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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One)x
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934For the fiscal year ended December 31, 2003ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from ____ to ____
Commission file number 1-14031 CORRECTIONAL PROPERTIES TRUST  MARYLAND
    
    65-0823232(State or Other Jurisdiction
of Incorporation or Organization)
    
    (I.R.S. Employer
Identification No.)
 3300 PGA BOULEVARD, SUITE 750
PALM BEACH GARDENS, FLORIDA
    
    33410(Address of Principal Executive Offices)
    
    (Zip Code)
 (561) 630-6336
(Registrant telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class
    
    Name of each exchange on which registeredCommon Shares of Beneficial Interest, $.001 par value per share
    
    New York Stock Exchange
 Securities registered pursuant to Section 12(g) of the Act: None   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 o Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be 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. o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes x No o As of June 30, 2003, the aggregate market value of the voting shares held by
non-affiliates of the registrant was approximately $210,364,000 based on the
closing price on that date of $28.00 per share. As of March 11, 2004, there were 10,977,750 of the registrants Common Shares
outstanding. DOCUMENTS INCORPORATED BY REFERENCE The information required by Items 10, 11, 12, 13 and 14 of Part III of this
Form 10-K is incorporated by reference to the definitive Proxy Statement of the
Company relating to the 2004 Annual Meeting of Shareholders. Certain exhibits listed in Part IV of this Annual Report on Form 10-K are
incorporated by reference from prior filings made by the registrant under the
Securities Exchange Act of 1934, as amended.




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Correctional Properties Trust
Annual Report on Form 10-K Index Page
NumberPART IItem 1.
    
    Business
    
    
    2Item 2.
    
    Properties
    
    
    25Item 3.
    
    Legal Proceedings
    
    
    26Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    26PART IIItem 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
    
    
    27Item 6.
    
    Selected Financial Data
    
    
    28Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    29Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    34Item 8.
    
    Financial Statements and Supplementary Data
    
    
    35Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    35Item 9A.
    
    Controls and Procedures
    
    
    35PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    53Item 11.
    
    Executive Compensation
    
    
    53Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
    
    
    53Item 13.
    
    Certain Relationships and Related Transactions
    
    
    53Item 14.
    
    Principal Accounting Fees and Services
    
    
    53PART IVItem 15.
    
    Exhibits, Financial Statement Schedules and Reports on Form 8-K
    
    
    54Amended & Restated ByLawsSenior Executive Retirement Plan Termination AgmtDeferred Share Long-Term Loyalty Bonus AgreementConsent of Ernst & Young LLPSection 302 - Certification of CEOSection 302 - Certification of CFOSection 906 Certification - CEOSection 906 Certification - CFO




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PART I FORWARD-LOOKING STATEMENTS: This report contains forward-looking statements for purposes of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
are based on current expectations, estimates and projections about the business
marketplace in which we operate. This report also includes managements beliefs
and assumptions. Words such as expects, anticipates, intends, plans,
believes, seeks, estimates, and variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions, or Future Risk Factors (described below), which
are difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-looking
statements. We caution you not to place undue reliance on these forward-looking
statements, which speak only as of the date of this report. We undertake no
obligation to update publicly any forward-looking statements, whether as a
result of new information, future events or otherwise. Future Risk Factors include, without limitation, increasing competition,
including new entrants in the marketplace; the mix of tenants as it relates to
other private operators and governmental entities; governmental and public
policy changes; reliance on a single tenant for a significant portion of
revenue; non-renewal of existing leases; annual governmental appropriation
risk; interest rate risk; repurchase of properties by tenants under purchase
options; continued availability of financing; rental rates sufficient to make
acquisitions feasible; limited alternative use and special purpose aspects of
our properties; continued ability to pay a dividend; and financial resources
in the amounts, at the times and on the terms required to support our future
business. These are representative of the Future Risk Factors that could affect
the outcome of the forward-looking statements. In addition, such statements
could be affected by general industry and market conditions and growth rates,
general domestic economic conditions including interest rate fluctuations and
other Future Risk Factors. We discuss such risks in our various reports filed
with the Securities and Exchange Commission. 
 Item 1.Business. General We are a fully integrated, self-administered and self-managed real estate
investment trust or REIT that acquires correctional and detention facilities
from both private prison operators and government entities. We lease our
facilities to tenants that are experienced correctional and detention facility
operators under long-term, non-cancelable, triple-net leases (leases where the
tenant is required to pay all operating expenses, taxes, insurance,
maintenance, structural and non-structural repairs and other costs). We lease
our two North Carolina correctional facilities directly to the State of North
Carolina. All of our other tenants operate detention facilities under
management services or operating agreements with various federal, state and
local governmental authorities, including: Immigration and Customs Enforcement
    
    Oklahoma Department of CorrectionsKarnes County, Texas
    
    Essex County, New JerseyLea County, New Mexico
    
    Union County, New JerseyBroward County, Florida Sheriffs Office
    
    New Jersey Department of CorrectionsCalifornia Department of Corrections
 As of December 31, 2003, we owned and leased fourteen correctional and
detention facilities in ten states. The aggregate purchase price of our
facilities was approximately $293 million. Eleven of our facilities are located
in eight states and leased to and operated by The Geo Group, Inc. or GEO (NYSE:
GGI) and its affiliates formerly known as Wackenhut Corrections Corporation.
These facilities currently represent 72% of our rental income. Two of our
facilities, which currently represent 2




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20% of our rental income, are leased to the State of North Carolina, and are
operated by the North Carolina Department of Correction. The remaining
facility, which currently represents 8% of our rental income, is located in the
State of New Jersey and leased to and operated by Community Education Centers.
We are currently the only publicly-traded REIT which focuses exclusively on the
acquisition and ownership of correctional and detention facilities. As of
December 31, 2003, the aggregate design capacity of our facilities was 8,008
beds. We were formed in February 1998 as a Maryland REIT, to capitalize on the
growing trend toward privatization in the corrections industry. We believe that the privatized corrections industry has the potential for
substantial growth in the United States due to increases in the inmate
population, decreases in the availability of capital for new correctional and
detention facilities and a growing acceptance of the trend toward privatization
in the corrections industry. According to the United States Bureau of Justice
Statistics, the inmate population in federal, state and local facilities in the
United States has grown from 501,886 in 1980 to 2,166,260 at December 31, 2002.
In addition, according to the Bureau of Justice Statistics, as of December 31,
2002, state prison systems reported operating at between 1% and 16% above
capacity and the federal corrections system reported operating at approximately
33% above capacity. The privatized corrections industry has capitalized on
these favorable supply/demand fundamentals, resulting in a substantial increase
in the number of privatized beds. The location and mailing address of our principal executive offices is
Gardens Plaza, Suite 750, 3300 PGA Boulevard, Palm Beach Gardens, Florida
33410. Our telephone number is (561) 630-6336. As of March 11, 2004, we had
four employees. In this annual report, unless stated otherwise or unless the content
requires otherwise, references to we, us, our or Correctional
Properties mean Correctional Properties Trust. Recent Events and 2003 Overview Delaney Hall Acquisition.On May 29, 2003, we acquired Delaney Hall, a 726
bed, minimum-security, correctional facility located in Newark, New Jersey, for
approximately $21,000,000 plus transaction costs. The seller, Community
Education Centers, Inc., or CEC, leased Delaney Hall back from us under the
terms of a ten-year, triple-net lease. The lease provides for three additional
renewal options of five years each which may be exercised by CEC. The initial
cash lease rate is 11% of the purchase price or $2,310,000 per annum, with 3%
fixed annual increases on each annual anniversary. Under United States
generally accepted accounting principles, the lease revenue will be recognized
at a straight-line lease rate of 12.61% of the purchase price. Delaney Hall is located adjacent to the newly constructed Essex County
Jail approximately two miles from Newark International Airport. CEC will
continue to operate Delaney Hall under separate operating agreements with Essex
County, New Jersey; Union County, New Jersey; and the New Jersey Department of
Corrections. CEC, based in Roseland, New Jersey, is a leading provider of
housing, treatment, and educational services to correctional populations
throughout the United States. CEC currently operates twenty correctional
facilities in eight states, providing services to approximately 3,500
individuals. Delaney Hall is a secure, urban-based, correctional facility
developed by CEC and opened in March 2000 to provide housing, and comprehensive
training and educational services for sentenced adults. We completed this acquisition using cash on hand, plus $17,000,000 drawn
under our amended bank credit facility. See Amended and Restated Credit
Agreement below. In connection with this acquisition, we entered into an
intercreditor agreement with CECs senior lender granting specified cure rights
to the senior lender. These cure rights permit CECs senior lender to pay all
lease obligations of CEC including rental payments and impositions if an event
of default occurs due to CECs actions allowing the lender to prevent us from
terminating the CEC lease. As part of the transaction, a security deposit of
approximately $662,000 was delivered by CEC to us, which may be used by us to
the extent required for the payment of rent or any imposition if an event of
default occurs. July 2003 Public Offering.In July 2003, we completed a public offering
of 3,250,000 common shares at $25.50 per share, under our shelf registration
statement previously declared effective by the Securities and Exchange
Commission. The gross proceeds from the offering of $82,875,000 less expenses
of $4,984,000, which includes underwriters fees and expenses associated with
the offering, generated net proceeds to us of approximately $77,891,000. The
net proceeds of the offering were used to pay down a substantial portion of the
then outstanding balance of the amended bank credit facility. 3




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Amended and Restated Credit Agreement.On November 25, 2003, we entered
into an Amended and Restated Credit Agreement the terms of which govern our new
amended bank credit facility initially consisting of a $95 million secured
revolving credit facility. The amended bank credit facility has a term of
thirty-six months and replaces our initial secured line of credit which matured
on October 1, 2003 but was extended up until the closing of the amended bank
credit facility. The proceeds of the amended bank credit facility may be used
to finance the construction and the acquisition of correctional and detention
facilities, to expand or improve current facilities and for general working
capital purposes. The amended bank credit facility includes a swing line
component and provisions to increase the amended bank credit facility up to a
total of $200 million by increasing the revolver, and/or by originating a new
term loan of up to $100 million, subject to successful syndication and other
specified closing conditions. For more information, please see Item 7.
Managements Discussion and Analysis of Financial Condition and Results of
Operations  Liquidity and Capital Resources. The Formation Transactions In connection with the closing of our initial public offering on April 28,
1998, we and GEO, entered into a series of transactions which were designed to
transfer ownership of eight correctional and detention facilities having an
aggregate design capacity of 3,154 beds and owned and operated by GEO to
Correctional Properties. The sale of these initial facilities to us was
intended to provide a vehicle for possible future acquisitions of other
facilities which Geo owns or has a right to acquire, in addition to other
facilities we may acquire, and to enable us to qualify as a REIT for federal
income tax purposes. In addition, during the period October 1998 to January
2000, we acquired from GEO three additional facilities for an aggregate
purchase price equal to $109.4 million. These additional facilities have an
aggregate design capacity of 2,976 beds. For more information, please see
Relationship With The Geo Group below. In connection with these formation transactions, all of the $130.7 million
of net proceeds received by us from our initial public offering were
contributed by us directly to CPT Operating Partnership L.P., a Delaware
limited partnership, to fund our investment in this operating partnership. In
exchange for this investment, we received a combined 100% interest in the
operating partnership. This 100% interest is structured such that we own
directly a 98% limited partnership interest and a 1% general partnership
interest in the operating partnership while CPT Limited Partner, Inc., or CPT
LP, a wholly-owned subsidiary of ours, owns the remaining 1% limited
partnership interest in the operating partnership. At the same time we acquired these facilities, we leased them to The Geo
Group or its affiliate who continue to operate the facilities. Please See
Structure of the Company below. The facilities are leased to The Geo Group
or one of its affiliates under the terms of leases for an initial term of 10
years. Subject to specified limited exceptions, the term of each of these
leases may be extended by The Geo Group for three additional five-year terms at
a fair market rental rate as mutually agreed upon by us and The Geo Group or,
in the absence of an agreement, as determined by binding arbitration. In
addition, the term of any of these leases will be automatically extended upon
expiration of the term on the same terms (including the then applicable base
rent and base rent escalation (as explained below) as reflected in the
applicable lease if there is at that time an unexpired sublease with respect to
the respective facility. Under the terms of the leases with The Geo Group, The
Geo Group has a 30-day right of first refusal on the proposed sale by us of any
of the facilities leased to it. As a part of the formation transactions, we also entered into a Right to
Purchase Agreement with The Geo Group. Under this agreement, we have the
right, during the 15 years following our initial public offering, to acquire
and lease back to The Geo Group any correctional or detention facilities which
The Geo Group acquires or has the right to acquire. These facilities are
referred to in this report as the Future Facilities. The rights set forth in
the agreement are effective so long as there are any leases in force between us
and The Geo Group and are subject to specified limited exceptions where the
sale or transfer of ownership of a facility is restricted under a facility
operating agreement or governmentally assisted financing arrangement. Under the terms of the Right to Purchase Agreement, we may purchase a
particular Future Facility at any time until the earlier of: (i) (a) in the case of a newly developed Future Facility, four years from
the receipt of a certificate of occupancy for the Future Facility or (b) in the
case of an already operating Future Facility, four years from the date the
Future Facility is acquired by The Geo Group or the party from which The Geo
Group has the right to acquire the Future Facility; or 4




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(ii) six months after the Future Facility attains an occupancy level of
75% of the number of beds authorized under the certificate of occupancy for the
Future Facility, subject to certain limited exceptions. The purchase price for each Future Facility will equal 105% (or other
lower percentage as may be agreed to by The Geo Group) of the Total Facility
Cost of that Future Facility, which may differ from the fair market value of
that facility at the time we acquire it. The Total Facility Cost equals the
aggregate costs related to the acquisition, development, design, construction,
equipment and start-up of the respective Future Facility. The Geo Group has
agreed that, with respect to goods or services provided by The Geo Group, these
costs will not exceed the costs which would be paid if these goods and services
had been purchased from a third party in an arms length transaction. In the case of any Future Facility acquired after the first five years
following our initial public offering, the initial annual rental rate will be
the fair market rental rate as mutually agreed upon by us and The Geo Group or
as determined by binding arbitration if the parties cannot reach such
agreement. Under the terms of any lease between us and The Geo Group relating
to a Future Facility, The Geo Group has a thirty-day right of first refusal on
the proposed sale by us of any such Future Facility. Business and Growth Strategies Operating and Investment Philosophy.Our business objectives are to
maximize funds from operations and cash available for distribution to
shareholders. We strive to achieve these objectives by (i) pursuing investment opportunities with private prison operators and
governmental entities for the financing, development, acquisition and lease
back of correctional and detention facilities, (ii) working with tenants to identify opportunities to expand existing and
newly acquired facilities; and (iii) structuring facility leases to include rent escalation provisions
which provide for annual increases in rent. Acquisition Opportunities.We believe that, because of the increasing
demand for additional prison beds and the lack of capital available to finance
new facilities, opportunities exist to finance, acquire or develop correctional
and detention facilities from or on behalf of private prison owners and
operators and various government entities. We may acquire from both private prison owners and operators and
governmental entities additional correctional and detention facilities that
meet our investment guidelines, as described in this report. In addition, under
the Right to Purchase Agreement, we have the right to acquire and lease back to
The Geo Group each of the Future Facilities during the applicable Future
Facility option period. However, notwithstanding The Geo Groups significant
presence in the correctional and detention industry, less than 8% of all adult
prison beds in the United States are privately managed. We intend to continue
to pursue acquisitions that further diversify our investments with respect to
tenant base, underlying government entity and geographic location. We believe that opportunities may exist to finance, acquire or develop
correctional facilities from or on behalf of other private prison owners and
operators and various governmental entities. Historically, government entities
have used various methods of construction financing to develop new correctional
and detention facilities, including but not limited to the following: (i)
one-time general revenue appropriations by the government agency for the cost
of the new facility, (ii) general obligation bonds that are secured by either a
limited or unlimited tax levied by the issuing government entity or (iii) lease
revenue bonds secured by an annual lease payment that is subject to annual or
bi-annual legislative appropriation of funds. Many jurisdictions are operating
their correctional and detention facilities at well above their rated
capacities, and as a result are under a federal court order to alleviate prison
overcrowding within a certain time period. These jurisdictions are often not in
a position to appropriate funds or obtain financing to construct a new
correctional or detention facility because of other fiscal demands or
requirements for public approval. Accordingly, we believe that, in an attempt
to address fiscal pressures of matching revenue collections with projected
expenses, these government entities may consider private financing,
development, and ownership of new correctional and detention facilities and
sale-leaseback transactions or other financing alternatives with respect to
existing correctional and detention facilities. We believe that these
situations may enable us to finance, acquire and develop correctional or
detention facilities from and on behalf of governmental agencies at all levels,
including those which might not be the subject of a private management
contract. 5




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Expansion Opportunities.We believe that there may be opportunities for
expansion of our existing correctional facilities which could result in
increased cash flows and property values. We may use our capital to provide
expansion space as requested by our tenants and expect that any such expansion
of our facilities would result in correspondingly higher rental payments.
Alternatively, a tenant may provide the capital for expansion, which should
result in enhanced property values. Rent Escalations.All of our leases contain rent escalation provisions.  
    
    The Geo Group. The base rent for the first year for each
facility leased to The Geo Group before January 1, 2000 was equal to
9.5% of the facility purchase price. Thereafter, minimum rent
escalates by the greater of 3% or the actual Consumer Price Index, or
CPI with a maximum increase of 4% at the first two annual
anniversaries of the effective date of each lease and by an amount
equal to increases, if any, in the CPI at each successive annual
anniversary for the remaining term of each lease, subject to a
maximum increase of 4.0% per annum throughout the term of the leases.
The base rent for the first year of the Jena Juvenile Justice Center
leased to The Geo Group was equal to 11.0% of the facility purchase
price with a fixed 4.0% annual escalator. The average remaining life
on the eleven leases with The Geo Group as of December 31, 2003, is
approximately 4.75 years.  
    
    State of North Carolina Leases.In the year we acquired the
Pamlico Facility and assumed the existing lease agreement with the
State of North Carolina (which originally commenced in August 1998),
the base rent was equal to $2,858,754 or 11.9% of the facility
purchase price. In the year we acquired the Mountain View Facility
and assumed the existing lease agreement with the State of North
Carolina (which originally commenced in December 1998), the base rent
was equal to $2,965,900 or 11.9% of the facility purchase price. In
both cases, following the first year and continuing during the term
of the leases and any renewal terms, base rent increases by the
greater of 3.5%, or the percentage of increase, if any, in the CPI,
but not to exceed 4.0%.  
    
    Community Education Centers Lease.On May 29, 2003, we acquired
Delaney Hall. The initial base rent rate is $2,310,000 per annum or
11.0% of the facility purchase price. Following the first year and
continuing during the term of the lease, base rent increases by 3.0%
annually on each anniversary. The Operating Partnership The Operating Partnership.Substantially all of our assets (other than the
Mountain View and Pamlico Facilities) are held by, and our operations conducted
through, CPT Operating Partnership, L.P., the operating partnership. We are the
sole general partner of the operating partnership and have the exclusive power
under the governing partnership agreement to manage and conduct the business of
the operating partnership. Our board of trustees manages our affairs by
directing the affairs of the operating partnership. Our direct and, through CPT
LP, indirect percentage interest in the operating partnership, is 100%. The
operating partnership makes regular quarterly cash distributions to its
partners, including us and CPT LP, in proportion to their percentage interests
in the operating partnership. We, in turn, pay cash distributions to our
shareholders in an amount per common share equal to the amount distributed by
the operating partnership. The operating partnership was organized to facilitate the tax-advantaged
acquisition of additional correctional and detention facilities from private
owners. In the event we undertake such an acquisition, we contemplate that the
owner of that facility would become a limited partner in the operating
partnership and would be issued units of limited partnership interests in the
operating partnership, representing an equal undivided fractional share of each
item of the operating partnerships income, gain, and loss and in distribution
of the operating partnerships assets as the consideration, in whole or in
part, for the unitholders transfer of the facility to the operating
partnership. We also contemplate that the unitholder would be given the right
after a period of time to exchange units in the operating partnership for cash
based upon their fair market value or, at our option, for our common shares on
a one-for-one basis. We also contemplate that substantially all our assets may
be owned indirectly through the operating partnership so that one unit in the
operating partnership would generally correspond economically to one common
share. In order to accomplish such objective, the current structure using the
operating partnership was utilized, rather than us taking title to the initial
facilities we acquired upon formation or subsequently acquired facilities.
This structure was implemented at our formation in order to avoid a re-transfer
in the future of these facilities to such a partnership which would result in
associated transfer and other costs necessary or advisable in order to offer a
private owner a tax-advantaged acquisition vehicle. Currently, we and CPT LP
are the only partners in the operating partnership and possess the power
unilaterally to amend and 6




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restate the governing partnership agreement. While there are no present plans
to issue units to a private prison owner, we may pursue potential acquisitions
which, if successful, could involve the issuance of units as a component of the
consideration for the acquisitions. We do not intend to use the operating
partnership (or any partnership which is owned by the operating partnership) as
a vehicle for tax-advantaged acquisitions unless it receives an opinion of tax
counsel to us that this use would not result in our disqualification as a REIT,
including an opinion that the operating partnership or any subsidiary
partnership of the operating partnership would not be treated for federal
income tax purposes as an association taxable as a corporation or a
publicly-traded partnership. Operating Partnership Agreement.The operating partnership is organized as
a Delaware limited partnership under the terms of the governing partnership
agreement which includes us, as general partner, and both us and CPT LP as the
initial limited partners. Under the partnership agreement, we, as the sole
general partner of the operating partnership, have full, exclusive and complete
responsibility and discretion in the management and control of the operating
partnership, and we and CPT LP, in the capacity as the limited partners, have
no authority to transact business for, or participate in the management
activities or decisions of, the operating partnership. Generally, any amendment
to the partnership agreement may be made by the general partner, including,
without limitation, amendments that:  (i)
    
    add to the obligations of the general partner,  (ii)
    
    reflect the admission, substitution or withdrawal of partners,  (iii)
    
    reflect the issuance of additional partnership interests issued by
the operating partnership,  (iv)
    
    reflect a change that does not adversely affect limited partners, and  (v)
    
    are necessary to satisfy legal requirements. The consent of each adversely affected partner is required for any
amendment that would require any partner to make additional capital
contributions or restore any negative balance in its capital account, or which
amendment would convert a limited partnership interest into a general
partnership interest, affect a limited partners liability or right to receive
distributions or that would dissolve the operating partnership prior to
December 31, 2048 (other than as a result of certain mergers or
consolidations). The partnership agreement requires that the operating
partnership be operated in a manner that will enable us to satisfy the
requirements for being classified as a REIT. 7




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Structure of the Company The following diagram sets forth our structure.   (1)
    
