##### Table of Contents



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) þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the fiscal year ended December 31, 2004 OR o
    
    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
    
    (I.R.S. Employerof Incorporation or Organization)
    
    Identification No.)3300 PGA BOULEVARD, SUITE 750PALM 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 þ 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. þ 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 þ No o As of June 30, 2004, the aggregate market value of the voting shares held by non-affiliates of the
registrant was approximately $316,220,000 based on the closing price on that date of $29.25 per
share. As of March 14, 2005, there were 10,992,750 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 Annual Report on Form
10-K is incorporated by reference to the definitive Proxy Statement of the Company relating to the
2005 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.




---



Correctional Properties Trust
Annual Report on Form 10-K Index PageNumberPART IItem 1.
    
    Business
    
    
    2Item 2.
    
    Properties
    
    
    24Item 3.
    
    Legal Proceedings
    
    
    24Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    24PART IIItem 5.
    
    Market for
Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    25Item 6.
    
    Selected Financial Data
    
    
    26Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    27Item 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
    
    
    35Item 9B.
    
    Other Information
    
    
    35PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    54Item 11.
    
    Executive Compensation
    
    
    54Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    54Item 13.
    
    Certain Relationships and Related Transactions
    
    
    54Item 14.
    
    Principal Accounting Fees and Services
    
    
    54PART IVItem 15.
    
    Exhibits and Financial Statement Schedule
    
    
    54Consent of Ernst & Young LLPSection 302 Certification of CEOSection 302 Certification of CFOSection 906 Certification of CEOSection 906 Certification of CFO




---



##### Table of Contents



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 our business and 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 private prison operators and
government entities; governmental and public policy changes; reliance on a single tenant for a
significant portion of revenue; non-renewal of existing leases; government regulation; 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; continued ability to qualify as a real estate investment trust; 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 will discuss such risks in our future 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 owners and 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). Our 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, 2004, we owned and leased twelve correctional and detention
facilities in nine states. The aggregate purchase price of our facilities was approximately $244
million. Eleven of our facilities are located in eight states and leased to The Geo Group, Inc.,
The Geo Group or GEO (NYSE: GGI) or its subsidiary. GEO was formerly known as
Wackenhut Corrections Corporation. These facilities currently represent 90% of our rental income.
The remaining facility, which 2




---



##### Table of Contents



currently represents 10% of our rental income, is located in the
State of New Jersey and leased to and operated by Community Education Centers or CEC. 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, 2004, the aggregate design capacity of
our facilities was 6,856 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 2,212,475 at December 31, 2003. In addition, according to the Bureau
of Justice Statistics, as of December 31, 2003, state prison systems reported operating between
100% of their highest capacity and 16% above their lowest capacity and the federal corrections
system reported operating at approximately 39% over 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 14, 2005, we had five employees. In this annual report, unless stated otherwise or unless the content requires otherwise,
references to we, us, our, Company or Correctional Properties mean Correctional
Properties Trust and its subsidiaries. Recent Events and 2004 Overview Sale of Pamlico Facility and Mountain View Facility. On November 4, 2004, we completed the
sale to the State of North Carolina of the Pamlico Facility located in Bayboro, North Carolina and
the Mountain View Facility located in Spruce Pine, North Carolina for $25,228,900 and $26,215,800,
respectively. The facilities were purchased by the Company in 2001 from an unrelated third party,
subject to existing leases on each property for approximately $24,300,000 and $25,200,000,
respectively, including transaction costs. As previously disclosed, each of the leases contained an
option under which the State of North Carolina had the right to acquire the facilities for a
predetermined purchase price, which declined each year. In July 2004, we received written notice
from the State of North Carolina of the exercise of its options to purchase the facilities. We recognized a combined net gain on the sale of these facilities of approximately of
$4,969,000 for financial reporting purposes in the fourth quarter of 2004; however, future results
of operations and cash flows from operating activities will be negatively impacted because we will
no longer receive the monthly rental income after the date of the sale of these facilities. We used
the net proceeds from the sale of the facilities together with a substantial portion of the balance
of the debt service fund to repay all of the outstanding balance of the Bonds that were issued in
2001 to finance the facilities. The Bonds included a mandatory provision under which the proceeds
from a sale of the facilities were required to be used to redeem the Bonds. For more information,
please see Note 4. Discontinued Operations to our consolidated financial statements included
elsewhere herein. Lawton Facility Expansion. In March 2005, we signed a non-binding letter of intent to purchase
The GEO Groups existing 300-bed expansion to our Lawton Correctional Facility in Lawton, Oklahoma
and to finance a new 600-bed expansion at that facility, which would also be owned by us and leased
to GEO. The new 600-bed expansion is anticipated to be completed and become operational during the
second quarter of 2006. If the transactions are completed, we would own the entire 2,518-bed
facility (which includes the expansion and 118 adult segregation beds), and regardless of whether
or not the transactions are completed, we will continue lease the facility to GEO to house adult
male, medium-security inmates for the Oklahoma Department of Corrections. In 1999, we purchased the initial 1,500-bed, medium-security, Lawton Correctional Facility
from GEO. GEO then added a 300-bed addition later that year, which they designed, constructed and
owned. Under the proposed transactions, we expect to purchase that existing 300-bed expansion for
$3.9 million during the second quarter of 2005 with working capital and net cash provided by
operating activities. We expect to finance the new 600-bed expansion for approximately $23
million through net cash provided by operating activities and/or debt financings. We expect to
incur no construction risk or 3




---



##### Table of Contents



construction management responsibility in connection with the new
expansion. The architects, engineers and construction related professionals will be selected,
engaged and supervised by GEO, which has extensive experience and expertise in prison development
and construction. GEO is currently paying us a lease rate of 10.75 percent on the original 1,500-bed facility.
Although that rate is to remain unchanged if the transactions are completed, the existing 300-bed
expansion is expected to be leased to GEO at an initial rate of 9.5 percent. This is expected to
result in a blended rate for the 1,918-bed facility (which includes 118 adult segregation beds) of
approximately 10.65 percent with annual lease escalators at CPI, but not to exceed 4 percent
annually. The new 600-bed expansion is expected to also be leased to GEO at an initial rate of 9.5
percent when it is completed. Following the completion of the new 600-bed expansion, the initial
blended lease rate on the entire 2,518-bed facility is expected to be approximately 10.29 percent
with annual lease escalators at CPI, but not to exceed 4 percent annually. The lease maturity date on the existing 1,500-bed facility between GEO and us is expected to
also be amended. GEO has approximately four years remaining on its original 10-year lease with us
for the facility. The lease is expected to be amended to provide a maturity date of 10 years on the
entire facility, with the new 10-year term beginning the date upon which the new 600-bed expansion
is completed. The completion of the proposed transactions is subject to final documentation, due diligence
and normal closing conditions. 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 from 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
subsidiary who continue to operate the facilities. Please See Structure of the Company below.
The facilities are leased to The Geo Group or its subsidiary 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. 4




---



##### Table of Contents



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 (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 owners and operators and government
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 government 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 government entities.
Historically, government entities have used various methods of construction financing to develop
new correctional and detention facilities, including but not limited to the following: (i) one-time
general revenue appropriations by the government agency for the cost of the new facility, (ii)
general obligation bonds that are secured by either a limited or unlimited tax levied by the
issuing government entity or (iii) lease revenue bonds secured by an annual lease payment that is
subject to annual or bi-annual legislative appropriation of funds. 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 5




---



##### Table of Contents



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. Expansion Opportunities.We believe that there may be opportunities for expansion of our
existing correctional facilities which could result in increased cash flows from operating
activities 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, 2004,
is approximately 3.75 years.
    Community Education Centers Lease.On May 29, 2003, we acquired Delaney Hall. The
initial base rent rate was $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 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 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 6




---



##### Table of Contents



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 we receive an opinion of tax counsel 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




---



##### Table of Contents



Structure of the Company The following diagram sets forth our structure as of December 31, 2004. (ORGANISATION 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 government 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 to
acquire and own the previously owned Mountain View and Pamlico Facilities and issue the Bonds
which were used to pay for those acquisitions. On November 4, 2004, we sold the Mountain View
and Pamlico Facilities to the State of North Carolina (see Recent Events and 2004 Overview on
page 3). 8




---



##### Table of Contents



The Owned Facilities The twelve facilities owned by us at December 31, 2004, which we refer to in this annual report as
Owned Facilities, were purchased for an aggregate cash purchase price of approximately $244
million. We lease eleven of these facilities to The Geo Group or its subsidiary and one of these
facilities to CEC. These twelve facilities are located in nine states and have an aggregate design
capacity of 6,856 beds. The following table sets forth certain information with respect to these
facilities as of December 31, 2004. Date
    
    
    
    
    
    
    
    
    
    Design
    
    
    
    ExpirationFacility was
    
    
    
    
    
    
    
    
    
    Capacity
    
    
    
    of
    
    OperatingAcquired by
    
    
    
    
    
    
    
    
    
    and
    
    Facility
    
    Underlying
    
    AgreementFacility and
    
    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/
    
    300/75%
    
    May
    
    March
    
    TwoProcessing Center,
    
    
    
    
    
    Detention
    
    
    
    Medium
    
    
    
    1987
    
    2005(5)
    
    Six-or the Aurora
    
    
    
    
    
    Facility
    
    
    
    
    
    
    
    
    
    
    
    MonthFacility,
Aurora, COMcFarland Community
    
    April 1998
    
    April 2008
    
    Pre-Release
    
    CDOC (6)
    
    Minimum/
    
    224/0%
    
    February
    
    December
    
    Correctional
    
    
    
    
    
    
    
    
    
    Medium
    
    
    
    1988
    
    2005(7)Facility,
     or the McFarland
     Center Facility,
     McFarland, CAQueens Private
    
    April 1998
    
    April 2008
    
    BICE
    
    BICE
    
    Minimum/
    
    200/94%(8)
    
    March
    
    March
    
    TwoCorrectional
    
    
    
    
    
    Detention
    
    
    
    Medium
    
    
    
    1997
    
    2005(5)
    
    One-Facility,
    
    
    
    
    
    Facility
    
    
    
    
    
    
    
    
    
    
    
    Yearor the Queens
Facility,
New York, NYCentral Valley
    
    April 1998
    
    April 2008
    
    Adult
    
    CDOC
    
    Minimum/
    
    550/98%
    
    December
    
    December
    
    Community
    
    
    
    
    
    Correctional
    
    
    
    Medium
    
    
    
    1997
    
    2007Correctional
    
    
    
    
    
    FacilityFacility,
     or the Central
     Valley Facility,
     McFarland, CAGolden State
    
    April 1998
    
    April 2008
    
    Adult
    
    CDOC
    
    Minimum/
    
    550/97%
    
    December
    
    December
    
    Community
    
    
    
