-employment benefit liabilities, workers' compensation liabilities, liabilities associated with retiree benefits, liabilities relating to environmental matters and liabilities relating to any Guarantee of Indebtedness secured by a Lien on such Property. "NET WORTH" shall mean, as at any date for any Person, the sum for such Person and its Subsidiaries (determined on a consolidated basis without duplication in accordance with GAAP), of the following: (a) the amount of capital stock; PLUS (b) he amount of surplus and retained earnings (or, in the case of a surplus or retained earnings deficit, MINUS the amount of such deficit); PLUS (c) any warrant accretion expense (as that term is used in GAAP) or any original issue discount accretion expense (as such term is used in GAAP) arising after the date of the Second Amended and Restated Credit Agreement, PLUS (d) the value ascribed to any warrants issued to a Lender and the cumulative effect of any change in the valuation of such warrants; PROVIDED that any predecessor basis adjustment required under GAAP shall be disregarded in calculating "Net Worth." "1998 SYNTHETIC LEASE FINANCING" shall mean a Synthetic Lease Financing in which (a) the A Lenders (as that term is defined in the definition of "Synthetic Lease Financing" in this Section 1.01) are the Synthetic Lease Lenders hereunder, and (b) the B Guarantee and the C Investment (as those terms are defined in the definition of "Synthetic Lease Financing" in this Section 1.01) are not secured by the Collateral for the Loans and the Senior Notes. "NOTES" shall mean the promissory notes provided for by Section 2.07(a) hereof and all promissory notes delivered in substitution or exchange therefor, in each case as the same shall be modified and supplemented and in effect from time to time. "OPERATIVE DOCUMENTS" shall have the meaning given to that term in the Master Agreement. "PBGC" shall mean the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "PERMITTED INVESTMENTS" shall mean: (a) direct obligations of the United States of America, or of any agency thereof, or obligations guaranteed as to principal and interest by the United States of America, or of any agency thereof, in either case maturing not more than 90 days from the date of acquisition thereof; (b) certificates of deposit issued by any Lender or by any bank or trust company organized under the laws of the United States of America or any state thereof and having capital, surplus and undivided profits of at least $500,000,000, maturing not more than 90 days from the date of acquisition thereof; (c) commercial paper rated A-1 or better or P-1 by Standard & Poor's Corporation or Moody's Investors Services, Inc., respectively, maturing not more than six months from the date of acquisition thereof; (d) commercial paper of any Lender (or any Affiliate thereof located in the United States of America) that is rated A-1 or better or P-1 by Standard and Poor's Corporation or Moody's Investors Services, Inc., respectively, maturing not more than six months from the date of acquisition thereof; (e) repurchase agreements entered into with any Lender or with any bank or trust company satisfying the conditions of clause (b) hereof that is secured by any obligation of the type described in clauses (a) through (d) of this definition; and (f) money market funds acceptable to the Majority Lenders. "PERSON" shall mean any individual, corporation, company, voluntary association, partnership, joint venture, trust, unincorporated organization or government (or any agency, instrumentality or political subdivision thereof). "PLAN" shall mean an employee benefit or other plan established or maintained by the Company or any ERISA Affiliate and that is covered by Title IV of ERISA, other than a Multiemployer Plan. "POST-DEFAULT RATE" shall mean, in respect of any principal of any Loan, any Reimbursement Obligation or any other amount under this Agreement, any Note or any other Basic Document that is not paid when due (whether at stated maturity, by acceleration, by optional or mandatory prepayment or otherwise), a rate per annum during the period from and including the due date to but excluding the date on which such amount is paid in full equal to 2% PLUS the Base Rate as in effect from time to time PLUS the Applicable Margin for Base Rate Loans (PROVIDED that, with respect to principal of a Eurodollar Loan, the "Post-Default Rate" for such principal shall be, for the period from and including such due date to but excluding the last day of such Interest Period, 2% PLUS the interest rate for such Loan as provided in Section 3.02 hereof and, thereafter, the rate provided for above in this definition). "POTENTIAL LEASE-RELATED EVENT OF DEFAULT" shall mean any "Potential Event of Default" as defined in the Master Agreement. "PRIME RATE" shall mean the arithmetic average of the rates of interest publicly announced by The Chase Manhattan Bank, Citibank, N.A. and Morgan Guaranty Trust Company of New York (or their respective successors) as their respective prime commercial lending rates (or, as to any such bank that does not announce such a rate, such bank's "base" or other rate reasonably determined by the Agent to be the equivalent rate announced by such bank), EXCEPT THAT, if any such bank shall, for any period, cease to announce publicly its prime commercial lending (or equivalent) rate, the Agent shall, during such period, reasonably determine the "prime rate" based upon the commercial lending (or equivalent) rates announced publicly by the other such banks. "PRO FORMA ADJUSTMENTS" shall mean reasonable adjustments for (a) non-recurring or extraordinary expenses, (b) operating efficiencies, (c) census levels and (d) per diem rates. "PROPERTY" shall mean any right or interest in or to property of any kind whatsoever, whether real, personal or mixed and whether tangible or intangible. "QUARTERLY DATES" shall mean the last Business Day of March, June, September and December in each year, the first of which shall be the first such day after the date of this Agreement. "REGULATIONS A, D, U AND X" shall mean, respectively, Regulations A, D, U and X of the Board of Governors of the Federal Reserve System (or any successor), as the same may be modified and supplemented and in effect from time to time. "REGULATORY CHANGE" shall mean, with respect to any Lender, any change after the date of this Agreement in Federal, state or foreign law or regulations (including, without limitation, Regulation D) or the adoption or making after the date of this Agreement of any interpretation, directive or request applying to a class of banks including such Lender of or under any Federal, state or foreign law or regulations (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) by any court or governmental or monetary authority charged with the interpretation or administration thereof. "REIMBURSEMENT OBLIGATIONS" shall mean, at any time, the obligations of the Company then outstanding, or that may thereafter arise in respect of all Letters of Credit then outstanding, to reimburse amounts paid by the Letter of Credit Issuer in respect of any drawings under a Letter of Credit. "RELEASE" shall mean any release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration into the indoor or outdoor environment, including, without limitation, the movement of Hazardous Materials through ambient air, soil, surface water, ground water, wetlands, land or subsurface strata. "RELEASE DATE" shall have the meaning given to that term in the Master Agreement. "RELEVANT CONTRACT" shall have the meaning set forth in Section 7.02(a)(ii) hereof. "RELEVANT TRANSACTION" shall have the meaning set forth in Section 7.02(a) hereof. "REVOLVING CREDIT COMMITMENT" shall mean, for each Revolving Credit Lender, the obligation of such Lender to make Loans in an aggregate principal amount at any one time outstanding up to but not exceeding the amount set forth opposite the name of such Lender on the signature pages hereof under the caption "Revolving Credit Commitment" (as the same may be reduced from time to time pursuant to Section 2.03 hereof). The original aggregate principal amount of the Revolving Credit Commitments is $60,000,000. "REVOLVING CREDIT COMMITMENT PERCENTAGE" shall mean, with respect to any Lender, the ratio of (a) the amount of the Revolving Credit Commitment of such Lender to (b) the aggregate amount of the Revolving Credit Commitments of all of the Lenders." "REVOLVING CREDIT COMMITMENT REDUCTION DATES" shall mean the Quarterly Dates, commencing with the last Business Day of September 2000 through and including the last Business Day of December 2002. "REVOLVING CREDIT COMMITMENT TERMINATION DATE" shall mean the Business Day immediately preceding March 31, 2003. "REVOLVING CREDIT LENDERS" shall mean (a) on the date hereof, Lenders having Revolving Credit Commitments on the signature pages hereof, and (b) thereafter, Lenders from time to time holding Revolving Credit Loans and Revolving Credit Commitments after giving effect to any assignments thereof permitted by Section 13.06(b) hereof. "REVOLVING CREDIT LOANS" shall mean the revolving credit loans provided for by Section 2.01(a) hereof, which may be Base Rate Loans and/or Eurodollar Loans. "SECURITY AGREEMENT" shall mean the Security Agreement dated as of March 14, 1995, as amended, between each Obligor and the Agent, as amended by the Security Agreement Amendment, and as the same shall be further modified and supplemented and in effect from time to time. "SECURITY AGREEMENT AMENDMENT" shall mean an Amendment to the Security Agreement in substantially the form of Exhibit C hereto. "SECURITY DOCUMENTS" shall mean, collectively, the Security Agreement, any Mortgage and all Uniform Commercial Code financing statements required by this Agreement, the Security Agreement or any Mortgage to be filed with respect to the security interests in personal Property and fixtures created pursuant to the Security Agreement or any Mortgage. "SENIOR NOTES" shall mean, collectively, the following: (a) promissory notes of the Company, in an aggregate principal amount not to exceed $50,000,000, secured by a Lien upon substantially all of the Property of the Company and its Subsidiaries (the "1998 SENIOR NOTES"); and (b) additional Indebtedness of the Company, in an aggregate principal amount not to exceed $10,000,000, which may be secured by a Lien upon substantially all of the Property of the Company and its Subsidiaries, with terms and conditions, and pursuant to documentation, either (i) substantially similar to the terms and conditions of, and the documentation for, the 1998 Senior Notes or (ii) otherwise satisfactory to the Agent. "SENIOR NOTES DOCUMENTATION" shall mean any note purchase agreement, promissory note or other document or instrument evidencing or governing the Senior Notes. "SUBORDINATED NOTES" shall mean promissory notes of the Company, in an aggregate principal amount not to exceed $25,000,000, which is not secured by any Property of the Company or any Subsidiary Guarantor but which may be Guaranteed by each of the Subsidiaries of the Company, and which is subordinated to the prior payment in full of the principal of and interest on the Loans, on terms and conditions (including subordination terms), and pursuant to documentation, that is (i) on market terms at the time it is entered into and (ii) is otherwise satisfactory to the Agent. "SUBORDINATED NOTES DOCUMENTATION" shall mean any note purchase agreement, promissory note or other document or instrument evidencing or governing the Subordinated Notes. "SUBSEQUENT SYNTHETIC LEASE FUNDING DATE" shall mean each "Subsequent Funding Date" as defined in the Master Agreement. "SUBSIDIARY" shall mean, with respect to any Person, any corporation, partnership or other entity of which at least a majority of the securities or other ownership interests having by the terms thereof ordinary voting power to elect a majority of the board of directors or other persons performing similar functions of such corporation, partnership or other entity (irrespective of whether or not at the time securities or other ownership interests of any other class or classes of such corporation, partnership or other entity shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by such Person or one or more Subsidiaries of such Person or by such Person and one or more Subsidiaries of such Person. "SYNTHETIC LEASE CLOSING DATE" shall mean a "Closing Date" as defined in the Master Agreement. "SYNTHETIC LEASE FINANCING" shall mean transactions consisting of the following (provided that any such transaction need not include the matters described in clause (e) below): (a) the Company or one of its Subsidiaries enters into a lease (as lessee) of real Property and improvements (to be used for a correctional and/or detention facility) with another Person (the "LESSOR"); (b) pursuant to a loan agreement (the "LOAN AGREEMENT"), the Lessor borrows money from one or more lenders denominated "A Lenders" (the "A LENDERS") and one or more lenders denominated "B Lenders" (the "B LENDERS"); (c) the Lessor (or another Person, which may be an Affiliate of the Lessor) makes an investment (the "C INVESTMENT") to pay a portion of the cost of such real Property and improvements; (d) the Company and its Subsidiaries enter into a Guarantee of the Lessor's obligations to the A Lenders under the Loan Agreement (the "A GUARANTEE"), and, as provided in the Collateral Sharing Documentation Amendment: (x) the A Guarantee is secured by Liens on substantially all of the collateral for the Loans, Reimbursement Obligations and the Senior Notes, and (y) the Loans, Reimbursement Obligations and the other obligations of the Company hereunder and under the other Basic Documents, together with the Senior Notes, are secured by Liens in any collateral securing the Lessor's obligations to the A Lenders under the Loan Agreement (the "A COLLATERAL CONTRIBUTION"); and (e) the Company and its Subsidiaries enter into a Guarantee of the Lessor's obligations to the B Lenders under the Loan Agreement (the "B GUARANTEE"), and, as provided in the Collateral Sharing Documentation Amendment: (x) the B Guarantee and the C Investment is secured by Liens on substantially all of the collateral for the Loans and the Senior Notes, and (y) the Loans, Reimbursement Obligations and the other obligations of the Company hereunder and under the other Basic Documents, together with the Senior Notes, are secured by Liens in any collateral securing the Lessor's obligations to the B Lenders under the Loan Agreement or securing the C Investment (the "B AND C COLLATERAL CONTRIBUTION"). "SYNTHETIC LEASE DOCUMENTATION" shall mean any master agreement, lease agreement, loan agreement or other document or instrument evidencing or governing any Synthetic Lease Financing. "SYNTHETIC LEASE LOAN COMMITMENT" shall mean, for each Synthetic Lease Loan Lender, the obligation of such Lender to make Synthetic Lease Loans in an aggregate principal amount at any one time outstanding up to but not exceeding the amount set forth opposite the name of such Lender on the signature pages hereof under the caption "Synthetic Lease Loan Commitment" (as the same may be reduced from time to time pursuant to Section 2.03 hereof). The original aggregate principal amount of the Synthetic Lease Loan Commitments is $34,000,000. "SYNTHETIC LEASE LOAN COMMITMENT TERMINATION DATE" shall mean December 3, 2003. "SYNTHETIC LEASE LOAN LENDERS" shall mean (a) on the date hereof, Lenders having Synthetic Lease Loan Commitments on the signature pages hereof, and (b) thereafter, Lenders from time to time holding Synthetic Lease Loans and Synthetic Lease Loan Commitments after giving effect to any assignments thereof permitted by Section 13.06(b) hereof. "SYNTHETIC LEASE LOAN PRINCIPAL PAYMENT DATE" shall mean the Lease Termination Date (as that term is defined in the Master Agreement). "SYNTHETIC LEASE LOANS" shall mean the loans provided for by Section 2.01(b) hereof, which may be Base Rate Loans and/or Eurodollar Loans. "TYPE" shall have the meaning assigned to such term in Section 1.03 hereof. "USE PERMIT" shall mean any permit issued by a municipal, state or federal government, or agency, instrumentality or subdivision thereof, that is required for the operation by the Company or its Subsidiaries of any correctional or detention facility. "WHOLLY OWNED SUBSIDIARY" shall mean, with respect to any Person, any corporation, partnership or other entity of which all of the equity securities or other ownership interests (other than, in the case of a corporation, directors' qualifying shares) are directly or indirectly owned or controlled by such Person or one or more Wholly Owned Subsidiaries of such Person or by such Person and one or more Wholly Owned Subsidiaries of such Person. 1.02 ACCOUNTING TERMS AND DETERMINATIONS (a) Except as otherwise expressly provided herein, all accounting terms used herein shall be interpreted, and all financial statements and certificates and reports as to financial matters required to be delivered to the Lenders hereunder shall (unless otherwise disclosed to the Lenders in writing at the time of delivery thereof in the manner described in subsection (b) below) be prepared, in accordance with generally accepted accounting principles applied on a basis consistent with those used in the preparation of the latest financial statements furnished to the Lenders hereunder (which, prior to the delivery of the first financial statements under Section 9.01 hereof, shall mean the audited financial statements as at December 31, 1996 referred to in Section 8.02 hereof). All calculations made for the purposes of determining compliance with this Agreement shall (except as otherwise expressly provided herein) be made by application of generally accepted accounting principles applied on a basis consistent with those used in the preparation of the latest annual or quarterly financial statements furnished to the Lenders pursuant to Section 9.01 hereof (or, prior to the delivery of the first financial statements under Section 9.01 hereof, used in the preparation of the audited financial statements as at December 31, 1996 referred to in Section 8.02 hereof) unless (i) the Company shall have objected to determining such compliance on such basis at the time of delivery of such financial statements or (ii) the Majority Lenders shall so object in writing within 30 days after delivery of such financial statements, in either of which events such calculations shall be made on a basis consistent with those used in the preparation of the latest financial statements as to which such objection shall not have been made (which, if objection is made in respect of the first financial statements delivered under Section 9.01 hereof, shall mean the audited financial statements referred to in Section 8.02 hereof). (b) The Company shall deliver to the Lenders at the same time as the delivery of any annual or quarterly financial statement under Section 9.01 hereof (i) a description in reasonable detail of any material variation between the application of accounting principles employed in the preparation of such statement and the application of accounting principles employed in the preparation of the next preceding annual or quarterly financial statements as to which no objection has been made in accordance with the last sentence of subsection (a) above and (ii) reasonable estimates of the difference between such statements arising as a consequence thereof. (c) To enable the ready and consistent determination of compliance with the covenants set forth in Section 9 hereof, the Company will not change the last day of its fiscal year from December 31 of each year, or the last days of the first three fiscal quarters in each of its fiscal years from March 31, June 30, September 30 and December 31 of each year, respectively. 1.03 CLASSES AND TYPES OF LOANS. Loans hereunder are distinguished by "Type". The "Type" of a Loan refers to whether such Loan is a Base Rate Loan or a Eurodollar Loan, each of which constitutes a Type. Loans and Commitments may also be distinguished by "Class." The "Class" of a Loan or Commitment refers to whether such Loan is a Revolving Credit Loan or a Synthetic Lease Loan, each of which constitutes a Class. Loans may be identified by both Type and Class. Section 2. COMMITMENTS, LOANS, NOTES AND PREPAYMENTS 2.01 LOANS (a) REVOLVING CREDIT LOANS MADE TO CORNELL. Each Revolving Credit Lender severally agrees, on the terms and conditions of this Agreement, to make loans to the Company in Dollars during the period from and including the Closing Date to but not including the Revolving Credit Commitment Termination Date in an aggregate principal amount at any one time outstanding up to but not exceeding the amount of the Revolving Credit Commitment of such Lender as in effect from time to time. Subject to the terms and conditions of this Agreement, during such period the Company may borrow, repay and reborrow the amount of the Revolving Credit Commitments by means of Base Rate Loans and Eurodollar Loans and may Convert Loans of one Type into Loans of the other Type (as provided in Section 2.08 hereof) or Continue Eurodollar Loans from one Interest Period to the next Interest Period (as provided in Section 2.08 hereof), PROVIDED that in no event shall the aggregate principal amount of all Loans, together with the aggregate amount of all Letter of Credit Liabilities, exceed the aggregate amount of the Revolving Credit Commitments as in effect from time to time. (b) SYNTHETIC LEASE LOANS MADE TO THE LESSOR. Each Synthetic Lease Loan Lender severally agrees, on the terms and conditions of this Agreement, to make loans to the Lessor in Dollars during the period from and including the Closing Date but not including the Synthetic Lease Loan Commitment Termination Date in an aggregate principal amount up to but not exceeding the amount of the Synthetic Lease Loan Commitment of such Synthetic Lease Loan Lender as in effect from time to time. Each Synthetic Lease Loan shall be made on each Synthetic Lease Closing Date and on each Subsequent Synthetic Lease Funding Date and in the amounts required under Section 2.2 of the Master Agreement. Each Synthetic Lease Loan made by a Synthetic Lease Loan Lender on any date shall be in an amount equal to such Synthetic Lease Loan Lender's pro rata share of the A Percentage of the aggregate amount to be funded by the Funding Parties on such date, and the duration of the respective Interest Periods for each such Synthetic Lease Loan shall be the same as the duration of the respective "Rent Periods" (as that term is defined in the Master Agreement) for the B Loan that corresponds to such Synthetic Lease Loan. Subject to the terms and conditions of this Agreement, the Company may Convert Synthetic Lease Loans of one Type into Loans of the other Type (as provided in Section 2.08 hereof) or Continue Eurodollar Loans from one Interest Period to the next Interest Period (as provided in Section 2.08 hereof). (c) LIMIT ON EURODOLLAR LOANS. No more than six separate Interest Periods in respect of Eurodollar Loans from each Lender may be outstanding at any one time. 2.02 BORROWINGS OF LOANS. The Company shall give the Agent notice of each borrowing hereunder as provided in Section 4.05 hereof. Not later than 1:00 p.m. New York time on the date specified for each borrowing of Loans hereunder, each Lender shall make available the amount of the Loan or Loans to be made by it on such date to the Agent, at account number 9301035763 (ABA No. 021000021) maintained by the Agent with The Chase Manhattan Bank, in immediately available funds, for account of the Company or the Lessor (as the case may be). The amount so received by the Agent in respect of Revolving Credit Loans shall, subject to the terms and conditions of this Agreement, be made available to the Company by depositing the same, in immediately available funds, in an account of the Company maintained with a bank in New York City, Houston, Texas or San Francisco, California, designated by the Company. The amount so received by the Agent in respect of Synthetic Lease Loans shall, subject to the terms and conditions of this Agreement, be made available to, or on behalf of, the Lessor as provided in the Master Agreement. 2.03 CHANGES OF COMMITMENTS (a) The aggregate amount of the Revolving Credit Commitments shall automatically be reduced (i) by $3,000,000 on each Revolving Credit Commitment Reduction Date and (ii) to zero on the Revolving Credit Commitment Termination Date. (b) The aggregate amount of the Synthetic Lease Loan Commitments shall automatically be reduced to zero on the Synthetic Lease Loan Commitment Termination Date. (c) The Company shall have the right at any time or from time to time (i) so long as no Revolving Credit Loans or Letter of Credit Liabilities are outstanding, to terminate the Revolving Credit Commitments, and (ii) to reduce the aggregate unused amount of the Revolving Credit Commitments (for which purpose use of the Revolving Credit Commitments shall be deemed to include the aggregate amount of Letter of Credit Liabilities); PROVIDED that (x) the Company shall give notice of each such termination or reduction as provided in Section 4.05 hereof and (y) each partial reduction shall be in an aggregate amount at least equal to (x) in the case of Base Rate Loans, $25,000 (or a larger multiple of $25,000), and (y) in the case of Eurodollar Loans, $250,000 (or a larger multiple of $25,000). (d) The Commitments of any Class once terminated or reduced may not be reinstated. 2.04 COMMITMENT FEE (a) The Company shall pay to the Agent, for the account of each Revolving Credit Lender, a commitment fee on the daily average unused amount of such Lender's Revolving Credit Commitment (for which purpose the aggregate amount of any Letter of Credit Liabilities shall be deemed to be a pro rata (based on the Revolving Credit Commitments) use of each Lender's Revolving Credit Commitment), for the period from and including September 9, 1997 to (but not including) the date such Commitment is reduced to zero, at a rate per annum equal to 0.375%. Accrued commitment fees shall be payable on each Monthly Date and on the date the Revolving Credit Commitments are reduced to zero. (b) The Company shall pay to the Agent, for the account of each Synthetic Lease Loan Lender, a commitment fee on the daily average unused amount of such Lender's Synthetic Lease Loan Commitment, for the period from and including the Closing Date to (but not including) the date such Commitment is reduced to zero, at a rate per annum equal to 0.375%. Accrued commitment fees shall be payable on each Monthly Date and on the date the Synthetic Lease Loan Commitments are reduced to zero. 2.05 LENDING OFFICES. The Loans of each Type made by each Lender shall be made and maintained at such Lender's Applicable Lending Office for Loans of such Type. 2.06 SEVERAL OBLIGATIONS; REMEDIES INDEPENDENT. The failure of any Lender to make any Loan to be made by it on the date specified therefor shall not relieve any other Lender of its obligation to make its Loan on such date, but neither any Lender nor the Agent shall be responsible for the failure of any other Lender to make a Loan to be made by such other Lender, and no Lender shall have any obligation to the Agent or any other Lender for the failure by such Lender to make any Loan required to be made by such Lender. The amounts payable by the Company at any time hereunder and under the Notes to each Lender shall be a separate and independent debt and each Lender shall be entitled to protect and enforce its rights arising out of this Agreement and the Notes, and it shall not be necessary for any other Lender or the Agent to consent to, or be joined as an additional party in, any proceedings for such purposes. 2.07 NOTES. (a) (i) The Revolving Credit Loans made by each Lender shall be evidenced by a single promissory note of the Company substantially in the form of Exhibit A-1 hereto, dated the date hereof, payable to such Lender in a principal amount equal to the amount of its Revolving Credit Commitment as originally in effect and otherwise duly completed. (ii) The Synthetic Lease Loans made by each Lender shall be evidenced by a single promissory note of the Lessor substantially in the form of Exhibit A-2 hereto, dated the date hereof, payable to such Lender in a principal amount equal to the amount of its Synthetic Lease Loan Commitment as originally in effect and otherwise duly completed. (b) The date, amount, Type, interest rate and duration of Interest Period (if applicable) of each Loan made by each Lender to the Company or the Lessor (as the case may be), and each payment made on account of the principal thereof, shall be recorded by such Lender on its books and, prior to any transfer of the Note evidencing the Loans held by it, endorsed by such Lender on the schedule attached to such Note or any continuation thereof; PROVIDED that the failure of such Lender to make any such recordation or endorsement shall not affect the obligations of the Company or the Lessor (as the case may be) to make a payment when due of any amount owing hereunder or under such Note in respect of the Loans to be evidenced by such Note. (c) No Lender shall be entitled to have its Notes subdivided, by exchange for promissory notes of lesser denominations or otherwise, except in connection with a permitted assignment of all or any portion of such Lender's relevant Commitment, Loans and Notes pursuant to Section 13.06(b) hereof. 