Slot Machine Firm Appears to Have Lost Bet on Prison

It’s been 10 months since a small Nevada firm best known for marketing slot machines surprised and angered Santa Clarita Valley officials by announcing plans to build a privately run prison on about 400 acres of fallow land near Castaic.

Today, the land remains fallow. And if anything grows there at all, it won’t be a private prison, say valley officials and the state Department of Corrections. It appears that the slot machine firm, Mills-Jennings Co. of Reno, made a poor bet picking the Santa Clarita Valley, where public opinion and local politicians had doomed other prison proposals in the past.

“It sounds like they didn’t do their homework,” said Mike Van Winkle, a spokesman for the Department of Corrections. Corrections officials noted that California doesn’t have any private prisons and that it would take an act of the Legislature to open one. Mills-Jennings has never contacted the department about a prison, Van Winkle said.

Financial Difficulties

Not only did Mills-Jennings misjudge local public opinion, the company also stumbled after buying the Castaic property. On Oct. 12, the company filed for protection under Chapter 11 of the federal bankruptcy code.

Mills-Jennings officials did not return telephone calls seeking comment.

There has been a movement in some states, such as Florida and Texas, toward privately run prisons. The idea is that private companies could operate prisons more efficiently than the government, and that it would also eliminate the need for states to put up additional money for new prisons.

The Santa Clarita prison plan sounded impressive enough at first. On June 9, 1988, company President David J. Smith announced that Mills-Jennings had acquired more than 400 acres north of the county’s Peter J. Pitchess Honor Rancho jail. Smith said his prison would seek contracts to house state and federal inmates and predicted that the company would launch a feasibility study on the prison by fall of 1988.

At the time, Smith conceded that Mills-Jennings had no experience running prisons but was negotiating with another company already operating private prisons in other states. “This is our first move in that direction,” Smith said of the prison.

Mills-Jennings has recently been diversifying into other businesses. Until three years ago, its principal business was manufacturing and marketing slot machines. The company later branched out into wholesale food distribution, pet foods and fire protection services.

For the nine months that ended Aug. 31, Mills-Jennings reported net income of $531,776, or 17 cents a share, on revenues of $14.3 million.

Property tax records and documents filed with the federal Securities and Exchange Commission show that Mills-Jennings’ subsidiary bought 418 acres near Castaic on Oct. 4 in exchange for 1.8 million shares of its stock and the assumption of two mortgages totaling $1.7 million. The assessed value of the land is $6.9 million, according to property records.

Foreclosure Proceedings

But when Mills-Jennings acquired the Castaic property, foreclosure proceedings had already begun against one of the mortgages, which was in default, the company said in an SEC filing. The company said it considered restructuring or refinancing the loan in default but was unable to take either action quickly so it had to file for bankruptcy protection.

Even if the company had not run into financial problems, it seems unlikely that the proposal would have gotten very far.

State Sen. Ed Davis (R-Valencia), whose district includes the Mills-Jennings property and who is former chief of the Los Angeles Police Department, has often said he is philosophically opposed to private companies running prisons.

The Mills-Jennings proposal seemed so unlikely to succeed that Davis didn’t even bother to contact the company to complain, said Eric Rose, a Davis aide at the time of the company’s announcement. “A phone call from us wasn’t even necessary,” he said.

Councilwoman Did Phone

But Santa Clarita Councilwoman Jo Anne Darcy, a field deputy to Los Angeles County Supervisor Mike Antonovich, did call Smith. “I told him that it was the most inappropriate thing I’d seen and that it would not get the support of the supervisor and the people of the Santa Clarita Valley,” she recalled.

Darcy said she also told Smith how large and noisy protest rallies staged by Santa Clarita Valley activists helped kill a proposal by Los Angeles Mayor Tom Bradley to put a 1,700-bed state prison in Saugus a few years earlier.

“He was surprised,” Darcy said of Smith’s reaction. “He told me they would re-evaluate their position. Then we never heard any more about it. He got some bad advice from somebody. They didn’t do adequate market research.”