<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 16, 1997
REGISTRATION NO. 333-25727
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES
---------------------
CCA PRISON REALTY TRUST
(Exact name of Registrant as Specified in its Governing Instruments)
---------------------
2200 ABBOTT MARTIN ROAD
SUITE 201
NASHVILLE, TENNESSEE 37215
(615) 460-7452
(Address of Principal Executive Offices)
---------------------
J. MICHAEL QUINLAN
CHIEF EXECUTIVE OFFICER
CCA PRISON REALTY TRUST
2200 ABBOTT MARTIN ROAD
SUITE 201
NASHVILLE, TENNESSEE 37215
(615) 460-7452
(Name and Address of Agent for Service)
---------------------
COPIES TO:
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ELIZABETH E. MOORE F. MITCHELL WALKER, JR.
STOKES & BARTHOLOMEW, P.A. BASS, BERRY & SIMS PLC
SUNTRUST CENTER, NASHVILLE, TENNESSEE 37219 FIRST AMERICAN CENTER, NASHVILLE, TENNESSEE 37238
(615) 259-1450/FAX (615) 259-1470 (615) 742-6200/FAX (615) 742-6298
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE TO THE PUBLIC: As
soon as practicable after the effective date of this Registration Statement.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 16, 1997
PROSPECTUS
17,000,000 COMMON SHARES [LOGO]
CCA PRISON REALTY TRUST
CCA Prison Realty Trust, a Maryland real estate investment trust (the
"Company") was formed on April 23, 1997, to capitalize on the opportunities
created by the growing trend towards privatization in the corrections industry,
including the increased demand for private correctional and detention
facilities. The principal business strategy of the Company will be to acquire
correctional and detention facilities, that meet the Company's investment
criteria, from both private prison managers and government entities, to expand
its existing facilities, and to lease all such facilities under long-term
leases. The Company initially will acquire nine correctional and detention
facilities (collectively, the "Initial Facilities"), currently owned and
operated by Corrections Corporation of America, a Tennessee corporation ("CCA")
for an aggregate purchase price of $308.1 million. The Company will also have an
option for a period of three years following the closing of the purchase of the
Initial Facilities, to acquire up to five additional correctional and detention
facilities (collectively, the "Option Facilities") currently owned and operated
or under construction or development by CCA. See "The Formation Transactions."
The Company will lease all of the Facilities to CCA, and CCA will continue to
manage the Facilities. The Company intends to pay regular quarterly
distributions, initially at a rate of $1.70 per share per annum, beginning with
a pro-rated dividend for the quarter ended September 30, 1997. See
"Distributions."
All of the common shares, $0.01 par value per share, of the Company (the
"Common Shares") offered hereby (the "Offering") are being sold by the Company.
Doctor R. Crants, Chairman of the Company and Chairman and Chief Executive
Officer of CCA, has agreed to acquire in the Offering approximately 500,000
Common Shares at a price per share equal to the initial public offering price.
Upon completion of the Offering, Doctor R. Crants and other members of the
management of the Company will collectively own, or will have options to
acquire, approximately 10.1% of the Common Shares.
Prior to the Offering, there has been no public market for the Common
Shares. It is currently anticipated that the initial public offering price per
Common Share will be between $19.00 and $21.00. See "Underwriting" for a
discussion of factors to be considered in determining the initial public
offering price. The Common Shares have been approved for listing on the New York
Stock Exchange (the "NYSE") under the symbol "PZN," subject to official notice
of issuance.
SEE "RISK FACTORS" BEGINNING ON PAGE 16 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON SHARES OFFERED HEREBY, INCLUDING:
- The dependence on CCA, as the lessee of the Facilities;
- Potential conflicts of interest of affiliates of the Company and CCA;
- Correctional and detention facility industry risks;
- The Company's lack of operating history and lack of experience in
operating as a REIT;
- The taxation of the Company as a regular corporation if it fails to
qualify as a REIT; and
- Restrictions on ownership of outstanding Common Shares.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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========================================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- ------------------------------------------------------------------------------------------------------------------------
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Per Share.......................................... $ $ $
- ------------------------------------------------------------------------------------------------------------------------
Total(3)........................................... $ $ $
========================================================================================================================
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses estimated at $3,000,000 payable by the Company.