2.08 OPTIONAL PREPAYMENTS AND CONVERSIONS OR CONTINUATIONS OF LOANS (a) Subject to Section 4.04 hereof, the Company shall have the right to prepay Revolving Credit Loans, or to Convert Loans of one Type into Loans of another Type or to Continue Eurodollar Loans, at any time or from time to time, PROVIDED that the Company shall give the Agent notice of each such prepayment, Conversion or Continuation as provided in Section 4.05 hereof (and, upon the date specified in any such notice of prepayment, the amount to be prepaid shall become due and payable hereunder). Notwithstanding the foregoing, and without limiting the rights and remedies of the Lenders under Section 11 hereof, in the event that any Event of Default shall have occurred and be continuing, the Agent may (and at the request of the Majority Lenders shall) suspend the right of the Company to Convert any Base Rate Loan into a Eurodollar Loan, or to Continue any Loan as a Eurodollar Loan, in which event all Loans shall be Converted (on the last day(s) of the respective Interest Periods therefor) or Continued, as the case may be, as Base Rate Loans. (b) Except in conjunction with a payment by a Lessee of the Lease Balance, a Construction Failure Payment or a Leased Property Balance pursuant to the terms of the Lease or the Construction Agency Agreement, the Lessor shall not have the right to prepay Synthetic Lease Loans. 2.09 MANDATORY PREPAYMENTS. (a) SALE OF ASSETS. Without limiting the obligation of the Company to obtain the consent of the Majority Lenders pursuant to Section 9.05 hereof to any Disposition not otherwise permitted hereunder, in the event that the Net Available Proceeds of any Disposition (herein, the "CURRENT DISPOSITION"), and of all prior Dispositions as to which a prepayment has not yet been made under this Section 2.09(a), shall exceed $250,000 then, no later than five Business Days prior to the occurrence of the Current Disposition, the Company will deliver to the Lenders a statement, certified by the chief financial officer of the Company, in form and detail reasonably satisfactory to the Agent, of the amount of the Net Available Proceeds of the Current Disposition and of all such prior Dispositions and will prepay the Revolving Credit Loans (and/or provide cover for Letter of Credit Liabilities as specified in clause (f) below) in an aggregate amount equal to 100% of the Net Available Proceeds of the Current Disposition and such prior Dispositions. For purposes of this Section 2.09(a), if the Company is required, pursuant to the Senior Notes Documentation, to make an offer to prepay 1998 Senior Notes as a result of a Disposition, the amount of Net Available Proceeds required to prepay Revolving Credit Loans (and/or to provide cover for Letter of Credit Liabilities) with respect to such Disposition shall be reduced by an amount equal to the product of the following: (a) the Net Available Proceeds otherwise required to prepay Revolving Credit Loans (and/or to provide cover for Letter of Credit Liabilities), MULTIPLIED BY (b) the quotient of (x) the outstanding principal amount of 1998 Senior Notes at such time, DIVIDED BY (y) the sum of the outstanding principal amount of the 1998 Senior Notes at such time plus the outstanding principal amount of Revolving Credit Loans and Letter of Credit Liabilities at such time. (b) DEBT ISSUANCE. Without limiting the obligation of the Company to obtain the consent of the Majority Lenders pursuant to Section 9.07 hereof to the incurrence of any Indebtedness not otherwise permitted hereunder, upon the receipt by the Company or any of its Subsidiaries of the proceeds of any Indebtedness incurred after the date of the Second Amended and Restated Credit Agreement (other than Indebtedness described in clause (d), (e), (f) or (g) of Section 9.07 hereof), the Company shall prepay the Revolving Credit Loans (and/or provide cover for Letter of Credit Liabilities as specified in clause (f) below) in an aggregate amount equal to 100% of the Net Available Proceeds thereof. (c) EQUITY ISSUANCE. Upon any Equity Issuance (other than any Equity Issuance by a Designated Subsidiary), the Company shall prepay the Revolving Credit Loans (and/or provide cover for Letter of Credit Liabilities as specified in clause (f) below) in an aggregate amount equal to 50% of the Net Available Proceeds thereof, PROVIDED that (1) if the chief financial officer of the Company certifies to the Agent that, without effecting an Equity Issuance, the Company will not be able to pay principal of or interest on the Loans when due, all Net Available Proceeds of such Equity Issuance shall be applied directly by the Person making the equity investment to the payment of such principal and/or interest; (2) if the Majority Lenders shall have expressly approved an Investment or other acquisition by the Company or any of its Subsidiaries (which approval may be withheld by the Majority Lenders in their sole discretion) that was proposed by the Company to the Lenders and the written materials furnished to the Lenders describing such Investment or other acquisition described in reasonable detail an Equity Issuance that would be used to finance such Investment or acquisition, none of the Net Available Proceeds of such Equity Issuance shall be required to be applied to the prepayment of the Revolving Credit Loans or the reduction of the Revolving Credit Commitments; and (3) the Company shall not be required to prepay any Revolving Credit Loan if (x) the obligation to make such Loan was subject to Section 7.02 and (y) such Loan was used to finance Capital Expenditures for the construction of fixed assets, plant, furniture, fixtures and equipment and such construction has not substantially been completed on the date of such Equity Issuance. (d) CASUALTY EVENTS. Not later than 60 days following the receipt by any Obligor (other than any Designated Subsidiary) of the proceeds of insurance, condemnation award or other compensation in respect of any Casualty Event affecting any Property (other than any Leased Property) of any such Obligor (or upon such earlier date as the Obligor shall have determined not to repair or replace the Property affected by such Casualty Event), or upon the receipt by any Obligor of the proceeds of any key-man life insurance policy, the Company shall prepay the Revolving Credit Loans (and/or provide cover for Letter of Credit Liabilities as specified in clause (f) below) in an aggregate amount, if any, equal to 100% of the Net Available Proceeds of such Casualty Event not theretofore applied to the repair or replacement of such Property or 100% of the proceeds of the key-man life insurance policy, as applicable. Nothing in this clause (d) shall be deemed to limit any obligation of any Obligor pursuant to any of the Security Documents to remit to a collateral or similar account (including, without limitation, the Collateral Account) maintained by the Agent pursuant to any of the Security Documents the proceeds of insurance, condemnation award or other compensation received in respect of any Casualty Event. (e) EXCESS CASH FLOW. Not later than the date 90 days after the end of each fiscal year, commencing with the fiscal year commencing on January 1, 1997, the Company shall prepay the Revolving Credit Loans (and/or provide cover for Letter of Credit Liabilities as specified in clause (f) below) in an aggregate amount equal to 60% of Excess Cash Flow for such fiscal year (computed on the basis of the financial statements provided to the Agent pursuant to Section 9.01(d) hereof). (f) COVER FOR LETTER OF CREDIT LIABILITIES. In the event that the Company shall be required pursuant to this Section 2.09 to provide cover for Letter of Credit Liabilities, the Company shall effect the same by paying to the Agent immediately available funds in an amount equal to the required amount, which funds shall be retained by the Agent in the Collateral Account (as provided therein as collateral security in the first instance for Letter of Credit Liabilities) until such time as the Letter of Credit shall have been terminated and all of the Letter of Credit Liabilities paid in full. 2.10 LETTERS OF CREDIT. Subject to the terms and conditions of this Agreement, and subject to the prior consent of the Letter of Credit Issuer, Revolving Credit Commitments may be utilized, upon the request of the Company, in addition to the Revolving Credit Loans provided for by Section 2.01(a) hereof, by the issuance by the Letter of Credit Issuer of letters of credit (collectively, "LETTERS OF CREDIT") for account of the Company or any of its Subsidiaries (as specified by the Company), PROVIDED that in no event shall the aggregate amount of all Letter of Credit Liabilities exceed the lesser of (i) $15,000,000 and (ii) together with the aggregate principal amount of the Revolving Credit Loans, the aggregate amount of the Revolving Credit Commitments as in effect from time to time. The following additional provisions shall apply to Letters of Credit: (a) The Company shall give the Agent at least three Business Days' irrevocable prior notice (effective upon receipt) specifying the Business Day (which shall be no later than 30 days preceding the Revolving Credit Commitment Termination Date) each Letter of Credit is to be issued and the account party or parties therefor and describing in reasonable detail the proposed terms of such Letter of Credit (including the beneficiary thereof) and the nature of the transactions or obligations proposed to be supported thereby (including whether such Letter of Credit is to be a commercial letter of credit or a standby letter of credit). Upon receipt of any such notice, the Agent shall advise the Letter of Credit Issuer of the contents thereof. (b) On each day during the period commencing with the issuance by the Letter of Credit Issuer of any Letter of Credit and until such Letter of Credit shall have expired or been terminated, the Revolving Credit Commitment of each Lender shall be deemed to be utilized for all purposes of this Agreement in an amount equal to such Lender's Revolving Credit Commitment Percentage of the then undrawn face amount of such Letter of Credit. Each Revolving Credit Lender (other than the Letter of Credit Issuer) agrees that, upon the issuance of any Letter of Credit hereunder, it shall automatically acquire a participation in the Letter of Credit Issuer's liability under such Letter of Credit in an amount equal to such Lender's Revolving Credit Commitment Percentage of such liability, and each Revolving Credit Lender (other than the Letter of Credit Issuer) thereby shall absolutely, unconditionally and irrevocably assume, as primary obligor and not as surety, and shall be unconditionally obligated to the Letter of Credit Issuer to pay and discharge when due, its Revolving Credit Commitment Percentage of the Letter of Credit Issuer's liability under such Letter of Credit. (c) Upon receipt from the beneficiary of any Letter of Credit of any demand for payment under such Letter of Credit, the Letter of Credit Issuer shall promptly notify the Company (through the Agent) of the amount to be paid by the Letter of Credit Issuer as a result of such demand and the date on which payment is to be made by the Letter of Credit Issuer to such beneficiary in respect of such demand. Notwithstanding the identity of the account party of any Letter of Credit, the Company hereby unconditionally agrees to pay and reimburse the Agent for account of the Letter of Credit Issuer for the amount of each demand for payment under such Letter of Credit at or prior to the date on which payment is to be made by the Letter of Credit Issuer to the beneficiary thereunder, without presentment, demand, protest or other formalities of any kind. (d) Forthwith upon its receipt of a notice referred to in clause (c) of this Section 2.10, the Company shall advise the Agent whether or not the Company intends to borrow hereunder to finance its obligation to reimburse the Letter of Credit Issuer for the amount of the related demand for payment and, if it does, submit a notice of such borrowing as provided in Section 4.05 hereof. In the event that the Company fails to so advise the Agent, or if the Company fails to reimburse the Letter of Credit Issuer for a payment under a Letter of Credit by the date of such payment, the Agent shall give each Revolving Credit Lender prompt notice of the amount of the demand for payment, specifying such Lender's Revolving Credit Commitment Percentage of the amount of the related demand for payment. (e) Each Revolving Credit Lender (other than the Letter of Credit Issuer) shall pay to the Agent for account of the Letter of Credit Issuer at the Principal Office in Dollars and in immediately available funds, the amount of such Lender's Revolving Credit Commitment Percentage of any payment under a Letter of Credit upon notice by the Letter of Credit Issuer (through the Agent) to such Lender requesting such payment and specifying such amount. Each such Revolving Credit Lender's obligation to make such payment to the Agent for account of the Letter of Credit Issuer under this clause (e), and the Letter of Credit Issuer's right to receive the same, shall be absolute and unconditional and shall not be affected by any circumstance whatsoever, including, without limitation, the failure of any other Lender to make its payment under this clause (e), the financial condition of the Company (or any other account party), the existence of any Default or the termination of the Revolving Credit Commitments. Each such payment to the Letter of Credit Issuer shall be made without any offset, abatement, withholding or reduction whatsoever. If any Lender shall default in its obligation to make any such payment to the Agent for account of the Letter of Credit Issuer, for so long as such default shall continue the Agent may at the request of the Letter of Credit Issuer withhold from any payments received by the Agent under this Agreement or any Note for account of such Lender the amount so in default and, to the extent so withheld, pay the same to the Letter of Credit Issuer in satisfaction of such defaulted obligation. (f) Upon the making of each payment by a Revolving Credit Lender to the Letter of Credit Issuer pursuant to clause (e) above in respect of any Letter of Credit, such Lender shall, automatically and without any further action on the part of the Agent, the Letter of Credit Issuer or such Lender, acquire (i) a participation in an amount equal to such payment in the Reimbursement Obligation owing to the Letter of Credit by the Company hereunder and under the Letter of Credit Documents relating to such Letter of Credit and (ii) a participation in a percentage equal to such Lender's Revolving Credit Commitment Percentage in any interest or other amounts payable by the Company hereunder and under such Letter of Credit Documents in respect of such Reimbursement Obligation (other than the commissions, charges, costs and expenses payable to the Letter of Credit pursuant to clause (g) of this Section 2.10). Upon receipt by the Letter of Credit Issuer from or for account of the Company of any payment in respect of any Reimbursement Obligation or any such interest or other amount (including by way of setoff or application of proceeds of any collateral security) the Letter of Credit Issuer shall promptly pay to the Agent for account of each Lender entitled thereto, such Lender's Revolving Credit Commitment Percentage of such payment, each such payment by the Letter of Credit Issuer to be made in the same money and funds in which received by the Letter of Credit Issuer. In the event any payment received by the Letter of Credit Issuer and so paid to the Revolving Credit Lenders hereunder is rescinded or must otherwise be returned by the Letter of Credit Issuer, each Revolving Credit Lender shall, upon the request of the Letter of Credit Issuer (through the Agent), repay to the Letter of Credit Issuer (through the Agent) the amount of such payment paid to such Lender, with interest at the rate specified in clause (j) of this Section 2.10. (g) The Company shall pay to the Agent for account of each Revolving Credit Lender (ratably in accordance with their respective Revolving Credit Commitment Percentages) a letter of credit fee in respect of each Letter of Credit in an amount equal to the Applicable Margin for Revolving Credit Loans that are Eurodollar Loans per annum of the daily average undrawn face amount of such Letter of Credit for the period from and including the date of issuance of such Letter of Credit (i) in the case of a Letter of Credit that expires in accordance with its terms, to and including such expiration date and (ii) in the case of a Letter of Credit that is drawn in full or is otherwise terminated other than on the stated expiration date of such Letter of Credit, to but excluding the date such Letter of Credit is drawn in full or is terminated (such fee to be non-refundable, to be paid in arrears on each Quarterly Date and on the Revolving Credit Commitment Termination Date and to be calculated for any day after giving effect to any payments made under such Letter of Credit on such day). In addition, the Company shall pay to the Agent for account of the Letter of Credit Issuer a fronting fee in respect of each Letter of Credit in an amount equal to 1/4 of 1% per annum of the daily average undrawn face amount of such Letter of Credit for the period from and including the date of issuance of such Letter of Credit (i) in the case of a Letter of Credit that expires in accordance with its terms, to and including such expiration date and (ii) in the case of a Letter of Credit that is drawn in full or is otherwise terminated other than on the stated expiration date of such Letter of Credit, to but excluding the date such Letter of Credit is drawn in full or is terminated (such fee to be non-refundable, to be paid in arrears on each Quarterly Date and on the Revolving Credit Commitment Termination Date and to be calculated for any day after giving effect to any payments made under such Letter of Credit on such day) plus all commissions, charges, costs and expenses in the amounts customarily charged by the Letter of Credit Issuer from time to time in like circumstances with respect to the issuance of each Letter of Credit and drawings and other transactions relating thereto. (h) Promptly following the end of each calendar month, the Letter of Credit Issuer shall deliver (through the Agent) to each Revolving Credit Lender and the Company a notice describing the aggregate amount of all Letters of Credit outstanding at the end of such month. Upon the request of any Lender from time to time, the Letter of Credit Issuer shall deliver any other information reasonably requested by such Lender with respect to each Letter of Credit then outstanding. (i) The issuance by the Letter of Credit Issuer of each Letter of Credit shall, in addition to the conditions precedent set forth in Section 7 hereof, be subject to the conditions precedent that (i) such Letter of Credit shall be in such form, contain such terms and support such transactions as shall be satisfactory to the Letter of Credit Issuer consistent with its then current practices and procedures with respect to letters of credit of the same type and (ii) the Company shall have executed and delivered such applications, agreements and other instruments relating to such Letter of Credit as the Letter of Credit Issuer shall have reasonably requested consistent with its then current practices and procedures with respect to letters of credit of the same type, PROVIDED that in the event of any conflict between any such application, agreement or other instrument and the provisions of this Agreement or any Security Document, the provisions of this Agreement and the Security Documents shall control. (j) To the extent that any Revolving Credit Lender shall fail to pay any amount required to be paid pursuant to clause (e) or (f) of this Section 2.10 on the due date therefor, such Lender shall pay interest to the Letter of Credit Issuer (through the Agent) on such amount from and including such due date to but excluding the date such payment is made, PROVIDED that if such Lender shall fail to make such payment to the Letter of Credit Issuer within three Business Days of such due date, then, retroactively to the due date, such Lender shall be obligated to pay interest on such amount at the Post-Default Rate. (k) The issuance by the Letter of Credit Issuer of any modification or supplement to any Letter of Credit hereunder shall be subject to the same conditions applicable under this Section 2.10 to the issuance of new Letters of Credit, and no such modification or supplement shall be issued hereunder unless either (i) the respective Letter of Credit affected thereby would have complied with such conditions had it originally been issued hereunder in such modified or supplemented form or (ii) each Revolving Credit Lender shall have consented thereto. The Company hereby indemnifies and holds harmless each Revolving Credit Lender and the Agent from and against any and all claims and damages, losses, liabilities, costs or expenses that such Lender or the Agent may incur (or that may be claimed against such Lender or the Agent by any Person whatsoever) by reason of or in connection with the execution and delivery or transfer of or payment or refusal to pay by the Letter of Credit Issuer under any Letter of Credit; PROVIDED that the Company shall not be required to indemnify any Lender or the Agent for any claims, damages, losses, liabilities, costs or expenses to the extent, but only to the extent, caused by (x) the willful misconduct or gross negligence of the Letter of Credit Issuer in determining whether a request presented under any Letter of Credit complied with the terms of such Letter of Credit or (y) in the case of the Letter of Credit Issuer, such Lender's failure to pay under any Letter of Credit after the presentation to it of a request strictly complying with the terms and conditions of such Letter of Credit. Nothing in this Section 2.10 is intended to limit the other obligations of the Company, any Lender or the Agent under this Agreement. Section 3. PAYMENTS OF PRINCIPAL AND INTEREST. 3.01 REPAYMENT OF LOANS. (a) The Company hereby promises to pay to the Agent for the account of each Revolving Credit Lender: (i) on each Revolving Credit Commitment Reduction Date, an amount equal to the excess (if any) of (x) the entire outstanding principal of such Lender's Revolving Credit Loans outstanding plus such Lender's Letter of Credit Liabilities over (y) the Revolving Credit Commitment of such Lender as reduced pursuant to clause (i) of Section 2.03(a) hereof on such Revolving Credit Commitment Reduction Date, and (ii) the entire outstanding principal of such Lender's Revolving Credit Loans outstanding, and each Revolving Credit Loan shall mature, on the Revolving Credit Commitment Termination Date. (b) The Lessor hereby agrees to pay to the Agent for the account of each Synthetic Lease Loan Lender the entire outstanding principal amount of such Synthetic Lease Loan Lender's Synthetic Lease Loans, and each Synthetic Lease Loan shall mature, on the Synthetic Lease Loan Principal Payment Date. 3.02 INTEREST. (a) The Company hereby promises to pay to the Agent for account of each Lender interest on the unpaid principal amount of each Revolving Credit Loan made by such Lender for the period from and including the date of such Revolving Credit Loan to but excluding the date such Revolving Credit Loan shall be paid in full, at the following rates per annum: (i) during such periods as such Loan is a Base Rate Loan, the Base Rate (as in effect from time to time) PLUS the Applicable Margin; (ii) during such periods as such Loan is a Eurodollar Loan, for each Interest Period relating thereto, the Eurodollar Rate for such Loan for such Interest Period PLUS the Applicable Margin. Notwithstanding the foregoing, the Company hereby promises to pay to the Agent for account of each Lender interest at the applicable Post-Default Rate on any principal of any Revolving Credit Loan made by such Lender, on any Reimbursement Obligation held by such Lender, and on any other amount payable by the Company hereunder or under the Notes held by such Lender to or for account of such Lender, that shall not be paid in full when due (whether at stated maturity, by acceleration, by mandatory prepayment or otherwise), for the period from and including the due date thereof to but excluding the date the same is paid in full. Accrued interest on each Loan shall be payable (i) in the case of a Base Rate Loan, monthly on the Monthly Dates, (ii) in the case of a Eurodollar Loan, on the last day of each Interest Period therefor and, if such Interest Period is longer than three months, at three-month intervals following the first day of such Interest Period, and (iii) in the case of any Loan, upon the payment or prepayment thereof or the Conversion of such Loan to a Loan of another Type (but only on the principal amount so paid, prepaid or Converted), except that interest payable at the Post-Default Rate shall be payable from time to time on demand. Promptly after the determination of any interest rate provided for herein or any change therein, the Agent shall give notice thereof to the Lenders to which such interest is payable and to the Company. (b) The Lessor hereby promises to pay to the Agent for account of each Synthetic Lease Loan Lender interest on the unpaid principal amount of each Synthetic Lease Loan made by such Lender for the period from and including the date of such Loan to but excluding the date such Loan shall be paid in full, at the following rates per annum: (i) during such periods as such Loan is a Base Rate Loan, the Base Rate (as in effect from time to time) PLUS the Applicable Margin; (ii) during such periods as such Loan is a Eurodollar Loan, for each Interest Period relating thereto, the Eurodollar Rate for such Loan for such Interest Period PLUS the Applicable Margin. Notwithstanding the foregoing, the Lessor hereby promises to pay to the Agent for account of each Synthetic Lease Loan Lender interest at the applicable Post-Default Rate on any principal of any Synthetic Lease Loan made by such Lender and on any other amount payable by the Lessor hereunder or under the Notes held by such Lender to or for account of such Lender, that shall not be paid in full when due (whether at stated maturity, by acceleration, by mandatory prepayment or otherwise), for the period from and including the due date thereof to but excluding the date the same is paid in full. Accrued interest on each Synthetic Lease Loan shall be payable (i) in the case of a Base Rate Loan, monthly on the Monthly Dates, (ii) in the case of a Eurodollar Loan, on the last day of each Interest Period therefor and, if such Interest Period is longer than three months, at three-month intervals following the first day of such Interest Period, and (iii) in the case of any Loan, upon the payment or prepayment thereof or the Conversion of such Loan to a Loan of another Type (but only on the principal amount so paid, prepaid or Converted), except that interest payable at the Post-Default Rate shall be payable from time to time on demand. Promptly after the determination of any interest rate provided for herein or any change therein, the Agent shall give notice thereof to the Lenders to which such interest is payable and to the Lessor. (c) Interest accruing on each Synthetic Lease Loan with respect to any Leased Property during the Construction Term of such Leased Property, and for the period from the Completion Date for such Leased Property to the 120th day after such Completion Date, shall, subject to the limitations set forth in Section 2.3(c) of the Master Agreement, be added to the principal amount of such Synthetic Lease Loan from time to time. Following the date each Synthetic Lease Loan is made (or in the case of Synthetic Lease Loans with respect to a Construction Land Interest, the Construction Term Expiration Date), interest on such Loan shall be payable in arrears as provided in Section 3.02(b) hereof. Section 4. PAYMENTS; PRO RATA TREATMENT; COMPUTATIONS; ETC. 4.01 PAYMENTS. (a) Except to the extent otherwise provided herein, all payments of principal, interest, Reimbursement Obligations and other amounts to be made by the Company or the Lessor under this Agreement and the Notes, and, except to the extent otherwise provided therein, all payments to be made by the Obligors under any other Basic Document, shall be made in Dollars, in immediately available funds, without deduction, set-off or counterclaim, to the Agent at account number 9301035763 (ABA No. 021000021) maintained by the Agent with The Chase Manhattan Bank, not later than 2:00 p.m. New York time on the date on which such payment shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day). (b) Any Lender for whose account any such payment is to be made may (but shall not be obligated to) debit the amount of any such payment that is not made by such time to any ordinary deposit account of the Company with such Lender (with notice to the Company and the Agent). (c)The Company shall, at the time of making each payment under this Agreement or any Note for account of any Lender, specify to the Agent (which shall so notify the intended recipient(s) thereof) the Loans, Reimbursement Obligations or other amounts payable by the Company or the Lessor hereunder to which such payment is to be applied (and in the event that the Company fails to so specify, or if an Event of Default has occurred and is continuing, the Agent may distribute such payment to the Lenders for application in such manner as it or the Majority Lenders, subject to Section 4.02 hereof, may determine to be appropriate). (d) Each payment received by the Agent under this Agreement or any Note for account of any Lender shall be paid by the Agent promptly to such Lender, in immediately available funds, for account of such Lender's Applicable Lending Office for the Loan or other obligation in respect of which such payment is made. (e) If the due date of any payment under this Agreement or any Note would otherwise fall on a day that is not a Business Day, such date shall be extended to the next succeeding Business Day, and interest shall be payable for any principal so extended for the period of such extension. 