    Following the consummation of our initial public offering, WCC RE
Holdings, Inc., a wholly-owned subsidiary of The Geo Group, was merged
with and into WCC RE Holdings LLC, or WCCRE LLC, which was formed as a
wholly-owned subsidiary of The Geo Group, with WCCRE LLC being the
surviving entity.  (2)
    
    The operating partnership leases the following facilities to The Geo
Group: the Queens Facility, the Aurora Facility, the Hobbs Facility, the
Karnes Facility, the Lawton Facility and the Jena Facility, and leases the
Delaney Hall Facility to CEC. See The Facilities.  (3)
    
    The operating partnership leases the following facilities to WCCRE LLC,
each of which were in turn subleased to The Geo Group: the Broward
Facility, the Central Valley Facility, the Golden State Facility, the
Desert View Facility and the McFarland Facility. See The Facilities.  (4)
    
    The provisions of some existing facility operating agreements between The
Geo Group and the respective contracting governmental entities afford the
governmental entity the right to assume a lease of the respective facility
(or designate another facility operator to assume the lease of the
respective facility) at a fixed rental rate in the event of the early
termination of the facility operating agreement if specified events occur.
In these instances, The Geo Group has entered into a sublease for the
subject facility with WCCRE LLC, with WCCRE LLC as the sublessor and The
Geo Group as the sublessee. The contracting governmental entity has the
right to assume the rights of The Geo Group under this sublease on early
termination of the operating agreement for the relevant facility. However,
even if a government entity elects to exercise its right to assume a
sublease relating to a facility, The Geo Group is nevertheless liable to
us under the master lease relating to the facility. See Subleases.  (5)
    
    Correctional Properties North Carolina Prison Finance LLC, or CP North
Carolina, is a wholly owned subsidiary of ours. CP North Carolina is a
Delaware limited liability company formed solely to acquire and own the
Mountain View and Pamlico Facilities and issue the Bonds used to pay for
those acquisitions. CP North Carolinas assets and credit are not
available to pay the debts or obligations of any other entity. The Bonds
are non-recourse to CP North Carolina and its sole member, CPT Operating
Partnership L.P. Therefore, CP North Carolina and its sole member, CPT
Operating Partnership L.P., are not liable on account of any deficiency in
the event that the Trust Estate created under the Trust Indenture for the
Bonds is insufficient to repay the Bonds or the other obligations of CP
North Carolina under the Bond Documents. 8




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The Owned Facilities The fourteen facilities owned by us at December 31, 2003, which we refer to in
this annual report as Owned Facilities, were purchased for an aggregate cash
purchase price of approximately $293 million. We lease eleven of these
facilities to The Geo Group or its subsidiary, two of these facilities to the
State of North Carolina, and one of these facilities to CEC. These fourteen
facilities are located in ten states and have an aggregate design capacity of
8,008 beds. The following table sets forth certain information with respect to
these facilities as of December 31, 2003 Design
    
    
    
    
    
    ExpirationCapacity
    
    
    
    
    
    of
    
    OperatingDate Facility was
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    and
    
    Facility
    
    Underlying
    
    AgreementFacility and
    
    Acquired by the
    
    Lease
    
    Type of
    
    Contracting
    
    Security
    
    Occupancy
    
    Opening
    
    Operating
    
    RenewalLocation
    
    Company
    
    Expiration
    
    Facility
    
    Entity
    
    Level (1)
    
    Rate (2)
    
    Date
    
    Agreement (3)
    
    OptionsTHE GEO GROUP
FACILITIES:Aurora
    
    April 1998
    
    April 2008
    
    BICE
    
    BICE(4)
    
    Minimum/
    
    
    300/97
    %
    
    May
    
    September
    
    ThreeProcessing Center,
    
    
    
    
    
    
    
    
    
    Processing
    
    
    
    
    
    Medium
    
    
    
    
    
    
    1987
    
    
    
    2004
    
    
    Six-or the Aurora
    
    
    
    
    
    
    
    
    
    Center
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    MonthFacility,
Aurora, COMcFarland Community
    
    April 1998
    
    April 2008
    
    Pre-Release
    
    None
    
    Minimum/
    
    
    224/0
    %
    
    February
    
    None (6)
    
    
    Correctional
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Medium
    
    
    
    
    
    
    1988Facility,
or the McFarland
Center Facility,
McFarland, CAQueens Private
    
    April 1998
    
    April 2008
    
    BICE
    
    BICE(7)
    
    Minimum/
    
    
    200/70
    %
    
    March
    
    March
    
    ThreeCorrectional
    
    
    
    
    
    
    
    
    
    Detention
    
    
    
    
    
    Medium
    
    
    
    
    
    
    1997
    
    
    
    2004
    (4)
    
    One-Facility,
    
    
    
    
    
    
    
    
    
    Facility
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Yearor the Queens
Facility,
New York, NYCentral Valley
    
    April 1998
    
    April 2008
    
    Adult
    
    CDOC(5)
    
    Minimum/
    
    
    550/95
    %
    
    December
    
    December
    
    
    Community
    
    
    
    
    
    
    
    
    
    Correctional
    
    
    
    
    
    Medium
    
    
    
    
    
    
    1997
    
    
    
    2007Correctional
    
    
    
    
    
    
    
    
    
    FacilityFacility,
or the Central
Valley Facility,
McFarland, CAGolden State
    
    April 1998
    
    April 2008
    
    Adult
    
    CDOC
    
    Minimum/
    
    
    550/94
    %
    
    December
    
    December
    
    
    Community
    
    
    
    
    
    
    
    
    
    Correctional
    
    
    
    
    
    Medium
    
    
    
    
    
    
    1997
    
    
    
    2007Correctional
    
    
    
    
    
    
    
    
    
    FacilityFacility,
or the Golden State
Facility,
McFarland, CADesert View
    
    April 1998
    
    April 2008
    
    Adult
    
    CDOC
    
    Minimum/
    
    
    550/95
    %
    
    December
    
    December
    
    
    Community
    
    
    
    
    
    
    
    
    
    Correctional
    
    
    
    
    
    Medium
    
    
    
    
    
    
    1997
    
    
    
    2007Correctional
    
    
    
    
    
    
    
    
    
    FacilityFacility,
or the Desert View
Facility,
Adelanto, CABroward County
    
    April 1998
    
    April 2008
    
    BICE and
    
    Broward
    
    Non-
    
    
    300/77
    %(8)
    
    February
    
    September
    
    
    (9
    )Work Release Center
    
    
    
    
    
    
    
    
    
    Work
    
    County and
    
    Secured
    
    
    
    
    
    
    1998
    
    
    
    2004or the Broward
    
    
    
    
    
    
    
    
    
    Release
    
    BSO(8) and
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8)(9)County Facility,
    
    
    
    
    
    
    
    
    
    Center
    
    
    BICE(9)Broward County,FLKarnes County
    
    April 1998
    
    April 2008
    
    Adult
    
    Karnes
    
    Multi-
    
    
    480/96
    %
    
    January
    
    
    2026
    
    
    VariesCorrectional Center,
    
    
    
    
    
    
    
    
    
    Correctional
    
    County
    
    Security
    
    
    
    
    
    
    1996or the Karnes
    
    
    
    
    
    
    
    
    
    FacilityFacility,
Karnes County, TXLawton Correctional
    
    January 1999
    
    January 2009
    
    Prison
    
    ODOC(10)
    
    Medium
    
    
    1,500/105
    %
    
    December
    
    June
    
    FourFacility,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1999
    
    
    
    2004
    
    
    One-or theLawton
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    YearFacility,
Lawton, OK
 9




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##### Table of Contents



Design
    
    
    
    
    
    ExpirationCapacity
    
    
    
    
    
    of
    
    OperatingDate Facility was
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    and
    
    Facility
    
    Underlying
    
    AgreementFacility and
    
    Acquired by the
    
    Lease
    
    Type of
    
    Contracting
    
    Security
    
    Occupancy
    
    Opening
    
    Operating
    
    RenewalLocation
    
    Company
    
    Expiration
    
    Facility
    
    Entity
    
    Level (1)
    
    Rate (2)
    
    Date
    
    Agreement (3)
    
    OptionsLea County
    
    October 1998
    
    January 2009
    
    State
    
    Lea
    
    Multi-
    
    
    1,200/98
    %
    
    May
    
    June
    
    AnnualCorrectional
    
    
    (11
    )
    
    
    
    
    
    Prison
    
    County
    
    Security
    
    
    
    
    
    
    1998
    
    
    
    2004Facility,
or the Hobbs
Facility,
Hobbs, NMJena Juvenile
    
    January 2000
    
    January 2010
    
    Juvenile
    
    None
    
    Multi-
    
    
    276/0
    %
    
    June
    
    None (15)
    
    NoneJustice Center,
    
    
    
    
    
    
    
    
    
    Correctional
    
    
    
    
    
    Security
    
    
    
    
    
    
    1999or the Jena
    
    
    
    
    
    
    
    
    
    FacilityFacility,
Jena, LANORTH CAROLINA
FACILITIES:Mountain View
    
    March 2001
    
    November
    
    State
    
    
    (13
    )
    
    Medium
    
    
    576
    
    
    December
    
    
    (13
    )
    
    
    (13
    )Correctional
    
    
    
    
    
    
    2008
    (12)
    
    Prison
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1998Facility,
or the Mountain
View
Facility,
Spruce Pine, NCPamlico
    
    June 2001
    
    August
    
    State
    
    
    (13
    )
    
    Medium
    
    
    576
    
    
    August
    
    
    (13
    )
    
    
    (13
    )Correctional
    
    
    
    
    
    
    2008
    (12)
    
    Prison
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1998Facility,
or the Pamlico
Facility,
Bayboro, NCFACILITY LEASED
TO CEC:Delaney Hall
    
    May 2003
    
    May 2013
    
    Adult
    
    
    (14
    )
    
    Minimum
    
    
    726/ 99
    %
    
    March
    
    
    (14
    )
    
    
    (14
    )Newark, NJ
    
    
    
    
    
    
    
    
    
    Correctional
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2000FacilityTotal Facilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,008
 10




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##### Table of Contents



(1)
    
    Each facility is identified according to the level of security maintained
as follows: non-secured facilities are facilities which are access
controlled residential facilities; minimum security facilities are
facilities having open-housing within an appropriate designated and
patrolled institutional perimeter; medium security facilities are
facilities having either cells, rooms or dormitories, a secure perimeter,
and some form of external patrol; maximum security facilities are
facilities having single occupancy cells, a secure perimeter and external
patrol or devices; and multi-security facilities are facilities with
various components of the previously described security levels.(2)
    
    Design capacity measures the number of beds, and, accordingly, the number
of inmates each facility is designed to accommodate. Occupancy rate
measures the percentage of the number of beds which a facility is designed
to accommodate which are occupied at any given time or for which payment
has been guaranteed by the contracting governmental entity. The facility
operating agreement with respect to any facility may provide for occupancy
less than the facility design capacity. While the design capacity of each
of the Central Valley Community Correctional Facility, the Golden State
Community Correctional Facility and the Desert View Community Correctional
Facility is 550, the facility operating agreement for each such facility
provides for the use and occupancy of only 500 beds per facility. The
occupancy rates presented are as of December 31, 2003. We believe design
capacity and occupancy rate are appropriate measures for evaluating prison
operations because the revenues generated by each facility are generally
based on a per diem or monthly rate per inmate housed at the facility paid
by the corresponding contracting governmental entities. The ability of The
Geo Group, CEC or another private prison operator to satisfy its financial
obligations under its leases with us is based in part on the revenues
generated by their facilities, which in turn depends on the design
capacity and occupancy rate of each facility. The State of North Carolina
is not obligated to report occupancy percentages to us.(3)
    
    We are not a party to the underlying operating agreement on each
facility. The Geo Group and CEC or their affiliates are the parties to the
operating agreements with the contracting governmental entities on the The
Geo Group and CEC facilities, respectively. The expiration or termination
of any operating agreement between a governmental entity and The Geo Group
or CEC does not terminate or cause the expiration of the lease agreement.(4)
    
    The Homeland Security Act of 2002 moved the functions of the Immigration
and Naturalization Service, or INS to the Department of Homeland Security,
or DHS. The Bureau of Immigration and Customs Enforcement, or BICE, or
ICE, is a division of the DHS. The Geo Group has advised us that it
expects the operating contract on the Queens
Facility, which expires in March 2004, to be extended by BICE.(5)
    
    The State of California Department of Corrections.(6)
    
    The Geo Groups correctional facility operating contract with the
California Department of Corrections, or the CDOC, on the 224 bed
McFarland Community Correctional Facility, or the McFarland Facility,
expired on December 31, 2003. The Geo Group is continuing its efforts to
offer the McFarland Facility to incarcerate inmates from agencies of
federal and/or state governments. However, we cannot assure you that a new
operating contract will be entered into on the facility. The
non-cancelable McFarland Facility lease between us and The Geo Group,
which expires in April 2008, requires fixed rental payments to us
regardless of whether or not The Geo Group has an operating contract for
the leased facility. The current annual cash rent on the McFarland
Facility is approximately $759,000.(7)
    
    The facility operating agreement for the Queens Private Correctional
Facility includes a minimum guarantee of 150 beds (75% occupancy).(8)
    
    The Broward County Sheriffs Office, or the BSO. Under the operating
agreement between the BSO and The Geo Group, which expires on September
30, 2004, the BSO will utilize between 50-60 beds.(9)
    
    BICE has executed an operating agreement with The Geo Group under which
BICE will utilize 200 beds in the Broward Facility, with an option to
expand by an additional 50 beds at the request of BICE. The contract is a
five-year contract with a one-year base period beginning October 1, 2003,
with four one-year options.(10)
    
    State of Oklahoma Department of Corrections. 11




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##### Table of Contents



(11)
    
    In October 1998, we acquired the 600-bed Hobbs Facility. Subsequently, we
acquired the 600-bed expansion of the Hobbs Facility in January 1999, and
an industries building in July 1999.(12)
    
    The State of North Carolina has the option to acquire the Mountain View
Facility in December 2004 for approximately $26.2 million and the Pamlico
Facility in August 2004 for approximately $25.2 million. At the end of
each lease year after those dates, the State of North Carolina has an
option to purchase the Mountain View and/or the Pamlico Facility for a
predetermined declining amount. If the State of North Carolina were to
elect to exercise its option to acquire the Mountain View Facility and/or
the Pamlico Facility, we would be obligated to redeem all or a portion of
the Bonds using net proceeds from the facility or facilities sale and a
contingent reserve fund of $5.8 million held by the Trustee under the
Trust Indenture governing the Bonds. In addition, we would recognize a
one-time gain on the sale of the facility and/or facilities; however,
future results of operations and cash flows would be negatively impacted
because we would no longer receive the monthly rental income once a
facility is sold. As part of the 2003 Budget Act, the North Carolina
General Assembly authorized the acquisition of either or both of the
Pamlico and Mountain View facilities under the options contained in their
respective leases. However, no funds were appropriated with respect to the
exercise of either option, and the issuance of any financing contracts is
subject to the approval of both the State Treasurer and the Council of
State. In addition, the State can terminate the leases at the end of any
term or renewal term by giving us at least 180 days advance written
notice.(13)
    
    The facility is leased to the State of North Carolina and operated by the
North Carolina Department of Corrections.(14)
    
    CEC operates Delaney Hall under three separate operating agreements with:
(1) the New Jersey Department of Corrections, which expires June 30, 2006;
(2) Union County, New Jersey, which expired on December 31, 2003; and (3)
Essex County, New Jersey, which expires September 30, 2004. In connection
with the Union County correctional services agreement contract, CEC
continues to provide services as specified in the contract and expects an
extension or a new contract to be approved including terms comparable to
those in the expired contract. On March 11, 2004, Union County housed 197
inmates in Delaney Hall.(15)
    
    The Jena Facility was operated by The Geo Group under an operating
agreement with the State of Louisiana, which was terminated in July 2000.
The Geo Group does not presently have an operating contract with a client
for the Jena Facility, and as a result, the facility is currently vacant.
However, The Geo Group is obligated under the terms of the lease to
continue to make rental payments to us. 12




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##### Table of Contents



Adult Correctional Facilities.Adult correctional facilities are used to
house adult inmates on a permanent basis for the duration of their sentences.
The adult correctional facilities acquired by us include the Karnes Facility,
the Central Valley Facility, the Golden State Facility, the Desert View
Facility, the Hobbs Facility, the Lawton Facility, the Mountain View Facility
and the Pamlico Facility. The Karnes Facility is a medium security correctional facility located in
Karnes City, Texas with a design capacity of 480 beds. The facility is situated
on approximately 12 acres and contains approximately 77,000 square feet. The
Geo Group owns an adjacent parcel of unimproved land containing approximately
30 acres acquired at a total cost of $60,000. The Geo Group began operating
this facility in January 1998 under an interim operating agreement with Karnes
County and has subsequently negotiated a long-term operating agreement with
Karnes County that expires in 2026. The Central Valley Facility and the Golden State Facility are medium
security facilities located on adjacent properties in McFarland, California.
The Central Valley Facility is situated on approximately 19 acres, and the
Golden State Facility is situated on approximately 33 acres. Each facility
contains an approximately 95,901 square foot structure with a design capacity
of 550 beds. Construction of each of the Central Valley Facility and Golden
State Facility was completed in December 1997. The Geo Group has contracted
with the CDOC to operate each of these facilities, which contracts expire in
December 2007. The Desert View Facility is located in Adelanto, California and is a
medium security facility. The facility is situated on approximately 16 acres
and contains approximately 95,901 square feet with a design capacity of 550
beds. Construction of the facility was completed in December 1997. The Geo
Group has contracted with the CDOC to operate this facility, which contract
expires in December 2007. The Hobbs Facility is located in Hobbs, New Mexico and is a new
high-security facility located on approximately 80 acres and contains
approximately 360,000 square feet with a design capacity of 1200 beds.
Construction was completed in May 1998. The Geo Group has contracted with Lea
County to operate the facility, which contract expires in June 2004. The 1200-bed Hobbs Facility was purchased by the Company in three parts.
The first 600 beds were acquired in October 1998, while the remaining 600 beds,
referred to in this report as the Hobbs Expansion, were bought by us in January
1999. In July 1999, the Company acquired an industries building at the Hobbs
Facility. The Lawton Facility is located in Lawton, Oklahoma and is used as a medium
security prison. The facility is situated on 160 acres. The approximately
406,000 square foot structure contains a design capacity for 1,500 beds.
Oklahoma state law requires that the operating agreement contain a provision
granting the Oklahoma Department of Corrections the option at the beginning of
each fiscal year to purchase the facility at a predetermined price, which must
be negotiated and included in a schedule or formula to be contained in the
operating agreement. The Geo Group has agreed in the lease for the Lawton
Facility to pay any shortfall to us in the event the purchase option is
exercised by the State of Oklahoma and the purchase price paid by the State of
Oklahoma is less than the net book value of the Lawton Facility as shown on our
books and records at the time the purchase option is exercised. The Mountain View Correctional Facility, located in Spruce Pine, North
Carolina, is a 576-cell, medium security prison and is leased to the State of
North Carolina. The North Carolina Department of Correction operates the
facility. The facility, which was built in 1998, is situated on 93 acres and
contains approximately 197,000 square feet. The State of North Carolina has the
option to acquire the Mountain View Facility in December 2004 for approximately
$26.2 million. At the end of each lease year (November) after this date, the
State of North Carolina has an option to purchase the Mountain View for a
predetermined declining amount. The Pamlico Correctional Facility, located in Bayboro, North Carolina, is
a 576-cell, medium-security prison and is leased to the State of North
Carolina. The North Carolina Department of Correction operates the facility.
The facility, which was built in 1998, is situated on 146 acres and contains
approximately 197,000 square feet. The State of North Carolina has the option
to acquire the Pamlico Facility in August 2004 for approximately $25.2 million.
At the end of each lease year (August) thereafter, the State of North Carolina
has an option to purchase the Pamlico Facility for a predetermined declining
amount. If the State of North Carolina were to elect to exercise its option to
acquire the Mountain View Facility and/or the Pamlico Facility, we would be
obligated to redeem all or a portion of the Bonds using net proceeds from the
facility or facilities 13




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##### Table of Contents



sale. In addition, we would recognize a one-time gain on the sale of the
facility and/or facilities; however, future results of operations and cash
flows would be negatively impacted because we would no longer receive the
monthly rental income once a facility is sold. Pre-Release Center.A pre-release center is a minimum to medium security
facility for inmates nearing parole, offering inmates basic education and
pre-employment training as well as alcohol and drug abuse treatment and
counseling. The pre-release centers acquired by us are the McFarland Facility
and the Delaney Hall Facility. The McFarland Facility is located in McFarland, California. The facility
is situated on approximately five acres, and contains approximately 35,000
square feet. The facility currently has a design capacity of 224 beds. The Geo
Group operated the McFarland Facility under an operating agreement with the
CDOC, which expired on December 31, 2003, and the facility is currently vacant.
The Geo Group is continuing its efforts to offer the McFarland Facility to
incarcerate inmates from agencies of federal and/or state governments. However,
we cannot assure you that a new operating contract will be entered into on the
facility. However, The Geo Group is obligated under the terms of the lease to
continue to make rental payments to us. The Delaney Hall Facility is a 726 bed, minimum-security, correctional
facility located in Newark, New Jersey. The facility is situated on
approximately five acres, and contains approximately 80,000 square feet. CEC
operates the Delaney Hall Facility under three separate operating agreements
with: (1) the New Jersey Department of Corrections, which expires June 30,
2006; (2) Union County, New Jersey, which expired on December 31, 2003; and (3)
Essex County, New Jersey, which expires September 30, 2004. In connection with
the Union County correctional services agreement contract, CEC continues to
provide services as specified in the contract and expects an extension or a new
contract to be approved including terms comparable to those in the expired
contract. As of March 11, 2004, Union County housed 197 inmates in Delaney
Hall. Detention Facilities.Detention facilities are used to house undocumented
aliens for the BICE and are classified as minimum to medium security
facilities. The detention facilities acquired by us include the Aurora
Facility, the Queens Facility, and the Broward Facility. The Queens Facility is located on approximately 1.34 acres in New York,
New York. The facility has a design capacity of 200 beds and contains
approximately 61,400 square feet. The Geo Group began operating the facility in
June 1997, and is presently operating the facility under a management contract
with the BICE, which expires in March 2004, and includes three one-year renewal
options at the option of the BICE. The Aurora Facility is located on approximately 46 acres in Aurora,
Colorado. Originally designed to accommodate 150 beds, the facility was
expanded in 1992 to contain a design capacity of 300 beds. The approximately
66,000 square foot medium security facility is operated under a management
agreement entered into between the BICE and The Geo Group which expires in
March 2004, and includes four six-month renewal options at the option of the
BICE. The Broward Facility is located on approximately ten acres in Pompano
Beach, Florida. The facility has a design capacity of 300 beds and contains
approximately 86,500 square feet. The Geo Group is currently operating the
facility under a contract with the BICE for 200 beds, with an option to expand
by an additional 50 beds at the request of BICE. The contract has an initial
one-year period, which expires in September 2004, and includes four one-year
renewal options at the option of the BICE. Work Release Centers.A work release center is an access-controlled
community residential center which houses court-ordered residents who work in
the community and participate in programs and residential services at the
center. In addition to being used as a detention facility, the Broward Facility
is partially used as a work release center. The Broward Facility is partially used to house residents participating in
the Broward County Work Release Program. The facility is operated under a
management agreement, which expires in September 2004, between Broward County,
the Sheriff of Broward County and The Geo Group for between 50 to 60 beds. Juvenile Correctional Facilities.Juvenile correctional facilities are
intended to house juvenile offenders under standards which differ from those
used to house adult offenders. On January 7, 2000, we exercised our option to
purchase the Jena Facility for approximately $15,300,000. The Jena Facility is
located in Jena, Louisiana and was used to house juvenile inmates. The facility
is situated on approximately 100 acres, consists of an approximately 62,400
square foot structure and has a 14