(3) The Company has granted to the Underwriters a 30-day over-allotment option
to purchase up to 2,550,000 additional Common Shares on the same terms and
conditions as set forth above. If all such shares are purchased by the
Underwriters, the total Price to Public will be $ , the total
Underwriting Discount will be $ and the total Proceeds to Company will
be $ .
---------------------
The Common Shares are offered subject to receipt and acceptance by the
several Underwriters, to prior sale, and to the several Underwriters' right to
reject any order in whole or in part and to withdraw, cancel or modify the offer
without notice. It is expected that certificates for the Common Shares will be
available for delivery on or about , 1997.
---------------------
J.C. Bradford & Co.
A.G. Edwards & Sons, Inc.
Legg Mason Wood Walker
incorporated
Lehman Brothers
PaineWebber Incorporated
Stephens Inc.
,1997
<PAGE> 3
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All levels of government have a growing [A collection of photos representing views of
demand for prison and jail beds to house the interior and exterior of various facili-
violent criminals. This demand has created an ties to be acquired or that may be acquired
opportunity for investment of private capital by the Company from CCA: (i) photo of open
to expand the system and meet the country's sleeping area; (ii) photo of security
need for additional secure facilities. personnel operating security panel; (iii)
[caption] photo of common area; (iv) photo of security
checkpoint; (v) photo of exterior of Eloy
Detention Center; (vi) photo of common area;
(vii) photo of multi-inmate cell; and (viii)
photo of exterior of Northeast Ohio
Correctional Center.]
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES,
INCLUDING STABILIZATION AND SHORT-COVERING TRANSACTIONS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
[Fold-Out]
CCA Prison Realty Trust
Building on the growth of private sector corrections. [caption]
[Map of the United States showing location of
properties to be acquired or that may be acquired by the Company from CCA]
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<S> <C> <C> <C> <C> <C>
[Picture of Exterior of [Picture of Exterior of
Eloy The Initial Central Arizona
Detention Center] Facilities Detention Center]
Eloy Detention Center Eloy, Arizona Central Arizona
Eloy, Arizona [caption] Florence, Arizona Detention Center
Leavenworth, Kansas Florence, Arizona
Mason, Tennessee [caption]
Bridgeport, Texas
Houston, Texas [Picture of Exterior of
Laredo, Texas Torrance County
[Picture of Exterior of Mineral Wells, Texas Detention Facility]
Houston Taylor, Texas Torrance County Detention
Processing Center] The Option Facility
Houston Processing Center Facilities Estancia, New Mexico
Houston, Texas [caption] Walsenburg, Colorado [caption]
Estancia, New Mexico
Youngstown, Ohio
Sayre, Oklahoma
Whiteville, Tennessee
[caption]
[Picture of Exterior of [Picture of Exterior of
West Tennessee [Picture of Exterior of Leavenworth Detention [Picture of Exterior of
Detention Facility] T. Don Hutto [Picture of Exterior of Center] Northeast Ohio
West Tennessee Detention Correctional Center] Laredo Leavenworth Detention Correctional Center]
Facility T. Don Hutto Correctional Processing Center] Center Northeast Ohio
Mason, Tennessee Center Laredo Processing Center Leavenworth, Kansas Correctional Center
[caption] Taylor, Texas [caption] Laredo, Texas [caption] [caption] Youngstown, Ohio [caption]
</TABLE>
<PAGE> 4
TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY.................................. 1
The Company........................................ 1
Summary Risk Factors............................... 2
Selected Historical and Pro Forma Financial Data... 3
Business Objectives and Strategies................. 5
Business of the Company and its Properties......... 6
The Private Corrections Industry................... 9
Corrections Corporation of America................. 9
Relationship Between CCA and the Company after the
Formation Transactions........................... 9
Leases............................................. 11
The Formation Transactions......................... 11
Distributions...................................... 13
Tax Considerations and Tax Status of the Company... 14
The Offering....................................... 15
RISK FACTORS........................................ 16
The Initial Dependence on CCA, as the Sole Lessee
of the Facilities, for the Company's Initial
Revenues and Ability to Make Distributions....... 16
Conflicts of Interest.............................. 16
Relationships Which May Give Rise to Conflicts of
Interest....................................... 16
Situations in Which Conflicts of Interest Have
Arisen and May Continue to Arise............... 16
Correctional and Detention Industry Risks.......... 17
Short-Term Nature of Government Contracts........ 17
Dependence on Government Appropriations.......... 17
Dependence on Government Agencies for Inmates.... 18
Dependence on Ability to Develop New Prisons..... 18
Legal Proceedings................................ 18
Adverse Impact on Distributions of Failure of
Company to Qualify as a REIT..................... 18
Initial Distribution Policy........................ 19
Real Estate Investment Considerations.............. 19