4.02 PRO RATA TREATMENT. Except to the extent otherwise provided herein: (a) each borrowing of Loans of either Class from the Lenders under Section 2.01 hereof shall be made from the Lenders holding Commitments of such Class, and each termination or reduction of the amount of the Revolving Credit Commitments under Section 2.03 hereof, shall be applied to the respective Commitments of such Class of the Lenders ratably in accordance with the amounts of their respective Commitments of such Class, (b) each payment of a commitment fee under Section 2.04 hereof in respect of Commitments of either Class shall be made for account of the Lenders pro rata according to the amounts of their respective Commitments of such Class; (c) the making, Conversion and Continuation of Loans of a particular Type of either Class (other than Conversions provided for by Section 5.04 hereof) shall be made pro rata among the Lenders according to the amounts of their respective Commitments of such Class (in the case of making of Loans) or their respective Loans of such Class (in the case of Conversions and Continuations of Loans) and the then current Interest Period for each Loan of such Class and such Type shall be coterminous; (d) each payment or prepayment of principal of Loans of either Class shall be made for account of the Lenders pro rata in accordance with the respective unpaid principal amounts of the Loans of such Class held by them; and (e) each payment of interest on Loans of either Class shall be made for the account of the Lenders pro rata in accordance with the amounts of interest on Loans of such Class then due and payable to the Lenders. 4.03 COMPUTATIONS. Except as otherwise provided herein, interest on Loans and Reimbursement Obligations and commitment fees shall be computed on the basis of a year of 360 days and actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable. 4.04 MINIMUM AMOUNTS. Except for mandatory prepayments made pursuant to Section 2.09 hereof and Conversions or prepayments made pursuant to Section 5.04 hereof, each borrowing, Conversion and partial prepayment of principal of Loans shall be in an aggregate amount at least equal to $25,000 (or $250,000 in the case of Eurodollar Loans) or a larger multiple of $25,000 (borrowings, Conversions or prepayments of or into Loans of different Types or, in the case of Eurodollar Loans, having different Interest Periods at the same time hereunder to be deemed separate borrowings, Conversions and prepayments for purposes of the foregoing, one for each Type or Interest Period). 4.05 CERTAIN NOTICES. Notices by the Company to the Agent of terminations or reductions of the Commitments, of borrowings, Conversions, Continuations and optional prepayments of Loans, of Types of Loans and of the duration of Interest Periods shall be irrevocable and shall be effective only if received by the Agent not later than 11:00 a.m. New York time on the number of Business Days prior to the date of the relevant termination, reduction, borrowing, Conversion, Continuation or prepayment or the first day of such Interest Period specified below: NUMBER OF BUSINESS DAYS NOTICE PRIOR NOTICE ------------- Termination or reduction of Commitments 3 Borrowing or prepayment of, or Conversions into, same day Base Rate Loans Borrowing or prepayment of, Conversions into, 3 Continuations as, or duration of Interest Period for, Eurodollar Loans Each such notice of termination or reduction shall specify the amount of the Commitments to be terminated or reduced. Each such notice of borrowing, Conversion, Continuation or optional prepayment shall specify the amount (subject to Section 4.04 hereof), Type and Class of each Loan to be borrowed, Converted, Continued or prepaid (and, in the case of a Conversion, the Type of Loan to result from such Conversion) and the date of borrowing, Conversion, Continuation or optional prepayment (which shall be a Business Day). Each such notice of the duration of an Interest Period shall specify the Loans to which such Interest Period is to relate. The Agent shall promptly notify the Lenders of the contents of each such notice. In the event that the Company fails to select the Type of Loan, or the duration of any Interest Period for any Eurodollar Loan, within the time period and otherwise as provided in this Section 4.05, such Loan (if outstanding as a Eurodollar Loan) will be automatically Converted into a Base Rate Loan on the last day of the then current Interest Period for such Loan or (if outstanding as a Base Rate Loan) will remain as, or (if not then outstanding) will be made as, a Base Rate Loan. 4.06 NON-RECEIPT OF FUNDS BY THE AGENT. Unless the Agent shall have been notified by a Lender or the Company (the "PAYOR") prior to the date on which the Payor is to make payment to the Agent of (in the case of a Lender) the proceeds of a Loan to be made by such Lender hereunder or (in the case of the Company) a payment to the Agent for account of one or more of the Lenders hereunder (such payment being herein called the "REQUIRED PAYMENT"), which notice shall be effective upon receipt, that the Payor does not intend to make the Required Payment to the Agent, the Agent may assume that the Required Payment has been made and may, in reliance upon such assumption (but shall not be required to), make the amount thereof available to the intended recipient(s) on such date; and, if the Payor has not in fact made the Required Payment to the Agent, the recipient(s) of such payment shall, on demand, repay to the Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date (the "ADVANCE DATE") such amount was so made available by the Agent until the date the Agent recovers such amount at a rate per annum equal to the Federal Funds Rate for such day and, if such recipient(s) shall fail promptly to make such payment, the Agent shall be entitled to recover such amount, on demand, from the Payor, together with interest as aforesaid, PROVIDED that if neither the recipient(s) nor the Payor shall return the Required Payment to the Agent within three Business Days of the Advance Date, then, retroactively to the Advance Date, the Payor and the recipient(s) shall each be obligated to pay interest on the Required Payment as follows: (i) if the Required Payment shall represent a payment to be made by the Company to the Lenders, the Company and the recipient(s) shall each be obligated retroactively to the Advance Date to pay interest in respect of the Required Payment at the Post-Default Rate (and, in case the recipient(s) shall return the Required Payment to the Agent, without limiting the obligation of the Company under Section 3.02 hereof to pay interest to such recipient(s) at the Post-Default Rate in respect of the Required Payment) and (ii) if the Required Payment shall represent proceeds of a Loan to be made by the Lenders to the Company, the Payor and the Company shall each be obligated retroactively to the Advance Date to pay interest in respect of the Required Payment at the rate of interest provided for such Required Payment pursuant to Section 3.02 hereof (and, in case the Company shall return the Required Payment to the Agent, without limiting any claim the Company may have against the Payor in respect of the Required Payment). 4.07 SHARING OF PAYMENTS, ETC. (a) The Company agrees that, in addition to (and without limitation of) any right of set-off, banker's lien or counterclaim a Lender may otherwise have, each Lender shall be entitled, at its option, to offset balances held by it for account of the Company at any of its offices, in Dollars or in any other currency, against any principal of or interest on any of such Lender's Loans, Reimbursement Obligations or any other amount payable to such Lender hereunder, that is not paid when due (regardless of whether such balances are then due to the Company), in which case it shall promptly notify the Company and the Agent thereof, PROVIDED that such Lender's failure to give such notice shall not affect the validity thereof. (b) If any Lender shall obtain from any Obligor or the Lessor payment of any principal of or interest on any Loan of either Class or Letter of Credit Liability owing to it or payment of any other amount under this Agreement or any other Basic Document through the exercise of any right of set-off, banker's lien or counterclaim or similar right or otherwise (other than from the Agent as provided herein), and, as a result of such payment, such Lender shall have received a greater percentage of the principal of or interest on the Loans of such Class, Letter of Credit Liabilities or such other amounts then due hereunder or thereunder by such Obligor or the Lessor to such Lender than the percentage received by any other Lender, it shall promptly purchase from such other Lenders participations in (or, if and to the extent specified by such Lender, direct interests in) the Loans of such Class, Letter of Credit Liabilities or such other amounts, respectively, owing to such other Lenders (or in interest due thereon, as the case may be) in such amounts, and make such other adjustments from time to time as shall be equitable, to the end that all the Lenders shall share the benefit of such excess payment (net of any expenses that may be incurred by such Lender in obtaining or preserving such excess payment) pro rata in accordance with the unpaid principal of and/or interest on the Loans of such Class, Letter of Credit Liabilities or such other amounts, respectively, owing to each of the Lenders. To such end all the Lenders shall make appropriate adjustments among themselves (by the resale of participations sold or otherwise) if such payment is rescinded or must otherwise be restored. (c) The Company agrees that any Lender so purchasing such a participation (or direct interest) may exercise all rights of set-off, banker's lien, counterclaim or similar rights with respect to such participation as fully as if such Lender were a direct holder of Loans or other amounts (as the case may be) owing to such Lender in the amount of such participation. (d) Nothing contained herein shall require any Lender to exercise any such right or shall affect the right of any Lender to exercise, and retain the benefits of exercising, any such right with respect to any other indebtedness or obligation of any Obligor. If, under any applicable bankruptcy, insolvency or other similar law, any Lender receives a secured claim in lieu of a set-off to which this Section 4.07 applies, such Lender shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Lenders entitled under this Section 4.07 to share in the benefits of any recovery on such secured claim. Section 5. YIELD PROTECTION, ETC. 5.01 ADDITIONAL COSTS. (a) The Company shall pay directly to each Lender from time to time such amounts as such Lender may determine to be necessary to compensate such Lender for any costs actually incurred by such Lender that such Lender determines are attributable to its making or maintaining of any Eurodollar Loans or its obligation to make any Eurodollar Loans hereunder, or any reduction in any amount receivable by such Lender hereunder in respect of any of such Loans or such obligation (such increases in costs and reductions in amounts receivable being herein called "ADDITIONAL COSTS"), resulting from any Regulatory Change that: (i) shall subject any Lender (or its Applicable Lending Office for any of such Loans) to any tax, duty or other charge in respect of such Loans or its Notes or changes the basis of taxation of any amounts payable to such Lender under this Agreement or its Notes in respect of any of such Loans (excluding (A) franchise taxes imposed on it or (B) changes in the rate of tax on the overall net income of such Lender or of such Applicable Lending Office, in each case, by the jurisdiction in which such Lender has its principal office or such Applicable Lending Office); or (ii) imposes or modifies any reserve, special deposit or similar requirements (other than, in the case of any Lender for any period as to which the Company is required to pay any amount under paragraph (e) below, the reserves and "Eurocurrency liabilities" under Regulation D referred to therein) relating to any extensions of credit or other assets of, or any deposits with or other liabilities of, such Lender (including, without limitation, any of such Loans or any deposits referred to in the definition of "Eurodollar Rate" in Section 1.01 hereof), or any commitment of such Lender (including, without limitation, the Commitments of such Lender hereunder); or (iii) imposes any other condition affecting this Agreement or its Notes (or any of such extensions of credit or liabilities) or its Commitments. If any Lender requests compensation from the Company under this Section 5.01(a), the Company may, by notice to such Lender (with a copy to the Agent), suspend the obligation of such Lender thereafter to make or Continue Eurodollar Loans, or to Convert Base Rate Loans into Eurodollar Loans, until the Regulatory Change giving rise to such request ceases to be in effect (in which case the provisions of Section 5.04 hereof shall be applicable), PROVIDED that such suspension shall not affect the right of such Lender to receive the compensation so requested. (b) Without limiting the effect of the provisions of paragraph (a) of this Section 5.01, in the event that, by reason of any Regulatory Change, any Lender either (i) incurs Additional Costs based on or measured by the excess above a specified level of the amount of a category of deposits or other liabilities of such Lender that includes deposits by reference to which the interest rate on Eurodollar Loans is determined as provided in this Agreement or a category of extensions of credit or other assets of such Lender that includes Eurodollar Loans or (ii) becomes subject to restrictions on the amount of such a category of liabilities or assets that it may hold, then, if such Lender so elects by notice to the Company (with a copy to the Agent), the obligation of such Lender to make or Continue, or to Convert Base Rate Loans into, Eurodollar Loans hereunder shall be suspended until such Regulatory Change ceases to be in effect (in which case the provisions of Section 5.04 hereof shall be applicable). (c) Without limiting the effect of the foregoing provisions of this Section 5.01 (but without duplication), the Company shall pay directly to each Lender from time to time on request such amounts as such Lender may determine to be necessary to compensate such Lender (or, without duplication, the bank holding company of which such Lender is a subsidiary) for any costs actually incurred by such Lender that it determines are attributable to the maintenance by such Lender (or any Applicable Lending Office or such bank holding company), pursuant to any law or regulation or any interpretation, directive or request (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) of any court or governmental or monetary authority (i) following any Regulatory Change or (ii) implementing any risk-based capital guideline or other requirement (whether or not having the force of law and whether or not the failure to comply therewith would be unlawful) heretofore or hereafter issued by any government or governmental or supervisory authority implementing at the national level the Basle Accord (including, without limitation, the Final Risk-Based Capital Guidelines of the Board of Governors of the Federal Reserve System (12 C.F.R. Part 208, Appendix A; 12 C.F.R. Part 225, Appendix A) and the Final Risk-Based Capital Guidelines of the Office of the Comptroller of the Currency (12 C.F.R. Part 3, Appendix A)), of capital in respect of its Commitments or Loans (such compensation to include, without limitation, an amount equal to any reduction of the rate of return on assets or equity of such Lender (or any Applicable Lending Office or such bank holding company) to a level below that which such Lender (or any Applicable Lending Office or such bank holding company) could have achieved but for such law, regulation, interpretation, directive or request). For purposes of this Section 5.01(c) and Section 5.06 hereof, "BASLE ACCORD" shall mean the proposals for risk-based capital framework described by the Basle Committee on Banking Regulations and Supervisory Practices in its paper entitled "International Convergence of Capital Measurement and Capital Standards" dated July 1988, as amended, modified and supplemented and in effect from time to time or any replacement thereof. (d) Each Lender shall notify the Company of any event occurring after the date of this Agreement entitling such Lender to compensation under paragraph (a) or (c) of this Section 5.01 as promptly as practicable, but in any event within 45 days, after such Lender obtains actual knowledge thereof; PROVIDED that (i) if any Lender fails to give such notice within 45 days after it obtains actual knowledge of such an event, such Lender shall, with respect to compensation payable pursuant to this Section 5.01 in respect of any costs resulting from such event, only be entitled to payment under this Section 5.01 for costs incurred from and after the date 45 days prior to the date that such Lender does give such notice and (ii) each Lender will designate a different Applicable Lending Office for the Loans of such Lender affected by such event if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the sole opinion of such Lender, be disadvantageous to such Lender, except that such Lender shall have no obligation to designate an Applicable Lending Office located in the United States of America. Each Lender will furnish to the Company a certificate setting forth the basis and amount of each request by such Lender for compensation under paragraph (a) or (c) of this Section 5.01. Determinations and allocations by any Lender for purposes of this Section 5.01 of the effect of any Regulatory Change pursuant to paragraph (a) or (b) of this Section 5.01, or of the effect of capital maintained pursuant to paragraph (c) of this Section 5.01, on its costs or rate of return of maintaining Loans or its obligation to make Loans, or on amounts receivable by it in respect of Loans, and of the amounts required to compensate such Lender under this Section 5.01, shall be conclusive, absent demonstrable error, PROVIDED that such determinations and allocations are made and attributed on a reasonable basis. (e) Without limiting the effect of the foregoing, the Company shall pay to each Lender on the last day of each Interest Period so long as such Lender is maintaining reserves against "Eurocurrency liabilities" under Regulation D (or, unless the provisions of paragraph (b) above are applicable, so long as such Lender is, by reason of any Regulatory Change, maintaining reserves against any other category of liabilities which includes deposits by reference to which the interest rate on Eurodollar Loans is determined as provided in this Agreement or against any category of extensions of credit or other assets of such Lender (which includes any Eurodollar Loans)) an additional amount (determined by such Lender and notified to the Company through the Agent) equal to the product of the following for each Eurodollar Loan for each day during such Interest Period: (i) the principal amount of such Eurodollar Loan outstanding on such day; and (ii) the remainder of (x) the fraction the numerator of which is the rate (expressed as a decimal) at which interest accrues on such Eurodollar Loan for such Interest Period as provided in this Agreement (less the Applicable Margin) and the denominator of which is one MINUS the effective rate (expressed as a decimal) at which such reserve requirements are imposed on such Lender on such day MINUS (y) such numerator; and (iii) 1/360. (f) Notwithstanding anything in this Section 5.01 to the contrary, to the extent that any Lender does not charge all of its customers who are similarly situated to the Company in respect of any Additional Costs or other cost or compensation referred to this Section 5.01, such Lender shall not charge the Company for such Additional Cost or other cost or compensation. 5.02 LIMITATION ON TYPES OF LOANS. Anything herein to the contrary notwithstanding, if, on or prior to the determination of any Eurodollar Rate for any Interest Period: (a) the Agent determines, which determination shall be conclusive, that quotations of interest rates for the relevant deposits referred to in the definition of "Eurodollar Rate" in Section 1.01 hereof are not being provided in the relevant amounts or for the relevant maturities for purposes of determining rates of interest for Eurodollar Loans as provided herein; or (b) if the Majority Lenders determine, which determination shall be conclusive, and notify (or notifies, as the case may be) the Agent that the relevant rates of interest referred to in the definition of "Eurodollar Rate" in Section 1.01 hereof upon the basis of which the rate of interest for Eurodollar Loans for such Interest Period is to be determined do not adequately cover the cost to such Lenders of making or maintaining Eurodollar Loans for such Interest Period; then the Agent shall give the Company and each Lender prompt notice thereof and, so long as such condition remains in effect, the Lenders shall be under no obligation to make additional Eurodollar Loans, to Continue Eurodollar Loans or to Convert Base Rate Loans into Eurodollar Loans, and the Company shall, on the last day(s) of the then current Interest Period(s) for the outstanding Eurodollar Loans, either prepay such Loans or Convert such Loans into Base Rate Loans in accordance with Section 2.08 hereof. 5.03 ILLEGALITY. Notwithstanding any other provision of this Agreement, in the event that it becomes unlawful for any Lender or its Applicable Lending Office to honor its obligation to make or maintain Eurodollar Loans hereunder, then such Lender shall promptly notify the Company thereof (with a copy to the Agent) and such Lender's obligation to make or Continue, or to Convert Base Rate Loans into, Eurodollar Loans shall be suspended until such time as such Lender may again make and maintain Eurodollar Loans (in which case the provisions of Section 5.04 hereof shall be applicable). 5.04 TREATMENT OF EURODOLLAR LOANS. If the obligation of any Lender to make Eurodollar Loans or to Continue, or to Convert Base Rate Loans into, Eurodollar Loans shall be suspended pursuant to Section 5.01 or 5.03 hereof, such Lender's Eurodollar Loans shall be automatically Converted into Base Rate Loans on the last day(s) of the then current Interest Period(s) for Eurodollar Loans (or, in the case of a Conversion required by Section 5.01(b) or 5.03 hereof, on such earlier date as such Lender may specify to the Company with a copy to the Agent) and, unless and until such Lender gives notice as provided below that the circumstances specified in Section 5.01 or 5.03 hereof that gave rise to such Conversion no longer exist: (a) to the extent that such Lender's Eurodollar Loans have been so Converted, all payments and prepayments of principal that would otherwise be applied to such Lender's Eurodollar Loans shall be applied instead to its Base Rate Loans; and (b) all Loans that would otherwise be made or Continued by such Lender as Eurodollar Loans shall be made or Continued instead as Base Rate Loans, and all Loans of such Lender that would otherwise be Converted into Eurodollar Loans shall be Converted instead into (or shall remain as) Base Rate Loans. If such Lender gives notice to the Company with a copy to the Agent that the circumstances specified in Section 5.01 or 5.03 hereof that gave rise to the Conversion of such Lender's Eurodollar Loans pursuant to this Section 5.04 no longer exist (which such Lender agrees to do promptly upon such circumstances ceasing to exist) at a time when Eurodollar Loans made by other Lenders are outstanding, such Lender's Base Rate Loans shall be automatically Converted, on the first day(s) of the next succeeding Interest Period(s) for such outstanding Eurodollar Loans, to the extent necessary so that, after giving effect thereto, all Loans held by the Lenders holding Eurodollar Loans and by such Lender are held pro rata (as to principal amounts, Types and Interest Periods) in accordance with their respective Commitments. 5.05 COMPENSATION. The Company shall pay to the Agent for account of each Lender, upon the request of such Lender through the Agent, such amount or amounts as shall be sufficient (in the reasonable opinion of such Lender) to compensate it for any loss, cost or expense actually incurred that such Lender determines is attributable to: (a) any payment, mandatory or optional prepayment or Conversion of a Eurodollar Loan made by such Lender for any reason (including, without limitation, the acceleration of the Loans pursuant to Section 10 hereof) on a date other than the last day of the Interest Period for such Loan; or (b) any failure by the Company for any reason (including, without limitation, the failure of any of the conditions precedent specified in Section 7 hereof to be satisfied) to borrow a Eurodollar Loan from such Lender on the date for such borrowing specified in the relevant notice of borrowing given pursuant to Section 2.02 hereof. Without limiting the effect of the preceding sentence, such compensation shall include an amount equal to the excess, if any, of (i) the amount of interest that otherwise would have accrued on the principal amount so paid, prepaid, Converted or not borrowed (other than the portion thereof consisting of the Applicable Margin) for the period from the date of such payment, prepayment, Conversion or failure to borrow to the last day of the then current Interest Period for such Loan (or, in the case of a failure to borrow, the Interest Period for such Loan that would have commenced on the date specified for such borrowing) at the applicable rate of interest for such Loan provided for herein over (ii) the amount of interest that otherwise would have accrued on such principal amount at a rate per annum equal to the interest component of the amount such Lender would have bid in the London interbank market for Dollar deposits of leading banks in amounts comparable to such principal amount and with maturities comparable to such period (as reasonably determined by such Lender). 5.06 SUBSTITUTION OF LENDERS. In the event that the Company becomes obligated to pay additional amounts to any Lender pursuant to Section 5.01 hereof, then (unless such Lender has theretofore taken steps to remove or cure, and has removed or cured, the conditions creating the cause for such obligation to pay such additional amounts), then the Company may, so long as no Default shall be continuing, within 60 days after the demand by such Lender for such additional amounts, designate another bank which is acceptable to the Agent and the Majority Lenders (such other bank being herein called a "REPLACEMENT LENDER") to purchase all of the Loans of such Lender and all of such Lender's rights and obligations hereunder (without recourse to or warranty by, or expense to, such Lender) for a purchase price equal to the outstanding principal amount of such Lender's Loans plus any accrued but unpaid interest thereon and any accrued but unpaid fees in respect of such Lender's Commitments and any other amounts then payable to such Lender hereunder, and to assume all of the obligations of such Lender hereunder (except for such rights as survive the repayment of the Loans) and, upon such purchase such Lender shall no longer be a party hereto or have any rights hereunder (except for those that survive repayment of the Loans) and shall be released from all of its obligations hereunder, and the Replacement Lender shall succeed to the rights and obligations of such Lender hereunder. 5.07 ADDITIONAL COSTS IN RESPECT OF LETTERS OF CREDIT. Without limiting the obligations of the Company under Section 5.01 hereof (but without duplication), if as a result of any Regulatory Change or any risk-based capital guideline or other requirement heretofore or hereafter issued by any government or governmental or supervisory authority implementing at the national level the Basle Accord there shall be imposed, modified or deemed applicable any tax, reserve, special deposit, capital adequacy or similar requirement against or with respect to or measured by reference to Letters of Credit issued or to be issued hereunder and the result shall be to increase the cost to any Lender or Lenders of issuing (or purchasing participations in) or maintaining its obligation hereunder to issue (or purchase participations in) any Letter of Credit hereunder or reduce any amount receivable by any Lender hereunder in respect of any Letter of Credit (which increases in cost, or reductions in amount receivable, shall be the result of such Lender's or Lenders' reasonable allocation of the aggregate of such increases or reductions resulting from such event), then, upon demand by such Lender or Lenders (through the Agent), the Company shall pay immediately to the Agent for account of such Lender or Lenders, from time to time as specified by such Lender or Lenders (through the Agent), such additional amounts as shall be sufficient to compensate such Lender or Lender (through the Agent) for such increased costs or reductions in amount. A statement as to such increased costs or reductions in amount incurred by any such Lender or Lender, submitted by such Lender or Lenders to the Company shall be conclusive in the absence of manifest error as to the amount thereof. Section 6. GUARANTEE. 6.01 THE GUARANTEE. The Subsidiary Guarantors hereby jointly and severally guarantee to each Lender and the Agent and their respective successors and assigns the prompt payment in full when due (whether at stated maturity, by acceleration or otherwise) of the principal of and interest on the Revolving Credit Loans made by the Revolving Credit Lenders to, and the Notes held by each Revolving Credit Lender of, the Company and all other amounts from time to time owing to the Lenders or the Agent by the Company under this Agreement, the Notes or the Guaranty Agreement and by any Obligor under any of the other Basic Documents, in each case strictly in accordance with the terms thereof (such obligations being herein collectively called the "GUARANTEED OBLIGATIONS"). The Subsidiary Guarantors hereby further jointly and severally agree that if the Company shall fail to pay in full when due (whether at stated maturity, by acceleration or otherwise) any of the Guaranteed Obligations, the Subsidiary Guarantors will promptly pay the same, without any demand or notice whatsoever, and that in the case of any extension of time of payment or renewal of any of the Guaranteed Obligations, the same will be promptly paid in full when due (whether at extended maturity, by acceleration or otherwise) in accordance with the terms of such extension or renewal. 