    
    
    Correctional
    
    
    
    Medium
    
    
    
    1997
    
    2007Correctional
    
    
    
    
    
    FacilityFacility,
     or the Golden State
     Facility,
     McFarland, CADesert View
    
    April 1998
    
    April 2008
    
    Adult
    
    CDOC
    
    Minimum/
    
    550/97%
    
    December
    
    December
    
    Community
    
    
    
    
    
    Correctional
    
    
    
    Medium
    
    
    
    1997
    
    2007Correctional Facility,
     or the Desert View
     Facility,
     Adelanto, CA
    
    
    
    
    
    FacilityBroward County
    
    April 1998
    
    April 2008
    
    BICE
    
    Broward County
    
    Non-
    
    300/70%(10)
    
    February
    
    September
    
    (10)Work
Release Center, or the BrowardCounty Facility,Broward County,FL
    
    
    
    
    
    Detention Facility
    
    and BSO(9) and BICE
    
    Secured
    
    
    
    1998
    
    2005 (10)and WorkReleaseCenterKarnes County
    
    April 1998
    
    April 2008
    
    Adult
    
    Karnes
    
    Multi-
    
    480/103%
    
    January
    
    2026
    
    VariesCorrectional
    
    
    
    
    
    Correctional
    
    County
    
    Security
    
    
    
    1996Center,
    
    
    
    
    
    Facilityor the Karnes
Facility,
Karnes City, TXLawton
    
    January 1999
    
    January 2009
    
    Adult
    
    ODOC(11)
    
    Medium
    
    1,500/99%
    
    December
    
    June
    
    ThreeCorrectional
    
    
    
    
    
    Correctional
    
    
    
    
    
    
    
    1998
    
    2005
    
    One-Facility,
    
    
    
    
    
    Facility
    
    
    
    
    
    
    
    
    
    
    
    Yearor the Lawton 
Facility,
Lawton, OK
 9




---



##### Table of Contents



Date
    
    
    
    
    
    
    
    
    
    Design
    
    
    
    ExpirationFacility was
    
    
    
    
    
    
    
    
    
    Capacity
    
    
    
    of
    
    OperatingAcquired by
    
    
    
    
    
    
    
    
    
    and
    
    Facility
    
    Underlying
    
    AgreementFacility and
    
    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
    
    Adult
    
    Lea
    
    Multi-
    
    1,200/102%
    
    May
    
    June
    
    AnnualCorrectional
    
    (12)
    
    
    
    Correctional
    
    County
    
    Security
    
    
    
    1998
    
    2005Facility,
    
    
    
    
    
    Facilityor the Hobbs
Facility,
Hobbs, NMJena Juvenile
    
    January 2000
    
    January 2010
    
    Juvenile
    
    None
    
    Multi-
    
    276/0%(13)
    
    June
    
    None (13)
    
    NoneJustice Center,
    
    
    
    
    
    Correctional
    
    
    
    Security
    
    
    
    1999or the Jena
    
    
    
    
    
    FacilityFacility,
Jena, LAFACILITY LEASED
TO CEC:Delaney Hall
    
    May 2003
    
    May 2013
    
    Adult
    
    (14)
    
    Minimum
    
    726/ 97%
    
    March
    
    (14)
    
    (14)Newark, NJ
    
    
    
    
    
    Correctional Facility
    
    
    
    
    
    
    
    2000Total Facilities
    
    12
    
    
    
    
    
    
    
    
    
    6,856/90%
 10




---



##### 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, 2004. 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 government 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 operation of these facilities, which in
turn depends on the design capacity and occupancy rate of each facility.  (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
government 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.  (5)
    The Geo Group anticipates the operating agreements on the Aurora Facility and the Queens
Facility, which expire in March 2005, will be extended or renewed on terms comparable to those
of the existing agreements.  (6)
    State of California Department of Corrections.   (7)
    In January 2005, The Geo Group entered into a one year operating contract with the California
Department of Corrections, or the CDOC, on the 224 bed McFarland Community Correctional
Facility, or the McFarland Facility, which expires on December 31, 2005. The Geo Groups
previous contract with the CDOC on the McFarland Facility had expired on December 31, 2003 and
the facility was vacant until the signing of the new contract in 2005.  (8)
    The facility operating agreement for the Queens Private Correctional Facility includes a
minimum guarantee of 150 beds (75% occupancy).  (9)
    The Broward County Sheriffs Office, or the BSO.  (10)
    Under the operating agreement between the BSO and The Geo Group, which expires on September
30, 2005, the BSO will utilize between 50-100 beds. 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 agreement has three
remaining one-year renewal options.  (11)
    State of Oklahoma Department of Corrections.  (12)
    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. 11




---



##### Table of Contents



(13)
    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.  (14)
    CEC operates Delaney Hall under three separate operating agreements with: (1) the New Jersey
Department of Corrections, which expires on June 30, 2006; (2) Union County, New Jersey, which
expired on December 31, 2004; and (3) Essex County, New Jersey, which expired on September 30,
2004. In connection with the Union County and Essex County correctional services operating
agreements, CEC continues to provide services as specified in the agreements and expects
extensions or new agreements to be approved including terms comparable to those in the expired
agreements. On December 31, 2004, Union County and Essex County
housed 178 and 420 inmates in
Delaney Hall, respectively. 12




---



##### 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 and the Lawton Facility. The Karnes Facility is a multi-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 minimum/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 minimum/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 multi-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 2005. The 1200-bed Hobbs Facility was acquired by us 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 acquired in January 1999. In July 1999, we acquired an industries building at the
Hobbs Facility. The Lawton Facility is located in Lawton, Oklahoma and is used as a medium security facility.
The facility is situated on 160 acres. The approximately 406,000 square foot structure contains a
design capacity for 1,500 beds. Construction was completed in December 1998. Oklahoma state law
requires that the operating agreement contain a provision granting the Oklahoma Department of
Corrections the option at the beginning of the State of Oklahomas 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 Geo Groups contract with the Oklahoma Department of Corrections expires in June 2005, and
includes three one-year renewal options at the option of the Oklahoma Department of Corrections. 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 has contracted with the CDOC to operate this facility
until December 2005. 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 on June 30,
2006; (2) Union County, New Jersey, which expired on December 31, 2004; and (3) Essex County, New
Jersey, which expired on September 30, 2004. In connection with the Union County and Essex County
correctional services agreement contracts, CEC 13




---



##### Table of Contents



continues to provide services as specified in the contracts and expects extensions
or new contracts to be approved including terms comparable to those in the expired contracts. As of
December 31, 2004, Union County and Essex County housed 178 and 420 inmates in Delaney Hall,
respectively. 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 2005, and includes two one-year renewal
options at the option of the BICE. The Geo Group anticipates the management contract on the Queens
Facility will be extended or renewed on terms comparable to those of the existing contract. 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 2005,
and includes two six-month renewal options at the option of the BICE. The Geo Group anticipates the
management contract on the Aurora Facility will be extended or renewed on terms comparable to those
of the existing contract. 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 expires in September
2005, and includes three 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 2005, between Broward County, the Sheriff of Broward County and The Geo Group for between
50 to 100 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 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, 2004. 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 at any time until the
earlier of (i) (a) in the case of a newly developed facility, four years from the receipt of a
certificate of occupancy for the facility or (b) in the case of an already operating facility, four
years from the date the facility is acquired by The Geo Group or the party from which The Geo Group
has the right to acquire the 14




---



##### Table of Contents



facility; or (ii) six months after the facility attains an occupancy level of 75% of the number
of beds authorized under the certificate of occupancy for the facility, subject to certain limited
exceptions. Some facilities currently owned by The Geo Group 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 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. In the case of any Future Facility acquired by us from The Geo Group, 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. 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. 15




---



##### Table of Contents



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. Right of First Refusal. The Geo Group has a 30-day right of first refusal on the proposed sale
by us of any of the facilities we lease to them. 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, 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 16




---



##### Table of Contents



transactions prohibits or
otherwise restricts our ability to lease properties to parties (domestic or foreign) other than The
Geo Group. Because our leases with our tenants on our 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 certain government 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 a 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 Broward Facility, 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, the Jena
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 government 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. 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 government 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 17




---



##### Table of Contents



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 31, 2004, The Geo Group had 42 correctional and detention
facilities under contract or award, with an aggregate design capacity of approximately 37,000 beds
(with many of such facilities being leased by The Geo Group from the contracting government
entity). The Geo Group offers government 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 continued 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 Chairman of the Correctional Properties 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, 2004 is approximately 3.75 years. 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. 18




---



##### Table of Contents



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. 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. Right of First Refusal. CEC has a 30-day right of first refusal on the proposed sale by us of
Delaney Hall. 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 government 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 19




---



##### Table of Contents



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 government
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 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. 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 20




---



##### Table of Contents



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 environmental 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. 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 owners and
operators or government entities in the United States. Additionally, we are pursing other
opportunities in essential purpose government facilities unrelated to the correctional and
detention industry, including without limitation, mental health and higher education facilities. 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, 21




---



##### Table of Contents



(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 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 and CEC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. 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, 2004 consisted of 100% equity and 0%
debt. 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. Our amended bank credit facility 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. 22




---



##### Table of Contents



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 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 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 affirmative vote of the holders of two-thirds of our shares entitled to vote 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 and Other Information 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. Additionally, charters for the
Audit Committee, the Corporate Governance and Nominating Committee, the Compensation
Committee, the Corporate 23




---



##### Table of Contents



Governance Guidelines and our Code of Business Conduct and Ethics policy
are available on our website by selecting the option entitled Corporate Governance. A copy of any
of these items may be obtained for no cost upon request from our Corporate Secretary. Our internet
website and the information contained in it are not intended to be part of this Form 10-K. Our chief executive officer has informed us that he intends to submit to the New York Stock
Exchange in a timely fashion the required Annual CEO Certification, without qualification, as to
our compliance with the New York Stock Exchanges corporate governance listing standards. 
 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 plus operating expenses.
The term of this lease expires on July 31, 2005. We are currently reviewing various alternatives in
connection with our corporate office space including the renewal or extension of our existing
lease. 
 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 lessees, 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. To the extent any claim is not covered by our lessees 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. 24




---



##### Table of Contents



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 quarterly periods for the years ended December 31, 2004 and 2003, as reported
by the NYSE. 2004
    
    
    2003High
    
    
    Low
    
    
    High
    
    
    LowFirst Quarter
    
    $
    32.41
    
    
    $
    27.35
    
    
    $
    21.98
    
    
    $
    20.11Second Quarter
    
    
    31.17
    
    
    
    24.55
    
    
    
    28.00
    
    
    
    19.99Third Quarter
    
    
    29.60
    
    
    
    25.75
    
    
    
    28.80
    
    
    
    24.25Fourth Quarter
    
    
    29.70
    
    
    