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capacity for 276 beds. At the same time as we acquired the Jena Facility, we
entered into a lease with The Geo Group for the facility at an initial cap rate
of 11% with 4% annual escalators for an initial term of ten years, with three
additional renewal options for terms of five years each in length. The lease
provides for fixed rental payments to us without regard to occupancy. The Jena
Facility was operated by The Geo Group under an operating agreement with the
State of Louisiana, which has been terminated. The Geo Group does not
presently have an operating contract with a client for the Jena Facility, and
as a result, the facility is currently vacant. However, The Geo Group is
obligated under the terms of the lease to continue to make rental payments to
us. With the exception of the Hobbs Facility and the Lawton Facility, the
carrying value of each of our facilities is less than 10% of our total assets
as of December 31, 2003. For federal income tax purposes, our tax basis in
each facility is generally the purchase price paid by us. The real property
associated with these properties (other than land) generally will be
depreciated for federal income tax purposes over 40 years using the
straight-line method, which equates to a rate of 2.5%. Other assets associated
with the facilities may be depreciated by us using applicable useful lives. The Future Facilities.The terms of the Right to Purchase Agreement between us
and The Geo Group include the exclusive option to purchase facilities from The
Geo Group for six months after the Future Facility attains an occupancy level
of 75% of the number of beds authorized under the Certificate of Occupancy.
Some facilities have attained 75% occupancy levels and notice of this has been
provided to us in the past. Currently, there are no facilities eligible for
purchase under the Right to Purchase Agreement. Leases and Subleases with The Geo Group Simultaneous with our acquisition of the The Geo Group facilities, we
leased these facilities either directly to The Geo Group or to WCCRE LLC, which
in turn subleases these facilities to The Geo Group. The sublease structure is
used in those instances where The Geo Group is required by a contracting
governmental entity to afford the governmental entity the right to assume a
lease of that facility (or designate another facility operator to assume the
lease of that facility) at a fixed rental rate in the event of the early
termination of the operating agreement upon the occurrence of specified events.
Generally, in those instances where a sublease is created for the contracting
governmental entity (or its designated replacement operator) to assume, the
term of the sublease is commensurate with the term of the operating agreement
originally entered into between The Geo Group and the governmental entity.
This affords the governmental entity the ability to plan and effectuate an
orderly relocation of its inmates to another facility in the event of early
termination of its operating agreement with The Geo Group. However, regardless
of whether the sublease structure is created for an individual facility, The
Geo Group, at all times, remains primarily liable to us under the leases. Leases Each of the facilities that are leased to The Geo Group or WCCRE LLC is
the subject of a separate lease that incorporates the provisions of a master
lease between us and The Geo Group. The lease of each of these facilities
includes the land, the buildings and structures and other improvements thereon,
easements, rights and similar appurtenances to such land and improvements, and
permanently affixed equipment, machinery, and other specified fixtures relating
to the operation of the facility. The lease of each of these facilities
provides for an initial term of 10 years and may be extended by The Geo Group
for three additional five-year terms beyond this fixed term at a fair market
rental rate as mutually agreed upon by us and The Geo Group or as determined by
binding arbitration if the parties cannot reach such an agreement. In addition,
an individual lease will be automatically extended on the same terms (including
the then applicable base rent and base rent escalation) as reflected in the
applicable lease if there is at that time an unexpired sublease with respect to
the facility. The fixed term and extended terms under each lease are subject to
earlier termination upon the occurrence of specified contingencies described in
the lease. Any additional Future Facilities will be leased upon terms and
conditions substantially similar to the above-described leases except that the
rental rate in the case of any Future Facility acquired during the first five
years following our initial public offering will be the greater of (i) the fair
market rental rate as mutually agreed upon by us and The Geo Group or by
binding arbitration if the parties cannot reach such an agreement or (ii) 9.5%
of the applicable purchase price of the Future Facility. In the case of any
Future Facility acquired after the first five years following our initial
public offering, the initial annual rental rate will be the fair market rental
rate as mutually agreed upon by us and The Geo Group or as determined by
binding arbitration if the parties cannot reach such an agreement. 15




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Use of the Facilities.Each lease on the facilities permits The Geo Group
to operate the leased property solely as a correctional or detention facility,
unless otherwise mutually agreed upon by us and The Geo Group. Each lease held by The Geo Group is a triple-net lease or absolute net
lease meaning The Geo Group is required to pay base rent plus any additional
charges related to the leased property, including all taxes, government
charges, and all charges for utilities and services. Maintenance, Modification and Capital Additions.Under each lease held by
The Geo Group, The Geo Group is required, at its sole cost and expense, to
maintain each leased property in good order, repair and appearance We are not
required to build or rebuild any improvements to any property leased to The Geo
Group, or to make any repairs, replacements, alterations, restorations or
renewals to any leased property. The Geo Group, at its sole cost and expense, may make alterations,
additions, changes and/or improvements to each leased property. Improvements
which have a cost of more than $500,000 or which, when aggregated with the cost
of all such improvements for any individual leased property in the same lease
year, would cause the total cost of all such improvements to exceed $1,000,000,
must receive our prior written consent and must not impair the value and
primary intended use of the leased property The $500,000 and $1,000,000
threshold amounts are increased 4% per year, cumulatively. Upon the expiration
or earlier termination of the lease, we have an option to purchase at appraised
market value all machinery, equipment, furniture, furnishings, and other
personal property, which has been installed at the expense of The Geo Group on
any leased property. This option may be subject to a contracting governmental
entitys superior right to acquire all or a portion of this removable personal
property under the terms of its operating contract with The Geo Group. Each lease held by The Geo Group provides that, at the request of The Geo
Group, we may construct capital additions, or improvements to a particular
leased property, which are not normal or recurring to the maintenance of the
leased property. A capital addition to a leased property may necessitate
changes in the premises, rent, or other similar terms of the lease which would
be reflected in an amendment to the lease or a new lease agreement. In
specified situations, a capital addition may be made directly by The Geo Group
and financed by third parties with our prior written consent. We have an option
to acquire and lease back to The Geo Group any capital additions that we have
not undertaken or financed for a period of one year following the date The Geo
Group first receives inmates or detainees in that capital addition. The
purchase price of the capital addition is required to be 105% (or a lower
percentage if agreed to by The Geo Group) of the cost of the capital addition.
Fair market rental rates for any capital addition acquired or undertaken by us
are mutually agreed upon by us and The Geo Group, or by binding arbitration if
the parties cannot reach such an agreement. Insurance.Each lease with The Geo Group provides that The Geo Group is
required to maintain insurance on each leased property under The Geo Groups
insurance policies providing for the following coverages: (i) fire, vandalism,
earthquake and malicious mischief, extended coverage perils, and all physical
loss perils, (ii) comprehensive general public liability (including personal
injury and property damage), (iii) loss of rental value or business
interruption and (iv) workers compensation. Environmental Matters.Each lease with The Geo Group provides that The Geo
Group makes various representations and warranties relating to environmental
matters with respect to each leased property. Each lease also requires The Geo
Group to indemnify and hold harmless us and any holder of a mortgage, deed of
trust or other security agreement on a leased property from and against all
environmental liabilities, costs and expenses except those liabilities, costs
and expenses that result from our gross negligence or intentional misconduct. Indemnification
Generally.Under each GEO Facility lease, except in circumstances
involving the Companys gross negligence or intentional misconduct, The Geo Group
indemnifies, and is obligated to save harmless, the Company from and against
any and all demands, claims, causes of action, fines, penalties, damages
(including consequential damages), losses, liabilities (including strict
liability), judgments, and expenses (including, without limitation, reasonable
attorneys fees, court costs, and related expenses) incurred in connection with
or arising from: (i) the use, condition, operation or occupancy of each leased
property; (ii) any activity, work, or thing done, or permitted or suffered by
The Geo Group in or about the leased property; (iii) any acts, omissions, or
negligence of The Geo Group or any person claiming under The Geo Group, or the
contractors, agents, employees, invitees, or visitors of The Geo Group or any
such person; (iv) any claim of any person incarcerated, held or detained in the
leased property, including claims alleging breach or violation of such persons
civil or legal rights; (v) any breach, violation, or nonperformance by The Geo
Group or the employees, agents, contractors, invitees, or visitors of The Geo
Group, of any term, covenant, or provision of any lease or any law, ordinance,
or governmental requirement of any kind; (vi) any injury or damage to the
person, property or business of The Geo Group, its employees, agents,
contractors, 16




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invitees, visitors, or any other person entering upon the leased property under
the express or implied invitation of The Geo Group; (vii) any accident, injury
to or death of persons or loss of damage to any item of property occurring at
the leased property. Events of Default.In the event of any event of default referable to a
specific lease, we may evict The Geo Group from the respective leased property
and either terminate the lease or re-let the leased property. However, we will
have specified duties to mitigate our losses in the exercise of these remedies.
In either event, The Geo Group shall remain responsible for the rent provided
in the lease for this leased property for the remaining period of the term in
excess of rents received by us from any successor occupant. Alternatively, at
our option, we will be entitled to recover all unpaid rent then due plus the
present value of the rent for the unexpired term at the time of the award. This
will be subject to our obligation to deliver and pay to The Geo Group any net
rentals or proceeds actually received from the lease, sale or other disposition
of the leased property thereafter, up to the amount paid by The Geo Group. In
addition, we may exercise any other rights that we may have under law. In the
event we evict The Geo Group from a leased property, the Master Lease will
remain in full force and effect for all other leased properties. With respect
to The Geo Groups failure to timely pay rent and with respect to specified
nonmonetary events of default under the master lease, we shall have all of the
foregoing rights, remedies and obligations with respect to all of the leased
facilities. Because the facilities are located in various states, the leases may be
subject to restrictions imposed by applicable local law. Neither the Master
Lease nor any of the other agreements entered into by The Geo Group in
connection with the formation transactions prohibits or otherwise restricts our
ability to lease properties to parties (domestic or foreign) other than The Geo
Group. Because the leases on the facilities are triple-net leases, which impose
significant burdens upon the tenant and provide for an escalating annual base
rent, the leases do not satisfy the requirements of these governmental entities
or allow The Geo Group the flexibility to tailor the lease provisions to the
terms of a particular Request for Proposals, or RFP. In these instances, The
Geo Group requests that we enter into the lease with WCCRE LLC., which in turn
enters into a more basic fixed rental rate sublease with The Geo Group, which
sublease meets the requirements of the contracting governmental entity, and
permits the contracting governmental entity to assume such sublease in the
event of early termination of the operating agreement for the relevant
facility. The provisions of all subleases are subject to our review and
approval. We have leased the following facilities to WCCRE LLC., each of which
in turn is subleased to The Geo Group: the Central Valley Facility, the Golden
State Facility, the Desert View Facility and the McFarland Facility. We have
leased the following facilities directly to The Geo Group: the Queens Facility,
the Aurora Facility, the Hobbs Facility, the Lawton Facility and the Karnes
Facility. Assignment and Subletting.The leases with The Geo Group provide that
generally The Geo Group may not, without our prior written consent, assign,
sublease, mortgage, pledge, hypothecate, encumber or otherwise transfer (except
to an affiliate of The Geo Group) any lease or any interest in the lease, or
all or any part of the leased property. The leases further provide that except
with respect to governmental subleases meeting specified requirements our
consent may be granted or withheld in our sole discretion. Any change of
control of The Geo Group will be treated as an assignment of a lease for these
purposes. The leases further provide that no assignment or sublease will in any
way impair the continuing primary liability of The Geo Group under the leases. In addition, if requested by The Geo Group in order to respond to a RFP
for an operating agreement, we may agree to provide nondisturbance agreements
in favor of governmental entities under the terms of which we will agree to
recognize and leave the rights of any governmental sub-tenant undisturbed in
the event of a termination of the lease, but only upon our determination that
the provisions of any of these governmental subleases are acceptable in our
sole and absolute discretion. Subleases The rental payments and other material terms of the existing subleases
differ from comparable provisions of the leases, and there is no requirement
that the governmental entity or its designee comply with the provisions of the
leases. In these cases, The Geo Group will, nevertheless, remain primarily
liable to us under the leases. 17




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In connection with the conveyance of the facilities under the terms of the
leases, we will agree to recognize and leave undisturbed the subleasing rights
of the governmental entities. These subleases are presently in effect with
respect to the McFarland Facility, the Central Valley Facility, the Desert View
Facility, and the Golden State Facility. The Geo Group has agreed that the
term of the individual leases between The Geo Group and us for these facilities
will be automatically extended, if necessary, in order to insure that the lease
between us and The Geo Group will be commensurate with the term of any such
subleases. Some of the material differences between the terms and provisions of
the existing subleases and the leases are discussed below. The California Facilities Subleases.WCCRE LLC has entered into a series
of subleases with The Geo Group for the use of the California facilities. In
connection with our initial public offering, we entered into a series of leases
with WCCRE LLC under the terms of which we will recognize and agree to leave
undisturbed the California subleases. Except for the base rent, the terms and
provisions of each of the California subleases are identical. With the
exception of the sublease of the McFarland Facility which expired in January
1999, the term of each of the California subleases is 120 months expiring
December 16, 2007 and is coterminous with a ten year facility operating
agreement entered into between The Geo Group and the State of California for
each of these facilities. Each of the California subleases provides for
specified termination rights in favor of the State of California under which
the State of California has the option, in the event of early termination of
the operating agreement between the State of California and The Geo Group, to
cause The Geo Groups interest under each of the California subleases to be
assigned to the State of California or to a replacement operator approved by
the State. The California Subleases may not be modified without the prior
written approval of the State of California. While the California Subleases are
triple-net leases, the provisions of these subleases are generally not as
favorable to the lessor as the comparable provisions of the relevant leases. If
The Geo Group defaults on its obligations under the leases, we will be required
to permit the contracting government entity to occupy the California facilities
under the provisions of the sublease. The annual base rent under the sublease
is not subject to adjustment for cost of living increases or any other reason.
As a result, the annual rent payable under the California subleases may, during
some portion of the term of the applicable master leases, fall below the annual
rent payable under such leases. The Geo Group will nevertheless remain
obligated to us for performance under these leases for the entire term of the
California subleases. Relationship With The Geo Group The Geo Group is a leading developer and manager of privatized
correctional and detention facilities in the United States and abroad. The Geo
Group was founded in 1984 as a division of The Wackenhut Corporation, a leading
provider of professional security services, to capitalize on emerging
opportunities in the private correctional services market. According to
industry reports, The Geo Group is the second largest provider of privatized
correctional and detention services in the United States and the largest
provider of such services abroad, based upon the number of beds under
management. As of December 29, 2003, The Geo Group had 42 correctional and
detention facilities under contract or award, with an aggregate design capacity
of approximately 36,000 beds (with many of such facilities being leased by The
Geo Group from the contracting government entity). The Geo Group offers governmental entities a comprehensive range of
correctional and detention facility management services, ranging from
individual consulting projects to the integrated design, development and
management of such facilities. In addition to providing the fundamental
residential services relating to the security of facilities and the detention
and care of inmates, The Geo Group has built a reputation as an effective
provider of a wide array of in-facility rehabilitative and educational
programs, such as chemical dependency counseling and treatment, basic education
and job and life skills training. On May 8, 2002, The Wackenhut Corporation, which was the parent company
and 57% owner of The Geo Group, completed a merger with a subsidiary of Group 4
Falck, a multinational security and corrective services company, headquartered
in Copenhagen, Denmark, which is publicly traded on the Copenhagen Exchange.
Prior to May 8, 2002, The Wackenhut Corporation and The Geo Group were each
traded individually on the New York Stock Exchange. As a result of the
completion of the merger between The Wackenhut Corporation and a subsidiary of
Group 4 Falck, The Wackenhut Corporation is no longer publicly traded, or
listed on the NYSE. The Geo Group continues to be publicly traded and listed on
the NYSE under the symbol GGI, and as a publicly traded company files regular
reports as required under the Securities Exchange Act of 1934.. Following the merger, George Wackenhut and Richard Wackenhut resigned as
members of the Board of Directors of The Geo Group, but continue as members of
the Board of Trustees of Correctional Properties Trust. In addition, George
Zoley, who was Vice Chairman and Chief Executive Officer of GEO, resigned as
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Trust Board of Trustees in
September 2002, and became Chairman of the Board of
Directors of The Geo Group. On July 9, 2003, The Geo Group announced that it
has completed the repurchase of all 12 million shares of The Geo Group common
stock held by its former majority shareholder, Group 4 Falck. The Company currently leases eleven correctional facilities to The Geo
Group under long-term, triple-net leases. The terms and conditions of these
non-cancelable leases were not affected by the purchase by The Geo Group of
Group 4 Falcks 57% ownership interest. The average remaining life on these
eleven leases as of December 31, 2003 is approximately 4.75 years. Leases on North Carolina Facilities The Mountain View Lease Agreement The Mountain View Facility is leased to the State of North Carolina
pursuant to a lease agreement dated June 19, 1997. The Mountain View Facility
lease term commenced on December 1, 1998. The lease agreement is for an
initial term of ten years, with two automatic extensions of ten years each, for
a total term of thirty years. The State can terminate the lease at the end of
any term or renewal term by giving the lessor at least 180 days advance written
notice. Equal monthly lease payments are due in arrears on the last day of each
month during the term of the Mountain View lease agreement. A one percent (1%)
late fee is assessable in the event that a lease payment is not made on or
before the last day of the month. The Mountain View lease agreement is a triple-net lease and rental
payments are due without deduction, offset or abatement and are due without
demand or notice. The State is responsible for all costs of maintenance,
insurance, taxes, and preservation and protection of the premises. Beginning
on the first anniversary of the first rental payment date and on each
anniversary date thereafter during the initial term of the Mountain View lease
agreement and any renewal term, the rent is increased by the greater of (a)
three and one-half percent (3.5%), or (b) the percentage of increase in the
Consumer Price Index for All Urban Consumers U.S. City Average, All Items, but
not to exceed four percent (4%). The continuation of the Mountain View lease agreement is dependent upon
and subject to the appropriation of funds for lease payments by the General
Assembly of North Carolina. Failure to appropriate sufficient funds for the
payment of the lease rental terminates the lease effective the end of the
immediately preceding fiscal period of the lessee without further liability on
the part of the State. The State has agreed in the Mountain View lease
agreement to seek authorization and appropriation of funds for the required
rental payments from the North Carolina General Assembly by including in its
annual budget a request for adequate funds to satisfy its obligations under the
Mountain View lease agreement. The State, commencing at the end of the sixth year of the Mountain View
Lease Agreement, and at the end of each lease year thereafter, has the option
to purchase the Mountain View Facility. The States purchase price under the
option to purchase in year six (December 2004) is approximately $26,200,000,
and the option purchase price at the end of each subsequent lease year, as
specified in the lease agreement, is at predetermined declining amounts. The Pamlico Lease Agreement The Pamlico Facility is leased to the State under a lease agreement dated
June 19, 1997. The Pamlico Facility lease term commenced on August 19, 1998.
The Pamlico lease agreement is for an initial term of ten years, with two
automatic extensions of ten years each for a total term of thirty years. The
State can terminate the lease at the end of any term or renewal term by giving
the lessor at least 180 days advance written notice. Equal monthly lease payments are due in arrears on the last day of each
month during the term of the Pamlico lease agreement. A one percent (1%) late
fee is assessable in the event that a lease payment is not made on or before
the last day of the month. The Pamlico lease agreement is a triple-net lease and rental payments are
due without deduction, offset or abatement and are due without demand or
notice. The State is responsible for all costs of maintenance, insurance,
taxes, and preservation and protection of the premises. Beginning on the first
anniversary of the first rental payment date and on each anniversary date
thereafter during the initial term of the lease and any renewal term, the rent
is increased by the greater of (a) three and one-half 19




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percent (3.5%), or (b) the percentage of increase in the Consumer Price
Index for All Urban Consumers U.S. City Average, All Items, but not to exceed
four percent (4%). The continuation of the Pamlico lease agreement is dependent upon and
subject to the appropriation of funds for lease payments by the General
Assembly of North Carolina. Failure to appropriate sufficient funds for the
payment of the lease rental terminates the lease effective the end of the
immediately preceding fiscal period of the lessee without further liability on
the part of the State. The State has agreed in the lease agreement to seek
authorization and appropriation of funds for the required rental payments from
the North Carolina General Assembly by including in its annual budget a request
for adequate funds to satisfy its obligations under the Pamlico lease
agreement. The State, commencing at the end of the sixth year of the Pamlico lease
agreement, and at the end of each lease year thereafter, has the option to
purchase the Pamlico Facility. The States purchase price under the option to
purchase in year six (August 2004) is approximately $25,230,000, and the option
purchase price at the end of each subsequent lease year, as specified in the
lease agreement, is at predetermined declining amounts. Lease with Community Education Centers, Inc. Leases The Delaney Hall Facility leased to CEC is the subject of a separate lease
that incorporates the provisions of a master lease between us and CEC. The
lease of the facility includes the land, the buildings and structures and other
improvements thereon, easements, rights and similar appurtenances to this land
and improvements, and permanently affixed equipment, machinery, and other
specified fixtures relating to the operation of the facility. The lease is for
an initial term of 10 years and may be extended by CEC for three additional
five-year terms beyond this fixed term at a fair market rental rate as mutually
agreed upon by us and CEC or as determined by binding arbitration if the
parties cannot reach an agreement. The fixed term and extended terms under each
lease are subject to earlier termination upon the occurrence of specified
contingencies described in the lease. Use of the Facilities.The Delaney Hall lease permits CEC to operate the
property solely as a correctional or detention facility, unless otherwise
mutually agreed upon by us and CEC. The Delaney Hall lease is a triple-net
lease or absolute net lease meaning CEC is required to pay base rent plus
any additional charges related to the property, including all taxes, government
charges, and all charges for utilities and services. Maintenance, Modification and Capital Additions.The Delaney Hall lease
requires CEC, at its sole cost and expense, to maintain the Delaney Hall
facility in good order, repair and appearance. We are not required to build or
rebuild any improvements to Delaney Hall, or to make any repairs, replacements,
alterations, restorations or renewals to the property. CEC, at its sole cost and expense, may make alterations, additions,
changes and/or improvements to the Delaney Hall Facility. Improvements which
have a cost of more than $25,000 or which, when aggregated with the cost of all
such improvements for any individual leased property in the same lease year,
would cause the total cost of all such improvements to exceed $50,000, must
receive our prior written consent and must not impair the value and primary
intended use of the leased property. The $25,000 and $50,000 threshold amounts
are increased 3% per year, cumulatively. Upon the expiration or earlier
termination of the lease, we have an option to purchase at appraised market
value all machinery, equipment, furniture, furnishings, and other personal
property, which has been installed at the expense of CEC on any leased
property. This option may be subject to a contracting governmental entitys
superior right to acquire all or a portion of this removable personal property
under the terms of its operating contract with CEC. The Delaney Hall lease held by CEC provides that, at the request of CEC,
we may but shall be under no obligation to finance and construct capital
additions, or improvements, which are not normal or recurring to the
maintenance of the property. A capital addition to the property may necessitate
changes in the premises, rent, or other similar terms of the lease, which would
be reflected in an amendment to the lease or a new lease agreement. In
specified situations, a capital addition may be made directly by CEC and
financed by third parties with our prior written consent. We have an option to
acquire and lease back to CEC any capital additions that we have not undertaken
or financed at any time during the lease term. The purchase price of the
capital addition is required to be 105% (or a lower percentage if agreed to by
CEC) of the cost of the capital addition. Fair market rental rates for any
capital addition acquired or undertaken by us are mutually agreed upon by us
and CEC, or established by binding arbitration if the parties cannot reach such
an agreement. 20