6.02 OBLIGATIONS UNCONDITIONAL. The obligations of the Subsidiary Guarantors under Section 6.01 hereof are absolute and unconditional, joint and several, irrespective of the value, genuineness, validity, regularity or enforceability of the obligations of the Company under this Agreement, the Notes or any other agreement or instrument referred to herein or therein, or any substitution, release or exchange of any other guarantee of or security for any of the Guaranteed Obligations, and, to the fullest extent permitted by applicable law, irrespective of any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor, it being the intent of this Section 6.02 that the obligations of the Subsidiary Guarantors hereunder shall be absolute and unconditional, joint and several, under any and all circumstances. Without limiting the generality of the foregoing, it is agreed that the occurrence of any one or more of the following shall not alter or impair the liability of the Subsidiary Guarantors hereunder which shall remain absolute and unconditional as described above: (i) at any time or from time to time, without notice to the Subsidiary Guarantors, the time for any performance of or compliance with any of the Guaranteed Obligations shall be extended, or such performance or compliance shall be waived; (ii) any of the acts mentioned in any of the provisions of this Agreement or the Notes or any other agreement or instrument referred to herein or therein shall be done or omitted; (iii) the maturity of any of the Guaranteed Obligations shall be accelerated, or any of the Guaranteed Obligations shall be modified, supplemented or amended in any respect, or any right under this Agreement or the Notes or any other agreement or instrument referred to herein or therein shall be waived or any other guarantee of any of the Guaranteed Obligations or any security therefor shall be released or exchanged in whole or in part or otherwise dealt with; or (iv) any lien or security interest granted to, or in favor of, the Agent or any Lender or Lenders as security for any of the Guaranteed Obligations shall fail to be perfected. The Subsidiary Guarantors hereby expressly waive diligence, presentment, demand of payment, protest and all notices whatsoever, and any requirement that the Agent or any Lender exhaust any right, power or remedy or proceed against the Company under this Agreement or the Notes or any other agreement or instrument referred to herein or therein, or against any other Person under any other guarantee of, or security for, any of the Guaranteed Obligations. 6.03 REINSTATEMENT. The obligations of the Subsidiary Guarantors under this Section 6 shall be automatically reinstated if and to the extent that for any reason any payment by or on behalf of the Company in respect of the Guaranteed Obligations is rescinded or must be otherwise restored by any holder of any of the Guaranteed Obligations, whether as a result of any proceedings in bankruptcy or reorganization or otherwise and the Subsidiary Guarantors jointly and severally agree that they will indemnify the Agent and each Lender on demand for all reasonable costs and expenses (including, without limitation, fees of counsel) incurred by the Agent or such Lender in connection with such rescission or restoration, including any such costs and expenses incurred in defending against any claim alleging that such payment constituted a preference, fraudulent transfer or similar payment under any bankruptcy, insolvency or similar law. 6.04 SUBROGATION. The Subsidiary Guarantors hereby jointly and severally agree that until the payment and satisfaction in full of all Guaranteed Obligations and the expiration and termination of the Commitments of the Lenders under this Agreement they shall not exercise any right or remedy arising by reason of any performance by them of their guarantee in Section 6.01 hereof, whether by subrogation or otherwise, against the Company or any other guarantor of any of the Guaranteed Obligations or any security for any of the Guaranteed Obligations. 6.05 REMEMDIES. The Subsidiary Guarantors jointly and severally agree that, as between the Subsidiary Guarantors and the Lenders, the obligations of the Company under this Agreement and the Notes may be declared to be forthwith due and payable as provided in Section 11 hereof (and shall be deemed to have become automatically due and payable in the circumstances provided in said Section 11) for purposes of Section 6.01 hereof notwithstanding any stay, injunction or other prohibition preventing such declaration (or such obligations from becoming automatically due and payable) as against the Company and that, in the event of such declaration (or such obligations being deemed to have become automatically due and payable), such obligations (whether or not due and payable by the Company) shall forthwith become due and payable by the Subsidiary Guarantors for purposes of said Section 6.01. 6.06 INSTRUMENT FOR THE PAYMENT OF MONEY. Each Guarantor hereby acknowledges that the guarantee in this Section 6 constitutes an instrument for the payment of money, and consents and agrees that any Lender or the Agent, at its sole option, in the event of a dispute by such Guarantor in the payment of any moneys due hereunder, shall have the right to bring motion-action under New York CPLR Section 3213. 6.07 CONTINUING GUARANTEE. The guarantee in this Section 6 is a continuing guarantee, and shall apply to all Guaranteed Obligations whenever arising. 6.08 RIGHTS OF CONTRIBUTION. The Subsidiary Guarantors hereby agree, as between themselves, that if any Subsidiary Guarantor shall become an Excess Funding Guarantor (as defined below) by reason of the payment by such Subsidiary Guarantor of any Guaranteed Obligations, each other Subsidiary Guarantor shall, on demand of such Excess Funding Guarantor (but subject to the next sentence), pay to such Excess Funding Guarantor an amount equal to such Subsidiary Guarantor's Pro Rata Share (as defined below and determined, for this purpose, without reference to the Properties, debts and liabilities of such Excess Funding Guarantor) of the Excess Payment (as defined below) in respect of such Guaranteed Obligations. The payment obligation of a Subsidiary Guarantor to any Excess Funding Guarantor under this Section 6.08 shall be subordinate and subject in right of payment to the prior payment in full of the obligations of such Subsidiary Guarantor under the other provisions of this Section 6 and such Excess Funding Guarantor shall not exercise any right or remedy with respect to such excess until payment and satisfaction in full of all of such obligations. For purposes of this Section 6.08, (i) "EXCESS FUNDING GUARANTOR" shall mean, in respect of any Guaranteed Obligations, a Subsidiary Guarantor that has paid an amount in excess of its Pro Rata Share of such Guaranteed Obligations, (ii) "EXCESS PAYMENT" shall mean, in respect of any Guaranteed Obligations, the amount paid by an Excess Funding Guarantor in excess of its Pro Rata Share of such Guaranteed Obligations and (iii) "PRO RATA SHARE" shall mean, for any Subsidiary Guarantor, the ratio (expressed as a percentage) of (x) the amount by which the aggregate present fair saleable value of all Properties of such Subsidiary Guarantor (excluding any shares of stock of any other Subsidiary Guarantor) exceeds the amount of all the debts and liabilities of such Subsidiary Guarantor (including contingent, subordinated, unmatured and unliquidated liabilities, but excluding the obligations of such Subsidiary Guarantor hereunder and any obligations of any other Subsidiary Guarantor that have been Guaranteed by such Subsidiary Guarantor) to (y) the amount by which the aggregate fair saleable value of all Properties of the Company and all of the Subsidiary Guarantors exceeds the amount of all the debts and liabilities (including contingent, subordinated, unmatured and unliquidated liabilities, but excluding the obligations of the Company and the Subsidiary Guarantors hereunder) of the Company and all of the Subsidiary Guarantors, all as of the Closing Date. If any Subsidiary becomes a Subsidiary Guarantor hereunder subsequent to the Closing Date, then for purposes of this Section 6.08 such subsequent Subsidiary Guarantor shall be deemed to have been a Subsidiary Guarantor as of the Closing Date and the aggregate present fair saleable value of the Properties, and the amount of the debts and liabilities, of such Subsidiary Guarantor as of the Closing Date shall be deemed to be equal to such value and amount on the date such Subsidiary Guarantor becomes a Subsidiary Guarantor hereunder. 6.09 GENERAL LIMITATION ON GUARANTEE OBLIGATIONS. In any action or proceeding involving any state corporate law, or any state or Federal bankruptcy, insolvency, reorganization or other law affecting the rights of creditors generally, if the obligations of any Subsidiary Guarantor under Section 6.01 hereof would otherwise, taking into account the provisions of Section 6.08 hereof, be held or determined to be void, invalid or unenforceable, or subordinated to the claims of any other creditors, on account of the amount of its liability under said Section 6.01, then, notwithstanding any other provision hereof to the contrary, the amount of such liability shall, without any further action by such Subsidiary Guarantor, any Lender, the Agent or any other Person, be automatically limited and reduced to the highest amount that is valid and enforceable and not subordinated to the claims of other creditors as determined in such action or proceeding. Section 7. CONDITIONS PRECEDENT 7.01 EFFECTIVENESS OF THIRD AMENDMENT AND RESTATEMENT. The effectiveness of the amendment and restatement of the Second Amended and Restated Credit Agreement is subject to the conditions precedent that the Agent shall have received the following, each of which shall be satisfactory to the Agent in form and substance: (a) CORPORATE DOCUMENTS. Certified copies of the charter and by-laws (or equivalent documents) of each Obligor and of all corporate authority for each Obligor (including, without limitation, board of director resolutions and evidence of the incumbency of officers) with respect to the execution, delivery and performance of such of the Basic Documents and the Operative Documents to which such Obligor is intended to be a party and each other document to be delivered by such Obligor from time to time in connection herewith and the extensions of credit hereunder (and the Agent and each Lender may conclusively rely on such certificate until it receives notice in writing from such Obligor to the contrary). (b) OFFICER'S CERTIFICATE. A certificate of a senior officer of the Company, dated the date hereof, to the effect set forth in the first sentence of Section 7.04 hereof. (c) OPINIONS OF TEXAS COUNSEL TO THE OBLIGORS. An opinion, dated the Closing Date, of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., counsel to the Obligors, substantially in the form of Exhibit B-1 hereto (and each Obligor hereby instructs such counsel to deliver such opinion to the Lenders and the Agent). (d) OPINIONS OF NEW YORK COUNSEL TO ING. An opinion, dated the Closing Date, of Mayer, Brown & Platt, special New York counsel to ING, substantially in the form of Exhibit B-2 hereto. (e) NOTES. The Notes evidencing the Synthetic Lease Loans, duly completed and executed. (f) SECURITY AGREEMENT AMENDMENT. The Security Agreement Amendment, duly executed and delivered by the Agent and the Obligors. (g) MASTER LEASE CONDITIONS. Evidence that each of the conditions precedent set forth in Article III of the Master Agreement shall have been duly satisfied. (h) OTHER DOCUMENTS. Such other documents as the Agent or any Lender or special New York counsel to ING may reasonably request. 7.02 CAPITAL EXPENDITURES; ELIGIBLE ACQUISITIONS. The obligation of any Revolving Credit Lender to make any Revolving Credit Loan the proceeds of which will be used to make (x) an Eligible Acquisition or (y) Capital Expenditures in respect of an Eligible New Contract (in each case, the "RELEVANT Transaction" for such borrowing) is subject to the further conditions precedent that the Agent shall have received the following, each of which shall be satisfactory to the Agent (and to the extent specified below, to the Majority Revolving Credit Lenders) in form and substance: (a) COMMON INFORMATION. With respect to any Relevant Transaction: (i) CFO CERTIFICATE. A certificate of the chief financial officer of the Company (in such detail as the Agent may request) as to the good faith estimated amount of the consideration to be paid in connection with such Relevant Transaction. (ii) RELEVANT CORRECTIONAL AND/OR DETENTION FACILITY CONTRACTS. True and complete copies of the fully executed Correctional and Detention Facility Contract or Contracts (including all amendments thereto) to which such Relevant Transaction relates (the "RELEVANT CONTRACT" for such Relevant Transaction), together with a certificate of a senior officer of the Company to the effect that (x) all conditions to the effectiveness of the Relevant Contract for such borrowing shall have been met or waived; PROVIDED THAT any condition in such Relevant Contract that, if not met, could reasonably be expected to have a Material Adverse Effect shall not be waived by any Person without the consent of the Agent and the Majority Revolving Credit Lenders and (y) such Relevant Contract does not contain any provision permitting the other party to such Relevant Contract to terminate, cancel or otherwise modify such Relevant Contract upon the occurrence of any change in control (or similar event) with respect to any Obligor. Further, any condition in such Relevant Contract requiring the satisfaction of any Person shall be deemed for purposes of this Section 7.02(a) to require the satisfaction of the Agent and the Majority Revolving Credit Lenders if the failure to meet such condition could reasonably be expected to have a Material Adverse Effect. (iii) USE PERMITS. A certificate of a senior officer of the Company to the effect that (x) attached thereto are true and complete copies of each Use Permit required in connection with such Relevant Transaction for such borrowing and that each such Use Permit is in full force and effect, or (y) no Use Permits are so required. (iv) CORPORATE AUTHORIZATIONS. Evidence to the reasonable satisfaction of the Agent that such Relevant Transaction for such borrowing shall have been duly approved by the board of directors of each relevant Obligor and that the Relevant Contract therefor shall have been duly executed and delivered by the parties thereto and shall be in full force and effect. In addition, the Agent shall have received copies of all written information provided to the board of directors of any Obligor in connection with such Relevant Transaction at the same time such information was provided to such board of directors. (v) FINANCIAL AND COMPLIANCE CERTIFICATE. A certificate from the chief financial officer of the Company with respect to such Relevant Transaction (A) providing the PRO FORMA consolidated statements of income, cash flow and balance sheet of the Company, (B) to the effect that immediately prior to such Relevant Transaction, and after giving effect thereto, (x) no Default shall have occurred and be continuing and (y) each of the representations and warranties set forth in Section 8 hereof, and by each Obligor in each of the other Basic Documents to which it is a party, shall be true and complete, and (C) providing PRO FORMA financial projections (which may reflect Pro Forma Adjustments) demonstrating or showing (x) the sources and uses of funds in such Relevant Transaction, (y) compliance with all financial covenants set forth in Section 9 hereof after giving effect to such Relevant Transaction and for the four consecutive fiscal quarters after consummation of such Relevant Transaction and (z) the Capital Expenditures to be incurred by the Company and its Subsidiaries in connection with such Relevant Transaction for the period beginning from the date on which such Relevant Transaction is consummated and ending on March 31, 2003. (vi) GOVERNMENTAL CONSENT AND APPROVALS. A certificate of a senior officer of the Company to the effect that (i) any municipal, state or federal government (or agency, instrumentality or political subdivision thereof) that is a party to the Relevant Contract for such borrowing, and any such governmental entity granting a Use Permit in connection with such Relevant Contract, does not object to the financing of such Relevant Transaction with such borrowing on the terms and conditions set forth in this Agreement and the other Basic Documents, including (without limitation) the granting of security interests and pledges of stock by the Obligors under the Security Agreement and the guarantees provided the Subsidiary Guarantors in Section 6 hereof and (ii) all necessary licenses, permits and governmental and third-party consents and approvals relating to such Relevant Transaction have been obtained and remain in full force and effect. (vii) ANALYSES. To the extent completed by or on behalf of any Obligor, any demographic, industry, competitive or other analysis performed by any industry consultant, and the Agent and the Lenders shall be named as beneficiaries of such report. (viii) INSURANCE. Evidence to the satisfaction of the Agent that, after giving effect to the transactions contemplated by such borrowing, the insurance program of the Obligors, insofar as it relates to such Relevant Transaction for such Revolving Credit Loans, adequately protects the interests of the Agent and the Lenders and is comparable in all material respects with insurance carried by responsible owners and operators of Properties similar to those of the Obligors, including (without limitation) that the Agent shall have been named as loss payee and additional insured under any additional insurance policies (or with respect to any additional insurance acquired under existing insurance policies) acquired in connection with such Relevant Transaction. (ix) ENVIRONMENTAL SURVEY AND QUESTIONNAIRE. If requested by the Agent, an environmental audit and/or review of any real property to be acquired or leased by any Obligor in connection with such Relevant Transaction, with the results and methodology thereof reasonably satisfactory to the Agent and performed by an engineer acceptable the Agent and the Company. In addition, if requested by the Majority Revolving Credit Lenders (through the Agent), the Company shall have completed (and delivered to each Revolving Credit Lender) an environmental risk questionnaire in a form provided to the Company by the Agent (and containing such inquiries with respect to environmental matters as shall have been requested by any Lender, through the Agent, to be included in such questionnaire), and the responses to such questionnaire (and the underlying facts and circumstances shown thereby) shall be in form and substance reasonably satisfactory to each Revolving Credit Lender. (x) ADVERSE LITIGATION OR PROCEEDING. A certificate from the secretary of the Company, to the effect that (and the Agent shall be satisfied in its good faith judgment that) no litigation or proceeding shall exist or, to such officer's knowledge be threatened, with respect to consummation of such Relevant Transaction or that could have a Material Adverse Effect. (xi) TRANSACTION DOCUMENTS. A true and complete copy of the fully executed transaction documents relating to such Relevant Transaction (or unsigned drafts thereof that conform in all material respects with the fully executed purchase agreement). (xii) SECURITY INTEREST. Evidence to the satisfaction of the Agent that the Agent (on behalf of the Lenders) has a perfected security interest in the assets (including stock) related to such Relevant Transaction. (xiii) OTHER DOCUMENTS. Such other documents as the Agent or any Revolving Credit Lender or special New York counsel to ING may reasonably request, and such other information regarding the financial condition, operations, business or prospects of the Obligors insofar as its relates to such Revolving Credit Loans and the Relevant Transaction related thereto. (b) ELIGIBLE ACQUISITION INFORMATION. With respect to any Relevant Transaction that is an Eligible Acquisition: (i) LENDER APPROVAL. If the consideration to be paid for such Eligible Acquisition will exceed $15,000,000, the approval of the Majority Revolving Credit Lenders of such Eligible Acquisition, such approval not to be unreasonably withheld. (ii) POSITIVE EBITDA. Evidence to the satisfaction of the Agent that the EBITDA of the business to be acquired in such Eligible Acquisition (based on actual results with Pro Forma Adjustments) for the period of 12 consecutive months most recently preceding the proposed date of such Eligible Acquisition is greater than $1. (iii) MAXIMUM CONSIDERATION. Evidence to the satisfaction of the Agent that the consideration to be paid for such Eligible Acquisition (including any Indebtedness assumed) will not exceed the product of (x) EBITDA with respect to the business to be acquired in such Eligible Acquisition for the 12 month period ending on the proposed date of consummation of such Eligible Acquisition and (y) six. (c) ELIGIBLE NEW CONTRACT INFORMATION. With respect to any Relevant Transaction that is an Eligible New Contract: (i) Evidence to the satisfaction of the Agent that the aggregate Revolving Credit Loans that would be used to finance Capital Expenditures in connection with such Eligible New Contract would not exceed the projected EBITDA for such Eligible New Contract for the period beginning on the date on which such Eligible New Contract is entered into and ending on the earlier of (x) the last day of the original term of such Eligible New Contract (including any stated renewal options) and (y) the fifth anniversary of such Eligible New Contract. (ii) If the principal amount of the Revolving Credit Loans to finance such Capital Expenditure would exceed $10,000,000, the Majority Revolving Credit Lenders shall have approved such Capital Expenditure, such approval not to be unreasonably withheld. 7.03 SYNTHETIC LEASE LOANS. The obligation of any Synthetic Lease Lender to make any Synthetic Lease Loan is subject to the further conditions precedent that the conditions precedent set forth in Sections 3.1 and 3.4 of the Master Agreement shall have satisfied with respect to the borrowing of such Synthetic Lease Loans. 7.04 INITIAL AND SUBSEQUENT EXTENSIONS OF CREDIT. The obligation of any Lender to make any Loan or otherwise extend credit to the Company upon the occasion of each borrowing or other extension of credit hereunder is subject to the further conditions precedent that, both immediately prior to the making of such Loan or other extension of credit and also after giving effect thereto and to the intended use thereof: (a) no Default shall have occurred and be continuing; and (b) the representations and warranties made by the Company in Section 8 hereof, and by each Obligor in each of the other Basic Documents to which it is a party, shall be true and complete on and as of the date of the making of such Loan or other extension of credit with the same force and effect as if made on and as of such date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date). Section 8. REPRESENTATIVES AND WARRANTIES. Each Obligor, represents and warrants to the Agent and the Lenders that: 8.01 CORPORATE EXISTENCE. Each Obligor: is a corporation, partnership or other entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization; (b) has all requisite corporate or other power, and has all material governmental licenses, authorizations, consents and approvals necessary to own its assets and carry on its business as now being or as proposed to be conducted; and (c) is qualified to do business and is in good standing in all jurisdictions in which the nature of the business conducted by it makes such qualification necessary and where failure so to qualify could reasonably be expected to (either individually or in the aggregate) have a Material Adverse Effect. 8.02 FINANCIAL CONDITION. The Obligors have heretofore furnished to each of the Lenders the consolidated and consolidating balance sheets of the Company and its Subsidiaries as at December 31, 1996 and the related consolidated and consolidating statements of income, retained earnings and cash flow of the Company and its Subsidiaries for the fiscal year ended on said date, with the opinion thereon (in the case of said consolidated balance sheet and statements) of Arthur Andersen L.L.P., and the unaudited consolidated and consolidating balance sheets of the Company and its Subsidiaries as at July 31, 1997 and the related consolidated and consolidating statements of income and retained earnings of the Company and its Subsidiaries for the seven-month period ended on such date. All such financial statements are complete and correct and fairly present the consolidated financial condition of the Obligors, and (in the case of said consolidating financial statements) the respective unconsolidated financial condition of the Obligors, as at said dates and the consolidated and unconsolidated results of their operations for the fiscal year and seven-month period ended on said dates (subject, in the case of such financial statements as at July 31, 1997, to normal year-end audit adjustments), all in accordance with generally accepted accounting principles and practices applied on a consistent basis, except as otherwise indicated in the notes thereto. None of the Obligors has on the date hereof any material contingent liabilities, liabilities for taxes, unusual forward or long-term commitments or unrealized or anticipated losses from any unfavorable commitments, in each case, of a type required to be reflected in a balance sheet prepared in accordance with GAAP, except as referred to or reflected or provided for in said balance sheets as at said dates. Since December 31, 1996, there has been no material adverse change in the consolidated financial condition, operations, business or prospects taken as a whole of the Obligors from that set forth in said financial statements as at said date. 8.03 LITIGATION. There are no legal or arbitral proceedings, or any proceedings by or before any governmental or regulatory authority or agency, now pending or (to the knowledge of the Company) threatened against any Obligor that, if adversely determined could be reasonably expected to (either individually or in the aggregate) have a Material Adverse Effect. 8.04 NO BREACH. None of the execution and delivery of this Agreement and the Notes and the other Basic Documents and the Operative Documents, the consummation of the transactions herein and therein contemplated or compliance with the terms and provisions hereof and thereof will conflict with or result in a breach of, or require any consent under, the charter or by-laws of any Obligor, or any applicable law or regulation, or any order, writ, injunction or decree of any court or governmental authority or agency, or any agreement or instrument to which any Obligor is a party or by which any of them or any of their Property is bound or to which any of them is subject, or constitute a default under any such agreement or instrument, or (except for the Liens created pursuant to the Security Documents) result in the creation or imposition of any Lien upon any Property of the Obligors pursuant to the terms of any such agreement or instrument. 8.05 ACTION. Each Obligor has all necessary power, authority and legal right to execute, deliver and perform its obligations under each of the Basic Documents and each of the Operative Documents to which it is a party; the execution, delivery and performance by each Obligor of each of the Basic Documents and each of the Operative Documents to which it is a party have been duly authorized by all necessary corporate action on its part (including, without limitation, any required shareholder approvals); and this Agreement has been duly and validly executed and delivered by each Obligor and constitutes, and each of the Notes and the other Basic Documents and Operative Documents to which it is a party when executed and delivered by such Obligor (in the case of the Notes, for value) will constitute, its legal, valid and binding obligation, enforceable against each Obligor in accordance with its terms, except as such enforceability may be limited by (a) bankruptcy, insolvency, reorganization, moratorium or similar laws of general applicability affecting the enforcement of creditors' rights and (b) the application of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 8.06 APPROVALS. No authorizations, approvals or consents of, and no filings or registrations with, any governmental or regulatory authority or agency, or any securities exchange, are necessary for the execution, delivery or performance by any Obligor of the Basic Documents or the Operative Documents to which it is a party or for the legality, validity or enforceability hereof or thereof, except for filings and recordings in respect of the Liens created pursuant to the Security Documents. 8.07 USE OF CREDIT. None of the Obligors is engaged principally, or as one of its important activities, in the business of extending credit for the purpose, whether immediate, incidental or ultimate, of buying or carrying Margin Stock, and no part of the proceeds of any extension of credit hereunder will be used to buy or carry any Margin Stock. 