    26.28
    
    
    
    29.40
    
    
    
    25.01
 As of March 14, 2005, there were 10,992,750 shares of common shares outstanding and 122
shareholders of record. Recent Sales of Unregistered Securities None. Distributions Subsequent to our initial public offering, we have paid regular quarterly cash dividend
distributions to our shareholders. Our Board of Trustees, in its sole discretion, has determined
the actual dividend distribution rate based on our actual results of operations, economic
conditions, tax considerations (including those related to REITs) and other factors. In 2004, we
declared and paid four quarterly cash dividend distributions ($.45 per common share in each of the
first, second, third and fourth quarters totaling $1.80 per common share). We also declared in the
fourth quarter of 2004 a special cash dividend distribution of $.18 per common share which was paid
in January 2005. Including the special dividend, cash dividends declared in 2004 totaled $1.98 per
common share. For federal tax reporting purposes, 2004 cash dividend distributions were classified
as 63.0% as ordinary income and 37.0% as capital gain. In 2003, we declared four cash dividend
distributions of $.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. For federal tax reporting purposes, 2003 cash dividend distributions were classified
as 65.2% as ordinary income and 34.8% 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 from operating activities 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 interprets the current
NAREIT definition differently than we do. Funds from operations is described and reconciled with
net income under Item 7. Managements Discussion and Analysis of Financial Condition and Results
of OperationsFunds from Operations. Under the terms of our amended bank credit facility, we are restricted from paying dividends
in excess of (a) the lesser of 100% of cash available for distribution (as defined in the amended
bank credit facility) or 95% of funds from operations (as defined in the amended bank credit
facility) plus, in either case (b) 100% of the amount of any capital gain from dispositions of
facilities. 25




---



##### Table of Contents



Securities Authorized For Issuance Under Equity Compensation Plans The following table provides information as of December 31, 2004 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
    
    
    283,500
    
    
    $
    18.01
    
    
    
    146,250
    (1)Equity Compensation Plans Not Approved by Security Holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    283,500
    
    
    $
    18.01
    
    
    
    146,250
 (1) As of December 31, 2004, the 1998 Employee Share Incentive Plan, 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. The shares available for grant of 146,250 excludes
2,500 shares reserved under the 1998 Employee Share Incentive Plan for granting pursuant to the
Deferred Share Long-Term Loyalty Bonus Agreement in years 2005 through 2009. 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. On November 4, 2004, we sold the Pamlico Facility and the Mountain View Facility, which were
acquired in 2001, upon the exercise by the State of North Carolina of its option to purchase the
facilities per the terms of the lease agreements. As discussed in Item 7. Managements Discussion
and Analysis of Financial Condition and Results of OperationsFinancial ConditionResults of
Operations and in Note 4 (Discontinued Operations) to our consolidated financial statements
included in Item 8 of this report, certain amounts in our prior
years consolidated financial statements
have been reclassified to reflect the discontinued operation presentation including reclassifying
the assets and liabilities associated with the Pamlico Facility and Mountain View Facility as held
for sale for prior periods, and reporting the results of operations associated with such facilities
for both current and prior periods as discontinued operations. Therefore, certain previously
reported amounts in the selected consolidated financial data have been reclassified to reflect the
discontinued operation presentation. Year
    
    
    Year
    
    
    Year
    
    
    Year
    
    
    YearEnded
    
    
    Ended
    
    
    Ended
    
    
    Ended
    
    
    Ended(In thousands, except per share amounts)
    
    12/31/04
    
    
    12/31/03
    
    
    12/31/02
    
    
    12/31/01
    
    
    12/31/00OPERATING RESULTSRevenue
    
    $
    27,104
    
    
    $
    25,705
    
    
    $
    23,440
    
    
    $
    23,004
    
    
    $
    22,711Income from continuing operations
    
    
    17,495
    
    
    
    13,021
    
    
    
    9,375
    
    
    
    8,388
    
    
    
    8,444Income from discontinued operations
    
    
    6,175
    
    
    
    718
    
    
    
    753
    
    
    
    562
    
    
    
    Net income
    
    
    23,670
    
    
    
    13,739
    
    
    
    10,128
    
    
    
    8,950
    
    
    
    8,444Income from continuing operations per share, basic
    
    
    1.60
    
    
    
    1.44
    
    
    
    1.30
    
    
    
    1.17
    
    
    
    1.18Income from continuing operations per share, diluted
    
    
    1.58
    
    
    
    1.42
    
    
    
    1.29
    
    
    
    1.17
    
    
    
    1.18Net income per share, basic
    
    
    2.16
    
    
    
    1.52
    
    
    
    1.41
    
    
    
    1.25
    
    
    
    1.18Net income per share, diluted
    
    
    2.14
    
    
    
    1.50
    
    
    
    1.40
    
    
    
    1.25
    
    
    
    1.18Weighted average shares outstanding, basic
    
    
    10,980
    
    
    
    9,048
    
    
    
    7,188
    
    
    
    7,140
    
    
    
    7,130Weighted average shares outstanding, diluted
    
    
    11,084
    
    
    
    9,144
    
    
    
    7,259
    
    
    
    7,164
    
    
    
    7,130DIVIDENDSCash distributions declared per share
    
    $
    1.98
    
    
    $
    1.72
    
    
    $
    1.60
    
    
    $
    1.47
    
    
    $
    1.46
 26




---



##### Table of Contents



As of December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000BALANCE SHEET DATAReal estate properties, net
    
    $
    209,526
    
    
    $
    215,321
    
    
    $
    199,626
    
    
    $
    204,975
    
    
    $
    210,324Assets held for sale
    
    
    
    
    
    
    54,355
    
    
    
    55,826
    
    
    
    57,070
    
    
    
    Total assets
    
    
    218,316
    
    
    
    274,628
    
    
    
    262,589
    
    
    
    266,847
    
    
    
    213,775Revolving line of credit
    
    
    
    
    
    
    3,800
    
    
    
    74,000
    
    
    
    80,000
    
    
    
    81,400Liabilities associated with assets held for sale
(including Bonds Payable)
    
    
    
    
    
    
    56,819
    
    
    
    57,755
    
    
    
    58,462
    
    
    
    Total liabilities
    
    
    3,243
    
    
    
    61,880
    
    
    
    135,133
    
    
    
    142,978
    
    
    
    84,832Total shareholders equity
    
    
    215,073
    
    
    
    212,748
    
    
    
    127,456
    
    
    
    123,869
    
    
    
    128,943
 
 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 government entities and leasing these
facilities to experienced correctional and detention facility operators or the government 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).
Except where the context otherwise requires, the terms we, us, Company or our refer to the
business of Correctional Properties Trust and its consolidated subsidiaries. Our principal business strategy is to finance and/or acquire correctional and detention
facilities that meet our investment criteria, from private prison owners and operators, developers
and government entities, to expand our existing facilities, and to lease all of these facilities
under long-term triple-net leases to qualified third-party operators. Our facilities are privately
managed facilities that are leased to and operated by The Geo Group, Inc., or The Geo Group, or
Community Educations Center, Inc., or CEC. We lease eleven of our facilities to The Geo Group or
its subsidiary and one of our facilities to 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 Leases. The base rent for the first year of each facility leased to
The Geo Group before January 1, 2000 was equal to 9.5% of the facility purchase price.
After the first year, minimum rent escalates by the greater of 3% or the increase in
the Consumer Price Index, or CPI, with a maximum increase of 4% for the first two
annual anniversaries of the effective date of each lease and, for each successive
annual anniversary for the remaining term of each lease, by an amount equal to
increases, if any, in the CPI, 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 in Jena, Louisiana 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, 2004, is
approximately 3.75 years. 27




---



##### Table of Contents




    Community Education Centers Lease. On May 29, 2003, we acquired Delaney Hall. The
initial base rent was $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 will
increase 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. 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. We have leveraged and anticipate continuing 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 our status as a real estate investment trust, or REIT, under the Internal
Revenue Code. Our cash flows from operating activities are dependent on the continued leasing of our
properties, the rents that we are able to charge to our tenants, the ability of these tenants to
make their rental payments, our ability to renew our leases with our existing tenants as they
expire and our ability to re-lease our properties with other suitable tenants if our leases are not
renewed by our existing tenants. A principal long-term risk to our business is our dependence on
the viability of our tenants, The Geo Group and CEC. Any of the following could have a material
adverse impact on our cash flows from operating activities and income from operating activities:  
    We are subject to lease payment collection risks because our lease agreements are
for longer terms than those of the facility management services or operating agreements
held by and which generate revenue for The Geo Group and CEC. Only a governmental
agency that has contracted with The Geo Group and CEC may exercise a renewal option of
an existing management services or operating agreement or enter into a new management
services or operating agreement. A governmental agency may choose to terminate or not
renew an operating agreement or management services agreement. For example, the
operating agreement for the Jena Facility has been terminated. The non-renewal of a
facility management services or operating agreement and the inability to secure an
alternate agreement or source of inmates could materially and adversely affect The Geo
Groups or CECs financial condition and their respective ability to make lease
payments to us.
    The Geo Group and its subsidiary and CEC are currently the only parties with whom we
have lease agreements on our facilities. Accordingly, these parties account for 100% of
our lease agreement revenue and the failure of either one of them to meet their
respective obligations to us may have a material adverse effect upon our operations.
    The Geo Group is either the lessee or sub-lessee of 11 of the 12 facilities we own.
As of December 31, 2004, approximately 90% of our revenue, and our ability to make
distributions to our shareholders, will depend substantially upon The Geo Group making
rent payments and satisfying its obligations to us. Any failure or delay by The Geo
Group in making rent payments or otherwise complying with its obligations under these
leases may adversely affect our cash flows from operating activities and income from
operating activities and our ability to make anticipated distributions. Eight of our
leases with The Geo Group expire during April 2008. To the extent these leases are not
renewed by The Geo Group or re-leased to other suitable tenants on acceptable terms,
our total revenue and ability to make distributions to our shareholders will be
adversely affected. 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 28




---



##### Table of Contents



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
current 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 investment limitations as it deems
appropriate from time to time, including investment 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. Critical Accounting Policies and Estimates The preparation of our consolidated 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 our consolidated financial
statements and related notes. In preparing our consolidated 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, and 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) to our consolidated
financial statements included in Item 8 of this report. 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 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 and liabilities based on their
respective values in accordance with Statement of Financial Accounting Standards (SFAS) No. 141,
Business Combinations, which was effective July 1, 2001. The tangible cost of real estate
properties acquired is allocated between land, buildings and improvements, and machinery and
equipment based upon the relative fair value of each component at the 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. The intangible costs of real estate properties are
allocated to above or below market in-place leases and other lease origination costs. These
intangible costs are amortized over the remaining term of the corresponding leases. We are required
to make subjective evaluations of the estimated useful lives of our properties, which directly
impact 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 expected to be generated from 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. Changes in the
fair value of interest rate swaps, which are 29