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Insurance.The Delaney Hall lease with CEC provides that CEC is required
to maintain insurance on the property under CECs insurance policies providing
for the following coverages: (i) fire, vandalism, earthquake and malicious
mischief, extended coverage perils, and all physical loss perils, (ii)
comprehensive general public liability (including personal injury and property
damage), (iii) loss of rental value or business interruption and (iv) workers
compensation. Environmental Matters.The Delaney Hall lease with CEC provides that CEC
makes various representations and warranties relating to environmental matters
with respect to the property. The lease also requires CEC to indemnify and hold
us harmless on the property from and against all environmental liabilities,
costs and expenses except those liabilities, costs and expenses that result
from our gross negligence or intentional misconduct. Assignment and Subletting.The lease with CEC provides that generally CEC
may not, without our prior written consent, assign, sublease, mortgage, pledge,
hypothecate, encumber or otherwise transfer any lease or any interest in the
lease, or all or any part of the leased property. The lease further provides
that except with respect to governmental subleases meeting specified
requirements our consent may be granted or withheld in our sole discretion. Any
change of control of CEC will be treated as an assignment of a lease for these
purposes. The leases further provide that no assignment or sublease will in any
way impair the continuing primary liability of CEC under the leases. In addition, if requested by CEC in order to respond to a RFP for an
operating agreement, we may agree to provide nondisturbance agreements in favor
of governmental entities under the terms of which we will agree to recognize
and leave the rights of any governmental sub-tenant undisturbed in the event of
a termination of the lease, but only upon our determination that the provisions
of any of these governmental subleases are acceptable in our sole and absolute
discretion. Indemnification
Generally.Under the Delaney Hall lease, except in circumstances
involving the Companys gross negligence or intentional misconduct, CEC indemnifies,
and is obligated to save harmless, us from and against any and all demands,
claims, causes of action, fines, penalties, damages (including, but not limited
to, incidental and consequential damages), losses, liabilities (including, but
not limited to, strict liability), judgments, and expenses (including, without
limitation, reasonable attorneys fees and expenses, court costs, and related
expenses) incurred in connection with or arising from: (i) the use, condition,
operation or occupancy of the property; (ii) any activity, work, or thing done,
or permitted or suffered by or though CEC in or about the leased property;
(iii) any acts, omissions, or negligence of CEC or any person claiming under
CEC, or the contractors, agents, employees, invitees, or visitors of CEC or any
such person; (iv) any claim of any person incarcerated, held or detained in the
property, including claims alleging breach or violation of such persons civil
or legal rights; (v) any breach, violation, or nonperformance by CEC or the
employees, agents, contractors, invitees, or visitors of CEC, of any term,
covenant, or provision of any lease or any law, ordinance, or governmental
requirement of any kind; (vi) any injury or damage to the person, property or
business of CEC, its employees, agents, contractors, invitees, visitors, or any
other person entering upon the leased property under the express or implied
invitation of CEC; or (vii) any accident, injury to or death of persons or loss
of damage to any item of property occurring at the leased property. Events of Default.In the event of any event of default with respect to a
specific lease, we may evict CEC from the respective leased property and either
terminate the lease or re-let the leased property. However, we will have
specified duties to mitigate our losses in the exercise of these remedies. In
either event, CEC will remain responsible for the rent provided in the lease
for this leased property for the remaining period of the term in excess of
rents received by us from any successor occupant. Alternatively, at our option,
we will be entitled to recover all unpaid rent then due plus the present value
of the rent for the unexpired term at the time of the award. This will be
subject to our obligation to deliver and pay to CEC any net rentals
or proceeds actually received from the lease, sale or other disposition of the
leased property thereafter, up to the amount paid by CEC. In addition, we may
exercise any other rights that we may have under law. In the event we evict CEC
from a leased property, the Master Lease will remain in full force and effect
for all other leased properties. With respect to CECs failure to timely pay
rent and with respect to specified nonmonetary events of default under the
master lease, we shall have all of the foregoing rights, remedies and
obligations with respect to all of the leased facilities. Competition The facilities are, and any additional correctional and detention
facilities acquired by us will be, subject to competition for inmates from
private prison managers and possibly governmental entities. These include, but
are not limited to Corrections Corporation of America; Correctional Services
Corporation; The Geo Group; CEC; Group 4 Falck Global Solutions Ltd; U.K.
Detention Services, Ltd.; Cornell Companies, Inc.; Securicor PLC; Sodexho
Alliance; Management and Training Corporation; Avalon Correctional Services,
Inc.; and GRW Inc. Some of these competitors are larger and have greater 21




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resources than we do. We also compete in some markets with small local
companies that may have a better knowledge of the local conditions and may be
better able to gain political and public acceptance. In addition, operating
revenues of our correctional and detention facilities will be affected by a
number of factors, including the demand for inmate beds and general economic
conditions. We are subject to competition for the acquisition of correctional
and detention facilities with other purchasers of correctional and detention
facilities. Non-U.S. Operations All of our operations are within the United States. We do not have any
international operations. Government Regulation Corrections Industry Regulations.The corrections industry is subject to
federal, state and local regulations in the United States which are
administered by a variety of regulatory authorities. Generally, prospective
providers of corrections services must be able to detail their readiness to,
and must comply with, a variety of applicable state and local regulations,
including education, health care and safety regulations. Correctional and
detention management contracts frequently include extensive reporting
requirements and require supervision and on-site monitoring by representatives
of contracting governmental agencies. State law also typically requires
corrections officers to meet certain training standards. In addition, many
state and local governments are required to enter into a competitive bidding
procedure before awarding contracts for products or services. The laws of
certain jurisdictions may also require us to award subcontracts on a
competitive basis or to subcontract with businesses owned by women or members
of minority groups. Environmental Matters.Under various federal, state and local laws,
ordinances and regulations, an owner or operator of real property may become
liable for the costs of removal or remediation of certain hazardous substances
released on or in its property. Such laws often impose such liability without
regard to whether the owner or operator knew of, or was responsible for, the
release of such hazardous substances. The presence of such substances, or the
failure to remediate such substances properly when released, may adversely
affect the owners ability to sell such real estate or to borrow funds if the
borrower is using such real estate as collateral. Neither we, The Geo Group,
CEC nor any of our or their affiliates has been notified by any government
authority of any material non-compliance, liability or other claim in
connection with any of the facilities leased to The Geo Group or CEC and
neither we, The Geo Group, CEC nor any of our or their affiliates is aware of
any other environmental condition with respect to any of these facilities that
is likely to be material to us. Phase I environmental assessments have been
obtained for all of the facilities. However, these investigations may not
reveal all potential environmental liabilities, that no prior or adjacent owner
created any material environmental condition not known to us or that future
uses or conditions (including, without limitation, changes in applicable
environmental laws and regulations) will not result in imposition of
environmental liability or limitation on use of properties. The leases provide
that The Geo Group and CEC will indemnify us for certain potential
environmental liabilities at the facilities leased to each of them. Americans With Disabilities Act.The facilities are subject to the ADA.
The ADA has separate compliance requirements for public accommodations and
commercial facilities but generally requires that public facilities, such as
correctional facilities, be made accessible to people with disabilities. These
requirements became effective in 1992. Compliance with the ADA requirements
could require removal of access barriers and other capital improvements at the
facilities. Noncompliance could result in imposition of fines or an award of
damages to private litigants. Receipt of a satisfactory ADA compliance report
is required prior to our acquisition of each facility. 22




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Tax Considerations and Tax Status We have elected to be taxed as a REIT under sections 856 through 860 of
the Internal Revenue Code of 1986, as amended, commencing with our taxable year
ending December 31, 1998. If we qualify for taxation as a REIT, with specified
exceptions, we will not be subject to federal income tax at the corporate level
on our taxable income. A REIT is subject to a number of organizational and
operational requirements, including a requirement that it distribute at least
90% of its annual real estate investment trust taxable income. Although we
believe we operate in a manner designed to qualify as a REIT, it is possible
that future economic, market, legal or tax considerations may cause us to fail
to qualify as a REIT or may cause our Board of Trustees to revoke the REIT
election if our Board of Trustees and the holders of two-thirds of all our
outstanding common shares determine that such factors make it no longer
beneficial to qualify as a REIT. Policies and Objectives With Respect to Certain Activities The following is a discussion of our investment objectives and policies,
financing policies and policies with respect to some other activities. These
policies are determined by our Board of Trustees and may be amended or revised
from time to time at the discretion of our Board of Trustees without a vote of
our shareholders. Investment Policies.We focus our investments on the financing,
acquisition or development of facilities directly from, or on behalf of,
existing tenants and other private prison managers or government entities in
the United States. Additionally, we may, but have no present plans to, pursue
other opportunities in facilities unrelated to the correctional and detention
industry. We may also invest in other facilities or excess land or make
mortgage loans to facilitate our acquisitions of a facility. We apply the following general guidelines in evaluating
potential investments in correctional and detention facilities: (i) completion
of the construction of the facility, (ii) execution of a government contract
for the operation of the facility, and (iii) documentation of adequate inmate
occupancy levels.
Subject to the general investment guidelines referenced above, we consider
a variety of specific factors in evaluating potential investments in
correctional or detention facilities, including the following:  (i)
    
    the essentiality of the facility to the governmental user.  (ii)
    
    the reputation and creditworthiness of the current owner, manager or
developer of the facility,  (iii)
    
    the proposed terms for purchasing the facility,  (iv)
    
    the proposed terms for leasing the facility, including rental
payments and lease term,  (v)
    
    the quality of construction of the facility,  (vi)
    
    the quality of operations at an existing facility or the quality of
other operations of a prison manager for a new facility,  (vii)
    
    the relationship between the prison manager and the contracting
government entity, and  (viii)
    
    the status of existing facilities as facilities accredited by the
American Correctional Association, or the ACA, The ACA is a multi-disciplinary organization of professionals representing
all levels and facets of the corrections and criminal justice industry,
including federal, state and military correctional facilities in prisons,
county jails and detention centers, probation and parole agencies, and
community corrections/half-way houses. Comprised of 70 chapters and affiliated
organizations, as well as individual members numbering more than 20,000, the
ACA serves as the umbrella organization for all areas of corrections, and
provides a broad base of expertise in this industry. We may finance, purchase or lease properties for long-term investment,
expand and improve the facilities presently owned or sell these properties, in
whole or in part, when circumstances warrant. We may also participate with
other entities in 23




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property ownership, through joint ventures or other types of co-ownership.
Equity investments may be subject to existing mortgage financing and other
indebtedness which have priority over our equity interest. While we emphasize equity real estate investments, we may, in our
discretion, invest in mortgages, equity or debt securities of other REITs or
partnerships and other real estate interests. Mortgage investments may include
participating in convertible mortgages. There are no limitations on the percentage of our assets that may be
invested in any one property, venture or type of security. Our Board of
Trustees may establish limitations as it deems appropriate from time to time,
including limitations necessary to maintain our qualification as a REIT. No
limitations have been set on the number of properties in which we will seek to
invest or on the concentration of investments in any one geographic region. Disposition Policies; The Geo Groups Right of First Refusal.We have no
current intention to dispose of any of the facilities, although we reserve the
right to do so if our Board of Trustees determines that this action would be in
our best interests. The Geo Group and CEC have a right of first refusal with
respect to any sale of facilities acquired from each of them and the
State of North Carolina has the right to purchase each of the North
Carolina Facilities leased to them commencing in 2004. See Item 1.
Business  The Formation Transactions and Leases above for a more
detailed discussion of the terms and conditions. Financing Policies.Our capital structure at December 31, 2003 consisted
of 78% equity and 22% debt. As of December 31, 2003, our debt was comprised of
$3.8 million outstanding under the amended bank credit facility and $55.9
million of Bonds outstanding, which are non-recourse to CP North Carolina and
its sole member, CPT Operating Partnership L.P. We determine our financing
policies in light of then current economic conditions, relative costs of debt
and equity capital, market values of properties, growth and acquisition
opportunities and other factors. We have established the amended bank credit
facility which may be used to finance the acquisition of additional
correctional and detention facilities (including the Future Facilities), the
expansion of existing facilities and for working capital requirements. If our
Board of Trustees determines that additional funding is desirable, we may raise
these funds through additional equity offerings, debt financing or retention of
cash flow (subject to provisions in the tax code concerning taxability of
undistributed REIT income and REIT qualification), or a combination of these
methods. Indebtedness incurred by us may be in the form of publicly or privately
placed debt instruments or financings from banks, institutional investors or
other lenders, any of which indebtedness may be unsecured or may be secured by
mortgages or other interests in the facilities owned by us. There are no limits
on the number or amounts of mortgages or other interests which may be placed on
any one facility. In addition, such indebtedness may be with or without
recourse to all or any part of our facilities or may be limited to the
particular facility to which the indebtedness relates. The proceeds from any borrowings may be used for the payment of
distributions and working capital or to refinance indebtedness or to finance
acquisitions, expansions or developments of new facilities. In the event that our Board of Trustees determines to raise additional
equity capital, our Board of Trustees has the authority, without shareholder
approval, to issue additional common shares or preferred shares. Our Bylaws
require the approval of at least two-thirds of the members of our Board of
Trustees for us to issue equity securities, other than common shares issued (a)
for at least the fair market value thereof at the time of issuance as
determined in good faith by a majority of our Board of Trustees, (b) pursuant
to any of our share incentive or option plans, or (c) in a bona fide
underwritten public offering managed by one or more nationally recognized
investment banking firms. Existing shareholders have no preemptive right to
purchase shares issued in any offering, and any such offering could cause a
dilution of a shareholders investment in us. Working Capital Reserve Policies.We maintain working capital reserves
(and when not sufficient, access to borrowings) in amounts that our Board of
Trustees determines to be adequate to meet normal contingencies in connection
with the operation of our business and the management of our investments. Conflicts of Interest Policies.We have adopted policies, including a Code
of Business Conduct and Ethics designed to minimize potential conflicts of
interest. However, these policies may not be successful in eliminating the
influence of these conflicts. The Declaration of Trust requires that at least a
majority of the members of our Board of Trustees be comprised of Independent
Trustees, defined as individuals who qualify as trustees but who are neither
an officer nor an employee of us or our affiliates, nor a director, trustee,
officer or employee of, or other person who has a material financial interest
in, any of (i) The 24




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Wackenhut Corporation or The Geo Group, or (ii) any lessee or tenant of a
facility owned by us or by our affiliates, or (iii) any owner, lessee or tenant
of any facility financed by us or by our affiliates, other than any any owner,
lessee or tenant which is an affiliate of the ours, or (iv) any management
company operating any facility owned or financed by us or by our affiliates, or
(v) an affiliate of any of the foregoing. The Declaration of Trust provides
that these provisions relating to Independent Trustees may be amended with the
approval by the shareholders by the affirmative vote of two-thirds of all of
the votes entitled to be cast on such matters. In addition, the Bylaws provide
that the selection of operators for our facilities and the entering into and
consummation of any agreement or transactions with The Geo Group or its
affiliates, including, but not limited to, the negotiation, enforcement and
renegotiation of the terms of any lease of any of our facilities with such
parties, be approved by our Independent Committee which must consist solely of
Independent Trustees. Other Policies.We operate in a manner that will not subject us to
regulation under the Investment Company Act of 1940. We do not (i) invest in
the securities of other issuers for the purpose of exercising control over the
issuer, (ii) underwrite securities of other issuers or (iii) trade actively in
loans or other investments. Although we do not currently intend to do so, we may make investments
other than as previously described, provided that such investments do not
disqualify us from our REIT status. We may repurchase or otherwise reacquire
common shares or any other securities we may issue and may engage in these
activities in the future. Our Board of Trustees has no present intention of
causing us to repurchase any of the common shares, and this action would be
taken only in conformity with applicable federal and state laws and the
requirements for qualifying as a REIT under the tax code and the applicable
treasury regulations. Although we may do so in the future, we have not issued
common shares or any other securities in exchange for property, nor have we
reacquired (other than founders shares in 1998 which consisted of 1,000 common
shares) any of our common shares or any other securities. We may make loans to
third parties, including, without limitation, to joint ventures in which we
decide to participate. These loans generally require the approval of our Board
of Trustees, and loans to The Geo Group and its affiliates or to a joint
venture in which The Geo Group participates require the approval of our
Independent Committee. At all times, we intend to make investments in such a manner as to be
consistent with the requirements of the tax code to qualify as a REIT, and our
Board of Trustees shall endeavor to take no action which disqualifies us as a
REIT or otherwise causes the revocation of our election to be taxed as a REIT
without the affirmative vote of the holders of not less than two-thirds of our
shares entitled to vote on these matters. Website Our Internet website address is www.CorrectionalPropertiesTrust.com. We
make available free of charge on or through our website our Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and
amendments to these reports, as soon as reasonably practicable after we
electronically file these materials with, or furnish these materials to, the
Securities and Exchange Commission. These reports may be found at
http://www.CorrectionalPropertiesTrust.com by selecting the option entitled
SEC FILINGS. We do not intend for information contained in our web site to be
part of this Form 10-K. 
 Item 2.Properties. For a description of the facilities owned and leased by us, see Item 1.
Business  The Owned Facilities. We also lease 2,800 square feet of office
space in Palm Beach Gardens, Florida for our principal executive offices at an
annual rent of approximately $50,000. The term of this lease expires on July
31, 2005. 25




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Item 3.Legal Proceedings. The nature of our business may result in claims or litigation against us
for damages arising from the conduct of our employees or others. Except for any routine litigation incidental to our business, there are no
pending material legal proceedings to which we or any of our subsidiaries is a
party or to which any of our property is subject. Subject to specified
exceptions appearing in the applicable leases, each of The Geo Group and CEC
has agreed to indemnify us for incidents that arise from operation of
facilities leased to them. The State of North Carolina is not required to
indemnify us for claims made against it on account of ownership of the two
facilities leased to the State of North Carolina. North Carolina is, however,
required by its leases to carry liability insurance for our benefit against
liabilities associated with or arising out of accidents or disasters at the
facilities in the coverage amounts equal to $1,000,000 per occurrence and
$10,000,000 in the aggregate. To the extent any claim is not covered by North
Carolinas insurance, or ours, or exceeds the amount of the coverage, we may be
liable which could have a material adverse effect on our operations, financial
position or our future business operations. 
 Item 4.Submission of Matters to a Vote of Security Holders. None. 26




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PART II Item 5. Market
for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities. 
 Since April 23, 1998, our common shares have been listed on the New York
Stock Exchange under the symbol CPV. The following table sets forth the range
of high and low sales prices for the common shares for the period from January
1, 2002 to December 31, 2003, as reported by NYSE. 2003
    
    2002High
    
    Low
    
    High
    
    LowFirst Quarter
    
    $
    21.98
    
    
    $
    20.11
    
    
    $
    19.59
    
    
    $
    16.00Second Quarter
    
    
    28.00
    
    
    
    19.99
    
    
    
    22.00
    
    
    
    17.79Third Quarter
    
    
    28.80
    
    
    
    24.25
    
    
    
    23.00
    
    
    
    17.65Fourth Quarter
    
    
    29.40
    
    
    
    25.01
    
    
    
    22.95
    
    
    
    18.50
 As of March 11, 2004, there were 10,977,750 shares of common shares
outstanding and 120 shareholders of record. Recent Sales of Unregistered Securities None. Distributions Subsequent to our initial public offering, we have paid regular quarterly
distributions to our shareholders. Our Board of Trustees, in its sole
discretion, has determined the actual distribution rate based on our actual
results of operations, economic conditions, tax considerations (including those
related to REITs) and other factors. In 2003, we paid four cash dividend
distributions  $.40 per common share in the first quarter, $.42 per common
share in the second quarter, and $.45 per common share in each of the third and
fourth quarters totaling $1.72 per common share. This was classified for
federal tax reporting purposes as 65.2% as ordinary income and 34.8% as return
of capital. In 2002, we paid four cash dividend distributions, each in the
amount of $.40 per common share, totaling $1.60 per common share. This was
classified for federal tax reporting purposes as 62.4% as ordinary income and
37.6% as return of capital We believe that in order to facilitate a clear understanding of our
operating results, funds from operations should be examined in conjunction with
our consolidated financial statements and information included elsewhere in
this report. Funds from operations does not represent cash generated from
operating activities in accordance with generally accepted accounting
principles, or GAAP, consistently applied and should not be considered an
alternative to net income as an indication of our performance or to cash flows
as a measure of liquidity or ability to make distributions. Our funds from
operations are not comparable to funds from operations reported by other REITs
that do not define the term using the current National Association of Real
Estate Investment Trusts, or NAREIT, definition or that interpret the current
NAREIT definition differently than we do. Under the terms of our new amended bank credit facility, we are restricted
from paying dividends in excess of (a) the lesser of 100% of cash available for
distribution or 95% of funds from operations plus, in either case (b) 100% of
the amount of any capital gain from dispositions of facilities. 27




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Securities Authorized For Issuance Under Equity Compensation Plans The following table provides information as of December 31, 2003 regarding
our compensation plans under which equity securities are authorized for
issuance. Number of SecuritiesRemaining AvailableNumber of Securities
    
    
    
    
    