8.08 ERISA. Each Plan, and, to the knowledge of each Obligor, each Multiemployer Plan, is in compliance in all material respects with, and has been administered in all material respects in compliance with, the applicable provisions of ERISA, the Code and any other Federal or State law, and no event or condition has occurred and is continuing as to which any Obligor would be under an obligation to furnish a report to the Lenders under Section 9.01(h) hereof. 8.09 TAXES. The Obligors are members of an affiliated group of corporations filing consolidated returns for Federal income tax purposes, of which the Company is the "common parent" (within the meaning of Section 1504 of the Code) of such group. Each Obligor has filed (either directly, or indirectly through the Company) all Federal income tax returns and all other material tax returns that are required to be filed by them and have paid (either directly, or indirectly through Company) all taxes due pursuant to such returns or pursuant to any assessment received by any Obligor, except for any taxes being contested by an Obligor in good faith by proper proceedings as to which no Liens have been created on any Property of any Obligor. The charges, accruals and reserves on the books of the Obligors in respect of taxes and other governmental charges are, in the opinion of the Obligors, adequate. The Company has not given or been requested to give a waiver of the statute of limitations relating to the payment of Federal, state, local and foreign taxes or other impositions. 8.10 INVESTMENT COMPANY ACT. None of the Obligors is an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. 8.11 PUBLIC UTILITY HOLDING COMPANY ACT. None of the Obligors is a "holding company", or an "affiliate" of a "holding company" or a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. 8.12 MATERIAL AGREEMENTS AND LIENS. (a) Part A of Schedule I hereto is a complete and correct list, as of the date of this Agreement, of each credit agreement, loan agreement, indenture, purchase agreement, guarantee, letter of credit or other arrangement providing for or otherwise relating to any Indebtedness or any extension of credit (or commitment for any extension of credit) to, or guarantee by, any Obligor, and the aggregate principal or face amount outstanding or that may become outstanding under each such arrangement is correctly described in Part A of said Schedule I. (b) Part B of Schedule I hereto is a complete and correct list, as of the date of this Agreement, of each Lien securing Indebtedness of any Person and covering any Obligor, and the aggregate Indebtedness secured (or that may be secured) by each such Lien and the Property covered by each such Lien is correctly described in Part B of said Schedule I. 8.13 ENVIRONMENT MATTERS. Each Obligor has obtained all environmental, health and safety permits, licenses and other authorizations required under all applicable Environmental Laws to carry on its business as now being or as currently proposed to be conducted, except to the extent failure to have any such permit, license or authorization would not (either individually or in the aggregate) have a Material Adverse Effect. Each of such permits, licenses and authorizations is in full force and effect and each of the Obligors is in compliance with the terms and conditions thereof, and is also in compliance with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in any applicable Environmental Law, except to the extent failure to comply therewith would not (either individually or in the aggregate) have a Material Adverse Effect. In addition, except as set forth in Schedule II hereto: (a) No notice, notification, demand, request for information, citation, summons or order has been issued to any Obligor or about which any Obligor has otherwise become aware, no complaint has been filed against any Obligor or about which any Obligor has otherwise become aware, no penalty has been assessed against any Obligor or about which any Obligor has otherwise become aware and no investigation or review is pending or, to the knowledge of any Obligor, threatened by any governmental authority or other entity with respect to any alleged failure by any Obligor to have any environmental, health or safety permit, license or other authorization required under any Environmental Law in connection with the conduct of the business of any Obligor or with respect to any generation, treatment, storage, recycling, transportation, discharge or disposal, or any Release of any Hazardous Materials generated by any Obligor, which has either not been resolved to the satisfaction of the issuing authority or which would not individually or in the aggregate have a Material Adverse Effect. (b) None of the Obligors owns, operates or leases a treatment, storage or disposal facility requiring a permit under the Resource Conservation and Recovery Act of 1976, as amended, or under any comparable state or local statute; and (i) no polychlorinated biphenyls (PCBs) are or have been present at any site or facility now or previously owned, operated or leased by any Obligor; (ii) no asbestos or asbestos-containing materials that are friable or bear a reasonable chance of becoming friable are or have been present at any site or facility now or previously owned, operated or leased by any Obligor; (iii) there are no underground storage tanks for Hazardous Materials, active orabandoned, at any site or facility now or previously owned, operated or leased by any Obligor that are not in material compliance with all applicable Environmental Laws, and there are no surface impoundments for Hazardous Materials, active or abandoned at any site or facility now or previously owned, operated or leased by any Obligor; (iv) no Hazardous Materials have been Released at, on or under any site or facility now or previously owned, operated or leased by any Obligor in a reportable quantity established by any applicable Environmental Law; and (v) no Hazardous Materials have been otherwise Released at, on or under any site or facility now or previously owned, operated or leased by any Obligor that would (either individually or in the aggregate) have a Material Adverse Effect. (c) None of the Obligors has transported or arranged for the transportation of any Hazardous Material to any location that is listed on the National Priorities List ("NPL") under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), listed for possible inclusion on the NPL by the Environmental Protection Agency in the Comprehensive Environmental Response and Liability Information System, as provided for by 40 C.F.R. ss. 300.5 ("CERCLIS"), or on any similar state or local list or that is the subject of Federal, state or local enforcement actions or other investigations that may lead to Environmental Claims against the Company or any of its Subsidiaries, which individually or in the aggregate would have a Material Adverse Effect. (d) No Hazardous Material generated by the Company or any of its Subsidiaries has been recycled, treated, stored, disposed of or Released by any Obligor at any facility which is subject to an Environmental Claim which would reasonably be expected individually or in the aggregate to have a Material Adverse Effect. (e) No oral or written notification of a Release of a Hazardous Material has been filed by or on behalf of the Company or any of its Subsidiaries and no site or facility now or previously owned, operated or leased by any Obligor is listed or to the knowledge of any Obligor (upon due investigation) proposed for listing on the NPL, CERCLIS or any similar state list of sites requiring investigation or clean-up, in each case, which has either not been resolved to the satisfaction of the issuing authority or which would not individually or in the aggregate have a Material Adverse Effect. (f) No Liens have arisen under or pursuant to any Environmental Laws on any site or facility owned, operated or leased by any Obligor, and no government action has been taken or is in process that could subject any such site or facility to such Liens and none of the Obligors would be required to place any notice or restriction relating to the presence of Hazardous Materials at any site or facility owned by it in any deed to the real property on which such site or facility is located. (g) All investigations, studies, audits, tests, reviews or other analyses conducted by or that are in the possession of any Obligor relating to environmental matters at or affecting any site or facility now or previously owned, operated or leased by the any Obligor and that reveal facts, circumstances or conditions that could reasonably be expected to result in a Material Adverse Effect have been made available to the Lenders. 8.14 CAPITALIZATION. Schedule V hereto correctly sets forth the number of shares of authorized capital stock of the Company, the class of such shares, the number of each such class outstanding and the par value thereof. All of such outstanding shares are duly and validly issued and outstanding, and (to the Company's knowledge) each of which shares is fully paid and nonassessable. Schedule V hereto correctly sets forth, as of the date hereof, the names of the Persons owning 5% or more of any class of such capital stock, the class or classes of such capital stock owned by each such Person and percentage of the total number of shares of such class owned by each such Person. As of the date hereof, (x) except for those set forth in Schedule V hereto, there are no outstanding Equity Rights with respect to the Company and (y) except for those set forth in Schedule V hereto, there are no outstanding obligations of any Obligor to repurchase, redeem, or otherwise acquire any shares of capital stock of any Obligor to make payments to any Person, such as "phantom stock" payments, where the amount thereof is calculated with reference to the fair market value or equity value of any Obligor. 8.15 SUBSIDIARIES, ETC. (a) Set forth in Part A of Schedule III hereto is a complete and correct list, as of the date hereof, of all of the Subsidiaries of the Company, together with, for each such Subsidiary, (i) the jurisdiction of organization of such Subsidiary, (ii) each Person holding ownership interests in such Subsidiary and (iii) the nature of the ownership interests held by each such Person and the percentage of ownership of such Subsidiary represented by such ownership interests. Except as disclosed in Part A of Schedule III hereto, (x) each of the Company and its Subsidiaries owns, free and clear of Liens (other than Liens created pursuant to the Security Documents), and has the unencumbered right to vote, all outstanding ownership interests in each Person shown to be held by it in Part A of Schedule III hereto, (y) all of the issued and outstanding capital stock of each such Person organized as a corporation is validly issued, fully paid and nonassessable and (z) there are no outstanding Equity Rights with respect to such Person. (b) Set forth in Part B of Schedule III hereto is a complete and correct list, as of the date of this Agreement, of all Investments (other than Investments disclosed in Part A of said Schedule III hereto) held by the Company or any of its Subsidiaries in any Person (other than Investments which are Permitted Investments or deposits maintained with banks in the ordinary course of business) and, for each such Investment, (x) the identity of the Person or Persons holding such Investment and (y) the nature of such Investment. Except as disclosed in Part B of Schedule III hereto, each of the Company and its Subsidiaries owns, free and clear of all Liens (other than Liens created pursuant to the Security Documents), all such Investments. 8.16 TITLE TO ASSETS. Each Obligor owns and has on the date hereof, and will own and have on the Closing Date, good and marketable title or valid and subsisting leaseholds (subject only to Liens permitted by Section 9.06 hereof) to the Properties shown to be owned in the most recent financial statements referred to in Section 8.02 hereof (other than Properties disposed of in the ordinary course of business or otherwise permitted to be disposed of pursuant to Section 9.05 hereof). Each Obligor (a) owns and has on the date hereof (and will own and have on the Closing Date), good and marketable title to, or has on the date hereof (and will have on the Closing Date) a valid and subsisting leasehold estate in, and (b) enjoys on the date hereof (and will enjoy on the Closing Date), peaceful and undisturbed possession of, all Properties (subject only to Liens permitted by Section 9.06 hereof) that are necessary for the operation and conduct of its businesses. 8.17 TRUE AND COMPLETE DISCLOSURE. The information (other than projections), reports, financial statements, exhibits and schedules furnished in writing by or on behalf of the Obligors to the Agent or any Lender in connection with the negotiation, preparation or delivery of this Agreement and the other Basic Documents or included herein or therein or delivered pursuant hereto or thereto, when taken as a whole do not contain any untrue statement of material fact or omit to state any material fact necessary to make the statements herein or therein, in light of the circumstances under which they were made, not misleading. All projections furnished by or on behalf of the Obligors in writing to the Agent or any Lender for purposes of or in connection with this Agreement or the transactions contemplated hereby were prepared by the Company in good faith based on assumptions determined to be reasonable by the Company under the then existing facts and circumstances. All written information furnished after the date hereof by any Obligor to the Agent and the Lenders in connection with this Agreement and the other Basic Documents and the transactions contemplated hereby and thereby will be true, complete and accurate in every material respect, or (in the case of projections) based on reasonable assumptions, on the date, and under the facts and circumstances, as of which such information is stated or certified. There is no fact actually known to any Obligor that could have a Material Adverse Effect that has not been disclosed herein, in the other Basic Documents or in a report, financial statement, exhibit, schedule, disclosure letter or other writing furnished to the Lenders for use in connection with the transactions contemplated hereby or thereby. 8.18 REAL PROPERTY. Set forth on Schedule IV hereto is a list, as of the Closing Date, of all of the real property interests held by the Company and its Subsidiaries, indicating in each case whether the respective Property is owned or leased, the identity of the owner or lessor and the location of the respective Property. Section 9. COVENANTS OF THE COMPANY. The Company covenants and agrees with the Lenders and the Agent that, so long as any Commitment, Loan or Letter of Credit Liability is outstanding and until payment in full of all amounts payable by the Company hereunder: 9.01 FINANCIAL STATEMENTS; ETC. The Company shall deliver to each of the Lenders (in such form as shall be satisfactory to the Agent): (a) no later than January 15 of each year, a budget (on a monthly basis) for the Company and its Subsidiaries for such year (including consolidating and consolidated statements of income, cash flow and balance sheets prepared in accordance with GAAP); and promptly after any material revision to such budget, such budget as so revised; (b) as soon as available and in any event within 30 days after the end of each month, consolidated and consolidating statements of income and retained earnings of the Company and its Subsidiaries for such month and for the period from the beginning of the respective fiscal year to the end of such month, and the related consolidated balance sheets of the Company and its Subsidiaries as at the end of such month, setting forth in each case in comparative form the corresponding consolidated and consolidating figures provided in the budget required under Section 9.01(a) hereof for such period, accompanied by a certificate of a senior financial officer of the Company, which certificate shall state that said consolidated financial statements fairly present the consolidated financial condition and results of operations of the Company and its Subsidiaries, and said consolidating financial statements fairly present the respective individual unconsolidated financial condition and results of operations of the Company and of each of its Subsidiaries, in each case in accordance with generally accepted accounting principles, consistently applied, as at the end of, and for, such month (subject to normal year-end audit adjustments with the absence of footnotes); (c) as soon as available and in any event within 45 days after the end of each quarterly fiscal period of each fiscal year of the Company, (i) a statement of occupancy rates at each of the facilities owned or maintained by the Company and its Subsidiaries as at the end of such period, and a statement of occupancy revenues and the direct costs of occupancy for each Correctional and Detention Facility Contract for such period and for the period from the beginning of the respective fiscal year to the end of such fiscal quarter, in each case setting forth in comparative form the corresponding figures for the corresponding periods in the preceding fiscal year and in the budget required under Section 9.01(a) hereof (ii) an analysis of the chief financial officer of the financial condition of the Company and its Subsidiaries, on a consolidated and consolidating basis, as of the end of such period, including (without limitation) a reconciliation to the budget required under Section 9.01(a) hereof; (d) as soon as available and in any event within 90 days after the end of each fiscal year of the Company, consolidated and consolidating statements of income and retained earnings, and a consolidated statement of cash flow, of the Company and its Subsidiaries for such fiscal year and the related consolidated and consolidating balance sheets of the Company and its Subsidiaries as at the end of such fiscal year, setting forth in each case in comparative form the corresponding consolidated and consolidating figures for the preceding fiscal year, and accompanied (i) in the case of said consolidated statements and balance sheet of the Company, by an opinion thereon of independent certified public accountants of recognized national standing (which opinion shall not contain any Impermissible Qualification), which opinion shall state that said consolidated financial statements fairly present the consolidated financial condition and results of operations of the Company and its Subsidiaries as at the end of, and for, such fiscal year in accordance with generally accepted accounting principles, and by a management letter or similar letter submitted to the Company by such accountants and (ii) in the case of said consolidating statements and balance sheets, by a certificate of a senior financial officer of the Company, which certificate shall state that said consolidating financial statements fairly present the respective individual unconsolidated financial condition and results of operations of the Company and of each of its Subsidiaries, in each case in accordance with generally accepted accounting principles, consistently applied, as at the end of, and for, such fiscal year; (e) promptly upon their becoming available, copies of all registration statements and regular periodic reports, if any, that the Company shall have filed with the Securities and Exchange Commission (or any governmental agency substituted therefor) or any national securities exchange; (f) to the extent not previously furnished to the Lenders or the Agent in such capacity, promptly upon the mailing thereof to the shareholders of the Company generally, copies of all financial statements, reports and proxy statements so mailed; (g) without duplication of any provision of subsection (d) above, promptly after the receipt by the Company thereof, copies of each report submitted to any Obligor by independent accountants in connection with any annual, interim or special audit of the books of any Obligor made by such accountants, or any management letters or similar documents submitted to any Obligor by such accountants; (h) as soon as possible, and in any event within ten days after the Company knows or has reason to believe that any of the events or conditions specified below with respect to any Plan or Multiemployer Plan has occurred or exists, a statement signed by a senior financial officer of the Company setting forth details respecting such event or condition and the action, if any, that the Company or its ERISA Affiliate proposes to take with respect thereto (and a copy of any report or notice required to be filed with or given to PBGC by the Company or an ERISA Affiliate with respect to such event or condition): (i) any reportable event, as defined in Section 4043(b) of ERISA and the regulations issued thereunder, with respect to a Plan, as to which PBGC has not by regulation waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event (PROVIDED that a failure to meet the minimum funding standard of Section 412 of the Code or Section 302 of ERISA, including, without limitation, the failure to make on or before its due date a required installment under Section 412(m) of the Code or Section 302(e) of ERISA, shall be a reportable event regardless of the issuance of any waivers in accordance with Section 412(d) of the Code); and any request for a waiver under Section 412(d) of the Code for any Plan; (ii) the distribution under Section 4041 of ERISA of a notice of intent to terminate any Plan or any action taken by the Company or an ERISA Affiliate to terminate any Plan; (iii) the institution by PBGC of proceedings under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Company or any ERISA Affiliate of a notice from a Multiemployer Plan that such action has been taken by PBGC with respect to such Multiemployer Plan; (iv) the complete or partial withdrawal from a Multiemployer Plan by the Company or any ERISA Affiliate that results in liability under Section 4201 or 4204 of ERISA (including the obligation to satisfy secondary liability as a result of a purchaser default) or the receipt by the Company or any ERISA Affiliate of notice from a Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA or that it intends to terminate or has terminated under Section 4041A of ERISA; (v) the institution of a proceeding by a fiduciary of any Multiemployer Plan against the Company or any ERISA Affiliate to enforce Section 515 of ERISA, which proceeding is not dismissed within 30 days; and (vi) the adoption of an amendment to any Plan that, pursuant to Section 401(a)(29) of the Code or Section 307 of ERISA, would result in the loss of tax-exempt status of the trust of which such Plan is a part if the Company or an ERISA Affiliate fails to timely provide security to the Plan in accordance with the provisions of said Sections; (i) without prejudice as to whether an Event of Default has occurred, promptly after the Company knows or has reason to believe that any Default has occurred, a notice of such Default describing the same in reasonable detail and, together with such notice or as soon thereafter as possible, a description of the action that the Company has taken or proposes to take with respect thereto; (j) promptly after the termination or expiration of any Correctional and Detention Facility Agreement, PRO FORMA financial projections prepared by the Company demonstrating that after giving effect to such termination or expiration (and any replacement Correctional and Detention Facility Agreement therefor) the Company will be in compliance with its obligations under Sections 9.10, 9.11, 9.12, 9.13, 9.14 and 9.15 hereof for the period commencing on the date of such termination and ending on the Commitment Termination Date; and (k) from time to time such other information regarding the financial condition, operations, business or prospects of the Company or any of its Subsidiaries (including, without limitation, any Plan or Multiemployer Plan and any reports or other information required to be filed under ERISA) available to the Company, as any Lender or the Agent may reasonably request. The Company will furnish to each Lender, at the time it furnishes each set of financial statements pursuant to paragraph (a), (b) or (c) above, a certificate of a senior financial officer of the Company to the effect that no Default has occurred and is continuing (or, if any Default has occurred and is continuing, describing the same in reasonable detail and describing the action that the Company has taken or proposes to take with respect thereto). In addition, at the time the Company furnishes to each Lender the financial statements required pursuant to paragraph (c) above, the Company shall furnish to each Lender a certificate of a senior financial officer setting forth in reasonable detail the computations necessary to determine whether the Company is in compliance with Sections 9.10, 9.11, 9.12, 9.13, 9.14 and 9.15 hereof as of the date as of which such financial statements have been provided. Further, upon the request of any Lender, at the time the Company furnishes the financial statements required pursuant to paragraph (b) above, the Company shall furnish to such Lender a certificate of a senior financial officer setting forth in reasonable detail the computations necessary to determine whether the Company is in compliance with Sections 9.10, 9.11, 9.12, 9.13, 9.14 and 9.15 hereof as of date as of which such financial statements have been provided. 9.02 LITIGATION. The Company will promptly give to each Lender notice of all legal or arbitral proceedings, and of all proceedings by or before any governmental or regulatory authority or agency, and any material development in respect of such legal or other proceedings, affecting the Company or any of its Subsidiaries, except proceedings that, if adversely determined, would not (either individually or in the aggregate) have a Material Adverse Effect. 9.03 EXISTENCE, ETC. The Company will, and will cause each of its Subsidiaries to: (a) preserve and maintain its legal existence and all of its material rights, privileges, licenses and franchises; (b) comply with the requirements of all applicable laws, rules, regulations and orders of governmental or regulatory authorities if failure to comply with such requirements could be reasonably expected to (either individually or in the aggregate) have a Material Adverse Effect; (c) pay and discharge all taxes, assessments and governmental charges or levies imposed on it or on its income or profits or on any of its Property prior to the date on which penalties attach thereto, except for any such tax, assessment, charge or levy the payment of which is being contested in good faith and by proper proceedings and against which adequate reserves are being maintained; (d) maintain all of its Properties necessary to the conduct of its business in good working order and condition, ordinary wear and tear excepted; (e) keep adequate records and books of account, in which complete entries will be made in accordance with generally accepted accounting principles consistently applied; and (f) upon notice to the Company, permit representatives of any Lender or the Agent, during normal business hours, to examine, copy and make extracts from its books and records, to inspect any of its Properties, and to discuss its business and affairs with its officers, all to the extent reasonably requested by such Lender or the Agent (as the case may be). 