---



##### Table of Contents



determined to be effective cash flow hedges, are recorded in accumulated other comprehensive income
or loss, which is a component of shareholders equity. Stock Options We account for stock-based compensation utilizing the intrinsic value method in accordance
with the provisions of Accounting Principles Board Opinion No. 25 and related interpretations.
Accordingly, no compensation cost has been recognized for our 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 Statement of
Financial Accounting Standards 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) to our consolidated financial
statements included in Item 8 of this report. FINANCIAL CONDITION Results of Operations On November 4, 2004, the Company completed the sale of the Pamlico Facility and Mountain View
Facility to the State of North Carolina, and using the net proceeds from the sale and a substantial
portion of the balance of the debt service fund, repaid all of the outstanding balance of the Bonds
at par which were issued in 2001 to finance these facilities. In July 2004, the Company received
written notice from the State of North Carolina of the exercise of its option to purchase the
Pamlico Facility and the Mountain View Facility, both of which were owned by a subsidiary of the
Company, and leased to the State of North Carolina. As
a result of the sale, certain amounts in our prior years consolidated financial statements have
been reclassified to reflect the discontinued operation presentation including reclassifying the
assets and liabilities associated with the Pamlico Facility and Mountain View Facility as held for
sale for prior periods, and reporting the results of operations associated with such facilities for
both current and prior periods as discontinued operations. The discontinued operations line item in
the consolidated statements of income includes rental income, interest income and the net gain on
the sale less depreciation expense recorded prior to the classification of the facilities as held
for sale, interest expense on the Bonds used to finance the facilities and general and
administrative expenses directly associated with both the Pamlico Facility and the Mountain View
Facility. We recognized a combined net gain on the sale of these facilities of approximately $4,969,000
for financial reporting purposes in the fourth quarter of 2004; however, future results of
operations and cash flows from operating activities will be negatively impacted because we will no
longer receive the monthly rental income after the date of the sale of the facilities. For
additional information, please see Note 4 (Discontinued Operations) to our consolidated financial
statements included in Item 8 of this report. 2004 Compared with 2003 For the twelve months ended December 31, 2004, rental revenues increased to $27,076,000 from
$25,658,000 for the twelve months ended December 31, 2003. The 6% increase in rental revenues
resulted primarily from the acquisition of Delaney Hall on May 29, 2003, which increased rental
revenue in 2004 by approximately $1,082,000. 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, 2004 increased to $5,795,000 from
$5,612,000 for the twelve months ended December 31, 2003. Depreciation associated with the Delaney
Hall Facility resulted in the 3% increase in depreciation from 2003 to 2004. General and administrative expenses for the twelve months ended December 31, 2004 increased
36% to $2,684,000 from $1,969,000 for the twelve months ended December 31, 2003. The increase in
general and administrative expenses was primarily due to an increase in professional fees of
$266,000, an increase in salaries and benefits of $225,000, an increase in insurance expense of
$74,000, and an increase in Board of Trustee fees of $174,000. 30




---



##### Table of Contents



Interest expense decreased to $1,130,000 for the twelve months ended December 31, 2004 from
$5,103,000 for the twelve months ended December 31, 2003. 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. Income from discontinued operations for the twelve months ended December 31, 2004 was
$6,175,000 compared to $718,000 for the same period in 2003. The increase is primarily due to a net
gain of $4,969,000 recognized in 2004 on the sale of the Mountain View Facility and Pamlico
Facility and a reduction in depreciation expense in 2004 as a result of the Pamlico Facility and
the Mountain View Facility no longer being depreciated during the period the facilities were
classified as held for sale, which was from July 2004 until the sale date in November 2004. 2003 Compared with 2002 For the twelve months ended December 31, 2003, rental revenues increased to $25,658,000 from
$23,366,000 for the twelve months ended December 31, 2002. The 10% increase in rental revenues
resulted primarily from the acquisition of Delaney Hall on May 29, 2003, which increased rental
revenue by $1,566,000. The balance of the increase was primarily due to rent escalations, based on
the consumer price index, on some of the remaining facilities of approximately $470,000 and a
one-time, cumulative non-recurring CPI rent escalation adjustment of approximately $256,000 on
certain of the facilities leased to The Geo Group. Depreciation for the twelve months ended December 31, 2003 increased to $5,612,000 from
$5,349,000 for the twelve months ended December 31, 2002. Depreciation associated with the Delaney
Hall Facility resulted in the 5% increase in depreciation from 2002 to 2003. General and administrative expenses for the twelve months ended December 31, 2003 increased
36% to $1,969,000 from $1,448,000 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 of
$183,000, an increase in insurance of $140,000, an increase in professional fees of $65,000 and an
increase in Board of Trustee fees of $71,000. Interest expense decreased to $5,103,000 for the twelve months ended December 31, 2003 from
$7,268,000 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. Income from discontinued operations for the year ended December 31, 2003 was $718,000 compared
to $753,000 for the same period in 2002. The decrease is primarily due to a decrease in interest
income. Liquidity and Capital Resources Our short-term liquidity requirements normally consist primarily of funds necessary to pay for
general and administrative expenses (including payroll and costs of legal, accounting and other
professionals), interest expense and scheduled principal payments on our outstanding debt, capital
expenditures incurred to facilitate the leasing of space, the expansion of existing facilities and
quarterly dividends and other distributions paid to our common shareholders. As a REIT, we are
required to distribute at least 90% of our taxable income to holders of our common shares on an
annual basis. Therefore, as a general matter, it is unlikely that we will retain any substantial
cash balances that could be used to meet our liquidity needs. Instead, we expect to meet our
short-term liquidity requirements generally through our working capital and net cash provided by
operating activities. We believe that our net cash provided by operating activities 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. We currently have an amended bank credit facility consisting of a $95 million secured
revolving credit facility. The proceeds of the amended bank credit facility may be used to finance
the construction and the acquisition of correctional and 31




---



##### Table of Contents



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 permits aggregate borrowings of up to 50% of the total value of the facilities, known as 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. As of December 31, 2004, the Company has no amounts drawn, and no interest rate
swap agreements in effect. 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, 2004. 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 50 basis points 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 may be 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 275 basis points at December
31, 2004, respectively. The Company is required to pay on a quarterly basis an unused fee under
the amended bank credit facility, which ranges from 35 to 50 basis points depending upon the ratio
of consolidated total liabilities to consolidated total assets, on the amount by which the
available borrowing capacity exceeds the amounts outstanding. The unused fee at December 31, 2004
was 35 basis points. 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. As of December 31, 2004, no
amounts were outstanding under the $95 million amended bank credit facility. As of December 31,
2004, we had $95 million of available borrowing capacity, including $7.5 million 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. However, The Geo Group continues to make rental
payments to us as required under the terms of the non-cancelable lease. The appraised value of the
Jena Facility is approximately seven percent of the total value of the facilities as calculated
above, and therefore, does not exceed 20% of the total value. As a result, the Jena Facility
continues 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. 32




---



##### Table of Contents



Our long-term liquidity requirements customarily consist primarily of funds necessary to pay
for the principal amount of our long-term debt as it matures and significant non-recurring capital
expenditures that may need to be made periodically at our properties if the properties are not
subject to a lease agreement, and the costs associated with acquisitions of properties as well as
the expansion of existing facilities. Historically, we have satisfied these long-term liquidity
requirements through what we believe to be the most advantageous source of capital available at the
time, which has included borrowing under our amended bank credit facility and by issuing equity or
debt securities in public or private transactions. We believe that these sources of capital will
continue to be available in the future to fund our long-term capital needs. 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. Our ability to incur
additional debt may be affected by a number of factors, including the terms and conditions of our
facility leases, the underlying operating and management services agreement between the government
entities and our lessees, our degree of leverage, the appraised value of our properties, the credit
quality of lessees, the value of our unencumbered assets, and borrowing restrictions imposed by
lenders. 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.
Subject to the effectiveness of this registration statement at the time of the offering, 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 effective 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. We currently have
approximately $167 million available for issuance under the shelf registration statement subject to
its effectiveness at the time of the offering. Net proceeds from the offering may be used by us to
acquire correctional properties, repay outstanding debt, and for general working capital purposes. Contractual Obligations and Contingent Liabilities and Commitments The following table aggregates our expected contractual obligations and commitments after
December 31, 2004: Payments due by periodLess than
    
    
    1-3
    
    
    4-5
    
    
    More than(In thousands)
    
    Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsDebt
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Operating lease
    
    $
    30
    
    
    $
    30
    
    
    $
    
    
    
    $
    
    
    
    $
    
 The operating lease in the table above is for our corporate office space which we lease at
annual rent of approximately $50,000 plus operating expenses. The term of our lease expires on July
31, 2005. We are currently reviewing various alternatives in connection with our corporate office
space including the renewal or extension of our existing lease. At December 31, 2004, we did not have any outstanding debt. Additionally, at December 31,
2004, 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. 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 33




---



##### Table of Contents



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, 2004, 2003 and 2002: (Amounts in thousands)
    
    2004
    
    
    2003
    
    
    2002Net income
    
    $
    23,670
    
    
    $
    13,739
    
    
    $
    10,128Real estate depreciation
    
    
    5,795
    
    
    
    5,612
    
    
    
    5,349Real estate depreciation included in discontinued operations
    
    
    964
    
    
    
    1,784
    
    
    
    1,784Gain on sale of facilities
    
    
    (4,969
    )
    
    
    
    
    
    
    Funds from operations
    
    $
    25,460
    
    
    $
    21,135
    
    
    $
    17,261
 
 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, (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 debt or the impact
interest rate movements will have on our 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 may from time to time enter into interest rate swaps and seek
long term financing. As of December 31, 2004, no funds were drawn on the amended bank credit
facility and, as such, we had no interest rate swaps in effect. 34




---



##### Table of Contents



Item 8.Financial Statements and Supplementary Data. Our consolidated financial statements for the year ended December 31, 2004 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. None. 
 Item 9A.Controls and Procedures. Disclosure Controls and Procedures.As of December 31, 2004, our principal executive officer
and principal financial officer have conducted an evaluation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934). These officers have concluded that, based on their evaluation, the design and operation of
these disclosure controls and procedures were effective as of December 31, 2004. Managements Report on Internal Control over Financial Reporting.Management of the Company is
responsible for establishing and maintaining adequate internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f)). The Companys internal control over financial reporting
is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Management assessed the effectiveness of the Companys internal control over financial
reporting as of December 31, 2004. In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control Integrated Framework.Based on managements assessment, management concluded that, as of
December 31, 2004, the Companys internal control over financial reporting is effective based on
those criteria. Managements assessment of the effectiveness of internal control over financial
reporting as of December 31, 2004, has been audited by Ernst & Young LLP, an independent registered
public accounting firm, as stated in their report which is included elsewhere herein. Changes in Internal Controls. There was no change in our internal control over financial
reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or
15d-15 under the Securities Exchange Act that occurred during the three months ended December 31,
2004 that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting. 
 Item 9B.Other Information None. 35