General.......................................... 19
Environmental Matters............................ 19
Uninsured Loss................................... 20
Dependence on Key Personnel........................ 20
Lack of Operating History.......................... 20
Lack of Control Over Day-to-Day Operations and Man-
agement of the Facilities........................ 20
Dilution........................................... 20
Ownership Limit.................................... 20
Limits on Changes in Control....................... 21
Changes in Investment and Financing Policies
Without Vote of Shareholders..................... 21
No Prior Market for Common Shares; Factors
Affecting Market Price........................... 22
Dependence on Financing For Growth and Adverse
Consequences of Debt Financing on Ability to Make
Distributions.................................... 22
ERISA Risks........................................ 22
THE COMPANY......................................... 23
General............................................ 23
Business Objectives and Strategies................. 24
Future Growth of the Company....................... 24
External Growth.................................... 24
Internal Growth.................................... 26
Lease Negotiation.................................. 26
Due Diligence Process.............................. 26
USE OF PROCEEDS..................................... 28
CAPITALIZATION...................................... 28
DISTRIBUTIONS....................................... 29
DILUTION............................................ 31
PRO FORMA FINANCIAL STATEMENTS...................... 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................ 35
General............................................ 35
Results of Operations.............................. 35
Pro Forma Results of Operations.................... 35
Liquidity and Capital Resources.................... 35
Funds from Operations.............................. 36
Inflation.......................................... 37
THE PRIVATE CORRECTIONS INDUSTRY.................... 37
CORRECTIONS CORPORATION OF AMERICA.................. 38
Facility Operations................................ 38
Certain Selected Financial Information............. 39
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Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 41
BUSINESS OF THE COMPANY AND ITS PROPERTIES.......... 48
The Facilities..................................... 48
Description of the Facilities...................... 50
Legal Proceedings.................................. 52
Competition........................................ 53
Government Regulation.............................. 53
RELATIONSHIP BETWEEN CCA AND THE COMPANY AFTER THE
FORMATION TRANSACTIONS............................. 53
LEASES.............................................. 55
MANAGEMENT.......................................... 59
Trustees and Executive Officers.................... 59
Committees of the Board of Trustees................ 62
Compensation of Trustees........................... 62
Indemnification.................................... 62
Executive Compensation............................. 63
The Share Incentive Plan........................... 63
Non-Employee Trustees' Plan........................ 64
Dividend Reinvestment Plan......................... 65
Deferred Compensation Plan......................... 65
Employment Agreements.............................. 65
CERTAIN RELATIONSHIPS AND TRANSACTIONS.............. 66
Share Acquisitions by Management................... 66
Purchase of Initial Facilities..................... 66
Option Facilities.................................. 66
Right to Purchase.................................. 66
Employment Agreements.............................. 67
POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN
ACTIVITIES......................................... 67
Investment Objectives and Policies................. 67
Dispositions; CCA's Right of First Refusal......... 68
Financing.......................................... 68
Working Capital Reserves........................... 69
Conflict of Interest Policies...................... 69
Other Policies..................................... 69
CONFLICTS OF INTEREST............................... 70
General............................................ 70
Relationships Which May Give Rise to Conflicts of
Interest......................................... 70
Situations in Which Conflicts of Interests Have
Arisen and May Continue to Arise................. 70
Steps Taken by the Company to Address Potential
Conflicts of Interest............................ 71
THE FORMATION TRANSACTIONS.......................... 72
Advantages and Disadvantages to Unaffiliated
Shareholders..................................... 72
Benefits to the Company and its Officers and
Trustees......................................... 73
Benefits to CCA.................................... 73
PRINCIPAL SHAREHOLDERS OF THE COMPANY............... 74
DESCRIPTION OF CAPITAL SHARES....................... 74
General............................................ 74
Restrictions on Ownership.......................... 75
Certain Provisions of Maryland Law and of the Com-
pany's Declaration of Trust and Bylaws........... 76