9.04 INSURANCE. The Company will, and will cause each of its Subsidiaries to, maintain insurance with financially sound and reputable insurance companies, and with respect to Property and risks of a character usually maintained by corporations of comparable size engaged in the same or similar business and similarly situated, against loss, damage and liability of the kinds and in the amounts customarily maintained by such corporations. The Company will in any event maintain (with respect to itself and each of its Subsidiaries): (1) CASUALTY INSURANCE -- insurance against loss or damage covering all of the tangible real and personal Property and improvements of the Company and each of its Subsidiaries by reason of any Peril (as defined below) in such amounts (subject to such deductibles as shall be satisfactory to the Majority Lenders) as shall be reasonable and customary and sufficient to avoid the insured named therein from becoming a co-insurer of any loss under such policy but in any event in an amount (i) in the case of fixed assets and equipment (including, without limitation, vehicles), at least equal to 100% of the actual replacement cost of such assets (including, without limitation, foundation, footings and excavation costs), subject to deductibles as aforesaid and (ii) in the case of inventory, not less than the fair market value thereof, subject to deductibles as aforesaid, PROVIDED that insurance in respect of Perils consisting of earthquakes or floods shall not be required to be obtained except upon 30 days' prior notice from the Agent. (2) AUTOMOBILE LIABILITY INSURANCE FOR BODILY INJURY AND PROPERTY DAMAGE - - -- insurance against liability for bodily injury and property damage in respect of all vehicles (whether owned, hired or rented by the Company or any of its Subsidiaries) at any time located at, or used in connection with, its Properties or operations in such amounts as are then customary for vehicles used in connection with similar Properties and businesses, but in any event to the extent required by applicable law. (3) COMPREHENSIVE GENERAL LIABILITY INSURANCE -- insurance against claims for bodily injury, death or Property damage occurring on, in or about the Properties (and adjoining streets, sidewalks and waterways) of the Company and its Subsidiaries, in such amounts as are then customary for Property similar in use in the jurisdictions where such Properties are located. (4) WORKERS' COMPENSATION INSURANCE -- workers' compensation insurance (including, without limitation, Employers' Liability Insurance) to the extent required by applicable law. (5) BUSINESS INTERRUPTION INSURANCE -- insurance against loss of operating income (up to an aggregate amount equal to $20,000,000 and subject to a deductible, or self-insured amount, not in excess of $100,000) by reason of any Peril. (6) PROFESSIONAL LIABILITY INSURANCE -- professional liability insurance in an amount equal to at least $10,000,000. Such insurance shall be written by financially responsible companies selected by the Company and (except for automobile insurance) having an A.M. Best rating of "A" or better and being in a financial size category of VII or larger (or, with respect to professional liability insurance only, an equivalent rating by a European equivalent of A.M. Best), or by other companies acceptable to the Majority Lenders, and (other than workers' compensation) shall name the Agent as loss payee (to the extent covering risk of loss or damage to tangible property) and as an additional named insured as its interests may appear (to the extent covering any other risk). Each policy referred to in this Section 9.04 shall provide that it will not be canceled or reduced, or allowed to lapse without renewal, except after not less than 30 days' notice to the Agent and shall also provide that the interests of the Agent and the Lenders shall not be invalidated by any act or negligence of the Company or any Person having an interest in any Property covered by the Mortgage nor by occupancy or use of any such Property for purposes more hazardous than permitted by such policy nor by any foreclosure or other proceedings relating to such Property. The Company will advise the Agent promptly of any significant policy cancellation (other than any such cancellation in connection with the replacement thereof), reduction or amendment. On or before the Closing Date, the Company will deliver to the Agent certificates of insurance satisfactory to the Agent evidencing the existence of all insurance required to be maintained by the Company hereunder setting forth the respective coverages, limits of liability, carrier, policy number and period of coverage and showing that such insurance will remain in effect through the December 31 falling at least six months after the date hereof, subject only to the payment of premiums as they become due (and attaching original copies of any policies with respect to casualty insurance). Thereafter, the Company will maintain all insurance required to be maintained by the Company hereunder through the December 31 of each subsequent calendar year as long as any Loans or Commitments are outstanding under this Agreement, subject only to the payment of premiums as they become due. In addition, the Company will not modify any of the provisions of any policy with respect to professional liability insurance without delivering the original copy of the endorsement reflecting such modification to the Agent accompanied by a written report of Kaye Insurance Associates, or any other firm of independent insurance brokers of nationally recognized standing, stating that, in their opinion, such policy (as so modified) adequately protects the interests of the Lenders and the Agent, is in compliance with the provisions of this Section 9.04, and is comparable in all respects with insurance carried by responsible owners and operators of businesses similar to those of the Company and its Subsidiaries. The Company will not obtain or carry separate insurance concurrent in form or contributing in the event of loss with that required by this Section 9.04 unless the Agent is the named insured thereunder, with loss payable as provided herein. The Company will immediately notify the Agent whenever any such separate insurance is obtained and shall deliver to the Agent the certificates evidencing the same. Without limiting the obligations of the Company under the foregoing provisions of this Section 9.04, in the event the Company shall fail to maintain in full force and effect insurance as required by the foregoing provisions of this Section 9.04, then the Agent may (upon notice to the Company), but shall have no obligation so to do, procure insurance covering the interests of the Lenders and the Agent in such amounts and against such risks as the Agent (or the Majority Lenders) shall deem appropriate, and the Company shall reimburse the Agent in respect of any premiums paid by the Agent in respect thereof. For purposes hereof, the term "PERIL" shall mean, collectively, fire, lightning, flood, windstorm, hail, earthquake, explosion, riot and civil commotion, vandalism and malicious mischief, damage from aircraft, vehicles and smoke and all other perils covered by the "all-risk" endorsement then in use in the jurisdictions where the Properties of the Company and its Subsidiaries are located. 9.05 PROHIBITION OF FUNDAMENTAL CHANGES. The Company will not, nor will it permit any of its Subsidiaries to, enter into any transaction of merger or consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution). The Company will not, nor will it permit any of its Subsidiaries to, acquire any business or Property from, or capital stock of, or be a party to any acquisition of, any Person except for (w) purchases of inventory and other Property to be sold or used in the ordinary course of business, (x) Investments permitted under Section 9.08 hereof, (y) Capital Expenditures permitted under Section 9.15 hereof and (z) other acquisitions so long as the aggregate consideration paid by the Obligors for all such acquisitions does not exceed $250,000. The Company will not, nor will it permit any of its Subsidiaries to, convey, sell, lease, transfer or otherwise dispose of, in one transaction or a series of transactions, any part of its business or Property, whether now owned or hereafter acquired (including, without limitation, receivables and leasehold interests, but excluding (i) obsolete or worn-out Property, tools or equipment no longer used or useful in its business, (ii) any inventory or other Property sold or disposed of in the ordinary course of business and on ordinary business terms, (iii) the granting of Liens to secure the Senior Notes, the 1998 Synthetic Lease Financing and any Future Synthetic Lease Financing, and (iv) other dispositions so long as the aggregate fair market value of all Property so disposed of does not exceed $250,000). 9.06 LIMITATION ON LIENS. The Company will not, nor will it permit any of its Subsidiaries to, create, incur, assume or suffer to exist any Lien upon any of its Property, whether now owned or hereafter acquired, except (without duplication): (a) Liens created pursuant to the Security Documents or the Operative Documents; (b) Liens in existence on the date hereof and listed in Part B of Schedule I hereto (excluding, however, following the making of the initial Loans hereunder, Liens securing Indebtedness to be repaid with the proceeds of such Loans, as indicated on said Schedule I); (c) Liens imposed by any governmental authority for taxes, assessments or charges not yet due or that are being contested in good faith and by appropriate proceedings if adequate reserves with respect thereto are maintained on the books of the Company or the affected Subsidiaries, as the case may be, in accordance with GAAP; (d) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business that are not overdue for a period of more than 30 days or that are being contested in good faith and by appropriate proceedings and Liens securing judgments but only to the extent for an amount and for a period not resulting in an Event of Default under Section 11.01(h) hereof; (e) pledges or deposits under worker's compensation, unemployment insurance and other social security legislation; (f) deposits to secure the performance of bids, trade contracts (other than for Indebtedness), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (g) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business and encumbrances consisting of zoning restrictions, easements, licenses, restrictions on the use of Property or minor imperfections in title thereto that, in the aggregate, are not material in amount, and that do not in any case materially detract from the value of the Property subject thereto or interfere with the ordinary conduct of the business of the Company or any of its Subsidiaries; (h) Liens upon real and/or tangible personal Property acquired after the date hereof (by purchase, construction or otherwise) by the Company or any of its Subsidiaries, each of which Liens either (A) existed on such Property before the time of its acquisition and was not created in anticipation thereof or (B) was created solely for the purpose of securing Indebtedness representing, or incurred to finance, refinance or refund, the cost (including the cost of construction) of such Property; PROVIDED that (i) no such Lien shall extend to or cover any Property of the Company or such Subsidiary other than the Property so acquired and improvements thereon and (ii) the principal amount of Indebtedness secured by any such Lien shall at no time exceed 80% of the fair market value (as determined in good faith by a senior financial officer of the Company) of such Property at the time it was acquired (by purchase, construction or otherwise); (i) Liens on the Property of a Designated Subsidiary securing Indebtedness permitted pursuant to Section 9.07(e) hereof; (j) Liens securing the Senior Notes that are PARI PASSU with the Liens in favor of the Agent and the Lenders under the Security Documents; and (k) Liens securing any Future Synthetic Lease Financing that are PARI PASSU with the Liens in favor of the Agent and the Lenders under the Security Documents. 9.07 INDEBTEDNESS. The Company will not, nor will it permit any of its Subsidiaries to, create, incur or suffer to exist any Indebtedness except (without duplication): (a) Indebtedness to the Lenders hereunder; (b) Indebtedness outstanding on the date hereof and listed in Part A of Schedule I hereto; (c) Indebtedness of Subsidiaries of the Company to the Company or to other Subsidiaries of the Company; (d) Indebtedness of the Company and its Subsidiaries secured by Liens permitted under Section 9.06(h) hereof up to but not exceeding $500,000 at any one time outstanding; (e) Indebtedness of the Designated Subsidiaries in an aggregate principal amount not to exceed $30,000,000 at any one time outstanding; (f) Indebtedness consisting of the Senior Notes, any Subordinated Notes, the 1998 Synthetic Lease Financing and any Future Synthetic Lease Financing; and (g) additional Indebtedness of the Company and its Subsidiaries (including, without limitation, Capital Lease Obligations) up to but not exceeding $500,000 at any one time outstanding. 9.08 INVESTMENTS. The Company will not, nor will it permit any of its Subsidiaries to, make or permit to remain outstanding any Investments except: (a) Investments outstanding on the date hereof and identified in Part B of Schedule III hereto; (b) operating deposit accounts with banks; (c) Permitted Investments; (d) Investments by the Company and its Subsidiaries in capital stock of Subsidiaries of the Company to the extent outstanding on the date of the financial statements of the Company and its Subsidiaries referred to in Section 8.02 hereof and advances by the Company and its Subsidiaries to Subsidiaries of the Company (other than Designated Subsidiaries) in the ordinary course of business or in connection with a Relevant Transaction financed with Loans; (e) Interest Rate Protection Agreements required to be maintained under Section 9.18 hereof; (f) additional Investments up to but not exceeding $200,000 in the aggregate; (g) existing and future Investments comprised of stocks, bonds and notes of existing or former account debtors of the Obligors if such Investment was received pursuant to the consummation of a bankruptcy plan of reorganization or similar proceedings of such account debtor; (h) the following loans or advances: (i) loans or advances by the Company or any of its Subsidiaries to employees in the ordinary course of business in an aggregate amount any one time outstanding not to exceed $100,000, and (ii) loans or advances made by the Company to Mr. David Cornell, with the terms and conditions set forth on Schedule VII to this Agreement, in an aggregate amount not to exceed $300,000; (i) Investments by the Company in Designated Subsidiaries made with the proceeds of Loans in an aggregate amount not to exceed $10,000,000. 9.09 DIVIDEND PAYMENTS. The Company will not, nor will it permit any of its Subsidiaries to, declare or make any Dividend Payment at any time; PROVIDED that the Company may repurchase shares of its capital stock so long as the aggregate amount paid by the Company for all such repurchases does not exceed $10,000,000. 9.10 EBITDA RATIO I. The Company will not permit the EBITDA Ratio I with respect to any period ending on a date that falls within any period set forth below under the column entitled "Period" to exceed the applicable ratio set forth under the caption "Ratio" opposite such period: PERIOD RATIO ---------------------------------------------------------------- September 9, 1997 through and including September 30, 2000 4.00 to 1 October 1, 2000 through and including March 31, 2001 3.75 to 1 April 1, 2001 through and including September 30, 2001 3.50 to 1 October 1, 2001 through and including March 31, 2002 3.25 to 1 April 1, 2002 through and including September 30, 2002 3.00 to 1 October 1, 2002 through and including March 31, 2003 2.50 to 1 9.11 EBITDA RATIO II. The Company will not permit the EBITDA Ratio II with respect to any period ending on a date that falls within any period set forth below under the column entitled "Period" to exceed the applicable ratio set forth under the caption "Ratio" opposite such period: PERIOD RATIO --------------------------------------------------------------- September 9, 1997 through and including September 30, 2000 5.00 to 1 October 1, 2000 through and including March 31, 2001 4.75 to 1 April 1, 2001 through and including September 30, 2001 4.50 to 1 October 1, 2001 through and including March 31, 2002 4.25 to 1 April 1, 2002 through and including September 30, 2002 4.00 to 1 October 1, 2002 through and including March 31, 2003 3.50 to 1 9.12 NET WORTH. The Company will not permit its Net Worth to be less than $80,000,000. 9.13 INTEREST COVERAGE RATIO. The Company will not permit the Interest Coverage Ratio with respect to any period ending on a date that falls within any period set forth below under the column entitled "Period" to be less than the applicable ratio set forth under the caption "Ratio" opposite such period: PERIOD RATIO --------------------------------------------------------------- September 9, 1997 through and including September 30, 1999 2.25 to 1 October 1, 1999 through and including September 30, 2000 2.50 to 1 October 1, 2000 through and including September 30, 2001 2.75 to 1 October 1, 2001 through and including March 31, 2003 3.00 to 1 9.14 FIXED CHARGES RATIO. The Company will not permit the Fixed Charge Ratio to be less than 1.25 to 1 at any time. 9.15 CAPITAL EXPENDITURES. The Company will not, and will not permit any of its Subsidiaries to, make any Capital Expenditures at any time, except for the following: (a) maintenance Capital Expenditures in an aggregate amount not to exceed; (i) for the year ending December 31, 1997, $2,750,000; and (ii)for each year thereafter, an amount equal to 3% of the total revenues of the Company and its Subsidiaries for such year; and (b) Capital Expenditures made in connection with Eligible Acquisitions and Eligible New Contracts as described pursuant to Section 7.02 (a) (v) (C) (z) hereof. 9.16 THE CORNELL COX GROUP, L.P. The Cornell Cox Group, L.P., a Delaware limited partnership, shall not hold or acquire any Property and shall not incur any Indebtedness or other liabilities in addition to those in existence as of the date hereof, which are correctly set forth on Schedule VI hereto. 9.17 SALE LEASE-BACK TRANSACTIONS. The Company will not, and will not permit any of its Subsidiaries to, enter into any arrangement with any Person whereby the Company or such Subsidiary shall sell or otherwise transfer any of its Property, whether now owned or hereafter acquired, and thereafter rent or lease such Property or similar Property for substantially the same use or uses as the Property sold or transferred UNLESS both of the following conditions are satisfied: (a) the consideration received by the Company or such Subsidiary in connection with such transfer is at least equal to the fair market value of the Property so transferred (as reasonably determined by the Board of Directors of the Company), and (b) all of the net proceeds received by the Company or any of its Subsidiaries in connection with any such transaction are used by the Company, within 12 months of the receipt thereof, to either (i) acquire other Property in compliance with the term of this Agreement and/or (ii) repay or prepay Indebtedness of the Company or any of its Subsidiaries (other than any Subordinated Notes). 9.18 DISCOUNT OF ACCOUNTS. The Company will not, and will not permit any of its Subsidiaries to, sell (with or without recourse) or discount any of their accounts receivable. 9.19 INTEREST RAT PROTECTION AGREEMENTS. The Company will, at all times after the date that is 180 days after the date of the Second Amended and Restated Credit Agreement, maintain in full force and effect one or more Interest Rate Protection Agreements with any Lender (or an affiliate of any Lender), that effectively enables the Company (in a manner satisfactory to the Majority Lenders), as at any date, to protect itself against interest rates as to a notional principal amount at least equal to 50% of the then outstanding principal amount of Revolving Credit Loans. 9.20 LINES OF BUSINESS. Neither the Company nor any of its Subsidiaries will engage to any substantial extent in any line or lines of business activity other than the business of operating correctional and/or detention facilities, substance abuse rehabilitation facilities and related lines of business. 9.21 TRANSACTIONS WITH AFFILIATES. Except as expressly permitted by this Agreement, the Company will not, nor will it permit any of its Subsidiaries to, directly or indirectly: (a) make any Investment in an Affiliate; (b) transfer, sell, lease, assign or otherwise dispose of any Property to an Affiliate; (c) merge into or consolidate with or purchase or acquire Property from an Affiliate; or (d) enter into any other transaction directly or indirectly with or for the benefit of an Affiliate (including, without limitation, Guarantees and assumptions of obligations of an Affiliate); PROVIDED that (x) any Affiliate who is an individual may serve as a director, officer or employee of the Company or any of its Subsidiaries and receive reasonable compensation for his or her services in such capacity and (y) the Company and its Subsidiaries may enter into transactions (other than extensions of credit by the Company or any of its Subsidiaries to an Affiliate or the payment of management or similar fees by the Company or a Subsidiary to an Affiliate) providing for the leasing of Property, the rendering or receipt of services or the purchase or sale of inventory and other Property in the ordinary course of business if the monetary or business consideration arising therefrom would be substantially as advantageous to the Company and its Subsidiaries as the monetary or business consideration that would obtain in a comparable transaction with a Person not an Affiliate. 9.22 USE OF PROCEEDS. (a) The Company will use the proceeds of the Revolving Credit Loans solely: (i) for working capital purposes, (ii) to make principal and interest payments on Loans, (iii) to make Capital Expenditures (including acquiring real property to be used for detention or correctional facilities), and (iv) subject to Section 9.08(i), to make Investments in Designated Subsidiaries; PROVIDED that neither the Agent nor any Lender shall have any responsibility as to the use of any of such proceeds. Notwithstanding the foregoing, no more than $15,000,000 of the aggregate proceeds of the Revolving Credit Loans outstanding at any one time may be used for working capital purposes. (b) The Lessor will use the proceeds of the Synthetic Lease Loans solely to acquire Land and Buildings and fund Construction; PROVIDED that neither the Agent nor any Lender shall have any responsibility as to the use of any of such proceeds. 9.23 CERTAIN OBLIGATIONS RESPECTING SUBSIDIARIES. (a) The Company will, and will cause each of its Subsidiaries to, take such action from time to time as shall be necessary to ensure that each of its Subsidiaries is a Wholly Owned Subsidiary. (b) In the event that any additional shares of capital stock shall be issued by any Subsidiary of the Company, the respective Obligor agrees forthwith to deliver to the Agent pursuant to the Security Agreement the certificates evidencing such shares of stock, accompanied by undated stock powers executed in blank and to take such other action as the Agent shall request to perfect the security interest created therein pursuant to the Security Agreement. (c) The Company will take such action, and will cause each of its Subsidiaries to take such action, from time to time as shall be necessary to ensure that all Subsidiaries of the Company are Subsidiary Guarantors and, thereby, "Obligors" hereunder. Without limiting the generality of the foregoing, in the event that the Company or any of its Subsidiaries shall form or acquire any new Subsidiary, the Company or the respective Subsidiary will cause (or in the event such new Subsidiary is a Designated Subsidiary, shall use its best effort to cause) such new Subsidiary to become a "Subsidiary Guarantor" (and, thereby, an "Obligor") hereunder pursuant to a written instrument in form and substance satisfactory to each Lender and the Agent, and to deliver such proof of corporate action, incumbency of officers, opinions of counsel and other documents as any Lender or the Agent shall have requested. 9.24 MODIFICATIONS OF CERTAIN DOCUMENTS. No Obligor will consent to any material modification, supplement or waiver of any of the provisions of any Correctional and Detention Facility Contract or any of the subordination provisions of the Subordinated Notes Documentation. 9.25 POSTING-CLOSING REAL PROPERTY. If any Obligor (other than any Designated Subsidiary) acquires any interest in real property (whether in fee or a leasehold estate, but excluding any Leased Properties) after the date of the Second Amended and Restated Credit Agreement, such Obligor shall notify the Agent and shall do the following: (a) upon the request of the Agent and the Majority Lenders at any time thereafter, do the following: (x) furnish to the Agent one or more Mortgages covering such interest in real property (and, if such property is a leasehold estate, appropriate estoppel certificates from the respective landlords thereof), and (y) furnish to the Agent evidence to the satisfaction of the Agent that the such real property is not subject to any Lien (other than Liens permitted under Section 9.06 hereof); and (b) during the continuance of any Default, do each of the following: (i) obtain one or more mortgagee policies of title insurance on forms of and issued by one or more title companies satisfactory to each Lender (the "TITLE Companies"), insuring the validity and priority of the Liens created under such Mortgage(s) for and in amounts satisfactory to each Lender, subject only to such exceptions as are satisfactory to the Majority Lenders; (ii) furnish to the Agent as-built surveys of recent date of such real property, showing such matters as may be required by any Lender, which surveys shall be in form and content acceptable to the Majority Lenders, and certified to the Agent and to each Lender and the Title Companies, and shall have been prepared by a registered surveyor acceptable to the Majority Lenders; and (iii) furnish to the Agent certified copies of unconditional certificates of occupancy (or, if it is not the practice to issue certificates of occupancy in the jurisdiction in which the facilities to be covered by such Mortgage(s) are located, then such other evidence reasonably satisfactory to the Majority Lenders) permitting the fully functioning operation and occupancy of each such facility and of such other permits necessary for the use and operation of each such facility issued by the respective governmental authorities having jurisdiction over each such facility. In addition, the Company shall have paid to the Title Companies all expenses and premiums of the Title Companies in connection with the issuance of such policies and in addition shall have paid to the Title Companies an amount equal to the recording and stamp taxes payable in connection with recording such Mortgage in the appropriate county land office(s). Section 10. THE LESSOR; EXERCISE OF REMEDIES UNDER LEASE. 10.01 COVENANTS OF LESSOR. So long as any Synthetic Lease Loan Lender's Synthetic Lease Loan Commitment remains in effect, any Synthetic Lease Loan remains outstanding and unpaid or any other amount is owing to any Synthetic Lease Loan Lender with respect to its Funding Party Balances (as that term is defined in the Master Agreement), subject to Section 10.02 hereof, the Lessor will promptly pay all amounts payable by it under this Agreement and the Notes issued by it in accordance with the terms hereof and thereof and shall duly perform each of its obligations under this Agreement and the Notes. The Lessor agrees to provide to the Agent a copy of each estoppel certificate that the Lessor proposes to deliver pursuant to Section 17.13 of the Lease at least five days prior to such delivery and to make any corrections thereto reasonably requested by the Agent prior to such delivery. The Lessor shall keep each Leased Property owned by it free and clear of all Lessor Liens (as that term is defined in the Master Agreement). The Lessor shall not reject any sale of any Leased Property pursuant to Section 14.6 of the Lease unless all of the related Synthetic Lease Loans have been paid in full or the Synthetic Lease Loan Lenders consent to such rejection. In the event that the Synthetic Lease Loan Lenders reject any sale of any Leased Property pursuant to Section 14.6 of the Lease, the Lessor agrees to take such action as the Synthetic Lease Lenders reasonably request to effect a sale or other disposition of such Leased Property, PROVIDED that the Lessor shall not be required to expend its own funds in connection with such sale or disposition. In the event that the Construction Agent returns any Leased Property to the Lessor pursuant to Section 5.3(a) of the Construction Agency Agreement, unless all of the related Synthetic Lease Loans are paid in full, the Lessor agrees to take such action as the Synthetic Lease Lenders reasonably request to complete the Construction, or to effect a sale or other disposition, of such Leased Property, PROVIDED that the Lessor shall not be required to expend its own funds in connection therewith. During the Construction Term for each Leased Property, the Lessor agrees to assume liability for, and to indemnify, protect, defend, save and hold harmless the Agent and each Synthetic Lease Loan Lender, on an After-Tax Basis (as that term is defined in the Master Agreement) from and against, any and all Claims (as that term is defined in the Master Agreement) that may be imposed on, incurred by or asserted or threatened to be asserted against the Agent or any Synthetic Lease Loan Lender, in any way relating to or arising out of the circumstances set forth in clauses (i) through (iv) of the first sentence of Section 3.3 of the Construction Agency Agreement, PROVIDED that the Lessor shall only be obligated pursuant to this sentence to the extent that the Lessor receives payment from the Construction Agent or any other Person with respect to such Claim. 10.02 LESSOR OBLIGATIONS NONRECOURSE; PAYMENT FROM CERTAIN LEASE OBLIGATIONS AND CERTAIN PROCEEDS OF LEASED PROPERTY ONLY. All payments to be made by the Lessor in respect of the Synthetic Lease Loans, the Notes and this Agreement shall be made only from certain payments received under the Lease, the Guaranty Agreement and the Construction Agency Agreement and certain proceeds of the Leased Properties and only to the extent that the Lessor or the Agent shall have received sufficient payments from such sources to make payments in respect of the Synthetic Lease Loans in accordance with Section 3 of the Loan Agreement. Each Synthetic Lease Loan Lender agrees that it will look solely to such sources of payments to the extent available for distribution to such Synthetic Lease Loan Lender as herein provided and that neither the Lessor nor the Agent is or shall be personally liable to any Synthetic Lease Loan Lender for any amount payable hereunder or under any Note. Nothing in this Agreement, the Notes, any other Basic Document or any Operative Document shall be construed as creating any liability (other than for willful misconduct, gross negligence, misrepresentation or breach of contract (other than the failure to make payments in respect of the Synthetic Lease Loans)) of the Lessor individually to pay any sum or to perform any covenant, either express or implied, in this Agreement, the Notes, any other Basic Documents or any Operative Document (all such liability, if any, being expressly waived by each Synthetic Lease Loan Lender) and that each Synthetic Lease Loan Lender, on behalf of itself and its successors and assigns, agrees in the case of any liability of the Lessor hereunder or thereunder (except for such liability attributable to its willful misconduct, gross negligence, misrepresentation or breach of contract (other than the failure to make payments in respect of the Synthetic Lease Loans)) that it will look solely to those certain payments received under the Lease, the Guaranty Agreement (as that term is defined in the Master Agreement) and the Construction Agency Agreement and those certain proceeds of the Leased Properties, provided, HOWEVER, that the Lessor in its individual capacity shall in any event be liable with respect to (i) the removal of Lessor's Liens (as that term is defined in the Master Agreement) or involving its gross negligence, willful misconduct, misrepresentation or breach of contract (other than the failure to make payments in respect of the Synthetic Lease Loans) or (ii) failure to turn over payments the Lessor has received in accordance with Section 3 of the Loan Agreement; and PROVIDED FURTHER that the foregoing exculpation of the Lessor shall not be deemed to be exculpations of the Company, any Lessee or any other Person. 