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm To the Shareholders
Correctional Properties Trust We have audited managements assessment included in managements report on internal control over
financial reporting that Correctional Properties Trust maintained effective internal control over
financial reporting as of December 31, 2004, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Correctional Properties Trusts management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the effectiveness of the companys internal
control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion. A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate. In our opinion, managements assessment that Correctional Properties Trust maintained effective
internal control over financial reporting as of December 31, 2004, is fairly stated, in all
material respects, based on the COSO criteria. Also, in our opinion, Correctional Properties Trust
maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2004, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Correctional Properties Trust and
subsidiaries as of December 31, 2004, and 2003, and the related consolidated statements of income,
shareholders equity and cash flows for each of the three years in the period ended December 31,
2004 and our report dated February 26, 2005 expressed an unqualified opinion thereon. /s/ ERNST & YOUNG LLP
Certified Public Accountants West Palm Beach, Florida
February 26, 2005 36




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm 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) and subsidiaries as of December 31, 2004 and
2003, and the related consolidated statements of income, shareholders equity and cash flows for
each of the three years in the period ended December 31, 2004. 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. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (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, 2004
and 2003, and the consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of Correctional Properties Trusts internal control over
financial reporting as of December 31, 2004, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 26, 2005 expressed an unqualified opinion thereon. /s/ ERNST & YOUNG LLP
Certified Public Accountants West Palm Beach, Florida
February 26, 2005 37




---



##### Table of Contents



CORRECTIONAL PROPERTIES TRUST 
 CONSOLIDATED BALANCE SHEETS December 31, 2004 and December 31, 2003
 (Amounts in thousands, except share and per share amounts)
    
    2004
    
    
    2003AssetsReal estate properties, at cost:Correctional and detention facilities
    
    $
    243,747
    
    
    $
    243,747Lessaccumulated depreciation
    
    
    (34,221
    )
    
    
    (28,426
    )Net real estate properties
    
    
    209,526
    
    
    
    215,321Assets held for sale
    
    
    
    
    
    
    54,355Cash and cash equivalents
    
    
    5,004
    
    
    
    668Deferred financing costs, net
    
    
    1,345
    
    
    
    2,045Other assets
    
    
    2,441
    
    
    
    2,239Total assets
    
    $
    218,316
    
    
    $
    274,628Liabilities and shareholders equityLiabilitiesAccounts payable and accrued expenses
    
    $
    3,243
    
    
    $
    1,261Liabilities associated with assets held for sale
    
    
    
    
    
    
    56,819Revolving line of credit
    
    
    
    
    
    
    3,800Total liabilities
    
    
    3,243
    
    
    
    61,880Commitments and contingenciesShareholders equityPreferred shares, $.001 par value; 50,000,000 shares authorized;
none outstanding
    
    
    
    
    
    
    Common shares, $.001 par value; 150,000,000 shares
authorized; 10,992,750 and 10,967,750 shares
issued and outstanding, respectively
    
    
    11
    
    
    
    11Capital in excess of par value
    
    
    220,709
    
    
    
    220,268Distributions in excess of accumulated earnings
    
    
    (5,625
    )
    
    
    (7,531
    )Unearned compensation
    
    
    (22
    )
    
    
    Total shareholders equity
    
    
    215,073
    
    
    
    212,748Total liabilities and shareholders equity
    
    $
    218,316
    
    
    $
    274,628
 The accompanying notes to consolidated financial statements are an integral part of these
statements. 38




---



##### Table of Contents



CORRECTIONAL PROPERTIES TRUST 
 CONSOLIDATED STATEMENTS OF INCOMEYears ended December 31, 2004, 2003 and 2002 (Amounts in thousands, except per share amounts)
    
    2004
    
    
    2003
    
    
    2002RevenueRental
    
    $
    27,076
    
    
    $
    25,658
    
    
    $
    23,366Interest
    
    
    28
    
    
    
    47
    
    
    
    7427,104
    
    
    
    25,705
    
    
    
    23,440ExpensesDepreciation
    
    
    5,795
    
    
    
    5,612
    
    
    
    5,349General and administrative
    
    
    2,684
    
    
    
    1,969
    
    
    
    1,448Interest
    
    
    1,130
    
    
    
    5,103
    
    
    
    7,2689,609
    
    
    
    12,684
    
    
    
    14,065Income from continuing operations
    
    
    17,495
    
    
    
    13,021
    
    
    
    9,375Discontinued operationsIncome from operations of discontinued facilities (including
net gain on sale of $4,969 in 2004)
    
    
    6,175
    
    
    
    718
    
    
    
    753Net income
    
    $
    23,670
    
    
    $
    13,739
    
    
    $
    10,128Basic net income per common share:Continuing operations
    
    $
    1.60
    
    
    $
    1.44
    
    
    $
    1.30Discontinued operations
    
    
    .56
    
    
    
    .08
    
    
    
    .11Total
    
    $
    2.16
    
    
    $
    1.52
    
    
    $
    1.41Diluted net income per common share:Continuing operations
    
    $
    1.58
    
    
    $
    1.42
    
    
    $
    1.29Discontinued operations
    
    
    .56
    
    
    
    .08
    
    
    
    .11Total
    
    $
    2.14
    
    
    $
    1.50
    
    
    $
    1.40Weighted average number of common shares and common share
equivalents outstanding:Basic
    
    
    10,980
    
    
    
    9,048
    
    
    
    7,188Diluted
    
    
    11,084
    
    
    
    9,144
    
    
    
    7,259Distributions declared per common share outstanding
    
    $
    1.98
    
    
    $
    1.72
    
    
    $
    1.60
 The accompanying notes to consolidated financial statements are an integral part of these
statements. 39




---



##### Table of Contents



CORRECTIONAL PROPERTIES TRUST 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITYYears ended December 31, 2004, 2003 and 2002 (Amounts in thousands, except per share amounts) Distributions
    
    
    AccumulatedCommon shares
    
    
    Capital in
    
    
    in excess of
    
    
    otherPar
    
    
    excess of
    
    
    accumulated
    
    
    comprehensive
    
    
    UnearnedShares
    
    
    Amount
    
    
    par value
    
    
    earnings
    
    
    loss
    
    
    Compensation
    
    
    TotalBalance, 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
    )
    
    
    
    
    
    
    
    
    
    
    212,748Exercise of stock options
    
    
    23
    
    
    
    
    
    
    
    366
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    366Issuance of restricted stock
    
    
    2
    
    
    
    
    
    
    
    75
    
    
    
    
    
    
    
    
    
    
    
    (75
    )
    
    
    Recognition of unearned compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53
    
    
    
    53Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,670
    
    
    
    
    
    
    
    
    
    
    
    23,670Distributions to shareholders ($1.98 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,764
    )
    
    
    
    
    
    
    
    
    
    
    (21,764
    )Balance, December 31, 2004
    
    
    10,993
    
    
    $
    11
    
    
    $
    220,709
    
    
    $
    (5,625
    )
    
    $
    
    
    
    $
    (22
    )
    
    $
    215,073
 The accompanying notes to consolidated financial statements are an integral part of these
statements. 40




---



##### Table of Contents



CORRECTIONAL PROPERTIES TRUST 
 CONSOLIDATED STATEMENTS OF CASH FLOWSYears ended December 31, 2004, 2003 and 2002 (Amounts in thousands)
    
    2004
    
    
    2003
    
    
    2002Cash flows from operating activitiesIncome from continuing operations
    
    $
    17,495
    
    
    $
    13,021
    
    
    $
    9,375Adjustments to reconcile income from continuing operations to net
cash provided by operating activities of continuing operations:Depreciation of real estate properties
    
    
    5,795
    
    
    
    5,612
    
    
    
    5,349Amortization of deferred financing costs
    
    
    709
    
    
    
    774
    
    
    
    765Stock based compensation
    
    
    53
    
    
    
    216
    
    
    
    Changes in operating assets and liabilities net of effect of
discontinued operations:Other assets
    
    
    (202
    )
    
    
    (20
    )
    
    
    (155
    )Accounts payable and accrued expenses
    
    
    1
    
    
    
    502
    
    
    
    (20
    )Net cash provided by operating activities of continuing
operations
    
    
    23,851
    
    
    
    20,105
    
    
    
    15,314Income from discontinued operations
    
    
    6,175
    
    
    
    718
    
    
    
    753Adjustments to reconcile income from discontinued operations to net
cash provided by discontinued operations:Depreciation of real estate properties
    
    
    964
    
    
    
    1,784
    
    
    
    1,784Amortization of deferred financing costs
    
    
    59
    
    
    
    70
    
    
    
    70Gain on sale of real estate properties
    
    
    (4,969
    )
    
    
    
    
    
    
    Changes in net assets held for sale
    
    
    (125
    )
    
    
    (371
    )
    
    
    (573
    )Changes in liabilities associated with assets held for sale
    
    
    (964
    )
    
    
    (11
    )
    
    
    (12
    )Net cash provided by operating activities of
discontinued operations
    
    
    1,140
    
    
    
    2,190
    
    
    
    2,022Net cash provided by operating activities
    
    
    24,991
    
    
    
    22,295
    
    
    
    17,336Cash flows from investing activitiesNet proceeds from the sale of real estate properties
    
    
    51,261
    
    
    
    
    
    
    
    Acquisition of real estate properties
    
    
    
    
    
    
    (21,308
    )
    
    
    Net cash provided by (used in) investing activities
    
    
    51,261
    
    
    
    (21,308
    )
    
    
    Cash flows from financing activitiesDistributions to shareholders
    
    
    (19,784
    )
    
    
    (16,036
    )
    
    
    (11,491
    )Proceeds from exercise of stock options
    
    
    366
    
    
    
    6,863
    
    
    
    3,832Proceeds from common stock offering (net of $4,984 of offering costs)
    
    
    
    
    
    
    77,891
    
    
    
    Net repayments under revolving line of credit
    
    
    (3,800
    )
    
    
    (70,200
    )
    
    
    (6,000
    )Repayments on bonds
    
    
    (55,855
    )
    
    
    (925
    )
    
    
    (695
    )Restricted cash
    
    
    7,166
    
    
    
    (12
    )
    
    
    (32
    )Deferred financing costs
    
    
    (9
    )
    
    
    (2,233
    )
    
    
    (46
    )Net cash used in financing activities
    
    
    (71,916
    )
    
    
    (4,652
    )
    