    For Issuance UnderTo Be Issued
    
    Weighted Average
    
    Equity CompensationUpon The Exercise
    
    Price of
    
    Plans (ExcludingOf Outstanding Options
    
    Outstanding Options
    
    Securities Reflectedand Deferred Shares
    
    and Deferred Shares
    
    In Column (a)PLAN CATEGORY
    
    (a)
    
    (b)
    
    (c)Equity Compensation Plans Approved by Security Holders
    
    
    306,000
    
    
    $
    18.33
    
    
    
    151,250
    (1)Equity Compensation Plans Not Approved by Security Holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    306,000
    
    
    $
    18.33
    
    
    
    151,250
   (1)
    
    As of December 31, 2003, the 1998 Employee Share Incentive Plan had 5,000
shares available, the 1998 Non-Employee Trustees Share Option Plan and the
2000 Stock Option Plan had no shares available and the 2002 Stock Option Plan
had 146,250 shares available. Purchases of Equity Securities by the Issuer and Affiliated Purchasers None. 
 Item 6.Selected Financial Data. The selected consolidated financial data set forth below are derived from
our consolidated financial statements which appear elsewhere in this report.
The following data should be read in conjunction with Managements Discussion
and Analysis of Financial Condition and Results of Operations, and the
Consolidated Financial Statements and Notes thereto, included elsewhere in this
report. Year
    
    Year
    
    Year
    
    Year
    
    YearEnded
    
    Ended
    
    Ended
    
    Ended
    
    Ended(In thousands, except per share amounts)
    
    12/31/03
    
    12/31/02
    
    12/31/01
    
    12/31/00
    
    12/31/99OPERATING RESULTSRevenue
    
    $
    32,417
    
    
    $
    30,204
    
    
    $
    27,431
    
    
    $
    22,711
    
    
    $
    20,329Net income
    
    
    13,739
    
    
    
    10,128
    
    
    
    8,950
    
    
    
    8,444
    
    
    
    8,728Weighted average shares outstanding, diluted
    
    
    9,144
    
    
    
    7,259
    
    
    
    7,164
    
    
    
    7,130
    
    
    
    7,130Net income per share, diluted
    
    
    1.50
    
    
    
    1.40
    
    
    
    1.25
    
    
    
    1.18
    
    
    
    1.22DIVIDENDSCash distribution per share
    
    $
    1.72
    
    
    $
    1.60
    
    
    $
    1.47
    
    
    $
    1.46
    
    
    $
    1.43BALANCE SHEET DATA (as of DECEMBER 31, 2003,
2002, 2001, 2000 and 1999)Real estate properties, net
    
    $
    260,141
    
    
    $
    246,229
    
    
    $
    253,362
    
    
    $
    210,324
    
    
    $
    200,415Total assets
    
    
    274,628
    
    
    
    262,589
    
    
    
    266,847
    
    
    
    213,775
    
    
    
    203,548Revolving line of credit
    
    
    3,800
    
    
    
    74,000
    
    
    
    80,000
    
    
    
    81,400
    
    
    
    69,200Bonds payable
    
    
    55,855
    
    
    
    56,780
    
    
    
    57,475
    
    
    
    
    
    
    
    Total liabilities
    
    
    61,880
    
    
    
    135,133
    
    
    
    142,978
    
    
    
    84,832
    
    
    
    72,788Total shareholders equity
    
    
    212,748
    
    
    
    127,456
    
    
    
    123,869
    
    
    
    128,943
    
    
    
    130,760
 28




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Item 7.
    Managements Discussion and Analysis of Financial Condition and Results of Operations. The following discussion should be read in conjunction with the Companys
consolidated financial statements and notes thereto, which are included
elsewhere in this annual report. Overview We were formed in February 1998 as a Maryland real estate investment trust
to capitalize on the growing trend toward privatization in the corrections
industry by acquiring correctional and detention facilities from both private
prison operators and governmental entities and leasing these facilities to
experienced correctional and detention facility operators or the governmental
entities under long-term, non-cancelable, triple-net leases (leases where the
tenant is required to pay all operating expenses, taxes, insurance, structural
and non-structural repairs and other costs). Our principal business strategy is to finance and acquire correctional and
detention facilities that meet our investment criteria, from both private
prison managers, developers and government entities, to expand our existing
facilities, and to lease all of these facilities under long-term leases to
qualified third-party operators. With the exception of the Mountain View
Facility and Pamlico Facility, our remaining facilities are privately managed
facilities that are leased to and operated by The Geo Group, Inc. or Community
Educations Center, Inc., or CEC. Substantially all of our revenues are derived from: (i) rents received
under triple-net leases of correctional and detention facilities; and (ii)
interest earned from the temporary investment of funds in short-term
investments. A component of the rental revenue we receive consists of increases
resulting from rent escalation provisions which appear in all of our leases:  
    
    The Geo Group. The base rent for the first year for each
facility leased to The Geo Group before January 1, 2000 was equal to
9.5% of the facility purchase price. Thereafter, minimum rent
escalates by the greater of 3% or actual CPI with a maximum increase
of 4% at the first two annual anniversaries of the effective date of
each lease and by an amount equal to increases, if any, in the CPI at
each successive annual anniversary for the remaining term of each
lease, subject to a maximum increase of 4.0% per annum throughout the
term of the leases. The base rent for the first year of the Jena
Juvenile Justice Center leased to The Geo Group was equal to 11.0% of
the facility purchase price with a fixed 4.0% annual escalator. The
average remaining life on the eleven leases with The Geo Group as of
December 31, 2003, is approximately 4.75 years.  
    
    State of North Carolina Leases.In the year we acquired the
Pamlico Facility and assumed the existing lease agreement with the
State of North Carolina (which originally commenced in August 1998),
the base rent was equal to $2,858,754 or 11.9% of the facility
purchase price. In the year we acquired the Mountain View Facility
and assumed the existing lease agreement with the State of North
Carolina (which originally commenced in December 1998), the base rent
was equal to $2,965,900 or 11.9% of the facility purchase price. In
both cases, following the first year and continuing during the term
of the leases and any renewal terms, base rent increases by the
greater of 3.5%, or the percentage of increase, if any, in the CPI,
but not to exceed 4.0%.  
    
    Community Education Centers Lease.On May 29, 2003, we acquired
Delaney Hall. The initial base rent rate is $2,310,000 per annum or
11.0% of the facility purchase price. Following the first year and
continuing during the term of the lease, base rent increases by 3.0%
annually on each anniversary. We incur operating and administrative expenses, including compensation
expense for our executive officers and other employees, office rental and
related occupancy costs and various expenses incurred in the process of
acquiring additional properties. We are self-administered and managed by our
executive officers and staff, and do not engage a separate advisor or pay an
advisory fee for administrative or investment services, although we do engage
legal, accounting, tax and financial advisors from time to time. Our primary
non-cash expense is depreciation of our correctional and detention facilities. 29




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We have leveraged and anticipate having to continue to leverage our
portfolio of real estate equity investments, and expect to continue to incur
short-term indebtedness and related interest expense. We may also incur
long-term indebtedness to make acquisitions, and/or refinance correctional
facilities currently owned. We intend to make distributions to our shareholders in amounts not less
than the amounts required to maintain REIT status under the Internal Revenue
Code. Critical Accounting Policies The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions in certain circumstances that affect amounts reported
in its financial statements and related notes. In preparing these financial
statements, we have made our best estimates and assumptions that affect the
reported assets and liabilities. We believe our most critical accounting
policies include revenue recognition, depreciation of real estate, impairment
of long-lived assets, the accounting for interest rate swaps and stock options.
Application of these assumptions requires the exercise of judgment as to future
uncertainties and, as a result, future results could differ from these
estimates. For additional information, please see Note 2 Basis of Presentation
and Summary of Significant Accounting Policies in the notes to the
consolidated financial statements included in this Form 10-K for the year ended
December 31, 2003. Revenue Recognition Lease revenue is recognized on a straight-line basis over the lease term
including the impact of scheduled rent increases which are determinable in
amount at the inception of the lease. Any increases in lease revenue due to
scheduled rent increases which were not determinable at the inception of the
lease will be recognized when determinable. Scheduled rent increases which are
not determinable at lease inception are dependent upon increases in the
Consumer Price Index, or CPI. Depreciation of Real Estate Real estate properties are recorded at cost. Acquisition costs and
transaction fees directly related to each property are capitalized as a cost of
the respective property. The purchase price of properties is allocated to
tangible and intangible assets based on their respective values. The tangible
cost of real estate properties acquired is allocated between land, buildings
and improvements, and machinery and equipment based upon cost at time of
acquisition. Depreciation is provided for on a straight-line basis over an
estimated useful life ranging from 27-40 years for buildings and improvements.
We are required to make subjective evaluations of the estimated useful lives of
our properties, which directly impacts our net income. Impairment of Long-lived Assets We review the recorded value of our real estate for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
asset in question may not be recoverable. We have reviewed our long-lived
assets and have determined that there are no events requiring impairment loss
recognition. The method used to determine impairment would be based on
estimates of undiscounted operating cash flows over the remaining amortization
period for the related long-lived assets. We would measure impairment as the
difference between fair value and the net book value of the related asset. Interest Rate Swaps In accordance with the amended bank credit facility, we utilize interest
rate swap derivative instruments to manage changes in market conditions related
to interest rate payments on certain of our variable rate bank debt
obligations. These interest rate swaps exchange floating interest rate LIBOR
payments on specified established notional amounts for fixed rate interest
payments on the same notional amounts. We recognize our interest rate swap
derivatives on the balance sheet at fair value, which is determined by the
counter party, as either an asset or a liability. We determined the interest
rate swaps to be effective cash flow hedges, and therefore, changes in the fair
value of these swap agreements are recorded in accumulated other comprehensive
loss, which is a component of shareholders equity. 30




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Stock Options We account for stock-based compensation utilizing the intrinsic value
method in accordance with the provisions of APB Opinion No. 25 and related
interpretations. Accordingly, no compensation cost has been recognized for our
employee stock plans because the exercise prices of the stock options equal the
market prices of the underlying stock on the dates of grant. Had compensation
for our stock-based compensation plans been determined pursuant to SFAS No.
123, Accounting for Stock-Based Compensation, our net income and earnings per
share would have decreased accordingly. For additional information, please see
Note 2 Basis of Presentation and Summary of Significant Accounting Policies:
Employee Stock-Based Compensation Plans and Note 5 Share Option and Incentive
Plans in the notes to the consolidated financial statements included in this
Form 10-K for the year ended December 31, 2003. FINANCIAL CONDITION Results of Operations 2003 Compared with 2002 For the twelve months ended December 31, 2003, rental revenues increased
to $32,309,000 from $30,017,000 for the twelve months ended December 31, 2002.
The 8% increase in rental revenues resulted primarily from the acquisition of
Delaney Hall on May 29, 2003, which increased rental revenue by $1.6 million.
The balance of the increase was primarily due to rent escalations, based on the
consumer price index, on some of the facilities of approximately $0.4 million
and a one-time, cumulative non-recurring CPI rent escalation adjustment of
approximately $0.3 million on certain of the facilities leased to The Geo
Group. Depreciation for the twelve months ended December 31, 2003 increased to
$7,396,000 from $7,133,000 for the twelve months ended December 31, 2002.
Depreciation associated with the Delaney Hall Facility resulted in the 4%
increase in depreciation from 2002 to 2003. General and administrative expenses for the twelve months ended December
31, 2003 increased 37% to $2,089,000 from $1,525,000 for the twelve months
ended December 31, 2002. The increase in general and administrative expenses
was primarily due to an increase in salaries and benefits, insurance,
professional fees and Board of Trustee fees. Interest expense decreased to $9,193,000 for the twelve months ended
December 31, 2003 from $11,418,000 for the twelve months ended December 31,
2002. The decrease was primarily due to a reduction in interest on our amended
bank credit facility as a result of the paying down of the outstanding balance
in July 2003 using the proceeds from the secondary public offering. 2002 Compared with 2001 For the twelve months ended December 31, 2002, rental revenues increased
to $30,017,000 from $27,320,000 for the twelve months ended December 31, 2001.
The 10% increase in rental revenues resulted primarily from revenue associated
with the Mountain View Facility, purchased on March 16, 2001, and the Pamlico
Facility, purchased on June 28, 2001, which increased rental revenue by $0.7
million and $1.6 million, respectively. The balance of the increase was
primarily due to rent escalations, based on the consumer price index, on some
of the remaining facilities. Depreciation for the twelve months ended December 31, 2002 increased to
$7,133,000 from $6,512,000 for the twelve months ended December 31, 2001.
Depreciation associated with the Mountain View Facility and Pamlico Facility
resulted in the 10% increase in depreciation from 2001 to 2002. General and administrative expenses for the twelve months ended December
31, 2002 decreased 9% to $1,525,000 from $1,673,000 for the twelve months ended
December 31, 2001. The decrease in general and administrative expense was
primarily due to a decrease in professional fees. Interest expense increased to $11,418,000 for the twelve months ended
December 31, 2002 from $10,296,000 for the twelve months ended December 31,
2001. The increase is primarily due to interest on the Bonds issued by a
wholly-owned 31




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##### Table of Contents



subsidiary of ours on June 28, 2001 in connection with the refinancing of the
Mountain View Facility and the acquisition of the Pamlico Facility offset by a
reduction in interest on our credit facility. Liquidity and Capital Resources We expect to meet our short-term liquidity requirements generally through
our working capital and net cash provided by operations. We believe that our
net cash provided by operations will be sufficient to allow us to make
distributions necessary to enable us to continue to qualify as a REIT. All
facilities owned by us are leased under triple-net leases, which require the
lessees to pay substantially all expenses associated with the operation of
these facilities. As a result of these arrangements, we do not believe we will
be responsible for any major expenses in connection with the facilities during
the terms of the leases. On November 25, 2003, we entered into an Amended and Restated Credit
Agreement the terms of which govern our new amended bank credit facility
initially consisting of a $95 million secured revolving credit facility. The
amended bank credit facility has a term of 36 months and replaces our initial
secured line of credit which matured on October 1, 2003 but was extended up
until the closing of the amended bank credit facility. The proceeds of the
amended bank credit facility may be used to finance the construction and the
acquisition of correctional and detention facilities, to expand or improve
current facilities and for general working capital purposes. The amended bank
credit facility includes a swing line component and provisions to increase the
amended bank credit facility up to a total of $200 million by increasing the
revolver, and/or by originating a new term loan of up to $100 million, subject
to successful syndication and other specified closing conditions. The amended bank credit facility is secured by our facilities, other than
the Queens Facility and the North Carolina facilities, and permits aggregate
borrowings of up to 50% of the total value of the facilities, i.e. the Pledge
Pool, which is calculated as the lesser of the aggregate of the historical cost
of our facilities or the aggregate of the appraised value of those facilities.
Under the terms of the amended bank credit facility, we are restricted from
paying dividends in excess of (a) the lesser of 100% of cash available for
distribution or 95% of funds from operations plus, in either case (b) 100% of
the amount of any capital gain from dispositions of facilities. The amended
bank credit facility includes a requirement that we enter into specified
interest rate swap agreements for a portion of the amounts drawn, which
effectively fixes the interest rate on a significant portion of the borrowings.
Our ability to borrow under the amended bank credit facility is subject to our
compliance with a number of customary affirmative and negative restrictive
covenants and other requirements including certain financial covenants with
respect to our consolidated net worth and interest coverage ratio and limits on
capital expenditures and borrowings in addition to other restrictions. We were
in compliance with these covenants at December 31, 2003. Borrowings under the amended bank credit facility bear interest at either
a base rate or eurodollar rate at our option. The base rate is equal to the sum
of (a) the higher of (i) the Federal Funds Rate plus 0.5% and (ii) the Prime
Rate plus (b) the base rate applicable margin, which ranges from 0 to 75 basis
points depending upon our ratio of consolidated total liabilities to
consolidated total assets. The eurodollar rate is equal to LIBOR plus the
eurodollar rate applicable margin, which ranges from 275 to 350 basis points
depending upon our ratio of consolidated total liabilities to consolidated
total assets. The interest period on eurodollar rate loans is based on
interest periods of one, two, three, six or nine months at our option. The
applicable margins for base rate loans and eurodollar rate loans described
above were 0% and 2.75% at December 31, 2003, respectively. Economic
conditions could result in higher interest rates, which could increase debt
service requirements on borrowings under the amended bank credit facility and
which could, in turn, reduce the amount of cash available for distribution.
Upon the closing of the amended bank credit facility, we paid fees and expenses
of approximately $2.1 million. As of December 31, 2003, the amount of
outstanding indebtedness under the amended bank credit facility was $3.8
million. As of December 31, 2003, we had $91.2 million available borrowing
capacity, including $5.7 million, which is currently available to be drawn on
the swing line component for general working capital requirements. In order for a facility to be initially included in the Pledge Pool, the
lessee of the facility must be in full compliance with the material terms and
conditions contained in the operating or management contract with the
governmental agency. However, in the event that any facility, after becoming a
part of the Pledge Pool, becomes vacant that property shall continue to be
included in the Pledge Pool so long as the lease agreement with respect to such
property is in full force and effect and the inclusion of that property in the
Pledge Pool would not cause the sum of the appraised values of all vacant
properties in the Pledge Pool to exceed 20% of the total value of the Pledge
Pool as calculated above. The Geo Group does not presently have a correctional facility operating or
management contract with a governmental agency for the Jena Facility and the
McFarland Facility. However, The Geo Group continues to make rental payments to
us as 32




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##### Table of Contents



required under the terms of the non-cancelable leases. The appraised value of
these two facilities is approximately ten percent of the total value of the
facilities as calculated above, and therefore, does not exceed 20% of the total
value. As a result, both of these facilities continue to be included in the
Pledge Pool. Each of our facilities are leased under triple-net leases in which the
tenant is required to pay all the operating expenses, taxes, insurance, and
structural and non-structural repairs and other costs. As a result, we have no
commitments with respect to other capital expenditures on our existing
facilities. We have an agreement under which we may acquire, at a price of up
to 105% of cost, and lease back to The Geo Group, any correctional or detention
facility acquired or developed and owned by The Geo Group, subject to specified
limited exceptions, and subject to time constraints on each specific property.
Currently there are no properties of The Geo Group eligible for purchase
pursuant to this agreement. We expect to meet our long-term liquidity requirements for the funding of
real property development and acquisitions by borrowing under our amended bank
credit facility and by issuing equity or debt securities in public or private
transactions. We anticipate that we will be able to obtain financing for our
long-term capital needs. However, we cannot assure you that this additional
financing or capital will be available on terms acceptable to us. We may, under
some circumstances, borrow additional amounts in connection with the renovation
or expansion of facilities, the acquisition of additional properties, or as
necessary, to meet certain distribution requirements imposed on REITs under the
Internal Revenue Code. On June 12, 2002, we filed a universal shelf registration statement on
Form S-3 with the Securities and Exchange Commission, under Rule 415 under the
Securities Act of 1933, as amended, which is now effective. We may, from time
to time, offer our common shares, preferred shares, debt securities, which may
be senior or subordinated, depositary shares and warrants to acquire any of the
foregoing. These securities may only be offered in amounts, at prices and on
terms to be set forth in the prospectus contained in the registration
statement, and in one or more supplements to the prospectus. The registration
statement is intended to provide us flexibility to raise up to $250 million
from the offering of these securities, subject to market conditions and capital
needs. Net proceeds from the offering may be used by us to acquire correctional
properties, repay outstanding debt, and for general working capital purposes. In July 2003, we completed a public offering of 3,250,000 common shares at
$25.50 per share, under our shelf registration statement. The gross proceeds
from the offering of $82,875,000 less expenses of $4,984,000, which includes
underwriters fees and expenses associated with the offering, generated net
proceeds to us of approximately $77,891,000. The net proceeds of the offering
were used to pay down the outstanding balance of our amended bank credit
facility. The Bonds issued in 2001 to acquire the Pamlico Facility and refinance the
Mountain View Facility require quarterly payments of principal and interest.
The total quarterly principal payments due in 2004 on the Bonds are $1,185,000. Contractual Obligations and Contingent Liabilities and Commitments The following table aggregates our expected contractual obligations and
commitments after December 31, 2003: Payments due by periodLess than
    
    1-3
    
    4-5
    
    More than(In thousands)
    
    Total
    
    1 year
    
    years
    
    years
    
    5 yearsDebt
    
    $
    59,655
    
    
    $
    1,185
    
    
    $
    7,130
    
    
    $
    4,910
    
    
    $
    46,430Operating lease
    
    $
    80
    
    
    $
    50
    
    
    $
    30
    
    
    $
    
    
    
    $
    
 At December 31, 2003, we did not have any off-balance-sheet financing
arrangements or any unconsolidated, special purpose entities. Funds from Operations We believe Funds from Operations, or FFO, is helpful to investors as a
measure of the performance of an equity REIT. FFO should not be considered as
an alternative to net income (determined in accordance with GAAP) as an
indication of our financial performance or to cash flows from operating
activities (determined in accordance with GAAP) as a measure of our liquidity,
nor is it indicative of funds available to fund our cash needs, including our
ability to make distributions. 33




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##### Table of Contents



We compute FFO in accordance with the current standards established by the
White Paper on Funds from Operations approved by the Board of Governors of the
National Association of Real Estate Investment Trusts, or NAREIT, which may
differ from the methodology for calculating FFO utilized by other equity REITs,
and accordingly, may not be comparable to such other REITs. The White Paper
defines FFO as net income (loss), computed in accordance with GAAP, excluding
gains (or losses) from sales of property, plus real estate related depreciation
and amortization and after adjustments for unconsolidated partnerships and
joint ventures. Further, FFO does not represent amounts available for
managements discretionary use because of needed capital replacement or
expansion, debt service obligations, or other commitments and uncertainties. We believe that in order to facilitate a clear understanding of our
consolidated operating results, FFO should be examined in conjunction with net
income as presented in the consolidated financial statements The following table presents a reconciliation of FFO to net income for the
years ended December 31, 2003, 2002 and 2001: (Amounts in thousands)
    
    2003
    
    2002
    
    2001Net income
    
    $
    13,739
    
    
    $
    10,128
    
    
    $
    8,950Real estate depreciation
    
    
    7,396
    
    
    
    7,133
    
    
    
    6,512Funds from operations
    
    $
    21,135
    
    
    $
    17,261
    
    
    $
    15,462Common shares outstandingBasic
    
    
    9,048
    
    
    
    7,188
    
    
    
    7,140Diluted
    
    
    9,144
    
    
    
    7,259
    
    
    