10.03 EXERCISE OF REMEDIES UNDER THE LEASE. (a) LEASE-RELATED EVENT OF DEFAULT. With respect to any Potential Lease-related Event of Default as to which notice thereof by the Lessor to a Lessee or the Company is a requirement to cause such Potential Lease-related Event of Default to become a Lease-related Event of Default, the Lessor agrees to give such notice to such Lessee or the Company promptly upon receipt of a written request by any Synthetic Lease Loan Lender or the Agent. The Lessor shall not, without the prior written consent of the Majority Synthetic Lease Lenders, waive any Lease-related Event of Default. (b) ACCELERATION OF LEASE BALANCE. When a Lease-related Event of Default exists, the Lessor, upon the direction of the Majority Synthetic Lease Lenders, shall exercise remedies under Article XIII of the Lease to demand payment in full of the Lease Balance by the Lessees (the "ACCELERATION"). Following the Acceleration, the Lessor shall consult with the Synthetic Lease Loan Lenders regarding actions to be taken in response to such Lease-related Event of Default. The Lessor: (i) shall not, without the prior written consent of the Majority Synthetic Lease B Lenders, and (ii) shall (subject to the provisions of this Section 10.03), if so directed by the Majority Synthetic Lease B Lenders, do any of the following: commence eviction or foreclosure proceedings, or file a lawsuit against any Lessee under the Lease, or sell the Leased Properties, or exercise other remedies against the Lessee under the Operative Documents in respect of such Lease-related Event of Default; PROVIDED, HOWEVER, that any payments received by the Lessor shall (subject to the provisions of the Collateral Sharing Documentation) be distributed in accordance with Section 3 of the Loan Agreement. Notwithstanding any such consent, direction or approval by the Majority Synthetic Lease B Lenders of any such action or omission, the Lessor shall not have any obligation to follow such direction if the same would, in the Lessor's reasonable judgment, require the Lessor to expend its own funds or expose the Lessor to expense, or unless Synthetic Lease Lenders and B Lenders provide to the Lessor an indemnity, in form and substance reasonably acceptable to the Lessor, for such liability, loss or damage or unless and until the Synthetic Lease Loan Lenders advance to the Lessor an amount which is sufficient, in the Lessor's reasonable judgment, to cover such liability, expense, loss or damage (excluding the Lessor's pro rata share thereof, if any). Notwithstanding the foregoing, on and after the related Release Date (and any application otherwise required under Section 3 of the Loan Agreement has been made): the Synthetic Lease Loan Lenders shall have no rights to such Leased Property or any proceeds thereof; the Synthetic Lease Loan Lenders shall have no rights to direct or give consent to any actions with respect to such Leased Property and the proceeds thereof; the Lessor shall have absolute discretion (but in all events subject to the terms of the Operative Documents) with respect to such exercise of remedies with respect to such Leased Property, and the proceeds thereof, including, without limitation, any foreclosure or sale of such Leased Property; and the Lessor shall have no liability to the Synthetic Lease Loan Lenders with respect to the Lessor's actions or failure to take any action with respect to such Leased Property. Section 11. EVENTS OF DEFAULT. 11.01 EVENTS OF DEFAULT. If one or more of the following events (herein called "EVENTS OF DEFAULT") shall occur and be continuing: (a) The Company shall: (i) default in the payment of any principal of any Loan or any Reimbursement Obligation when due (whether at stated maturity or at mandatory or optional prepayment); or (ii) default in the payment of any interest on any Loan, any fee or any other amount payable by it hereunder or under any other Basic Document when due and such default shall have continued unremedied for one Business Day; or (b) The Company or any of its Subsidiaries shall default in the payment when due of any principal of or interest on any of its other Indebtedness aggregating $100,000 or more, or in the payment when due of any amount under any Interest Rate Protection Agreement; or any event specified in any note, agreement, indenture or other document evidencing or relating to any such Indebtedness or any event specified in any Interest Rate Protection Agreement shall occur if the effect of such event is to cause, or (with the giving of any notice or the lapse of time or both) to permit the holder or holders of such Indebtedness (or a trustee or agent on behalf of such holder or holders) to cause, such Indebtedness to become due, or to be prepaid in full (whether by redemption, purchase, offer to purchase or otherwise), prior to its stated maturity or, in the case of an Interest Rate Protection Agreement, to permit the payments owing under such Interest Rate Protection Agreement to be liquidated; or the Company shall be obligated to pay any "Recourse Deficiency Amount" (as that term is defined in the Master Agreement) in respect of the 1998 Synthetic Lease Financing (or any substantially similar payment in respect of any Future Synthetic Lease Financing); or (c) Any representation, warranty or certification made or deemed made herein or in any other Basic Document (or in any modification or supplement hereto or thereto) by any Obligor, or any certificate furnished to any Lender or the Agent pursuant to the provisions hereof or thereof, shall prove to have been false or misleading as of the time made or furnished in any material respect; or (d) The Company shall default in the performance of any of its obligations under any of Sections 9.01(j), 9.05, 9.06, 9.07, 9.08, 9.09, 9.10, 9.11, 9.12, 9.13, 9.14, 9.15, 9.17, 9.18, 9.19, 9.20 or 9.22 hereof; or any Obligor shall default in the performance of any of its obligations under Section 4.2 or 5.2 of the Security Agreement; or "Event of Default" under any Mortgage; or any Obligor shall default in the performance of any of its other obligations in this Agreement or any other Basic Document and such default shall continue unremedied for a period of thirty or more days after notice thereof to the Company by the Agent or any Lender (through the Agent); or (e) The Company or any of its Subsidiaries shall admit in writing its inability to, or be generally unable to, pay its debts as such debts become due; or (f) The Company or any of its Subsidiaries shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee, examiner or liquidator of itself or of all or a substantial part of its Property, (ii) make a general assignment for the benefit of its creditors, (iii) commence a voluntary case under the Bankruptcy Code, (iv) file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, liquidation, dissolution, arrangement or winding-up, or composition or readjustment of debts, (v) fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the Bankruptcy Code or (vi) take any corporate action for the purpose of effecting any of the foregoing; or (g) A proceeding or case shall be commenced, without the application or consent of such of the Company or any of its Subsidiaries as is affected thereby, in any court of competent jurisdiction, seeking (i) the reorganization, liquidation, dissolution, arrangement or winding-up, or the composition or readjustment of the debts of the Company or any of its Subsidiaries, (ii) the appointment of a receiver, custodian, trustee, examiner, liquidator or the like of the Company or any of its Subsidiaries or of all or any substantial part of its Property, or (iii) similar relief in respect of the Company or any of its Subsidiaries under any law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts, and such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, for a period of 60 or more days; or an order for relief against the Company or any of its Subsidiaries shall be entered in an involuntary case under the Bankruptcy Code; or (h) A final judgment or judgments for the payment of money in an amount in excess of $100,000 shall be rendered by one or more courts, administrative tribunals or other bodies having jurisdiction against the Company or any of its Subsidiaries and the same shall not be discharged (or provision shall not be made for such discharge), or a stay of execution thereof shall not be procured, within 30 days from the date of entry thereof and the Company or such Subsidiary (as the case may be) shall not, within said period of 30 days, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal; or (i) An event or condition specified in Section 9.01(i) hereof shall occur or exist with respect to any Plan or Multiemployer Plan and, as a result of such event or condition, together with all other such events or conditions, the Company or any ERISA Affiliate shall incur or in the opinion of the Majority Lenders shall be reasonably likely to incur a liability to a Plan, a Multiemployer Plan or PBGC (or any combination of the foregoing) that, in the determination of the Majority Lenders, would (either individually or in the aggregate) have a Material Adverse Effect; or (j) A reasonable basis shall exist for the assertion against the Company or any of its Subsidiaries, or any predecessor in interest of the Company or any of its Subsidiaries or Affiliates, of (or there shall have been asserted against the Company or any of its Subsidiaries) an Environmental Claim that, in the judgment of the Majority Lenders is reasonably likely to be determined adversely to the Company or any of its Subsidiaries, and the amount thereof (either individually or in the aggregate) is reasonably likely to have a Material Adverse Effect (insofar as such amount is payable by the Company or any of its Subsidiaries but after deducting any portion thereof that is reasonably expected to be paid by other creditworthy Persons jointly and severally liable therefor); or (k) The Liens created by the Security Documents shall at any time not constitute a valid and perfected Lien on the collateral stated to be covered thereby (to the extent perfection by filing, registration, recordation or possession is required herein or therein) in favor of the Agent, free and clear of all other Liens (other than Liens permitted under Section 9.06 hereof or under the respective Security Documents), or, except for expiration in accordance with its terms, any of the Security Documents shall for whatever reason be terminated or cease to be in full force and effect, or the enforceability thereof shall be contested by any Obligor; or (l) Any of the following: (i) 15 Business Days shall have elapsed after any material Correctional and Detention Facility Contract shall have been terminated and shall not have been renewed on substantially the same terms or terms more favorable to the Obligors (unless during such 15 Business Day period the Company shall have demonstrated to the satisfaction of the Agent and each Lender that such termination will not have a Material Adverse Effect); or (ii) the payment terms of any material Correctional and Detention Facility Contract shall be modified or any other terms of any material Correctional and Detention Facility Contract shall be modified in any respect which the Majority Lenders determine could reasonably be expected to have a Material Adverse Effect; or (iii) any Obligor shall default in the performance of any of its material obligations under any material Correctional and Detention Facility Contract; or (iv) any party to any Correctional and Detention Facility Contract (other than an Obligor) shall default in the performance of any of its material obligations thereunder; or (v) an event or condition of the type described in Section 10(f) or 10(g) shall occur or exist with respect to any party to any material Correctional and Detention Facility Contract (other than an Obligor); or (vi) any relevant legislature or administrative body shall fail to appropriate any material amount of funds in respect of any material Correctional and Detention Facility Contract (for purposes of this clause (l) and the following clause (m), a Correctional and Detention Facility Contract shall be deemed to be "material" if the failure of the Obligors to receive the amounts stated to be due and owing thereunder could reasonably be expected to have a Material Adverse Effect); or (m) Any Use Permit relating to a material Correctional and Detention Facility Agreement shall be revoked, withdrawn or otherwise terminated; or any Use Permit relating to a material Correctional and Detention Facility Agreement shall be modified, amended or supplemented in a way which the Majority Lenders determine could have a Material Adverse Effect; THEREUPON: (1) in the case of an Event of Default other than one referred to in clause (f) or (g) of this Section 11.01 with respect to any Obligor, (A) the Agent may and, upon request of the Majority Lenders shall, by notice to the Company, terminate the Commitments and they shall thereupon terminate, and (B) the Agent may and, upon request of the Majority Lenders shall by notice to the Company, declare the principal amount then outstanding of, and the accrued interest on, the Loans, the Reimbursement Obligations and all other amounts payable by the Obligors hereunder and under the Notes to be forthwith due and payable, whereupon such amounts shall be immediately due and payable without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by each Obligor; and (2) in the case of the occurrence of an Event of Default referred to in clause (f) or (g) of this Section 11 with respect to any Obligor, the Commitments shall automatically be terminated and the principal amount then outstanding of, and the accrued interest on, the Loans, the Reimbursement Obligations and all other amounts payable by the Obligors hereunder and under the Notes shall automatically become immediately due and payable without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by each Obligor. In addition, upon the occurrence and during the continuance of any Event of Default (if the Agent has declared the principal amount then outstanding of, and accrued interest on, the Loans and all other amounts payable by the Company hereunder and under the Notes to be due and payable), the Company agrees that it shall, if requested by the Agent or the Majority Lenders through the Agent (and, in the case of any Event of Default referred to in clause (f) or (g) of this Section 11.01 with respect to any Obligor, forthwith, without any demand or the taking of any other action by the Agent or the Lenders) provide cover for the Letter of Credit Liabilities by paying to the Agent immediately available funds in an amount equal to the then aggregate undrawn face amount of all Letters of Credit, which funds shall be held by the Agent in the Collateral Account as collateral security in the first instance for the Letter of Credit Liabilities and be subject to withdrawal only as therein provided. 11.02 LEASE-RELATED EVENTS OF DEFAULT. (a) LEASE-RELATED EVENTS OF DEFAULT. Each of the following events shall constitute a Lease-related Event of Default (whether any such event shall be voluntary or involuntary or come about or be effected by operation of law or pursuant to or in compliance with any judgment, decree or order of any court or any order, rule or regulation of any Governmental Authority) and each such Lease-related Event of Default shall continue so long as, but only as long as, it shall not have been remedied: (i) Lessor shall fail to distribute in accordance with the provisions of Section 3 of the Loan Agreement any amount received by the Lessor pursuant to the Lease or the Master Agreement within two Business Days of receipt thereof if and to the extent that the Agent or the Synthetic Lease Loan Lenders are entitled to such amount or a portion thereof; or (ii) the Lessor shall fail to pay to the Agent, within two Business Days of the Lessor's receipt thereof, any amount which a Lessee is required, pursuant to the Operative Documents, to pay to the Agent but erroneously pays to the Lessor; or (iii) failure by the Lessor to perform in any material respect any other covenant or condition herein or in any other Operative Document to which the Lessor is a party, which failure shall continue unremedied for 30 days after receipt by the Lessor of written notice thereof from the Agent or any Synthetic Lease Loan Lender; or (iv) any representation or warranty of the Lessor contained in any Operative Document or in any certificate required to be delivered thereunder shall prove to have been incorrect in a material respect when made and shall not have been cured within thirty days of receipt by the Lessor of written notice thereof from the Agent or any Synthetic Lease Loan Lender; or (v) the Lessor or the General Partner (as that term is defined in the Master Agreement) shall become bankrupt or make an assignment for the benefit of creditors or consent to the appointment of a trustee or receiver; or a trustee or a receiver shall be appointed for the Lessor or the General Partner or for substantially all of its property without its consent and shall not be dismissed or stayed within a period of sixty days; or bankruptcy, reorganization or insolvency proceedings shall be instituted by or against the Lessor or the General Partner and, if instituted against the Lessor or the General Partner, shall not be dismissed or stayed for a period of 60 days; or (vi) any "Event of Default" (as that term is defined in the Master Agreement) shall occur and be continuing. (b) REMEDIES. (i) Upon the occurrence of a Lease-related Event of Default, (a) if such event is a Lease-related Event of Default specified in clause (v) of Section 11.02(a) hereof with respect to the Lessor, automatically the Synthetic Lease Loan Commitments shall terminate and the outstanding principal of, and accrued interest on, the Synthetic Lease Loans shall be immediately due and payable, and (b) if such event is any other Lease-related Event of Default, upon written request of the Majority Synthetic Lease A and B Lenders, the Agent shall, by notice of default to the Lessor, declare the Synthetic Lease Loan Commitments of the Synthetic Lease Loan Lenders to be terminated forthwith and the outstanding principal of, and accrued interest on, the Synthetic Lease Loans to be immediately due and payable, whereupon the Synthetic Lease Loan Commitments of the Synthetic Lease Loan Lenders shall immediately terminate and the outstanding principal of, and accrued interest on, the Synthetic Lease Loans shall become immediately due and payable. (ii)When a Lease-related Event of Default exists, the Agent may, and upon the written instructions of the Majority Synthetic Lease B Lenders shall, exercise any or all of the rights and powers and pursue any and all of the remedies available to it hereunder, under the Notes, or any provision of law. When a Lease-related Event of Default exists, the Agent may, and upon the written instructions of the Majority Synthetic Lease B Lenders shall, have the right to exercise all rights of the Lessor under the Lease pursuant to the terms and in the manner provided for in the Mortgages and the Assignments of Lease and Rents. (iii) Except as expressly provided above, no remedy under this Section 11.02(b) is intended to be exclusive, but each shall be cumulative and in addition to any other remedy provided under this Section 11.02(b) or under the other Operative Documents or otherwise available at law or in equity. The exercise by the Agent or any Synthetic Lease Loan Lender of any one or more of such remedies shall not preclude the simultaneous or later exercise of any other remedy or remedies. No express or implied waiver by the Agent or any Synthetic Lease Loan Lender of any Lease-related Event of Default shall in any way be, or be construed to be, a waiver of any future or subsequent Lease-related Event of Default. The failure or delay of the Agent or any Synthetic Lease Loan Lender in exercising any rights granted it hereunder upon any occurrence of any of the contingencies set forth herein shall not constitute a waiver of any such right upon the continuation or recurrence of any such contingencies or similar contingencies and any single or partial exercise of any particular right by the Agent or any Synthetic Lease Loan Lender shall not exhaust the same or constitute a waiver of any other right provided herein. Section 12. THE AGENT. 12.01 APPOINTMENT, POWERS AND IMMUNITIES. Each Lender hereby irrevocably appoints and authorizes the Agent to act as its agent hereunder and under the other Basic Documents with such powers as are specifically delegated to the Agent by the terms of this Agreement and of the other Basic Documents, together with such other powers as are reasonably incidental thereto. The Agent (which term as used in this sentence and in Section 12.05 and the first sentence of Section 12.06 hereof shall include reference to its affiliates and its own and its affiliates' officers, directors, employees and agents): (a) shall have no duties or responsibilities except those expressly set forth in this Agreement and in the other Basic Documents, and shall not by reason of this Agreement or any other Basic Document be a trustee for any Lender; (b) shall not be responsible to the Lenders for any recitals, statements, representations or warranties contained in this Agreement or in any other Basic Document, or in any certificate or other document referred to or provided for in, or received by any of them under, this Agreement or any other Basic Document, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement, any Note or any other Basic Document or any other document referred to or provided for herein or therein or for any failure by the Company or any other Person to perform any of its obligations hereunder or thereunder; (c) shall not be required to initiate or conduct any litigation or collection proceedings hereunder or under any other Basic Document; and (d) shall not be responsible for any action taken or omitted to be taken by it hereunder or under any other Basic Document or under any other document or instrument referred to or provided for herein or therein or in connection herewith or therewith, except for its own gross negligence or willful misconduct. The Agent may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by it in good faith. The Agent may deem and treat the payee of any Note as the holder thereof for all purposes hereof unless and until a notice of the assignment or transfer thereof shall have been filed with the Agent, together with the consent of the Company to such assignment or transfer (to the extent provided in Section 13.06(b) hereof). 12.02 RELIANCE BY AGENT. The Agent shall be entitled to rely upon any certification, notice or other communication (including, without limitation, any thereof by telephone, telecopy, telex, telegram or cable) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by the Agent. As to any matters not expressly provided for by this Agreement or any other Basic Document, the Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder or thereunder in accordance with instructions given by the Majority Lenders or, if provided herein, in accordance with the instructions given all of the Lenders, and such instructions of such Lenders and any action taken or failure to act pursuant thereto shall be binding on all of the Lenders. 12.03 DEFAULTS. The Agent shall not be deemed to have knowledge or notice of the occurrence of a Default unless the Agent has received notice from a Lender or the Company specifying such Default and stating that such notice is a "Notice of Default". In the event that the Agent receives such a notice of the occurrence of a Default, the Agent shall give prompt notice thereof to the Lenders. The Agent shall (subject to Section 12.07 hereof) take such action with respect to such Default as shall be directed by the Majority Lenders, PROVIDED that, unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default as it shall deem advisable in the best interest of the Lenders except to the extent that this Agreement expressly requires that such action be taken, or not be taken, only with the consent or upon the authorization of the Majority Lenders or all of the Lenders. 12.04 RIGHTS AS A LENDER. With respect to its Commitments and the Loans made by it, ING (and any successor acting as Agent) in its capacity as a Lender hereunder shall have the same rights and powers hereunder as any other Lender and may exercise the same as though it were not acting as the Agent, and the term "Lender" or "Lenders" shall, unless the context otherwise indicates, include the Agent in its individual capacity. ING (and any successor acting as Agent) and its affiliates may (without having to account therefor to any Lender) accept deposits from, lend money to, make investments in and generally engage in any kind of banking, trust or other business with the Obligors (and any of their Subsidiaries or Affiliates) as if it were not acting as the Agent, and ING and its affiliates may accept fees and other consideration from the Obligors for services in connection with this Agreement or otherwise without having to account for the same to the Lenders. 12.05 INDEMNIFICATION. The Lenders agree to indemnify the Agent (to the extent not reimbursed under Section 13.03 hereof, but without limiting the obligations of the Company under said Section 13.03, and including in any event any payments under any indemnity that the Agent is required to issue to any bank referred to in Section 4.02 of the Security Agreement to which remittances in respect of Accounts, as defined therein, are to be made) ratably in accordance with their respective Commitments, for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever that may be imposed on, incurred by or asserted against the Agent (including by any Lender) arising out of or by reason of any investigation in or in any way relating to or arising out of this Agreement or any other Basic Document or any other documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby (including, without limitation, the costs and expenses that the Company is obligated to pay under Section 13.03 hereof, but excluding, unless a Default has occurred and is continuing, normal administrative costs and expenses incident to the performance of its agency duties hereunder) or the enforcement of any of the terms hereof or thereof or of any such other documents, PROVIDED that no Lender shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the party to be indemnified. 12.06 NON-RELIANCE ON AGENT AND OTHER LENDERS. Each Lender agrees that it has, independently and without reliance on the Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Company and its Subsidiaries and decision to enter into this Agreement and that it will, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement or under any other Basic Document. The Agent shall not be required to keep itself informed as to the performance or observance by any Obligor of this Agreement or any of the other Basic Documents or any other document referred to or provided for herein or therein or to inspect the Properties or books of the Company or any of its Subsidiaries. Except for notices, reports and other documents and information expressly required to be furnished to the Lenders by the Agent hereunder or under the Security Documents, the Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the affairs, financial condition or business of the Company or any of its Subsidiaries (or any of their affiliates) that may come into the possession of the Agent or any of its affiliates. 12.07 FAILURE TO ACT. Except for action expressly required of the Agent hereunder and under the other Basic Documents, the Agent shall in all cases be fully justified in failing or refusing to act hereunder and thereunder unless it shall receive further assurances to its satisfaction from the Lenders of their indemnification obligations under Section 12.05 hereof against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action. 12.08 RESIGNATION OR REMOVAL OF AGENT. Subject to the appointment and acceptance of a successor Agent as provided below, the Agent may resign at any time by giving notice thereof to the Lenders and the Company, and the Agent may be removed at any time with or without cause by the Majority Lenders. Upon any such resignation or removal, the Majority Lenders shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Majority Lenders and shall have accepted such appointment within 30 days after the retiring Agent's giving of notice of resignation or the Majority Lenders' removal of the retiring Agent, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent, that shall be a financial institution that has an office in New York, New York. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Section 12 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Agent. The Agent may at any time assign all of its rights and obligations hereunder to any affiliate of the Agent by notice to the Company and each Lender. 12.09 CONSENTS UNDER OTHER BASIC DOCUMENTS. Except as otherwise provided in Section 13.04 hereof with respect to this Agreement, the Agent may, with the prior consent of the Majority Lenders (but not otherwise), consent to any modification, supplement or waiver under any of the Basic Documents, PROVIDED that, without the prior consent of each Lender, the Agent shall not (except as provided herein or in the Security Documents) release any collateral or otherwise terminate any Lien under any Basic Document providing for collateral security, or agree to additional obligations being secured by such collateral security, except that no such consent shall be required, and the Agent is hereby authorized, to release any Lien covering Property that is the subject of a disposition of Property permitted hereunder or to which the Majority Lenders have consented. Section 13. MISCELLANEOUS. 