    
    (14,432
    )Net increase (decrease) in cash and cash equivalents
    
    
    4,336
    
    
    
    (3,665
    )
    
    
    2,904Cash and cash equivalents, beginning of year
    
    
    668
    
    
    
    4,333
    
    
    
    1,429Cash and cash equivalents, end of year
    
    $
    5,004
    
    
    $
    668
    
    
    $
    4,333Supplemental disclosure:Cash paid for interest
    
    $
    4,673
    
    
    $
    8,525
    
    
    $
    10,574
 The accompanying notes to consolidated financial statements are an integral part of these
statements. 41




---



##### Table of Contents



CORRECTIONAL PROPERTIES TRUST 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2004
 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 owners and
operators and government entities. At December 31, 2004, the Company owned twelve facilities of
which eleven were leased to The Geo Group, Inc. (together with its subsidiaries, GEO) formerly
known as Wackenhut Corrections Corporation, 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




---



##### 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 the Jena Facility, and as a result this facility is 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 was leased
to the State of North Carolina, and was 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 operated the facility. The initial lease on this facility, which became
effective December 1998, included cash rental payments of $2,768,700 during the first year of the
lease, payable monthly in arrears. On each anniversary date, the rental payment escalated in
accordance with increases in the Consumer Price Index (CPI), with a minimum increase of 3.5%, and a
maximum increase of 4%. The initial term of the lease was ten years, with two, ten-year renewals
at the State of North Carolinas option. The lessee had the option to acquire the facility in
December 2004, for $26,215,800. The lessee exercised its option in July 2004 and purchased the
facility from the Company in November 2004 (See Note 4). In an effort to minimize the costs and
expenses associated with the selling of the Mountain View Facility and the Pamlico Facility, a
single closing date was agreed to for the transactions. The closing date of November 4, 2004 was
selected as it represented the approximate midpoint of the dates upon which each option became
exercisable. 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). This refinancing included repayment of the proceeds drawn
under the Amended Bank Credit Facility (See Note 3) to purchase the Mountain View Facility. As a
result of the sale of the Mountain View Facility and Pamlico Facility, the Company repaid all of
the outstanding balance of the Bonds at par in November 2004 (See Note 4). 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 was leased to the State of
North Carolina, and was 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 operated 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 escalated in accordance with increases in the CPI, with a minimum increase of 3.5%, and a
maximum increase of 4%. The initial term of the lease was ten years, with two, ten-year renewals
at the State of North Carolinas option. The Company acquired the Pamlico Facility using a portion
of the proceeds from the issuance of the Bonds. The lessee had the option to acquire the facility
in August 2004, for $25,228,900. The lessee exercised its option in July 2004 and purchased the
facility from the Company in November 2004 (See Note 4). 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 was 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 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. 43




---



##### Table of Contents



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. Deferred Financing Costs Deferred financing costs, which are the costs of obtaining the Amended Bank Credit Facility,
are being amortized on a straight-line basis over the term of the debt. This method approximates
the effective interest rate method. Accumulated amortization of deferred financing costs at
December 31, 2004 and 2003 was approximately $779,000 and $70,000, 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 and liabilities based on their
respective values in accordance with Statement of Financial Accounting Standards (SFAS) No. 141,
Business Combinations, which was effective July 1, 2001. The tangible cost of real estate
properties acquired is allocated between land, buildings and improvements, and machinery and
equipment based upon the relative fair value of each component at the 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. The intangible costs of real estate properties are
allocated to above or below market in-place leases and other lease origination costs. These
intangible costs are amortized over the remaining term of the corresponding leases. Components of these real estate investments at cost are as follows at December 31, 2004 and
2003 (in thousands): Land and land improvements
    
    $
    11,942Buildings and improvements
    
    
    231,805$
    243,747
 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 expected to be generated from 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, 2004 is as follows
(in thousands): 44




---



##### Table of Contents



Fiscal year
    
    Annual Rent2005
    
    $
    27,2732006
    
    
    27,4282007
    
    
    27,5882008
    
    
    19,2582009
    
    
    5,586Thereafter
    
    
    9,947$
    117,080
 For the year December 31, 2004, the revenue generated from GEO, the State of North Carolina
and CEC represented 75%, 17% and 8%, respectively, of total rental revenue. 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 ended December 31, 2002, the revenue
generated from GEO and the State of North Carolina represented 78% and 22%, 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. Reconciliation Between Net Income and Estimated Taxable Income (in thousands) (Unaudited): For the years ended December 31,2004
    
    
    2003
    
    
    2002Net income
    
    $
    23,670
    
    
    $
    13,739
    
    
    $
    10,128Straight-line rent adjustments
    
    
    (335
    )
    
    
    (511
    )
    
    
    (596
    )Net tax gain on sale of real estate in excess of
GAAP gain on sale
    
    
    2,224
    
    
    
    
    
    
    
    Excess of Tax depreciation over GAAP
depreciation
    
    
    (1,436
    )
    
    
    (1,739
    )
    
    
    (2,010
    )Tax stock option compensation expense in
excess of GAAP
    
    
    (138
    )
    
    
    (851
    )
    
    
    (322
    )Other adjustments
    
    
    (72
    )
    
    
    152
    
    
    
    (58
    )Taxable income
    
    
    23,913
    
    
    
    10,790
    
    
    
    7,142Less capital gains
    
    
    (8,044
    )
    
    
    
    
    
    
    Adjusted taxable income subject
to 90% dividend requirement
    
    $
    15,869
    
    
    $
    10,790
    
    
    $
    7,142
 45




---



##### Table of Contents



Reconciliation Between Cash Distribution and Distributions Paid Deduction (in thousands)
(Unaudited): For the years ended December 31,2004
    
    
    2003
    
    
    2002Cash dividends paid
    
    $
    19,784
    
    
    $
    16,036
    
    
    $
    11,491Less: Dividends on deferred shares and non-
vested restricted stock
    
    
    (17
    )
    
    
    
    
    
    
    Less: Dividends treated as return of capital
    
    
    
    
    
    
    (5,246
    )
    
    
    (4,319
    )Plus: Dividends paid in subsequent year treated
as paid in current year
    
    
    1,978
    
    
    
    
    
    
    
    Plus: Dividends designated from following year
    
    
    2,168
    
    
    
    
    
    
    
    Dividends paid deduction
    
    $
    23,913
    
    
    $
    10,790
    
    
    $
    7,172
 Characterization of Distributions Per Share (Unaudited): For the years ended December 31,2004
    
    
    2003
    
    
    2002$
    
    
    %
    
    
    $
    
    
    %
    
    
    $
    
    
    %Ordinary income
    
    $
    1.2474
    
    
    
    63.0
    %
    
    $
    1.12144
    
    
    
    65.2
    %
    
    $
    .9984
    
    
    
    62.4
    %Capital gains
    
    
    .7326
    
    
    
    37.0
    %
    
    
    
    
    
    
    0.00
    %
    
    
    
    
    
    
    0.00
    %Return of capital
    
    
    
    
    
    
    0.00
    %
    
    
    .59856
    
    
    
    34.8
    %
    
    
    .6016
    
    
    
    37.6
    %Total dividend distributions per share
    
    $
    1.98
    
    
    
    100
    %
    
    $
    1.72
    
    
    
    100
    %
    
    $
    1.60
    
    
    
    100
    %
 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 approximates fair value. 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. From time to time, 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 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
$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, 2004 and 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 customarily obtain collateral in connection
with its derivative financial instruments. 46




---



##### Table of Contents



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. 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) 2004
    
    
    2003
    
    
    2002Net income, as reported
    
    $
    23,670
    
    
    $
    13,739
    
    
    $
    10,128Add: stock-based compensation expense included in net income
as reported
    
    
    53
    
    
    
    
    
    
    
    Deduct: stock-based compensation expense determined under the
fair value based method for all awards
    
    
    (109
    )
    
    
    (125
    )
    
    
    (89
    )Pro forma net income
    
    $
    23,614
    
    
    $
    13,614
    
    
    $
    10,039Net income per common shareBasic, as reported
    
    $
    2.16
    
    
    $
    1.52
    
    
    $
    1.41Basic, pro forma
    
    $
    2.15
    
    
    $
    1.50
    
    
    $
    1.40Diluted, as reported
    
    $
    2.14
    
    
    $
    1.50
    
    
    $
    1.40Diluted, pro forma
    
    $
    2.13
    
    
    $
    1.49
    
    
    $
    1.38
 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 31,2004
    
    
    2003
    
    
    2002Net income
    
    $
    23,670
    
    
    $
    13,739
    
    
    $
    10,128Unrealized gain (loss) on derivative instruments
    
    
    
    
    
    
    48
    
    
    
    (1,897
    )Losses reclassified into earnings from other comprehensive loss
    
    
    
    
    
    
    2,571
    
    
    
    3,015Comprehensive income
    
    $
    23,670
    
    
    $
    16,358
    
    
    $
    11,246
 Recent Accounting Pronouncements On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement
No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123,
Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting
for Stock Issued to Employees, and amends FASB Statement No. 47




---



##### Table of Contents



95,
Statement of Cash Flows. Generally, the approach in Statement
123(R) is similar to the approach
described in Statement 123. However, Statement 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the income statement
based on their fair values. Pro forma disclosure is no longer an alternative. Statement 123(R) must be adopted no later than July 1, 2005. Early adoption is permitted in
periods in which financial statements have not yet been issued. The Company expects to adopt
Statement 123(R) on July 1, 2005. Statement 123(R) permits public companies to adopt its requirements using one of two methods:  1)
    A modified prospective method in which compensation cost is recognized beginning with
the effective date (a) based on the requirements of Statement 123(R) for all share-based
payments granted after the effective date and (b) based on the requirements of Statement
123 for all awards granted to employees prior to the effective date of Statement 123(R)
that remain unvested on the effective date.2)
    A modified retrospective method which includes the requirements of the modified
prospective method described above, but also permits entities to restate based on the
amounts previously recognized under Statement 123 for purposes of pro forma disclosures
either (a) all prior periods presented or (b) prior interim periods of the year of
adoption. The Company plans to adopt Statement 123 using the modified prospective method. As permitted
by Statement 123, the Company currently accounts for share-based payments to employees using the
intrinsic value method consistent with APB Opinion No. 25 and, as such, generally recognizes no
compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)s fair
value method may have a material impact on our results of operations, although it will have no
impact on our overall financial position. The impact of adoption of Statement 123(R) cannot be
predicted at this time because it will depend on levels of share-based payments granted in the
future. However, had the Company adopted Statement 123(R) in prior periods, the impact of that
standard would have approximated the impact of Statement 123 as described in the disclosure of pro
forma net income and earnings per share in Note 1 to the consolidated financial statements. 3. AMENDED BANK CREDIT FACILITY On November 25, 2003, the Company entered into 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 currently secured by the Companys facilities other than
the Queens Facility, and permits aggregate borrowings of up to 50% of the lesser of the aggregate
of the historical cost of the 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 50 basis points and (ii) the Prime Rate plus (b) the Base Rate
Applicable Margin, which ranges from 0 to 75 basis points depending 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 depending upon the
ratio of consolidated total liabilities to consolidated total assets. The interest period on
Eurodollar rate loans may be 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 48