    7,164
 
  Item 7A.
    Quantitative and Qualitative Disclosures about Market Risk. We are exposed to market risks inherent in our financial instruments.
These instruments arise from transactions entered into in the normal course of
business and relate to our acquisitions and financing of correctional and
detention facilities. We are subject to interest rate risk on our existing
amended bank credit facility and any future financing requirements. We do not
use financial instruments for trading or speculative purposes and all financial
instruments are entered into in accordance with the amended bank credit
facility agreement and Board approved policies. Our interest rate risk is related primarily to the variable rates of our
amended bank credit facility, which we seek to reduce by entering into the
interest rate swaps. We are also exposed to market risk from (i) the interest
rate risk on short-term borrowings, (ii) the possibility of non-performance by
the counter parties to the interest rate swaps (which we do not anticipate),
(iii) our ability to refinance our amended bank credit facility at maturity and
(iv) the impact of interest rate movements on our ability to obtain and
maintain adequate financing to fund our existing properties and future
acquisitions. While we cannot predict or manage our ability to refinance
existing debt or the impact interest rate movements will have on our existing
debt, we continue to evaluate our financial position on an ongoing basis and
may in the future seek to minimize interest rate exposure. Our interest rate
risk management objective is to limit the impact of interest rate changes on
earnings and cash flows. To achieve this objective, we enter into interest
rate swaps and seek long term financing. As of December 31, 2003, $3,800,000 had been drawn on the amended bank
credit facility at an average rate of 4.00% based upon the base rate under the
amended bank credit facility. No indebtedness under the amended bank credit
facility greater than 90 days in duration existed as of December 31, 2003.
Holding the variable rate outstanding debt balance constant, each one
percentage point increase in interest rates occurring on the first day of 2004
would result in an increase in interest expense for fiscal year 2004 of
approximately $38,000. The Bonds outstanding at December 31, 2003 of $55,855,000 under the Trust
Indenture are non-recourse to us and non-recourse to our subsidiary, which is
the obligor under the Bonds, and non-recourse to the subsidiarys sole member,
CPT Operating Partnership L.P., and bear interest at a fixed rate of 7.15% per
annum. 34




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##### Table of Contents



Item 8.
    Financial Statements and Supplementary Data. Our consolidated financial statements for the year ended December 31, 2003
and the respective notes thereto, are set forth elsewhere in this report. An
index of these financial statements appears in Item 15. 
  Item 9.
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. There were no disagreements with accountants on accounting or financial
disclosures during the last three fiscal years. On July 2, 2002, we dismissed
Arthur Andersen LLP as our independent auditors and engaged Ernst & Young LLP
as our new independent auditors. For more information with respect to this
matter, see our Current Report on Form 8-K filed on July 3, 2002. Item 9A.Controls and Procedures. (a) As of December 31, 2003, our principal executive officer and
principal financial officer evaluated our controls and procedures related to
our reporting and disclosure obligations. These officers have concluded that,
based on their evaluation, these disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934), as
amended, or the Exchange Act, are effective to ensure that (i) material
information relating to us is known to these officers, particularly material
information related to the period for which this periodic report is being
prepared; and (ii) this information is recorded, processed, summarized,
evaluated and reported, as applicable, within the time periods specified in the
rules and forms promulgated by the Securities and Exchange Commission. (b) There have been no significant changes in our internal control over
financial reporting during the fiscal year ended December 31, 2003 that have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting. 35




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##### Table of Contents



Report of Independent Certified Public Accountants To the Shareholders
Correctional Properties Trust We have audited the accompanying consolidated balance sheets of Correctional
Properties Trust (the Company)(a Maryland real estate investment trust) as of
December 31, 2003 and 2002, and the related consolidated statements of income,
shareholders equity and cash flows for the years then ended. Our audits also
included the financial statement schedule listed in the Index at Item 15(a)(2).
These financial statements and schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits. The financial statements of
Correctional Properties Trust for the year ended December 31, 2001 were audited
by other auditors who have ceased operations. Those auditors expressed an
unqualified opinion on those financial statements in their report dated January
14, 2002. We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Correctional
Properties Trust at December 31, 2003 and 2002, and the consolidated results of
its operations and its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein. ERNST & YOUNG LLP West Palm Beach, Florida
January 16, 2004 36




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##### Table of Contents



Report of Independent Certified Public Accountants ** To Correctional Properties Trust: We have audited the accompanying consolidated balance sheets of Correctional
Properties Trust (a Maryland real estate investment trust) and subsidiaries as
of December 31, 2001 and 2000, and the related consolidated statements of
income, shareholders equity and cash flows for each of the three years in the
period ended December 31, 2001. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Correctional
Properties Trust and subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States. As explained in Note 2 to the consolidated financial statements, effective
January 1, 2001, the Company changed its method of accounting for derivative
instruments. ARTHUR ANDERSEN LLP West Palm Beach, Florida   **
    
    Note: This report of the Independent Certified Public Accountants is a copy
of the previously issued report and the predecessor auditor, Arthur Andersen
LLP, has not reissued the report. 37




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##### Table of Contents



CORRECTIONAL PROPERTIES TRUST CONSOLIDATED BALANCE SHEETS
December 31, 2003 and December 31, 2002 (Amounts in thousands, except share and per share amounts)
    
    2003
    
    2002AssetsReal estate properties, at cost:Correctional and detention facilities
    
    $
    293,298
    
    
    $
    271,990Lessaccumulated depreciation
    
    
    (33,157
    )
    
    
    (25,761
    )Net real estate properties
    
    
    260,141
    
    
    
    246,229Cash and cash equivalents
    
    
    668
    
    
    
    4,333Restricted cash
    
    
    7,166
    
    
    
    7,154Deferred financing costs, net
    
    
    2,955
    
    
    
    1,566Other assets
    
    
    3,698
    
    
    
    3,307Total assets
    
    $
    274,628
    
    
    $
    262,589Liabilities and shareholders equityLiabilitiesAccounts payable and accrued expenses
    
    $
    2,225
    
    
    $
    4,353Bonds payable
    
    
    55,855
    
    
    
    56,780Revolving line of credit
    
    
    3,800
    
    
    
    74,000Total liabilities
    
    
    61,880
    
    
    
    135,133Commitments and contingenciesShareholders equityPreferred shares, $.001 par value; 50,000,000 shares authorized;
none outstanding
    
    
    
    
    
    
    Common shares, $.001 par value; 150,000,000 shares
authorized; 10,967,750 and 7,349,650 shares issued and
outstanding
    
    
    11
    
    
    
    7Capital in excess of par value
    
    
    220,268
    
    
    
    135,302Distributions in excess of accumulated earnings
    
    
    (7,531
    )
    
    
    (5,234
    )Accumulated other comprehensive loss
    
    
    
    
    
    
    (2,619
    )Total shareholders equity
    
    
    212,748
    
    
    
    127,456Total liabilities and shareholders equity
    
    $
    274,628
    
    
    $
    262,589
 The accompanying notes to consolidated financial statements are an integral part of these statements. 38




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##### Table of Contents



CORRECTIONAL PROPERTIES TRUST CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2003, 2002 and 2001 (Amounts in thousands, except per share amounts)
    
    2003
    
    2002
    
    2001RevenueRental
    
    $
    32,309
    
    
    $
    30,017
    
    
    $
    27,320Interest
    
    
    108
    
    
    
    187
    
    
    
    11132,417
    
    
    
    30,204
    
    
    
    27,431ExpensesDepreciation
    
    
    7,396
    
    
    
    7,133
    
    
    
    6,512General and administrative
    
    
    2,089
    
    
    
    1,525
    
    
    
    1,673Interest
    
    
    9,193
    
    
    
    11,418
    
    
    
    10,29618,678
    
    
    
    20,076
    
    
    
    18,481Net income
    
    $
    13,739
    
    
    $
    10,128
    
    
    $
    8,950Net income per common share and common share equivalents:Basic
    
    $
    1.52
    
    
    $
    1.41
    
    
    $
    1.25Diluted
    
    $
    1.50
    
    
    $
    1.40
    
    
    $
    1.25Weighted average number of common shares and common share
equivalents outstanding:Basic
    
    
    9,048
    
    
    
    7,188
    
    
    
    7,140Diluted
    
    
    9,144
    
    
    
    7,259
    
    
    
    7,164Distributions declared per common share outstanding
    
    $
    1.72
    
    
    $
    1.60
    
    
    $
    1.47
 The accompanying notes to consolidated financial statements are an integral part of these statements. 39




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##### Table of Contents



CORRECTIONAL PROPERTIES TRUST CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Years ended December 31, 2003, 2002 and 2001 (Amounts in thousands) Common shares
    
    Capital inexcess of
    
    Distributionsin excess ofaccumulated
    
    AccumulatedothercomprehensiveShares
    
    Amount
    
    par value
    
    earnings
    
    loss
    
    TotalBalance, December 31, 2000
    
    
    7,130
    
    
    $
    7
    
    
    $
    131,259
    
    
    $
    (2,323
    )
    
    $
    
    
    
    $
    128,943Exercise of stock options
    
    
    15
    
    
    
    
    
    
    
    167
    
    
    
    
    
    
    
    
    
    
    
    167Non-cash compensation charge
    
    
    
    
    
    
    
    
    
    
    44
    
    
    
    
    
    
    
    
    
    
    
    44Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,950
    
    
    
    
    
    
    
    8,950Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,500
    )
    
    
    (1,500
    )Unrealized loss on derivative instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,660
    )
    
    
    (3,660
    )Losses reclassified into earnings from other
comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,423
    
    
    
    1,423Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,213Distributions to shareholders ($1.47 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,498
    )
    
    
    
    
    
    
    (10,498
    )Balance, December 31, 2001
    
    
    7,145
    
    
    
    7
    
    
    
    131,470
    
    
    
    (3,871
    )
    
    
    (3,737
    )
    
    
    123,869Exercise of stock options
    
    
    205
    
    
    
    
    
    
    
    3,832
    
    
    
    
    
    
    
    
    
    
    
    3,832Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,128
    
    
    
    
    
    
    
    10,128Unrealized loss on derivative instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,897
    )
    
    
    (1,897
    )Losses reclassified into earnings from other
comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,015
    
    
    
    3,015Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,246Distributions to shareholders ($1.60 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,491
    )
    
    
    
    
    
    
    (11,491
    )Balance, December 31, 2002
    
    
    7,350
    
    
    
    7
    
    
    
    135,302
    
    
    
    (5,234
    )
    
    
    (2,619
    )
    
    
    127,456Exercise of stock options
    
    
    368
    
    
    
    1
    
    
    
    6,862
    
    
    
    
    
    
    
    
    
    
    
    6,863Issuance of common shares in a secondary offering, net
of $4,984 of offering costs
    
    
    3,250
    
    
    
    3
    
    
    
    77,888
    
    
    
    
    
    
    
    
    
    
    
    77,891Granting of deferred shares
    
    
    
    
    
    
    
    
    
    
    216
    
    
    
    
    
    
    
    
    
    
    
    216Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,739
    
    
    
    
    
    
    
    13,739Unrealized gain on derivative instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48
    
    
    
    48Losses reclassified into earnings from other
comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,571
    
    
    
    2,571Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,358Distributions to shareholders ($1.72 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,036
    )
    
    
    
    
    
    
    (16,036
    )Balance, December 31, 2003
    
    
    10,968
    
    
    $
    11
    
    
    $
    220,268
    
    
    $
    (7,531
    )
    
    $
    
    
    
    $
    212,748
 The accompanying notes to consolidated financial statements are an integral part of these statements. 40




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##### Table of Contents



CORRECTIONAL PROPERTIES TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2003, 2002 and 2001 (Amounts in thousands)
    
    2003
    
    2002
    
    2001Cash flows from operating activitiesNet income
    
    $
    13,739
    
    
    $
    10,128
    
    
    $
    8,950Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation of real estate properties
    
    
    7,396
    
    
    
    7,133
    
    
    
    6,512Amortization of deferred financing costs
    
    
    844
    
    
    
    835
    
    
    
    699Stock based compensation
    
    
    216
    
    
    
    
    
    
    
    44Changes in operating assets and liabilities:Other assets
    
    
    (391
    )
    
    
    (728
    )
    
    
    (808
    )Accounts payable and accrued expenses
    
    
    491
    
    
    
    (32
    )
    
    
    211Deferred revenue
    
    
    
    
    
    
    
    
    
    
    (1,877
    )Net cash provided by operating activities
    
    
    22,295
    
    
    
    17,336
    
    
    
    13,731Net cash used in investing activitiesAcquisition of real estate properties
    
    
    (21,308
    )
    
    
    
    
    
    
    (49,550
    )Cash flows from financing activitiesDistributions to shareholders
    
    
    (16,036
    )
    
    
    (11,491
    )
    
    
    (10,498
    )Proceeds from exercise of stock options
    
    
    6,863
    
    
    
    3,832
    
    
    
    167Proceeds from common stock offering
(net of $4,984 of offering costs)
    
    
    77,891
    
    
    
    
    
    
    
    Net repayments under revolving line of credit
    
    
    (70,200
    )
    
    
    (6,000
    )
    
    
    (1,400
    )Proceeds from issuance of bonds
    
    
    
    
    
    
    
    
    
    
    57,535Repayments on bonds
    
    
    (925
    )
    
    
    (695
    )
    
    
    (60
    )Restricted cash
    
    
    (12
    )
    
    
    (32
    )
    
    
    (7,122
    )Deferred financing costs
    
    
    (2,233
    )
    
    
    (46
    )
    
    
    (1,840
    )Net cash (used in) provided by
financing activities
    
    
    (4,652
    )
    
    
    (14,432
    )
    
    
    36,782Net (decrease) increase in cash
and cash equivalents
    
    
    (3,665
    )
    
    
    2,904
    
    
    
    963Cash and cash equivalents, beginning of year
    
    
    4,333
    
    
    
    1,429
    
    
    
    466Cash and cash equivalents, end of year
    
    $
    668
    
    
    $
    4,333
    
    
    $
    1,429Supplemental disclosure:Cash paid for interest
    
    $
    8,525
    
    
    $
    10,574
    
    
    $
    8,531
 The accompanying notes to consolidated financial statements are an integral part of these statements. 41




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##### Table of Contents



CORRECTIONAL PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003  1.
    ORGANIZATION AND OPERATIONS Correctional Properties Trust (the Company) was formed in February 1998
as a Maryland real estate investment trust to capitalize on the growing trend
toward privatization in the corrections industry by acquiring correctional and
detention facilities from both private prison operators and governmental
entities. At December 31, 2003, the Company owned fourteen facilities of which
eleven were leased to The Geo Group, Inc. (together with its subsidiaries,
GEO) formerly known as Wackenhut Corrections Corporation, two were leased to
the State of North Carolina, and one was leased to Community Education Centers,
Inc (CEC). The Company operates in only one segment. On April 28, 1998, the Company commenced operations after completing its
initial public offering (the IPO). Simultaneous with the completion of the
IPO, the Company acquired the following eight correctional and detention
facilities (the Initial Facilities), located in five states with an aggregate
design capacity of 3,154 beds, from GEO for an aggregate purchase price of
$113,000,000 (collectively, the Formation Transactions):  (i)
    
    Aurora INS Processing Center (Aurora, Colorado);  (ii)
    
    McFarland Community Correctional Facility (McFarland, California);  (iii)
    
    Queens Private Correctional Facility (New York, New York);  (iv)
    
    Central Valley Community Correctional Facility (McFarland, California);  (v)
    
    Golden State Community Correctional Facility (McFarland,
California);  (vi)
    
    Desert View Community Correctional Facility (Adelanto, California);  (vii)
    
    Broward County Work Release Center (Broward County, Florida); and  (viii)
    
    Karnes County Correctional Center (Karnes County, Texas). As part of the Formation Transactions, the Company also entered into
agreements with GEO to lease the Initial Facilities back to GEO pursuant to
long-term, non-cancelable triple-net leases (the Leases) which require GEO to
pay all operating expenses, property taxes, insurance and other costs. The
Leases provide for an initial term of 10 years that may generally be extended
by GEO for three five-year terms at fair market rental rates. The Leases
provide for a base rent equal to 9.5% of the total purchase price of each
Initial Facility and annual rent escalations equal to the annual increase in
the Consumer Price IndexAll Urban Consumers, as published by the Bureau of
Statistics of the United States Department of Labor (the CPI), subject to a
minimum annual increase of 3% at the end of years one and two and a maximum
annual increase of 4% throughout the term of the Leases. Further, the Company has entered into a Right to Purchase Agreement with
GEO, pursuant to which the Company will have the right, during the 15 years
following the consummation of the IPO (so long as there are any leases in force
between the Company and GEO), to acquire and leaseback to GEO any future
facilities, subject to exception where the sale or transfer of ownership of a
facility is previously restricted and subject to purchase option time
constraints on each specific property. Currently, there are no facilities
eligible for purchase under the Right to Purchase Agreement. On October 30, 1998, Correctional Properties Trust completed the
acquisition of the 600-bed medium security Lea County Correctional Facility in
Hobbs, New Mexico (the Hobbs Facility) for approximately $26,500,000. On January 15, 1999, the Company completed the acquisition of the 600-bed
expansion of the Hobbs Facility for approximately $20,000,000 and the Lawton
Correctional Facility (the Lawton Facility) for approximately $46,000,000.
On July 1, 1999, the Company acquired the industries building at the Hobbs
Facility for $1,600,000. GEO leased the Lawton Facility and the Hobbs Facility
from the Company for the same base rent and escalation percentage as the
Initial Facilities for an initial term of ten years, with three additional
renewal options for terms of five years each. The renewal terms are to be
determined by fair market rental rates. On January 7, 2000, the Company purchased the Jena Juvenile Justice Center
(the Jena Facility) from GEO for approximately $15,300,000 using proceeds
available under the Amended Bank Credit Facility (See Note 3). GEO has leased
the 276-bed facility located in Jena, Louisiana at an initial lease rate of 11%
with 4% annual escalators for an initial term of ten years, 42




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##### Table of Contents



with three additional renewal options for terms of five years each in length at
fair market rental rates. The lease provides for fixed rental payments to the
Company without regard for occupancy. GEO does not presently have a correctional facility operating or
management contract with a governmental agency for both the Jena Facility and
the McFarland Facility, and as a result both facilities are vacant. However,
GEO continues to make rental payments to the Company as required under the
terms of the leases. On March 16, 2001, the Company acquired the Mountain View Correctional
Facility (the Mountain View Facility) in Spruce Pine, North Carolina, for
approximately $25,200,000, including transaction costs, from an unrelated third
party. The 576-cell, medium security prison is leased to the State of North
Carolina, and is subject to the terms of an existing long-term, triple-net
lease, which was assigned by the previous facility owner to the Company. The
North Carolina Department of Correction operates the facility. The initial
lease on this facility, which became effective December 1998, included cash
rental of $2,768,700 during the first year of the lease, payable monthly in
arrears. On each anniversary date, the rental payment escalates in accordance
with increases in the Consumer Price Index (CPI), with a minimum increase of
3.5%, and a maximum of 4%. The current annual rent is approximately
$3,288,300. The initial term of the lease is ten years, with two, ten-year
renewals at the State of North Carolinas option. The lessee has the option to
acquire the facility in December 2004, for approximately $26,200,000 and for
predetermined declining amounts at the end of each subsequent lease year. The
annual lease payment is subject to appropriation by the North Carolina General
Assembly. On June 28, 2001, the Company transferred the Mountain View Facility,
subject to its mortgage, to Correctional Properties North Carolina Prison
Finance LLC (CP North Carolina), a newly formed and wholly owned subsidiary
of the Company. Concurrently, the Company refinanced the Mountain View Facility
using a portion of the proceeds from the issuance of $57,535,000 of Taxable
Mortgage Revenue Bonds, Series 2001 (the Bonds)(See Note 4. Bonds). This
refinancing included repayment of the proceeds drawn under the Amended Bank
Credit Facility (See Note 3) to purchase the Mountain View Facility. On June 28, 2001, CP North Carolina acquired the Pamlico Correctional
Facility (the Pamlico Facility) in Bayboro, North Carolina for approximately
$24,300,000, including transaction costs, from an unrelated third party. This
576-cell, medium-security prison is leased to the State of North Carolina, and
is subject to the terms of an existing long-term, triple-net lease, which was
assigned by the previous facility owner to the Company. The North Carolina
Department of Correction operates the facility. The initial lease on the
Pamlico Facility, which became effective in August of 1998, included annual
cash rental payments of $2,664,300 during the first year of the lease, payable
monthly in arrears. On each anniversary date of the lease, the rental payment
escalates in accordance with increases in the CPI, with a minimum increase of
3.5%, and a maximum of 4%. The current annual rent is approximately
$3,169,600. The initial term of the lease is ten years, with two, ten-year
renewals at the State of North Carolinas option. The State of North Carolina
has an option to acquire the facility in August 2004, for approximately
$25,230,000. At the end of each lease year thereafter, it has an option to
purchase the facility for a predetermined declining amount. The annual lease
payment is subject to appropriation by the North Carolina General Assembly.
The Company acquired the Pamlico Facility using a portion of the proceeds from
the issuance of the Bonds (See Note 4). CP North Carolina, which is a fully consolidated entity of the Company for
financial reporting purposes, is a Delaware limited liability company formed
solely to issue the Bonds and acquire and own the Mountain View and Pamlico
Facilities. CP North Carolinas assets and credit are not available to pay the
debts or obligations of any other entity. The Bonds are non-recourse to CP
North Carolina and its sole member, CPT Operating Partnership L.P. Therefore,
CP North Carolina and its sole member, CPT Operating Partnership L.P., are not
liable on account of any deficiency in the event that the Trust Estate created
under the Trust Indenture for the Bonds is insufficient to repay the Bonds or
the other obligations of CP North Carolina under the Bond Documents. As the
sole member of CP North Carolina, CPT Operating Partnership L.P. will have
availability on a quarterly basis of distributions of remaining revenue
proceeds of CP North Carolina, after payment of principal and interest on the
bonds, and funding of any deficiencies in the various funds required under the
Trust Indenture. On May 29, 2003, the Company acquired Delaney Hall, a 726 bed,
minimum-security, correctional facility located in Newark, New Jersey, for
approximately $21,000,000 plus transaction costs. The seller, Community
Education Centers, Inc., leased Delaney Hall back from the Company subject to
the terms of a ten-year, triple-net lease, with three additional renewal
options of five years each at the option of CEC. The initial cash lease rate is
11% of the purchase price or $2,310,000 per annum, with 3% fixed annual
increases on each anniversary. Under accounting principles generally accepted
in the United States, the lease revenue will be recognized at a straight-line
lease rate of 12.61% of the purchase price. The Company completed this
acquisition using cash on hand, plus $17,000,000 drawn under the Amended Bank
Credit Facility. The 43