13.01 WAIVER. No failure on the part of the Agent or any Lender to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under this Agreement or any Note shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under this Agreement or any Note preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. Each Obligor irrevocably waives, to the fullest extent permitted by applicable law, any claim that any action or proceeding commenced by the Agent or any Lender relating in any way to this Agreement should be dismissed or stayed by reason, or pending the resolution, of any action or proceeding commenced by any Obligor relating in any way to this Agreement whether or not commenced earlier. To the fullest extent permitted by applicable law, the Obligors shall take all measures necessary for any such action or proceeding commenced by the Agent or any Lender to proceed to judgment prior to the entry of judgment in any such action or proceeding commenced by any Obligor. 13.02 NOTICES. All notices, requests and other communications provided for herein and under the Security Documents (including, without limitation, any modifications of, or waivers, requests or consents under, this Agreement) shall be given or made in writing (including, without limitation, by telex or telecopy), delivered to the intended recipient at the "Address for Notices" specified below its name on the signature pages hereof (below the name of the Company, in the case of any Subsidiary Guarantor); or, as to any party, at such other address as shall be designated by such party in a notice to each other party. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given when transmitted by telex or telecopier or personally delivered or, in the case of a mailed notice, upon receipt, in each case given or addressed as aforesaid. 13.03 EXPENSES, ETC. The Company agrees to pay or reimburse each of the Lenders and the Agent for: (a) all reasonable out-of-pocket costs and expenses of the Agent (including, without limitation, the reasonable fees and expenses of Mayer, Brown & Platt, special New York counsel to ING) in connection with (i) the negotiation, preparation, execution and delivery of this Agreement and the other Basic Documents and the extension of credit hereunder and (ii) the negotiation or preparation of any modification, supplement or waiver of any of the terms of this Agreement or any of the other Basic Documents (whether or not consummated); (b) all reasonable out-of-pocket costs and expenses of the Lenders and the Agent (including, without limitation, the reasonable fees and expenses of legal counsel) in connection with (i) any Default and any enforcement or collection proceedings resulting therefrom, including, without limitation, all manner of participation in or other involvement with (x) bankruptcy, insolvency, receivership, foreclosure, winding up or liquidation proceedings, (y) judicial or regulatory proceedings and (z) workout, restructuring or other negotiations or proceedings (whether or not the workout, restructuring or transaction contemplated thereby is consummated) and (ii) the enforcement of this Section 13.03; and (c) all transfer, stamp, documentary or other similar taxes, assessments or charges levied by any governmental or revenue authority in respect of this Agreement or any of the other Basic Documents or any other document referred to herein or therein and all costs, expenses, taxes, assessments and other charges incurred in connection with any filing, registration, recording or perfection of any security interest contemplated by any Basic Document or any other document referred to therein. The Company hereby agrees to indemnify the Agent and each Lender and their respective directors, officers, employees, attorneys and agents from, and hold each of them harmless against, any and all losses, liabilities, claims, damages or expenses incurred by any of them (including, without limitation, any and all losses, liabilities, claims, damages or expenses incurred by the Agent to any Lender, whether or not the Agent or any Lender is a party thereto) arising out of or by reason of any investigation or litigation or other proceedings (including any threatened investigation or litigation or other proceedings) relating to the Repurchase Transaction and the transactions contemplated thereby, the extensions of credit hereunder or any actual or proposed use by the Company or any of its Subsidiaries of the proceeds of any of the extensions of credit hereunder, including, without limitation, the reasonable fees and disbursements of counsel incurred in connection with any such investigation or litigation or other proceedings (but excluding any such losses, liabilities, claims, damages or expenses incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified). Without limiting the generality of the foregoing, the Company will (x) indemnify the Agent for any payments that the Agent is required to make under any indemnity issued to any bank referred to in Section 4.02 of the Security Agreement to which remittances in respect to Accounts, as defined therein, are to be made and (y) indemnify the Agent and each Lender from, and hold the Agent and each Lender harmless against, any losses, liabilities, claims, damages or expenses described in the preceding sentence arising under any Environmental Law as a result of (i) the past, present or future operations of the Company or any of its Subsidiaries (or any predecessor in interest to the Company or any of its Subsidiaries), or (ii) the past, present or future condition of any site or facility owned, operated or leased at any time by the Company or any of its Subsidiaries (or any such predecessor in interest), or (iii) any Release or threatened Release of any Hazardous Materials at or from any such site or facility, including any such Release or threatened Release that shall occur during any period when the Agent or any Lender shall be in possession of any such site or facility following the exercise by the Agent or any Lender of any of its rights and remedies hereunder or under any of the Security Documents, PROVIDED THAT the Company shall not be liable under this subclause (y) for any of the foregoing to the extent they arise solely from the gross negligence or willful misconduct of the party to be indemnified (or such party's employees or agents). 13.04 AMENDMENTS, ETC. Except as otherwise expressly provided in this Agreement, any provision of this Agreement may be modified or supplemented only by an instrument in writing signed by the Company, the Agent and the Majority Lenders, or by the Company and the Agent acting with the consent of the Majority Lenders, and any provision of this Agreement may be waived by the Majority Lenders or by the Agent acting with the consent of the Majority Lenders; PROVIDED that: (a) no modification, supplement or waiver shall, unless by an instrument signed by all of the Lenders or by the Agent acting with the consent of all of the Lenders: (i) increase, or extend the term of any of the Commitments, or extend the time or waive any requirement for the reduction or termination of any of the Commitments, (ii) extend the date fixed for the payment of principal of or interest on any Loan, the Reimbursement Obligations or any fee hereunder, (iii) reduce the amount of any such payment of principal, (iv) reduce the rate at which interest is payable thereon or any fee is payable hereunder, (v) alter the rights or obligations of the Company to prepay Loans, (vi) alter the terms of this Section 13.04, (vii) modify the definition of the term "Majority Lenders," "Majority Revolving Credit Lenders," "Majority Synthetic Lease A Lenders," "Majority Synthetic Lease B Lenders," "Majority Synthetic Lease A and B Lenders," "Majority Synthetic Lease Lenders" or modify in any other manner the number or percentage of the Lenders required to make any determinations or waive any rights hereunder or to modify any provision hereof, or (viii) waive any of the conditions precedent set forth in Section 7.01 hereof; (b) any modification or supplement of Section 7.02 hereof shall require the consent of all of the Revolving Credit Lenders (and shall not require the consent of any of the Synthetic Lease Loan Lenders); (c) any modification or supplement of Section 12 hereof shall require the consent of the Agent; (d) any modification or supplement of Section 6 hereof shall require the consent of each Subsidiary Guarantor; and (e) any modification or supplement of Section 9 hereof (other than Section 9.19 (Interest Rate Protection Agreements) or Section 9.22 (Use of Proceeds)), and any determination as to whether the events described in clauses (i), (j), (l) or (m) of Section 11.01 hereof (ERISA matters, environmental matters, matters related to Correctional and Detention Facility Contracts and matters relating to Use Permits, respectively) have occurred, shall require the consent of the holders of at least 51% of the sum of (a) the Revolving Credit Commitments (or, after the termination of the Revolving Credit Commitments, the outstanding principal amount of the Revolving Credit Loans), (b) the Synthetic Lease Loan Commitments (or, after the termination thereof, the outstanding principal amount of Synthetic Lease Loans), (c) the amount of the commitments to make B Loans (or, after the termination of such commitments, the outstanding amounts thereof), and (d) the amount of the commitment of the Lessor to make investments in Leased Property (or, after the termination of such commitment, the outstanding amount thereof). 13.05 SUCCESSORS AND ASSIGNS; OBLIGATIONS UNDER OPERATIVE DOCUMENTS. (a) This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. (b) The Synthetic Lease Lenders acknowledge and agree that they benefit from certain provisions of the Master Agreement and the other Operative Documents, and each Synthetic Lease Lender hereby severally agrees to comply with all of the obligations in the Master Agreement and the other Operative Documents stated therein to be performed by it. 13.06 ASSIGNMENTS AND PARTICIPATIONS. (a) No Obligor may assign any of its rights or obligations hereunder or under the Notes without the prior consent of all of the Lenders and the Agent. (b) Each Lender may, with the consent of the Agent and (in the case of a Revolving Credit Lender) the Letter of Credit Issuer, assign any of its Loans, its Notes, its Letter of Credit Liabilities and its Commitments (and, in the case of its outstanding Commitments, only with the consent of the Company which consent shall not be unreasonably withheld); PROVIDED that (i) no such consent by the Company or the Agent shall be required in the case of any assignment to another Lender; (ii) any such partial assignment shall be in an amount at least equal to $5,000,000; (iii) each such assignment by a Lender of its Loans, Letter of Credit Liabilities or Commitment shall be made in such manner so that the same portion of its Loans, Letter of Credit Liabilities and Commitment is assigned to the respective assignee; and (iv) each such assignment by a Synthetic Lease Loan Lender of all or any portion of its Synthetic Lease Loan shall be made in such manner so that the same portion of its B Loan is assigned to the respective assignee. Upon execution and delivery by the assignor and the assignee to the Company and the Agent of an Assignment Agreement substantially in the form of Exhibit E hereto pursuant to which such assignee agrees to become a "Lender" hereunder (if not already a Lender) having the Commitment(s), Letter of Credit Liabilities and Loans specified in such Assignment Agreement, and upon consent thereto by the Company and the Agent, to the extent required above, the assignee shall have, to the extent of such assignment (unless otherwise provided in such assignment with the consent of the Company and the Agent), the obligations, rights and benefits of a Lender hereunder holding the Commitment(s), Letter of Credit Liabilities and Loans (or portion thereof) assigned to it (in addition to the Commitment(s), Letter of Credit Liabilities and Loans, if any, theretofore held by such assignee) and the assigning Lender shall, to the extent of such assignment, be released from the Commitment(s) (or portion(s) thereof) so assigned. Upon each such assignment, the assigning Lender shall pay the Agent an assignment fee of $3,000. (c) A Lender may sell or agree to sell to one or more other Persons a participation in all or any part of any Loans or Letter of Credit Interest held by it, or in its Commitments, in which event each purchaser of a participation (a "PARTICIPANT") shall be entitled to the rights and benefits of the provisions of Section 9.01(k) hereof with respect to its participation in such Loans, Letter of Credit Interest and Commitments as if (and the Company shall be directly obligated to such Participant under such provisions as if) such Participant were a "Lender" for purposes of said Section, but, except as otherwise provided in Section 4.07(c) hereof, shall not have any other rights or benefits under this Agreement or any Note or any other Basic Document (the Participant's rights against such Lender in respect of such participation to be those set forth in the agreements executed by such Lender in favor of the Participant). All amounts payable by the Company to any Lender under Section 5 hereof in respect of Loans and Letter of Credit Interest held by it, and its Commitments, shall be determined as if such Lender had not sold or agreed to sell any participations in such Loans, Letter of Credit Interest and Commitments, and as if such Lender were funding each of such Loan, Letter of Credit Interest and Commitments in the same way that it is funding the portion of such Loan and Commitments in which no participations have been sold. In no event shall a Lender that sells a participation agree with the Participant to take or refrain from taking any action hereunder or under any other Basic Document except that such Lender may agree with the Participant that it will not, without the consent of the Participant, agree to (i) increase or extend the term, or extend the time or waive any requirement for the reduction or termination, of such Lender's related Commitment, (ii) extend the date fixed for the payment of principal of or interest on the related Loan or Loans, Reimbursement Obligations or any portion of any fee hereunder payable to the Participant, (iii) reduce the amount of any such payment of principal, (iv) reduce the rate at which interest is payable thereon, or any fee hereunder payable to the Participant, to a level below the rate at which the Participant is entitled to receive such interest or fee, (v) alter the rights or obligations of the Company to prepay the related Loans or (vi) consent to any modification, supplement or waiver hereof or of any of the other Basic Documents to the extent that the same, under Section 12.10 or 13.04 hereof, requires the consent of each Lender. (d) In addition to the assignments and participations permitted under the foregoing provisions of this Section 13.06, any Lender may (without notice to the Company, the Agent or any other Lender and without payment of any fee) (i) assign and pledge all or any portion of its Loans and its Notes to any Federal Reserve Bank as collateral security pursuant to Regulation A and any Operating Circular issued by such Federal Reserve Bank and (ii) assign all or any portion of its rights under this Agreement and its Loans and its Notes to an affiliate. No such assignment shall release the assigning Lender from its obligations hereunder. (e) A Lender may furnish any information concerning the Company or any of its Subsidiaries in the possession of such Lender from time to time to assignees and participants (including prospective assignees and participants), subject, however, to the provisions of Section 13.12 hereof. (f) Anything in this Section 13.06 to the contrary notwithstanding, no Lender may assign or participate any interest in any Loan or Reimbursement Obligation held by it hereunder to the Company or any of its Affiliates or Subsidiaries without the prior consent of each Lender. 13.07 SURVIVAL. The obligations of the Company under Sections 5.01, 5.05 and 13.03 hereof, the obligations of each Subsidiary Guarantor under Section 6.03 hereof, and the obligations of the Lenders under Section 12.05 hereof, shall survive the repayment of the Loans and the Reimbursement Obligations and the termination of the Commitments. 13.08 CAPTIONS. The table of contents and captions and section headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Agreement. 13.09 COUNTERPARTS. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Agreement by signing any such counterpart. 13.10 GOVERNING LAW; SUBMISSION TO JURISDICTION. This Agreement and the Notes shall be governed by, and construed in accordance with, the law of the State of New York. Each Obligor hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York state court sitting in New York City for the purposes of all legal proceedings arising out of or relating to this Agreement or the transactions contemplated hereby. Each Obligor irrevocably waives, to the fullest extent permitted by applicable law, any objection that it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. 13.11 WAIVER OF JURY TRIAL. EACH OF THE OBLIGORS, THE AGENT AND THE LENDERS HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 13.12 CONFIDENTIALITY. Each Lender and the Agent agrees (on behalf of itself and each of its affiliates, directors, officers, employees and representatives) to use reasonable precautions to keep confidential, in accordance with their customary procedures for handling confidential information of the same nature and in accordance with safe and sound banking practices, any non-public information supplied to it by the Company pursuant to this Agreement, PROVIDED that nothing herein shall limit the disclosure of any such information (i) to the extent required by statute, rule, regulation or judicial process, (ii) to counsel for any of the Lenders or the Agent, (iii) to bank examiners, auditors or accountants, (iv) to the Agent or any other Lender, (v) in connection with any litigation to which any one or more of the Lenders or the Agent is a party relating to any of the Obligors or the transactions contemplated hereby, (vi) to a subsidiary or affiliate of such Lender or (vii) to any assignee or participant (or prospective assignee or participant) so long as such assignee or participant (or prospective assignee or participant) first executes and delivers to the respective Lender a Confidentiality Agreement substantially in the form of Exhibit C hereto; PROVIDED, FURTHER, that in no event shall any Lender or the Agent be obligated or required to return any materials furnished by the Company. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. CORNELL CORRECTIONS, INC. By /s/ BRIAN E. BERGERON Title: CFO Address for Notices: Cornell Corrections, Inc. 1700 West Loop South Suite 1500 Houston, Texas 77027 Attention: Mr. Brian Bergeron Telecopier No.: (713) 623-9393 Telephone No.: (713) 623-0790 SUBSIDIARY GUARANTORS CORNELL CORRECTIONS MANAGEMENT, INC. By /s/ BRIAN E. BERGERON Title: CFO CORNELL CORRECTIONS CONSULTING, INC. By /s/ BRIAN E. BERGERON Title: CFO CORNELL CORRECTIONS OF RHODE ISLAND, INC. By /s/ BRIAN E. BERGERON Title: CFO THE CORNELL COX GROUP, L.P. By CORNELL CORRECTIONS OF NORTH AMERICA, INC. By BRIAN E. BERGERON Title: CFO CORNELL CORRECTIONS OF NORTH AMERICA, INC. By /s/ BRIAN E. BERGERON Title: CFO CORNELL CORRECTIONS OF TEXAS, INC. By /s/ BRIAN E. BERGERON Title: CFO CORNELL CORRECTIONS OF CALIFORNIA, INC. By /s/ BRIAN E. BERGERON Title: CFO CORNELL CORRECTIONS OF ALASKA, INC. By /s/ BRIAN E. BERGERON Title: CFO CORNELL CORRECTIONS OF OKLAHOMA, INC. By /s/ BRIAN E. BERGERON Title: CFO INTERNATIONAL SELF HELP SERVICES, INC. By /s/ BRIAN E. BERGERON Title: CFO WBP LEASING, INC. By /s/ BRIAN E. BERGERON Title: CFO ABRAXAS GROUP, INC. By /s/ KEVIN KELLY Title: Assistant Secretary LESSOR ATLANTIC FINANCIAL GROUP, LTD. By: Atlantic Financial Managers, Inc. its General Partner By /s/ STEPHEN S. BROOKSHIRE Title: PRESIDENT Address for Notices: Atlantic Financial Group, Ltd. 1000 Ballpark Way Suite 304 Arlington, Texas 76011 Attn: Mr. Stephen S. Brookshire Telecopier No.: (817) 265-0537 Telephone No.: (817) 265-1263 LENDERS REVOLVING CREDIT COMMITMENT ING (U.S.) CAPITAL CORPORATION $15,000,000 SYNTHETIC LEASE LOAN COMMITMENT By /s/ DAVID BALESTRERY $17,000,000 Title: VP Lending Office for all Loans: ING Capital 135 East 57th Street New York, New York 10022-2101 Address for Notices: ING Capital 135 East 57th Street New York, New York 10022-2101 Attention: Merchant Banking Group -- New York Mr. David Scopelliti Mr. David Balestrery Telecopier No.: (212) 593-3362 Telephone No.: (212) 446-1955 REVOLVING CREDIT COMMITMENT BHF-BANK AKTIENGESELLSCHAFT $15,000,000 SYNTHETIC LEASE LOAN COMMITMENT By /s/ [ILLEGIBLE] zero Title: Lending Office for all Loans: BHF-Bank Aktiengesellschaft 590 Madison Avenue New York, New York 10022-2540 Address for Notices: BHF-Bank Aktiengesellschaft 590 Madison Avenue New York, New York 10022-2540 Attention: Paul Travers Telecopier No.: (212) 756-5536 Telephone No.: (212) 756-5570 REVOLVING CREDIT COMMITMENT COMERICA BANK - TEXAS $15,000,000 SYNTHETIC LEASE LOAN COMMITMENT By /s/ ERIC LUNDQUIST zero Title: VICE PRESIDENT Lending Office for all Loans: Address for Notices: Comerica Bank - Texas One Shell Plaza 910 Louisiana Street 4th Floor Houston, Texas 77002 Attn: Mr. Eric Lundquist Telecopier No.: (713) 220-5651 Telephone No.: (713) 220-5604 REVOLVING CREDIT COMMITMENT BANK AUSTRIA CREDITANSTALT CORPORATE $15,000,000 FINANCE, INC. SYNTHETIC LEASE LOAN COMMITMENT By /s/ [ILLEGIBLE] zero Title: Vice President By /s/ [ILLEGIBLE] Title: Executive Vice President Lending Office for all Loans: Bank Austria Creditanstalt Corporate Finance, Inc. Two Ravinia Drive, Suite 1680 Atlanta, Georgia 30346 Address for Notices: Bank Austria Creditanstalt Corporate Finance, Inc. Two Ravinia Drive, Suite 1680 Atlanta, Georgia 30346 Attention: Pat Kennedy Telecopier No.: (770) 390-1851 Telephone No.: (770) 390-1850 with a copy to: Troutman Sanders 600 Peachtree Street N.W., Suite 5200 Atlanta, Georgia 30308 Attention: Hazen Dempster Telecopier No.: (404) 885-3947 Telephone No.: (404) 885-3000 REVOLVING CREDIT COMMITMENT SUNTRUST BANK, ATLANTA zero SYNTHETIC LEASE LOAN COMMITMENT By /s/ STEVEN J. NEWBY $17,000,000 Title: Corporate Banking Officer By /s/ JOHN A. FIELDS, JR. Title: FIRST VICE PRESIDENT Lending Office for all Loans: SunTrust Bank, Atlanta 25 Park Place Drive Mail Code 120 Atlanta, Georgia 30303 Address for Notices: SunTrust Bank, Atlanta 25 Park Place Drive Mail Code 120 Atlanta, Georgia 30303 Attention: R. Todd Shutley Steve Newby Telecopier No.: (404) 827-6270 Telephone No.: (404) 658-4916 ING (U.S.) CAPITAL CORPORATION, as Agent By /s/ DAVID BALESTRERY Title: VP Address for Notices to ING as Agent: ING Capital 135 East 57th Street New York, New York 10022-2101 Attention: Merchant Banking Group -- New York Mr. David Scopelliti Mr. David Balestrery Telecopier No.: (212) 593-3362 Telephone No.: (212) 409-1955 EX-11.1 4 EXHIBIT 11.1 Cornell Corrections, Inc. Statement Re: Computation of Per Share Earnings (in thousands except per share amounts)
Year Ended December 31, 1998 1997 1996 -------------------- -------------------- -------------------- Basic Diluted Basic Diluted Basic Diluted -------------------- -------------------- -------------------- Net earnings (loss) ........................................ $ 6,062 $ 6,062 $ 3,554 $ 3,554 $ (2,379) $ (2,379) ==================== ==================== ==================== Shares used in computing net earnings (loss) per share: Weighted average common shares and common share equivalents ............................. 10,032 10,032 7,905 7,905 4,228 4,228 Less treasury shares ................................... (590) (590) (555) (555) (555) (555) Effect of shares issuable under stock options and warrants based on the treasury stock method ...... -- 330 -- 390 -- 0 -------------------- -------------------- -------------------- 9,442 9,772 7,350 7,740 3,673 3,673 -------------------- -------------------- -------------------- Net earnings (loss) per share ............................ $ 0.64 $ 0.62 $ 0.48 $ 0.46 $ (0.65) $ (0.65) ==================== ==================== ====================
EX-21.1 5 EXHIBIT 21.1 SUBSIDIARIES OF CORNELL CORRECTIONS, INC. (AS OF DECEMBER 31, 1998)
PERCENTAGE OF VOTING PERCENTAGE OF VOTING SECURITIES OWNED BY A SECURITIES OWNED BY CORNELL SUBSIDIARY CORRECTIONS, INC. OF CORNELL CORRECTIONS, INC. ---------------------------- ---------------------------- Cornell Corrections of North America, Inc. 100% Cornell Corrections Management, Inc. 100% 100% Cornell Corrections of Texas, Inc. 100% Cornell Corrections of California, Inc. 100% Cornell Corrections of Rhode Island, Inc. 100% Abraxas Group, Inc. 100% WBP Leasing, Inc. 100% Cornell Corrections of Oklahoma, Inc. 100% Cornell Corrections of Georgia, L.P. 100% Cornell Corrections of Alaska, Inc. 100% CCGI Corporation 100%
EX-23.1 6 Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated February 25, 1999, included herein in this Form 10-K into the Company's previously filed Registration Statements on Form S-8 No. 333-19127 and 333-19145 filed on December 31, 1996. ARTHUR ANDERSEN LLP Houston, Texas March 30, 1999 EX-24.1 7 EXHIBIT 24.1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer or director, or both, of Cornell Corrections, Inc., a Delaware corporation (the "Company"), does hereby constitute and appoint David M. Cornell his true and lawful attorney and agent, to do any and all acts and things and to execute any and all instruments which said attorney and agent deems necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, and requirements of the Securities and Exchange Commission in respect thereof, in connection with the Form 10-K under the said Securities Exchange Act of said corporation, including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned as officer or director, or both, of the Company to the Form 10-K or to any amendments thereto filed with the Securities and Exchange Commission, and to any instrument or document filed as part of, as an exhibit to or in connection with said Form 10-K or amendments, and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 30th day of March, 1999. /s/ PETER A. LEIDEL Peter A. Leidel POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer or director, or both, of Cornell Corrections, Inc., a Delaware corporation (the "Company"), does hereby constitute and appoint David M. Cornell his true and lawful attorney and agent, to do any and all acts and things and to execute any and all instruments which said attorney and agent deems necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, and requirements of the Securities and Exchange Commission in respect thereof, in connection with the Form 10-K under the said Securities Exchange Act of said corporation, including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned as officer or director, or both, of the Company to the Form 10-K or to any amendments thereto filed with the Securities and Exchange Commission, and to any instrument or document filed as part of, as an exhibit to or in connection with said Form 10-K or amendments, and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 30th day of March, 1999. /s/ CAMPBELL A. GRIFFIN, JR. Campbell A. Griffin, Jr. POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer or director, or both, of Cornell Corrections, Inc., a Delaware corporation (the "Company"), does hereby constitute and appoint David M. Cornell his true and lawful attorney and agent, to do any and all acts and things and to execute any and all instruments which said attorney and agent deems necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, and requirements of the Securities and Exchange Commission in respect thereof, in connection with the Form 10-K under the said Securities Exchange Act of said corporation, including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned as officer or director, or both, of the Company to the Form 10-K or to any amendments thereto filed with the Securities and Exchange Commission, and to any instrument or document filed as part of, as an exhibit to or in connection with said Form 10-K or amendments, and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 30th day of March, 1999. /s/ ARLENE R. LISSNER Arlene R. Lissner POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer or director, or both, of Cornell Corrections, Inc., a Delaware corporation (the "Company"), does hereby constitute and appoint David M. Cornell his true and lawful attorney and agent, to do any and all acts and things and to execute any and all instruments which said attorney and agent deems necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, and requirements of the Securities and Exchange Commission in respect thereof, in connection with the Form 10-K under the said Securities Exchange Act of said corporation, including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned as officer or director, or both, of the Company to the Form 10-K or to any amendments thereto filed with the Securities and Exchange Commission, and to any instrument or document filed as part of, as an exhibit to or in connection with said Form 10-K or amendments, and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has subscribed these presents this 30th day of March, 1999. /s/ TUCKER TAYLOR Tucker Taylor EX-27.1 8
5 1,000 12-MOS DEC-31-1998 DEC-31-1998 2,519 0 27,564 0 0 36,108 159,219 (4,228) 212,695 19,280 0 0 0 10 91,490 91,500 0 123,119 0 110,530 0 0 2,601 10,104 4,042 6,062 0 0 0 6,062 0.64 0.62
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