---



##### Table of Contents



Credit Facility were 0 and 275 basis points at December 31, 2004, respectively. The Company is
required to pay on a quarterly basis an unused fee under the Amended Bank Credit Facility, which
ranges from 35 to 50 basis points depending upon the ratio of consolidated total liabilities to
consolidated total assets, on the amount by which the available borrowing capacity exceeds the
amounts outstanding. The unused fee at December 31, 2004 was 35 basis points. 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, 2004, no amounts were outstanding under the $95 million Amended Bank Credit
Facility. As of December 31, 2004, the Company had $95 million of available borrowing capacity
under its Amended Bank Credit Facility, including $7.5 million 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.
However, 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. However, GEO continues to make rental payments to the
Company as required under the terms of the non-cancelable lease. The appraised value of this
facility is approximately seven percent of the Total Value, and therefore, does not exceed 20% of
the Total Value. As a result, the Jena Facility continues to be included in the Pledge Pool. 4. DISCONTINUED OPERATIONS After receiving written notice in July 2004 from the State of North Carolina of the exercise
of its option to purchase the Pamlico Facility and the Mountain View Facility from the Company per
the terms of the lease agreements, the Company completed the sale of the facilities to the State of
North Carolina in November 2004. Per the terms of the lease agreements, the Company sold the
Pamlico Facility and Mountain View Facility to the State of North Carolina for $25,228,900 and
$26,215,800, respectively. The Company recognized a combined net gain on the sale of approximately
$4,969,000 in 2004. As
a result of the sale, certain amounts in our prior years consolidated financial statements have
been reclassified to reflect the discontinued operation presentation including reclassifying the
assets and liabilities associated with the Pamlico Facility and Mountain View Facility as held for
sale for prior periods, and reporting the results of operations associated with such facilities for
both current and prior periods as discontinued operations. The discontinued operations line item in
the consolidated statements of income includes rental income, interest income and the net gain on
the sale less depreciation expense recorded prior to the classification of the facilities as held
for sale, interest expense on the Bonds used to finance the facilities and general and
administrative expenses directly associated with both the Pamlico Facility and the Mountain View
Facility. The Company used the net proceeds from the sale and a substantial portion of the balance of
the debt service fund and repaid all of the outstanding balance of the Bonds at par which were
issued in 2001 to finance these facilities. As a result, there are no Bonds outstanding as of
November 4, 2004. As of December 31, 2003, the aggregate net carrying value of the Pamlico Facility and Mountain
View Facility assets were approximately $54,355,000, which included the debt service fund and other
restricted cash held by the trustee for the Bonds of approximately $7,166,000, with related
liabilities of approximately $56,819,000, which included Bonds outstanding of $55,855,000. The
aggregate rental revenues from these facilities for the year ended December 31, 2004, 2003 and 2002
were approximately $5,598,000, $6,651,000 and $6,651,000, respectively. 49




---



##### Table of Contents



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 have been granted at an exercise price equal to
the fair market value at date of grant and have had a term of ten years from the date of grant. The
options granted to officers and employees have vested 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 have vested 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, 2004, 2003 and 2002, respectively, is presented below: 2004
    
    
    2003
    
    
    2002Weighted-
    
    
    
    
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding at beginning of year
    
    
    298,500
    
    
    $
    18.33
    
    
    
    623,100
    
    
    $
    18.32
    
    
    
    761,750
    
    
    $
    18.44Options granted
    
    
    
    
    
    
    
    
    
    
    56,000
    
    
    $
    20.93
    
    
    
    66,000
    
    
    $
    18.13Options exercised
    
    
    (22,500
    )
    
    $
    16.20
    
    
    
    (368,100
    )
    
    $
    18.65
    
    
    
    (204,650
    )
    
    $
    18.73Options forfeited
    
    
    
    
    
    
    
    
    
    
    (12,500
    )
    
    $
    20.00
    
    
    
    
    
    
    
    Outstanding at end of year
    
    
    276,000
    
    
    $
    18.50
    
    
    
    298,500
    
    
    $
    18.33
    
    
    
    623,100
    
    
    $
    18.32Exercisable at end of year
    
    
    242,500
    
    
    $
    18.31
    
    
    
    233,250
    
    
    $
    18.27
    
    
    
    559,850
    
    
    $
    18.65
 Significant option groups outstanding at December 31, 2004, 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
    
    
    95,000
    
    
    $
    20.00
    
    
    
    95,000
    
    
    $
    20.00
    
    
    3.3 years1/21/99
    
    
    36,000
    
    
    $
    17.31
    
    
    
    36,000
    
    
    $
    17.31
    
    
    4.1 years4/25/00
    
    
    12,000
    
    
    $
    11.19
    
    
    
    12,000
    
    
    $
    11.19
    
    
    5.3 years1/17/01
    
    
    12,000
    
    
    $
    11.00
    
    
    
    12,000
    
    
    $
    11.00
    
    
    6.0 years5/29/01
    
    
    5,000
    
    
    $
    12.62
    
    
    
    5,000
    
    
    $
    12.62
    
    
    6.4 years1/23/02
    
    
    62,000
    
    
    $
    18.13
    
    
    
    49,500
    
    
    $
    18.13
    
    
    7.1 years1/23/03
    
    
    54,000
    
    
    $
    20.93
    
    
    
    33,000
    
    
    $
    20.93
    
    
    8.1 years276,000
    
    
    $
    18.50
    
    
    
    242,500
    
    
    $
    18.31
 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. During 2004, 2,500 restricted stock awards were granted with a value of $30.18 each. The value
of the restricted stock awards is recognized as compensation expense over the vesting period. The
employee recipients of the restricted stock awards are entitled to receive dividends on all the
restricted stock awards whether vested or not. 50




---



##### Table of Contents



As of December 31, 2004, the Company had options with respect to an aggregate of 146,250
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 did not grant any stock options in 2004. 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
    
    
    2002Weighted average fair value of options granted
    
    $
    2.81
    
    
    $
    2.14Risk-free interest rate
    
    
    4.00
    %
    
    
    5.00
    %Expected life (years)
    
    
    8
    
    
    
    8Expected volatility
    
    
    32.2
    %
    
    
    32.5
    %Quarterly dividend rate
    
    
    7.6
    %
    
    
    8.8
    %
 6. EARNINGS PER SHARE Basic earnings per share is computed by dividing income from continuing operations and income
from operations of discontinued facilities by the weighted average number of common shares
outstanding during the year. Diluted earnings per share is computed by dividing income from
continuing operations and income from operations of discontinued facilities 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 31,2004
    
    
    2003
    
    
    2002Income from continuing operations
    
    $
    17,495
    
    
    $
    13,021
    
    
    $
    9,375Weighted average sharesbasic
    
    
    10,980
    
    
    
    9,048
    
    
    
    7,188Per sharebasic
    
    $
    1.60
    
    
    $
    1.44
    
    
    $
    1.30Effect of dilutive stock options
    
    
    104
    
    
    
    96
    
    
    
    71Weighted average sharesdiluted
    
    
    11,084
    
    
    
    9,144
    
    
    
    7,259Per sharediluted
    
    $
    1.58
    
    
    $
    1.42
    
    
    $
    1.29Income from operations of discontinued facilities
    
    $
    6,175
    
    
    $
    718
    
    
    $
    753Weighted average sharesbasic
    
    
    10,980
    
    
    
    9,048
    
    
    
    7,188Per sharebasic
    
    $
    .56
    
    
    $
    .08
    
    
    $
    .11Effect of dilutive stock options
    
    
    104
    
    
    
    96
    
    
    
    71Weighted average sharesdiluted
    
    
    11,084
    
    
    
    9,144
    
    
    
    7,259Per sharediluted
    
    $
    .56
    
    
    $
    .08
    
    
    $
    .11Net income
    
    $
    23,670
    
    
    $
    13,739
    
    
    $
    10,128Weighted average sharesbasic
    
    
    10,980
    
    
    
    9,048
    
    
    
    7,188Per sharebasic
    
    $
    2.16
    
    
    $
    1.52
    
    
    $
    1.41Effect of dilutive stock options
    
    
    104
    
    
    
    96
    
    
    
    71Weighted average sharesdiluted
    
    
    11,084
    
    
    
    9,144
    
    
    
    7,259Per sharediluted
    
    $
    2.14
    
    
    $
    1.50
    
    
    $
    1.40
 As of December 31, 2004, 2003 and 2002, all outstanding options to purchase shares of the
Companys stock were included in the computation of diluted EPS. 51




---



##### Table of Contents



7. COMMITMENTS AND CONTINGENCIES Employment Agreements In 2004, the Company entered into employment agreements with the Chief Executive Officer and
the Chief Financial Officer. The employment agreements expire on April 30, 2009, unless terminated
sooner in accordance with the terms of the agreements. Legal Proceedings The nature of the Companys business may result in claims for damages arising from the conduct
of its employees, lessees 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 at an
annual rent of approximately $50,000 plus operating expenses. Rent expense for the years ended
December 31, 2004, 2003 and 2002 was $50,000, $45,000 and $43,000, respectively. The minimum
remaining annual rent commitment under this obligation is $30,000 plus operating expenses. 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,
subject to IRS limitations. 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, 2004,
2003 and 2002, the Company incurred administrative costs of approximately $1,800, $1,800 and $1,000
respectively, in connection with the 401(k) Plan. 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 the
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. Pursuant to 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 to reverse the previously 52




---



##### Table of Contents



recognized pension expense of $260,000 in 2003. For the years ended December 31, 2003 and 2002, the
Company recorded pension expense of approximately $85,000 and $75,000, 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
    
    
    Quarter2004Net real estate properties
    
    $
    213,873
    
    
    $
    212,424
    
    
    $
    210,975
    
    
    $
    209,526Total assets
    
    
    272,435
    
    
    
    271,509
    
    
    
    271,436
    
    
    
    218,316Revenue
    
    
    6,695
    
    
    
    6,768
    
    
    
    6,804
    
    
    
    6,837Net income
    
    
    4,511
    
    
    
    4,585
    
    
    
    5,050
    
    
    
    9,524Net income per share, basic
    
    
    0.41
    
    
    
    0.42
    
    
    
    0.46
    
    
    
    0.87Net income per share, diluted
    
    
    0.41
    
    
    
    0.41
    
    
    
    0.46
    
    
    