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##### Table of Contents



Company executed an intercreditor agreement with CECs senior lender
granting certain rights to the senior lender to permit a cure by such lender of
CECs events of default subject to such lender paying all lease obligations
including rental payments and impositions, thereby preventing the termination
of the CEC lease by the Company. As part of the transaction, a security deposit
of approximately $662,000 was delivered by CEC to the Company which may be used
by the Company to the extent required for the payment of rent or any other
lease obligation if an event of default occurs. In July 2003, the Company completed a public offering of 3,250,000 common
shares at $25.50 per share, under its shelf registration statement. The gross
proceeds from the offering of $82,875,000 less expenses of $4,984,000, which
includes underwriters fees and expenses associated with the offering,
generated net proceeds to the Company of approximately $77,891,000. The net
proceeds of the offering were used to pay down the outstanding balance of our
Amended Bank Credit Facility.  2.
    BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements of the Company include all the
accounts of the Company and its subsidiaries. All significant intercompany
balances and transactions have been eliminated. Cash and Cash Equivalents The Company considers all short-term, highly liquid investments that are
readily convertible to cash and have an original maturity of three months or
less at the time of purchase to be cash equivalents. Restricted Cash Restricted cash consists of restrictive funds held by the Trustee under
the indenture agreement in connection with the Bonds. Included in restricted
cash is a debt service reserve fund requirement equal to $5,753,500, which
represents 10% of the initial principal amounts of the Bonds. The debt service
reserve fund may be used to pay principal of and interest on the Bonds in the
event there should be insufficient funds to pay the principal and interest. The
debt service reserve fund requirement must be maintained throughout the life of
the Bonds and was required in order to obtain the bond insurance policy and
credit rating on the Bonds. Deferred Financing Costs Deferred financing costs, which include costs of obtaining the Amended
Bank Credit Facility and the Bonds, are being amortized on a straight-line
basis over the respective term of the debt. This method approximates the
effective interest rate method. Accumulated amortization of deferred financing
costs at December 31, 2003 and 2002 was approximately $246,000 and $2,523,000,
respectively. Real Estate Properties Real estate properties are recorded at cost. Acquisition costs and
transaction fees directly related to each property are capitalized as a cost of
the respective property. The purchase price of properties is allocated to
tangible and intangible assets based on their respective values. The tangible
cost of real estate properties acquired is allocated between land, buildings
and improvements, and machinery and equipment based upon cost at time of
acquisition. Depreciation is provided for on a straight-line basis over an
estimated useful life ranging from 27-40 years for buildings and improvements. As of December 31, 2003 and 2002, the Company had investments in fourteen
and thirteen leased real estate properties, respectively. Components of these
real estate investments at cost are as follows (in thousands): 2003
    
    2002Land and land improvements
    
    $
    12,610
    
    
    $
    9,157Buildings and improvements
    
    
    280,688
    
    
    
    262,833$
    293,298
    
    
    $
    271,990
 44




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Long-Lived Assets Statement of Financial Accounting Standards (SFAS) No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, adopted by the Company in
2002, requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
asset in question may not be recoverable. If such changes or circumstances
exist, management will evaluate estimated undiscounted cash flows over the
remaining amortization period for the related long-lived assets. If such
undiscounted cash flow estimates are less than the carrying values of the
related assets, the Company would measure impairment as the difference between
fair value and the net book value of the related asset. Leases and Rental Income All leases are accounted for as operating leases. Lease revenue is
recognized on a straight-line basis over the lease term including the impact of
the scheduled rent increases which are determinable in amount at the inception
of the lease. Any increases in the lease revenue due to scheduled rent
increases which were not determinable at the inception of the lease will be
recognized when determinable. The annual minimum rent to be received for
correctional and detention facilities under non-cancelable operating leases as
of December 31, 2003 is as follows (in thousands): Fiscal year
    
    Annual Rent2004
    
    $
    33,0362005
    
    
    33,4142006
    
    
    33,8042007
    
    
    34,2082008
    
    
    24,671Thereafter
    
    
    15,522$
    174,655
 For the year December 31, 2003, the revenue generated from GEO, the State
of North Carolina and CEC represented 74%, 21% and 5%, respectively, of total
rental revenue. For the year December 31, 2002, the revenue generated from GEO
and the State of North Carolina represented 78% and 22%, respectively, of total
rental revenue. For the year ended December 31, 2001, the revenue generated
from GEO and the State of North Carolina represented 84% and 16%, respectively,
of total rental revenue. Federal Income Taxes The Company sought qualification as a Real Estate Investment Trust
(REIT) under the Internal Revenue Code commencing with its taxable period
ended December 31, 1998 and each subsequent year. The Company intends to
continue to seek to qualify as a REIT in future years. As a result, management
believes the Company will generally not be subject to federal income tax on its
taxable income at corporate rates to the extent it distributes annually at
least 90% of its taxable income to its shareholders and complies with certain
other requirements. Accordingly, no provision has been made for federal income
taxes in the accompanying consolidated financial statements. If the Company fails to qualify as a REIT in any taxable year, it would be
subject to federal income tax on its taxable income. Such an event could
materially affect the Companys net income. However, the Company believes that
it is organized and operates in such a manner as to qualify for treatment as a
REIT for the years ended December 31, 2003, 2002 and 2001. Fair Value of Financial Instruments The carrying value of cash and cash equivalents, accounts payable and
accrued expenses, the Bonds and the revolving line of credit approximate fair
value. The fair value of the Companys interest rate swaps at December 31,
2002 was a liability of approximately $2,619,000 and is included in Accounts
Payable and Accrued Expenses in the accompanying Consolidated Balance Sheet. 45




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##### Table of Contents



Interest Rate Swaps The Company applies the provisions of Statement of Financial Accounting
Standards No. 133 (SFAS 133), Accounting for Derivative Instruments and
Hedging Activities, as amended by SFAS No. 137 and 138, related to its use of
derivative financial instruments. This statement establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or a liability measured at its fair value.
SFAS 133 requires that changes in the derivatives fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. The
Company utilizes interest rate swap derivative instruments to manage changes in
market conditions related to interest rate payments on certain of its variable
rate debt obligations. As of December 31, 2002, the Company had interest rate swap agreements for
a total notional amount of $66 million, effectively fixing the rate on a like
amount of variable rate borrowings. Management of the Company determined the
interest rate swaps to be effective cash flow hedges. The Company records its
derivatives on the balance sheet at fair value, representing a liability of
approximately $2,619,000 at December 31, 2002, which is included in Accounts
Payable and Accrued Expenses in the accompanying Consolidated Balance Sheet. As a result of the repayment of the Amended Bank Credit Facility of $78
million in July 2003 using the proceeds from the July 2003 public offering,
which in effect eliminated the like amount of variable rate borrowings
associated with interest rate swap agreements, the Company terminated its $66
million of interest rate swap agreements. The cost of terminating the interest
rate swap agreements was approximately $1.0 million and was recorded as
interest expense in the consolidated statements for the year ended December 31,
2003. As of December 31, 2003, the Company has no interest rate swap
agreements in effect. Concentration of Credit Risk As the Company enters into certain derivative financial instruments,
counterparties expose the Company to credit related losses in the event of
non-performance. The Company monitors the credit worthiness of the
counterparties. The Company does not obtain collateral in connection with its
derivative financial instruments. Use of Estimates in the Preparation of Financial Statements The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results could vary from those
estimates. Significant estimates include the useful lives and related
depreciation of real estate properties and the fair value of the derivative
financial instruments. Employee Stock-Based Compensation Plans The Company accounts for stock-based compensation utilizing the intrinsic
value method in accordance with the provisions of APB Opinion No. 25 and
related interpretations. Accordingly, no compensation cost has been recognized
for its employee stock plans because the exercise prices of the stock options
granted equal the market prices of the underlying stock on the dates of grant.
Had compensation for the Companys stock-based compensation plans been
determined pursuant to SFAS No. 123, Accounting for Stock-Based Compensation,
the Companys net income and earnings per share would have decreased
accordingly. 46




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The following table represents the effect on net income and earnings per
share if the Company had applied the fair value based method pursuant to SFAS
No. 123, to employee stock-based compensation plans. (In thousands except per
share amounts) 2003
    
    2002
    
    2001Net income, as reported
    
    $
    13,739
    
    
    $
    10,128
    
    
    $
    8,950Add: stock-based compensation expense included in net income
as reported
    
    
    
    
    
    
    
    
    
    
    44Deduct: stock-based compensation expense determined under the
fair value based method for all awards
    
    
    (125
    )
    
    
    (89
    )
    
    
    (123
    )Pro forma net income
    
    $
    13,614
    
    
    $
    10,039
    
    
    $
    8,871Net income per shareBasic, as reported
    
    $
    1.52
    
    
    $
    1.41
    
    
    $
    1.25Basic, pro forma
    
    $
    1.50
    
    
    $
    1.40
    
    
    $
    1.24Diluted, as reported
    
    $
    1.50
    
    
    $
    1.40
    
    
    $
    1.25Diluted, pro forma
    
    $
    1.49
    
    
    $
    1.38
    
    
    $
    1.24
 Comprehensive Income The components of the Companys comprehensive income are as follows (in thousands): Year Ended
    
    Year Ended
    
    Year EndedDecember 31,
    
    December 31,
    
    December 31,2003
    
    2002
    
    2001Net income
    
    $
    13,739
    
    
    $
    10,128
    
    
    $
    8,950Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    (1,500
    )Unrealized gain (loss) on derivative instruments
    
    
    48
    
    
    
    (1,897
    )
    
    
    (3,660
    )Losses reclassified into earnings from other comprehensive loss
    
    
    2,571
    
    
    
    3,015
    
    
    
    1,423Comprehensive income
    
    $
    16,358
    
    
    $
    11,246
    
    
    $
    5,213
 Recent Accounting Pronouncements In January 2003, the FASB issued Financial Interpretation Number 46,
Consolidation of Variable Interest Entities (FIN No. 46), which addresses
consolidation by a business of variable interest entities in which it is the
primary beneficiary. FIN No. 46 was amended in December 2003, and is effective
immediately for all variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN No. 46 must be applied for the first
quarter ended March 31, 2004. The Company has not entered into any variable
interest entities since January 31, 2003 nor has it identified any existing
variable interest entities. Therefore, the Company does not expect any material
impact from the adoption of FIN No. 46 on its financial position, results of
operations and cash flows.  3.
    AMENDED BANK CREDIT FACILITY On November 25, 2003, the Company completed its Amended and Restated
Credit Agreement (the Amended Bank Credit Facility) initially consisting of a
$95 million secured revolving credit facility. The Amended Bank Credit
Facility replaces the Companys original secured line of credit which matured
on October 1, 2003 but was extended up until the closing of the Amended Bank
Credit Facility. The proceeds of the Amended Bank Credit Facility, which has a
term of thirty-six (36) months, may be used to finance the construction and
acquisition of correctional and detention facilities, to expand or improve
current facilities and for general working capital purposes. The Amended Bank
Credit Facility includes a swingline component and provisions to increase the
Amended Bank Credit Facility up to a total of $200 million by increasing the
Revolver, and/or by originating a new term loan of up to $100 million, subject
to successful syndication and closing. The Amended Bank Credit Facility is secured by the Companys facilities
other than the Queens Facility and the North Carolina Facilities, and permits
aggregate borrowings of up to 50% of the lesser of the aggregate of the
historical cost of the 47




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Companys facilities or the aggregate of the appraised value of such facilities
(the Total Value). Under the terms of the Amended Bank Credit Facility, the
Company is restricted from paying dividends in excess of the lesser of 100% of
Cash Available for Distribution (as defined) or 95% of Funds from Operations
plus, in either case 100% of the amount of any capital gain from dispositions
of facilities. The Amended Bank Credit Facility includes a requirement that the
Company enter into certain interest rate swap agreements for a portion of the
amounts drawn, which effectively fixes the interest rate on a significant
portion of the borrowings. The Companys ability to borrow under the Amended
Bank Credit Facility is subject to the Companys compliance with a number of
restrictive covenants and other requirements. Borrowings under the Amended Bank Credit Facility bear interest at either
the Base Rate or Eurodollar Rate at the option of the Company. The Base Rate is
equal to the sum of (a) the higher of (i) the Federal Funds Rate plus one-half
of one percent (0.5%) and (ii) the Prime Rate plus (b) the Base Rate Applicable
Margin, which ranges from 0 to 75 basis points dependent upon the ratio of
Consolidated Total Liabilities to Consolidated Total Assets. The Eurodollar
Rate is equal to LIBOR plus the Eurodollar Rate Applicable Margin, which ranges
from 275 to 350 basis points dependent upon the ratio of Consolidated Total
Liabilities to Consolidated Total Assets. The interest period on Eurodollar
Rate Loans are based on interest periods of one, two, three, six or nine months
at the option of the Company. The Applicable Margins for Base Rate Loans and
Eurodollar Rate Loans described above in the Amended Bank Credit Facility were
0% and 2.75% at December 31, 2003, respectively. Economic conditions could
result in higher interest rates, which could increase debt service requirements
on borrowings under the Amended Bank Credit Facility and which could, in turn,
reduce the amount of cash available for distribution. Upon the closing of the
Amended Bank Credit Facility, the Company paid fees and expenses of
approximately $2.1 million. As of December 31, 2003, $3.8 million was drawn on the $95 million Amended
Bank Credit Facility. As of December 31, 2003, the Company had $91.2 million
available borrowing capacity under its Amended Bank Credit Facility, including
$5.7 million, which is currently available to be drawn on the swing line
component of the Amended Bank Credit Facility for general working capital
requirements. All borrowings under the Amended Bank Credit Facility are subject
to the Companys compliance with several restrictive covenants prior to any
such amounts being drawn to finance the acquisition of correctional and
detention facilities and/or to expand the Facilities and for general working
capital requirements. In order for a facility to be initially included in the Pledge Pool
Borrowing Base (Pledge Pool), the lessee of the facility must be in full
compliance with the material terms and conditions contained in the operating or
management contract with the governmental agency. Provided, however, that in
the event that any facility, after becoming a part of the Pledge Pool, becomes
vacant such property shall continue to be included in the Pledge Pool so long
as the lease agreement with respect to such property is in full force and
effect and the inclusion of such property in the Pledge Pool would not cause
the sum of the appraised values of all vacant properties in the Pledge Pool to
exceed 20% of the Total Value. GEO does not presently have a correctional facility operating or
management contract with a governmental agency for the Jena Facility and the
McFarland Facility. However, GEO continues to make rental payments to the
Company as required under the terms of the non-cancelable leases. The appraised
value of these two facilities is approximately ten percent of the Total Value,
and therefore, does not exceed 20% of the Total Value. As a result, both of
these facilities continue to be included in the Pledge Pool.  4.
    BONDS PAYABLE On June 28, 2001, CP North Carolina, which is a fully consolidated entity
of the Company for financial reporting purposes, issued $57,535,000 in Taxable
Mortgage Revenue Bonds, Series 2001. The proceeds from the Bonds were used to
complete the acquisition of the Pamlico Facility, to refinance the Mountain
View Correctional Facility, provide a debt service reserve fund of
approximately $5,754,000, establish a working capital fund of $750,000, and pay
the costs of the transaction, including the one time premium for a bond
insurance policy. The Bonds, which have a fixed-rate coupon of 7.15%, were
privately placed at par value on a negotiated basis to qualified institutional
buyers as defined under Rule 144A of the Securities Act of 1933. 48




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##### Table of Contents



Quarterly payments of principal and interest on the Bonds began in October
2001, with the final payment due in January 2017. The Bonds are non-recourse
obligations and are secured by a deed of trust and a security agreement on the
Mountain View Facility and Pamlico Facility, as well as an assignment to a
trustee of the lease payments to be made by the State of North Carolina under
each of the facility leases. The scheduled annual principal payments due on
the bonds as of December 31, 2003 is as follows (in thousands): ScheduledFiscal year
    
    Principal Payments2004
    
    $
    1,1852005
    
    
    1,4902006
    
    
    1,8402007
    
    
    2,2102008
    
    
    2,700Thereafter
    
    
    46,430$
    55,855
 In the event of the exercise of the purchase option on the Mountain View
Facility, and/or the Pamlico Facility by the State of North Carolina prior to
January of 2017 as provided in the respective leases, CP North Carolina is
obligated to redeem all or a portion of the Bonds at a redemption price equal
to 100% of the principal amount of the Bonds to be redeemed, plus accrued
interest to the redemption date. If both of the Mountain View and Pamlico
Facilities are purchased, CP North Carolina is obligated to redeem all of the
Bonds. If only one of the Mountain View or Pamlico Facilities is purchased, CP
North Carolina is obligated to redeem a principal amount of Bonds equal to the
purchase price of the facility purchased, net of closing costs, pro rations and
adjustments.  5.
    SHARE OPTION AND INCENTIVE PLANS The Company has established share option and incentive plans for the
purpose of attracting and retaining qualified executive officers and key
employees, as well as trustees. The Compensation Committee is responsible for
making recommendations to the Board of Trustees concerning the granting of
awards including determining the terms and conditions of the awards, vesting
schedule, and any other restriction or limitations. Options are granted at an
exercise price of the fair market value at date of grant and have a term of ten
years from the date of grant. The options granted to officers and employees
vest immediately as to one-fourth of the shares subject thereto, and vest as to
the remaining shares ratably on the first, second and third anniversary of the
grant date. The options granted to the trustees vest in full at the date of
grant. A summary of the status of the Companys stock option plans, including
their weighted average option exercise price, as of December 31, 2003, 2002 and
2001, respectively, is presented below: 49




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##### Table of Contents



2003
    
    2002
    
    2001Weighted-
    
    
    
    
    
    Weighted-
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    Average
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    Exercise
    
    
    
    
    
    ExerciseShares
    
    Price
    
    Shares
    
    Price
    
    Shares
    
    PriceOutstanding at beginning of year
    
    
    623,100
    
    
    $
    18.65
    
    
    
    761,750
    
    
    $
    18.44
    
    
    
    757,000
    
    
    $
    18.55Options granted
    
    
    56,000
    
    
    $
    20.93
    
    
    
    66,000
    
    
    $
    18.13
    
    
    
    71,000
    
    
    $
    11.11Options exercised
    
    
    (368,100
    )
    
    $
    18.65
    
    
    
    (204,650
    )
    
    $
    18.73
    
    
    
    (15,000
    )
    
    $
    11.13Options forfeited
    
    
    (12,500
    )
    
    $
    20.00
    
    
    
    
    
    
    
    
    
    
    
    (51,250
    )
    
    $
    12.01Outstanding at end of year
    
    
    298,500
    
    
    $
    18.33
    
    
    
    623,100
    
    
    $
    18.32
    
    
    
    761,750
    
    
    $
    18.44Exercisable at end of year
    
    
    233,250
    
    
    $
    18.09
    
    
    
    559,850
    
    
    $
    18.65
    
    
    
    703,000
    
    
    $
    18.98
 Significant option groups outstanding at December 31, 2003, and related
weighted average exercise price and remaining life information, are as follows: Exercise Price/
    
    
    
    
    
    Exercise Price/Weighted Average
    
    
    
    
    
    Weighted Average
    
    Remaining LifeGrant Date
    
    Outstanding
    
    Exercise Price
    
    Exercisable
    
    Exercise Price
    
    Outstanding4/28/98
    
    
    100,000
    
    
    $
    20.00
    
    
    
    100,000
    
    
    $
    20.00
    
    
    4.3 years1/21/99
    
    
    42,000
    
    
    $
    17.31
    
    
    
    42,000
    
    
    $
    17.31
    
    
    5.1 years4/25/00
    
    
    12,000
    
    
    $
    11.19
    
    
    
    12,000
    
    
    $
    11.19
    
    
    6.3 years1/17/01
    
    
    19,500
    
    
    $
    11.00
    
    
    
    12,000
    
    
    $
    11.00
    
    
    7.1 years5/29/01
    
    
    5,000
    
    
    $
    12.62
    
    
    
    3,750
    
    
    $
    12.62
    
    
    7.4 years1/23/02
    
    
    64,000
    
    
    $
    18.13
    
    
    
    39,000
    
    
    $
    18.13
    
    
    8.1 years1/23/03
    
    
    56,000
    
    
    $
    20.93
    
    
    
    24,500
    
    
    $
    20.93
    
    
    9.1 years298,500
    
    
    $
    18.33
    
    
    
    233,250
    
    
    $
    18.09
 Included in the 623,100 options outstanding at December 31, 2002, were
315,600 options, which had an expiration date of April 27, 2003. These options
were granted on April 28, 1998 with an exercise price of $20.00 per share.
Prior to the expiration date in 2003, 310,600 of these stock options were
exercised, and the Company received proceeds of $6,212,000. During 2003, 7,500 deferred shares were granted pursuant to a Deferred
Share Long-Term Loyalty Bonus Agreement in connection with the termination of
the Senior Executive Retirement Plan (see note 8). On December 31, 2003, the
date of grant, these deferred shares were valued at the closing price of the
Companys common stock of $28.80 per common share, and an expense of $216,000
was recorded in general and administrative expense in the consolidated
statements in the year ended December 31, 2003. The Company has reserved an
additional 2,500 deferred shares for granting pursuant to the Deferred Share
Long-Term Loyalty Bonus Agreement in years 2005 through 2009. As of December 31, 2003, the Company had options with respect to an
aggregate of 151,250 common shares available for grant. The Company applies
APB Opinion No. 25 and related interpretations in accounting for its employee
stock-based compensation plans. Accordingly, no compensation cost has been
recognized for its employee stock plans. Had compensation for the Companys
stock-based compensation plans been determined pursuant to SFAS No. 123,
Accounting for Stock-Based Compensation, the Companys net income and
earnings per share would have decreased accordingly. The Companys pro forma
information regarding net income and net income per share, as disclosed in Note
2, has been determined using the Black-Scholes option-pricing model based on
the following assumptions: 2003
    
    2002
    
    2001Weighted average fair value of options granted
    
    $
    2.81
    
    
    $
    2.14
    
    
    $
    0.17Risk-free interest rate
    
    
    4.00
    %
    
    
    5.00
    %
    
    
    5.00
    %Expected life (years)
    
    
    8
    
    
    
    8
    
    
    
    10Expected volatility
    
    
    32.2
    %
    
    
    32.5
    %
    
    
    21.3
    %Quarterly dividend rate
    
    
    7.6
    %
    
    
    8.8
    %
    
    
    13.2
    %
 50




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##### Table of Contents



6.
    EARNINGS PER SHARE Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding during the year. Diluted
earnings per share is computed by dividing net income by the weighted average
number of common shares after considering additional dilution. The following
data show the amounts used in computing earnings per share and the effects on
income and the weighted average number of shares of potential dilutive common
stock (in thousands, except per share data): Year Ended
    
    Year Ended
    
    Year EndedDecember 31,
    
    December 31,
    
    December 31,2003
    
    2002
    
    2001Net income
    
    $
    13,739
    
    
    $
    10,128
    
    
    $
    8,950Weighted average sharesbasic
    
    
    9,048
    
    
    
    7,188
    
    
    
    7,140Per sharebasic
    
    $
    1.52
    
    
    $
    1.41
    
    
    $
    1.25Effect of dilutive stock options
    
    
    96
    
    
    
    71
    
    
    
    24Weighted average sharesdiluted
    
    
    9,144
    
    
    
    7,259
    
    
    
    7,164Per sharediluted
    
    $
    1.50
    
    
    $
    1.40
    
    
    $
    1.25
 As of December 31, 2003 and 2002, all outstanding options to purchase
shares of the Companys stock were included in the computation of diluted EPS. As of December 31, 2001, outstanding options to purchase 644,750 shares of
the Companys stock, with exercise prices ranging from $17.31 to $20.00 per
share and expiration dates between 2003 and 2009, were not included in the
computation of diluted EPS because their effect would be anti-dilutive.  7.
    COMMITMENTS AND CONTINGENCIES Legal Proceedings The nature of the Companys business may result in claims for damages
arising from the conduct of its employees or others. In the opinion of
management, there are no known pending legal proceedings that would have a
material effect on the consolidated financial statements of the Company. Lease Commitments The
Company leases office space under a
non-cancelable operating lease expiring in 2005. Rent expense for the
years ended December 31, 2003, 2002 and 2001 was $45,000, $43,000 and $42,000,
respectively. The
minimum remaining commitment under this obligation is as follows: Year2004
    
    $
    50,0002005
    
    
    30,000Total
    
    $
    80,000
  8.
    SAVINGS AND RETIREMENT PLANS The Company has a 401(k) retirement plan (the 401(k) Plan) covering all
of the officers and employees of the Company. The 401(k) Plan permits
participants to contribute, until termination of employment with the Company,
up to a maximum of 25% of their compensation to the 401(k) Plan. The Company
does not match contributions of participants, however, the Company made a
discretionary contribution for the benefit of the participants of approximately
$27,000 to the 401(k) Plan for year ended December 31, 2003. For the years
ended December 31, 2003, 2002 and 2001, the Company incurred administrative
costs of approximately $1,800, $1,000 and $1,200 respectively, in connection
with the 401(k) Plan. 51




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##### Table of Contents



Previously, the Board of Trustees had approved and adopted a Senior
Executive Retirement Plan for which the only eligible participant in the plan,
up to and including December 31, 2003, was Chief Executive Officer of the
Company. On December 31, 2003, the Company terminated the Senior Executive
Retirement Plan and entered into a Deferred Share Long-Term Loyalty Bonus
Agreement with the Chief Executive Officer of the Company. Per the Deferred
Share Long-Term Loyalty Bonus Agreement, the Chief Executive Officer was
granted 7,500 deferred shares on December 31, 2003 and will be granted an
additional 500 deferred shares each year beginning in 2005 and ending in 2009
for a total of 10,000 deferred shares. Distributions will be paid on the
outstanding deferred shares equal to any dividends paid on the common shares
outstanding. The Chief Executive Officer will become vested in all of the deferred
shares granted to him as of the earliest to occur (i) April 30, 2009, provided
he is still an employed by the Company on that date or (ii) any date on or
after April 30, 2007 on which his employment with the Company is terminated for
any reason other than his resignation or by the Company for cause. Any deferred
shares that have not vested to him at the time his employment with the Company
is terminated shall be forfeited immediately upon such termination of
employment. On December 31, 2003, the date of grant, the 7,500 deferred shares
were valued at the closing price of the Companys common stock of $28.80 per
common share, and an expense of $216,000 was recorded in general and
administrative expense in the consolidated statements in the year ended
December 31, 2003. The Company will record as additional expense the value of
the additional 500 deferred shares granted each year in 2005 through 2009. The Senior Executive Retirement Plan was a defined benefit plan and,
subject to certain maximum and minimum provisions, was to base pension benefits
on a percentage of the employees final average annual salary, not including
bonus (earned during the employees last five years of credited service) times
the employees years of credited service. Benefits under the plan were to be
offset by social security benefits. The plan was never funded. The assumptions
for the discount rate and average increase in compensation used in determining
the pension expense were 6% and 8%, respectively. In connection with the
termination of the Senior Executive Retirement Plan, the Company recorded a
gain on pension expense of $260,000 for the year ended December 31, 2003. For
the years ended December 31, 2003, 2002 and 2001, the Company recorded pension
expense of approximately $85,000, $75,000 and $100,000, respectively.  9.
    SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (In thousands, except per share data) As of or for the period ended:1st
    
    2nd
    
    3rd
    
    4thQuarter
    
    Quarter
    
    Quarter
    
    Quarter2003Real estate properties, net
    
    $
    244,447
    
    
    $
    263,930
    
    
    $
    262,035
    
    
    $
    260,141Total assets
    
    
    260,053
    
    
    
    279,555
    
    
    
    277,790
    
    
    
    274,628Revenue
    
    
    7,596
    
    
    
    7,897
    
    
    
    8,339
    
    
    
    8,585Net income
    
    
    2,628
    
    
    
    2,827
    
    
    
    3,432
    
    
    
    4,852Net income per share, diluted
    
    
    0.35
    
    
    
    0.37
    
    
    
    0.33
    
    
    
    0.44Cash distribution per share
    
    
    0.40
    
    
    
    0.42
    
    
    
    0.45
    
    
    
    0.452002Real estate properties, net
    
    $
    251,579
    
    
    $
    249,860
    
    
    $
    248,171
    
    
    $
    246,229Total assets
    
    
    268,675
    
    
    
    268,140
    
    
    
    267,850
    
    
    
    262,589Revenue
    
    
    7,508
    
    
    
    7,551
    
    
    
    7,575
    
    
    
    7,570Net income
    
    
    2,448
    
    
    
    2,542
    
    
    
    2,665
    
    
    
    2,473Net income per share, diluted
    
    
    0.34
    
    
    
    0.35
    
    
    
    0.37
    
    
    
    0.34Cash distribution per share
    
    
    0.40
    
    
    
    0.40
    
    
    
    0.40
    
    
    
    0.40
 52




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##### Table of Contents



PART III The information required by Items 10, 11, 12, 13 and 14 of Part III of
Form 10-K is set forth in our definitive Proxy Statement relating to our 2004
Annual Meeting of Shareholders and is incorporated herein by reference. 53




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##### Table of Contents



PART IV 
 Item 15.Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a)(1) The following consolidated financial statements are filed as part of this Form 10-K: Correctional Properties Trust Consolidated Financial Statements Report of Independent Certified Public Accountants  Ernst & Young LLP Report of Independent Certified Public Accountants  Arthur Andersen LLP Consolidated Balance Sheets at December 31, 2003 and December 31, 2002 Consolidated Statements of Income for the years ended December 31, 2003, 2002 and 2001 Consolidated
Statements of Shareholders Equity for years ended December 31, 2003, 2002 and 2001 Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001 Notes to Consolidated Financial Statements. (2) The following financial statement schedules are filed as part of this Form 10-K: Schedule III  Real Estate and Accumulated Depreciation as of December 31,
2003 (3) See Exhibit Index included elsewhere herein. (b) Reports on Form 8-K: (1) We filed a Form 8-K on October 22, 2003 in connection with the
release of our earnings for the quarter ended September 30, 2003. (2) We filed a Form 8-K dated November 25, 2003 on December 5, 2003 in
connection with the completion of our Amended and Restated
           Credit
Agreement initially consisting of a $95 million secured revolving credit
facility. 54




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized. Date: March 12, 2004
    CORRECTIONAL PROPERTIES TRUST
(Registrant)By:
    /s/ Charles R. JonesCharles R. JonesChief Executive Officer,
President and Trustee KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Charles R. Jones as his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign
any and all amendments to this Annual Report on Form 10-K, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated. Signature
    
    Title
    
    Date/s/ Robert R. Veach, Jr.
Robert R. Veach, Jr.
    
    Chairman of the Board
    
    March 12, 2004/s/ Richard R. Wackenhut
Richard R. Wackenhut
    
    Vice-Chairman of the Board
    
    March 12, 2004/s/ George R. Wackenhut
George R. Wackenhut
    
    Trustee
    
    March 12, 2004/s/ Anthony P. Travisono
Anthony P. Travisono
    
    Trustee
    
    March 12, 2004/s/ Clarence E. Anthony
Clarence E. Anthony
    
    Trustee
    
    March 12, 2004/s/ James D. Motta
James D. Motta
    
    Trustee
    
    March 12, 2004/s/ William M. Murphy
William M. Murphy
    
    Trustee
    
    March 12, 2004/s/ David J. Obernesser
David J. Obernesser
    
    Vice President, Chief Financial Officer,
Secretary, Treasurer and Chief Accounting
Officer
    
    March 12, 2004
 55




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##### Table of Contents



Correctional Properties Trust
Schedule III  Real Estate and Accumulated Depreciation as of December 31, 2003
(dollars in thousands) Costs Capitalized
    
    Gross Amount Carried atSubsequent to
    
    Close of PeriodInitial Cost to Company
    
    Acquisition
    
    12/31/2003Date ofEncumbrances
    
    
    
    
    
    Building and
    
    
    
    
    
    Building and
    
    
    
    
    
    Building and
    
    
    
    
    
    Accumulated
    
    Construction/
    
    Date
    
    DepreciableDescription
    
    Location
    
    at 12/31/2003
    
    Land
    
    Improvements
    
    Land
    
    Improvements
    
    Land
    
    Improvements
    
    Total
    
    Depreciation
    
    Renovation
    
    Acquired
    
    Lives1
    
    
    Aurora Facility
    
    Aurora, CO
    
    
    (1
    )
    
    $
    669
    
    
    $
    7,160
    
    
    $
    
    
    
    $
    
    
    
    $
    669
    
    
    $
    7,160
    
    
    $
    7,829
    
    
    $
    (1,018
    )
    
    
    1987
    
    
    
    4/28/1998
    
    
    
    402
    
    
    McFarland Facility
    
    McFarland, CA
    
    
    (1
    )
    
    
    333
    
    
    
    6,687
    
    
    
    
    
    
    
    
    
    
    
    333
    
    
    
    6,687
    
    
    
    7,020
    
    
    
    (949
    )
    
    
    1988
    
    
    
    4/28/1998
    
    
    
    403
    
    
    Queens Facility
    
    New York, NY
    
    
    
    
    
    
    1,436
    
    
    
    13,296
    
    
    
    
    
    
    
    
    
    
    
    1,436
    
    
    
    13,296
    
    
    
    14,732
    
    
    
    (1,887
    )
    
    
    1997
    
    
    
    4/28/1998
    
    
    
    404
    
    
    Central Valley
Facility
    
    McFarland, CA
    
    
    (1
    )
    
    
    526
    
    
    
    17,066
    
    
    
    
    
    
    
    
    
    
    
    526
    
    
    
    17,066
    
    
    
    17,592
    
    
    
    (2,421
    )
    
    
    1997
    
    
    
    4/28/1998
    
    
    
    405
    
    
    Golden State
Facility
    
    McFarland, CA
    
    
    (1
    )
    
    
    956
    
    
    
    16,599
    
    
    
    
    
    
    
    
    
    
    
    956
    
    
    
    16,599
    
    
    
    17,555
    
    
    
    (2,355
    )
    
    
    1997
    
    
    
    4/28/1998
    
    
    
    406
    
    
    Desert View
Facility
    
    Adelanto, CA
    
    
    (1
    )
    
    
    452
    
    
    
    16,413
    
    
    
    
    
    
    
    
    
    
    
    452
    
    
    
    16,413
    
    
    
    16,865
    
    
    
    (2,329
    )
    
    
    1997
    
    
    
    4/28/1998
    
    
    
    407
    
    
    Broward County
    
    BrowardFacility
    
    County, FL
    
    
    (1
    )
    
    
    3,192
    
    
    
    11,935
    
    
    
    
    
    
    
    
    
    
    
    3,192
    
    
    
    11,935
    
    
    
    15,127
    
    
    
    (1,694
    )
    
    
    1998
    
    
    
    4/28/1998
    
    
    
    408
    
    
    Karnes Facility
    
    Karnes County, TX
    
    
    (1
    )
    
    
    500
    
    
    
    15,820
    
    
    
    
    
    
    
    
    
    
    
    500
    
    
    
    15,820
    
    
    
    16,320
    
    
    
    (2,245
    )
    
    
    1996
    
    
    
    4/28/1998
    
    
    
    409
    
    
    Lawton Facility
    
    Lawton, OK
    
    
    (1
    )
    
    
    371
    
    
    
    45,389
    
    
    
    
    
    
    
    
    
    
    
    371
    
    
    
    45,389
    
    
    
    45,760
    
    
    
    (5,631
    )
    
    
    1999
    
    
    
    1/15/1999
    
    
    
    4010
    
    
    Hobbs Facility
    
    Hobbs, NM
    
    
    (1
    )
    
    
    
    
    
    
    48,389
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48,389
    
    
    
    48,389
    
    
    
    (6,121
    )
    
    
    1998
    
    
    
    (3
    )
    
    
    4011
    
    
    Jena Facility
    
    Jena, LA
    
    
    (1
    )
    
    
    55
    
    
    
    15,196
    
    
    
    
    
    
    
    
    
    
    
    55
    
    
    
    15,196
    
    
    
    15,251
    
    
    
    (1,513
    )
    
    
    1999
    
    
    
    1/7/2000
    
    
    
    4012
    
    
    Mountain View
Facility
    
    Spruce Pine, NC
    
    
    (2
    )
    
    
    303
    
    
    
    24,915
    
    
    
    
    
    
    
    
    
    
    
    303
    
    
    
    24,915
    
    
    
    25,218
    
    
    
    (2,512
    )
    
    
    1998
    
    
    
    3/16/2001
    
    
    
    2813
    
    
    Pamlico Facility
    
    Bayboro, NC
    
    
    (2
    )
    
    
    364
    
    
    
    23,968
    
    
    
    
    
    
    
    
    
    
    
    364
    
    
    
    23,968
    
    
    
    24,332
    
    
    
    (2,218
    )
    
    
    1998
    
    
    
    6/28/2001
    
    
    
    2714
    
    
    Delaney Hall
Facility
    
    Newark, NJ
    
    
    (1
    )
    
    
    3,453
    
    
    
    17,855
    
    
    
    
    
    
    
    
    
    
    
    3,453
    
    
    
    17,855
    
    
    
    21,308
    
    
    
    (264
    )
    
    
    2000
    
    
    
    5/29/2003
    
    
    
    40$
    12,610
    
    
    $
    280,688
    
    
    $
    
    
    
    $
    
    
    
    $
    12,610
    
    
    $
    280,688
    
    
    $
    293,298
    
    
    $
    (33,157
    )
   (1)
    
    This facility is held as security for the Bank Credit Facility, which had
an outstanding balance of $3,800,000 at December 31, 2003.(2)
    
    This facility is held as security for the Bonds, which had an outstanding
balance of $55,855,000 at December 31, 2003.(3)
    
    In October 1998, the Company acquired the 600-bed Hobbs Facility.
Subsequently, the Company acquired the 600-bed expansion of the Hobbs
Facility in January 1999, and an industries building in July 1999. 56




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##### Table of Contents



A summary of activity of real estate and accumulated depreciation is as follows:
(Dollars in Thousands) For the years ended December 31,Real Estate
    
    2003
    
    2002
    
    2001Balance at beginning of
period
    
    $
    271,990
    
    
    $
    271,990
    
    
    $
    222,440Additions during period:Acquisitions
    
    
    21,308
    
    
    
    
    
    
    
    49,550Improvements
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    Deductions during the
period:Cost of real estate sold
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    Balance at close of period
    
    $
    293,298
    
    
    $
    271,990
    
    
    $
    271,990
 For the years ended December 31,Accumulated Depreciation
    
    2003
    
    2002
    
    2001Balance at beginning of
period
    
    $
    (25,761
    )
    
    $
    (18,628
    )
    
    $
    (12,116
    )Additions during period:Depreciation
    
    
    (7,396
    )
    
    
    (7,133
    )
    
    
    (6,512
    )Other
    
    
    
    
    
    
    
    
    
    
    Deductions during the
period:Real estate sold
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    Balance at close of
period
    
    $
    (33,157
    )
    
    $
    (25,761
    )
    
    $
    (18,628
    )
 57




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##### Table of Contents



INDEX TO EXHIBITS Number
    
    Description of Exhibits3.1
    
    Articles of Amendment and Restatement of Declaration of Trust of Correctional Properties Trust (1)3.2
    
    Amended and Restated Bylaws of Correctional Properties Trust (2)3.3
    
    Specimen of certificate representing the Common Shares (3)4.1
    
    Provisions defining the rights of shareholders are found in the Articles
of Amendment and Restatement of the Declaration of Trust and the Amended
and Restated Bylaws, respectively, of Correctional Properties Trust
(included as Exhibits 3.1 and 3.2 hereof)10.1
    
    Agreement of Limited Partnership of Correctional Properties Trust
Operating Limited Partnership L.P. (3)10.2
    
    Master Agreement to Lease between CPT Operating Partnership L.P. and
Wackenhut Corrections Corporation (3)10.3
    
    Form of Lease Agreement between CPT Operating Partnership L.P. and
Wackenhut Corrections Corporation (3)10.4
    
    Form of Right to Purchase Agreement between Wackenhut Corrections
Corporation and CPT Operating Partnership L.P. (3)10.5
    
    Form of Option Agreement between Wackenhut Corrections Corporation and
CPT Operating Partnership L.P. (3)10.6
    
    Form of Trustee and Officer Indemnification Agreement between
Correctional Properties Trust and its trustees and officers (3)10.7
    
    Correctional Properties Trust 1998 Employee Share Incentive Plan (4)+10.8
    
    Correctional Properties Trust 1998 Non-Employee Trustees Share Option Plan (4)+10.9
    
    Correctional Properties Trust 2000 Stock Option Plan (6)+10.10
    
    Correctional Properties Trust 2002 Stock Option Plan (11)+10.11
    
    Agreement of Sale and Purchase dated October 30, 1998 between Wackenhut
Corrections Corporation and CPT Operating Partnership L.P. (3)10.12
    
    Credit Agreement dated October 2, 1998 by and among CPT Operating
Partnership, L.P., Correctional Properties Trust, NationsBank, N.A.,
NationsBanc Montgomery Securities LLC, the Bank of Nova Scotia and the
Lenders parties thereto from time to time (5)10.12(a)
    
    Amendment Agreement No. 1 to Credit Agreement, dated March 10, 2000,
by and among CPT Operating Partnership, L.P., Correctional Properties
Trust, Bank of America, N.A. (successor by merger to NationsBank, N.A), as
Agent for the Lenders party to the Credit Agreement (8)10.12(b)
    
    Amendment Agreement No. 2 to Credit Agreement, dated March 16, 2001,
by and among CPT Operating Partnership, L.P., Correctional Properties
Trust, Bank of America, N.A. (successor by merger to NationsBank, N.A), as
Agent for the Lenders party to the Credit Agreement (9)




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##### Table of Contents



Number
    
    Description of Exhibits10.12(c)
    
    Amendment Agreement No. 3 to Credit Agreement, dated March 16, 2001,
by and among CPT Operating Partnership, L.P., Correctional Properties
Trust, Bank of America, N.A. (successor by merger to NationsBank, N.A), as
Agent for the Lenders party to the Credit Agreement (9)10.12(d)
    
    Amendment Agreement No. 4 to Credit Agreement, dated June 28, 2001, by
and among CPT Operating Partnership, L.P., Correctional Properties Trust,
Bank of America, N.A. (successor by merger to NationsBank, N.A), as Agent
for the Lenders party to the Credit Agreement (10)10.12(e)
    
    Amendment Agreement No. 5 to Credit Agreement dated April 10, 2003 by
and among CPT Operating Partnership L.P., Correctional Properties Trust
and Bank of America, N.A. as Agent for the lenders(12).10.12(f)
    
    Amended and Restated Credit Agreement dated as of November 25, 2003 by
and among CPT Operating Partnership L.P., Correctional Properties Trust,
Bank of America, N.A., as Administrative Agent(13).10.13
    
    Agreement of Sale and Purchase dated January 15, 1999 between Wackenhut
Corrections Corporation and CPT Operating Partnership LP (7)10.14
    
    Agreement of Sale and Purchase dated January 7, 2000 between Wackenhut
Corrections Corporation and CPT Operating Partnership LP (7)10.15
    
    The Agreement of Sale dated March 1, 2001 (Mountain View Correctional
Facility), by and between Corrections Corporation of America, a Maryland
corporation, and CPT Operating Partnership, L.P.,a Delaware limited
partnership (9)10.16
    
    The Agreement of Sale dated March 10, 2001 (Pamlico Correctional
Facility), by and between Corrections Corporation of America, a Maryland
corporation, and CPT Operating Partnership, L.P.,a Delaware limited
partnership (10)10.17
    
    Lease Between CPT Operating Partnership L. P. as Landlord and Community
Education Centers, Inc. as tenant dated May 29, 2003(12).10.18
    
    Master Agreement to Lease Between CPT Operating Partnership L. P. as
Landlord and Community Education Centers, Inc. as tenant dated May 29,
2003(12).10.19
    
    Senior Executive Retirement Plan Termination Agreement (2).10.20
    
    Deferred Share Long-Term Loyalty Bonus Agreement (2).21.1
    
    List of Subsidiaries of Correctional Properties Trust (4)23.1
    
    Consent of Ernst & Young LLP (2)31.1
    
    Chief Executive Officers certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(2).31.2
    
    Chief Financial Officers certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(2).32.1
    
    Chief Executive Officers certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002(2).32.2
    
    Chief Financial Officers certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002(2).




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##### Table of Contents



+
    
    Management contract or compensatory plan or arrangement.(1)
    
    Incorporated by reference to exhibit 3.2 to Amendment No. 1 to the
Registrants Form S-11 (File No. 333-46681) filed with the Commission on
March 20, 1998.(2)
    
    Filed herewith this Annual Report on Form 10-K for the fiscal year ended
December 31, 2003.(3)
    
    Incorporated by reference to Amendment No. 1 to the Registrants Form
S-11 (File No. 333-46681) filed with the Commission on March 20, 1998.(4)
    
    Incorporated by reference to Amendment No. 2 to the Registrants Form
S-11 (File No. 333-46681) filed with the Commission on April 8, 1998.(5)
    
    Incorporated by reference to exhibit 4.1 of the Registrants Form 10-Q
for the quarter ended September 30, 1998 filed with the Commission on
November 16, 1998.(6)
    
    Incorporated by reference to Appendix A to Registrants Definitive Proxy
Statement filed with the Commission on March 30, 2000.(7)
    
    Incorporated by reference to Registrants Form 10-K for the year ended
December 31, 1999 filed with the Commission on March 31, 2000.(8)
    
    Incorporated by reference to Registrants Form 10-K for the year ended
December 31, 2000 filed with the Commission on April 2, 2001.(9)
    
    Incorporated by reference to Registrants Form 8-K filed with the
Commission on April 2, 2001.(10)
    
    Incorporated by reference to Registrants Form 8-K filed with the
Commission on July 13, 2001.(11)
    
    Incorporated by reference to Appendix 2 to Registrants Definitive Proxy
Statement filed with the Commission on March 14, 2002.(12)
    
    Incorporated by reference to Registrants Form 10-Q for the quarter ended
June 30, 2003 filed with the Commission on July 15, 2003.(13)
    
    Incorporated by reference to Registrants Form 8-K filed with the
Commission on December 5, 2003.