    0.86Cash distribution per share
    
    
    0.45
    
    
    
    0.45
    
    
    
    0.45
    
    
    
    0.632003Net real estate properties
    
    $
    198,289
    
    
    $
    218,219
    
    
    $
    216,770
    
    
    $
    215,321Total assets
    
    
    260,053
    
    
    
    279,555
    
    
    
    277,790
    
    
    
    274,628Revenue
    
    
    5,917
    
    
    
    6,217
    
    
    
    6,662
    
    
    
    6,909Net income
    
    
    2,628
    
    
    
    2,827
    
    
    
    3,432
    
    
    
    4,852Net income per share, basic
    
    
    0.36
    
    
    
    0.37
    
    
    
    0.34
    
    
    
    0.44Net income per share, diluted
    
    
    0.35
    
    
    
    0.37
    
    
    
    0.33
    
    
    
    0.44Cash distribution per share
    
    
    0.40
    
    
    
    0.42
    
    
    
    0.45
    
    
    
    0.45
 Certain amounts in the selected quarterly financial data for the first and second quarters in
2004 and each of the quarters in 2003 have been reclassified from that which was reported in the
respective Form 10-Qs as the result of the classification of the Mountain View Facility and the
Pamlico Facility as held for sale effective in the third quarter of 2004. As a result, the net real
estate carrying value of the Mountain View Facility and the Pamlico Facility, which was $43,927,000
at June 30, 2004, $44,373,000 at March 31, 2004, $44,819,000 at December 31, 2003, $45,265,000 at
September 30, 2003, $45,711,000 at June 30, 2003 and $46,157,000 at March 31, 2003, was
reclassified from net real estate properties into asset held for sale, and $1,663,000 for each of
the quarters was reclassified from rental revenue to income from operations of discontinued
facilities as compared to what was reported in the respective Form 10-Qs. The reclassification was
for financial statement presentation purposes only, and does not affect net income or cash flows
for each of the quarters. 53




---



##### 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 2005 Annual Meeting of Shareholders and is
incorporated herein by reference. 
 PART IV 
 Item 15. Exhibits and Financial Statement Schedules.  (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 Registered Public Accounting Firm  Ernst & Young LLP 
 Consolidated Balance Sheets at December 31, 2004 and December 31, 2003 
 Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002 
 Consolidated Statements of Shareholders Equity for years ended December 31, 2004, 2003 and 2002 
 Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002 
 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, 2004(3)
    See Exhibit Index included elsewhere herein. 54




---



##### 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 16, 2005
    CORRECTIONAL PROPERTIES TRUST
(Registrant)By:
    /s/ Charles R. JonesCharles R. JonesChief Executive Officer and
President 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 16, 2005/s/ CHARLES R. JONES

Charles R. Jones
    
    Trustee, Chief Executive Officer
and President (Principal Executive Officer)
    
    March 16, 2005/s/ Richard R. Wackenhut

Richard R. Wackenhut
    
    Vice-Chairman of the Board
    
    March 16, 2005/s/ Anthony P. Travisono

Anthony P. Travisono
    
    Trustee
    
    March 16, 2005/s/ Clarence E. Anthony

Clarence E. Anthony
    
    Trustee
    
    March 16, 2005/s/ James D. Motta

James D. Motta
    
    Trustee
    
    March 16, 2005/s/ Donna Arduin

Donna Arduin
    
    Trustee
    
    March 16, 2005/s/ David J. Obernesser

David J. Obernesser
    
    Senior Vice President, Chief Financial Officer,
Secretary and  Treasurer (Principal Financial Officer
and Accounting Officer)
    
    March 16, 2005
 55




---



##### 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)




---



##### 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)+10.21
    
    Employment Agreement dated October 28, 2004 by and between Correctional Properties Trust and
Charles R. Jones (14)+10.22
    
    Employment Agreement dated October 28, 2004 by and between Correctional Properties Trust and
David J. Obernesser (14)+21.1
    
    List of Subsidiaries of Correctional Properties Trust (4)23.1
    
    Consent of Ernst & Young LLP (15)31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (15)31.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (15)




---



##### Table of Contents



Number
    
    Description of Exhibits32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (15)32.2
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (15)
  +
    Management contract or compensatory plan or arrangement.




---



##### Table of Contents



(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)
    Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended
December 31, 2003 filed on March 15, 2004.(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.(14)
    Incorporated by reference to Registrants Form 8-K filed with the Commission on November 2,
2004.(15)
    Filed here with this Annual Report on Form 10-K for the fiscal year ended December 31, 2004.




---



##### Table of Contents



Correctional Properties Trust
Schedule III - Real Estate and Accumulated Deprecation as of December 31, 2004
(dollars in thousands) Costs CapitalizedSubsequent to
    
    
    Gross Amount Carried atInitial Cost to Company
    
    
    Acquisition
    
    
    Close of Period 12/31/2004Date ofEncumbrances
    
    
    
    
    
    Building and
    
    
    
    
    
    
    Building and
    
    
    
    
    
    
    Building and
    
    
    
    
    
    
    Accumulated
    
    
    Construction/
    
    
    Date
    
    
    DepreciableDescription
    
    Location
    
    at 12/31/2004
    
    Land
    
    
    Improvements
    
    
    Land
    
    
    Improvements
    
    
    Land
    
    
    Improvements
    
    
    Total
    
    
    Depreciation
    
    
    Renovation
    
    
    Acquired
    
    
    Lives1
    
    Aurora Facility
    
    Aurora, CO
    
    (1)
    
    $
    669
    
    
    $
    7,160
    
    
    $
    
    
    
    $
    
    
    
    $
    669
    
    
    $
    7,160
    
    
    $
    7,829
    
    
    $
    (1,198
    )
    
    
    1987
    
    
    
    4/28/1998
    
    
    
    402
    
    McFarland Facility
    
    McFarland, CA
    
    (1)
    
    
    333
    
    
    
    6,687
    
    
    
    
    
    
    
    
    
    
    
    333
    
    
    
    6,687
    
    
    
    7,020
    
    
    
    (1,116
    )
    
    
    1988
    
    
    
    4/28/1998
    
    
    
    403
    
    Queens Facility
    
    New York, NY
    
    
    
    
    1,436
    
    
    
    13,296
    
    
    
    
    
    
    
    
    
    
    
    1,436
    
    
    
    13,296
    
    
    
    14,732
    
    
    
    (2,219
    )
    
    
    1997
    
    
    
    4/28/1998
    
    
    
    404
    
    Central Valley Facility
    
    McFarland, CA
    
    (1)
    
    
    525
    
    
    
    17,066
    
    
    
    
    
    
    
    
    
    
    
    525
    
    
    
    17,066
    
    
    
    17,591
    
    
    
    (2,848
    )
    
    
    1997
    
    
    
    4/28/1998
    
    
    
    405
    
    Golden State Facility
    
    McFarland, CA
    
    (1)
    
    
    956
    
    
    
    16,599
    
    
    
    
    
    
    
    
    
    
    
    956
    
    
    
    16,599
    
    
    
    17,555
    
    
    
    (2,770
    )
    
    
    1997
    
    
    
    4/28/1998
    
    
    
    406
    
    Desert View Facility
    
    Adelanto, CA
    
    (1)
    
    
    451
    
    
    
    16,413
    
    
    
    
    
    
    
    
    
    
    
    451
    
    
    
    16,413
    
    
    
    16,864
    
    
    
    (2,739
    )
    
    
    1997
    
    
    
    4/28/1998
    
    
    
    407
    
    Broward County Facility
    
    Broward County, FL
    
    (1)
    
    
    3,193
    
    
    
    11,935
    
    
    
    
    
    
    
    
    
    
    
    3,193
    
    
    
    11,935
    
    
    
    15,128
    
    
    
    (1,992
    )
    
    
    1998
    
    
    
    4/28/1998
    
    
    
    408
    
    Karnes Facility
    
    Karnes County, TX
    
    (1)
    
    
    500
    
    
    
    15,820
    
    
    
    
    
    
    
    
    
    
    
    500
    
    
    
    15,820
    
    
    
    16,320
    
    
    
    (2,640
    )
    
    
    1996
    
    
    
    4/28/1998
    
    
    
    409
    
    Lawton Facility
    
    Lawton, OK
    
    (1)
    
    
    371
    
    
    
    45,389
    
    
    
    
    
    
    
    
    
    
    
    371
    
    
    
    45,389
    
    
    
    45,760
    
    
    
    (6,765
    )
    
    
    1999
    
    
    
    1/15/1999
    
    
    
    4010
    
    Hobbs Facility
    
    Hobbs, NM
    
    (1)
    
    
    
    
    
    
    48,389
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48,389
    
    
    
    48,389
    
    
    
    (7,331
    )
    
    
    1998
    
    
    
    (2)
    
    
    
    4011
    
    Jena Facility
    
    Jena, LA
    
    (1)
    
    
    55
    
    
    
    15,196
    
    
    
    
    
    
    
    
    
    
    
    55
    
    
    
    15,196
    
    
    
    15,251
    
    
    
    (1,893
    )
    
    
    1999
    
    
    
    1/7/2000
    
    
    
    4012
    
    Delaney Hall Facility
    
    Newark, NJ
    
    (1)
    
    
    3,453
    
    
    
    17,855
    
    
    
    
    
    
    
    
    
    
    
    3,453
    
    
    
    17,855
    
    
    
    21,308
    
    
    
    (710
    )
    
    
    2000
    
    
    
    5/29/2003
    
    
    
    40$
    11,942
    
    
    $
    231,805
    
    
    $
    
    
    
    $
    
    
    
    $
    11,942
    
    
    $
    231,805
    
    
    $
    243,747
    
    
    $
    (34,221
    )
    (2) 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.




---



##### 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
    
    2004
    
    
    2003
    
    
    2002Balance at beginning of period
    
    $
    293,298
    
    
    $
    271,990
    
    
    $
    271,990Additions during period:Acquisitions
    
    
    
    
    
    
    21,308
    
    
    
    Improvements
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    Deductions during the period:Cost of real estate sold
    
    
    (49,551
    )
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    Balance at close of period
    
    $
    243,747
    
    
    $
    293,298
    
    
    $
    271,990
 For the years ended December 31,Accumulated Depreciation
    
    2004
    
    
    2003
    
    
    2002Balance at beginning of period
    
    $
    (33,157
    )
    
    $
    (25,761
    )
    
    $
    (18,628
    )Additions during period:Depreciation
    
    
    (6,759
    )
    
    
    (7,396
    )
    
    
    (7,133
    )Other
    
    
    
    
    
    
    
    
    
    
    Deductions during the period:Real estate sold
    
    
    5,695
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    Balance at close of period
    
    $
    (34,221
    )
    
    $
    (33,157
    )
    
    $
    (25,761
    )