Limitations on Changes in Control.................. 78
Limitation of Liability and Indemnification of
Trustees......................................... 79
Transfer Agent and Registrar....................... 79
SHARES AVAILABLE FOR FUTURE SALE.................... 80
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS.......... 80
Taxation of the Company............................ 80
Failure to Qualify................................. 86
Taxation of Taxable Domestic Shareholders.......... 86
Backup Withholding................................. 87
Taxation of Tax-Exempt Shareholders................ 87
Taxation of Foreign Shareholders................... 88
Other Tax Consequences............................. 89
ERISA CONSIDERATIONS................................ 90
UNDERWRITING........................................ 91
EXPERTS............................................. 92
LEGAL MATTERS....................................... 92
GLOSSARY............................................ 93
INDEX TO FINANCIAL STATEMENTS....................... F-1
</TABLE>
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<PAGE> 5
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-11 under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the Common Shares
offered hereby (the "Registration Statement"). This Prospectus, which is part of
the Registration Statement, does not contain all of the information set forth in
the Registration Statement and the exhibits and financial schedules thereto. For
further information with respect to the Company and the Common Shares, reference
is made to the Registration Statement and such exhibits and financial schedules
filed therewith. Any statements contained herein concerning the provisions of
any document are not necessarily complete, and, in each instance, reference is
made to the copy of such document filed as an exhibit to the Registration
Statement or otherwise filed with the Commission. Each such statement is
qualified in its entirety by such reference.
For further information with respect to the Company and the Common Shares,
reference is made to the Registration Statement and such exhibits and financial
schedules, copies of which may be examined without charge at, or copies obtained
upon payment of prescribed fees from, the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and will also be
available for inspection and copying at the regional offices of the Commission
located at 7 World Trade Center, Suite 1300, New York, New York 10048 and at
Citicorp Center, Suite 1400, 500 West Madison Street, Chicago, Illinois
60661-2511. The Commission also maintains a web site that contains reports,
proxy and information statements and other information regarding registrants
that file documents with the Commission, including the Company, and the address
is http://www.sec.gov. Moreover, the Common Shares have been approved for
listing on the NYSE, subject to official notice of issuance. Accordingly, upon
official notice of issuance, periodic reports, proxy material, and other
information concerning the Company, when filed, may be inspected at the offices
of the NYSE, Operations, 20 Broad Street, New York, New York 10005.
Following consummation of the Offering, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and will, therefore, be required to file reports, proxy and
information statements and other information with the Commission pursuant to the
reporting requirements of Section 13(a) thereof, in addition to any other legal
or NYSE requirements. Such reports, statements and information can also be
inspected and copied at the Commission's offices and web site listed above.
CAUTIONARY STATEMENT
Information contained in this Prospectus contains "forward-looking
statements" relating to, without limitation, future economic performance, plans
and objectives of management for future operations and projections of revenue
and other financial items, which can be identified by the use of forward-looking
terminology such as "may," "will," "should," "expect," "anticipate," "estimate"
or "continue" or the negative thereof or other variations thereon or comparable
terminology. The cautionary statements set forth under the caption "Risk
Factors" and elsewhere in this Prospectus identify important factors with
respect to such forward-looking statements, including certain risks and
uncertainties, that could cause actual results to differ materially from those
in such forward-looking statements.
ii
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial information and statements, and the notes thereto,
appearing elsewhere in this Prospectus. Unless otherwise indicated, the
information contained in this Prospectus assumes(i) an initial public offering
price per Common Share of $20.00 (the midpoint of the range of estimated initial
public offering prices set forth on the front cover of this Prospectus); (ii)
the consummation of the Formation Transactions (as hereinafter defined); and
(iii) no exercise of the Underwriters' over-allotment option. See "Glossary" for
the definitions of certain terms used in the Prospectus.
THE COMPANY
CCA Prison Realty Trust, a Maryland real estate investment trust (the
"Company") has been formed to capitalize on the opportunities created by the
growing trend towards privatization in the corrections industry, including the
increased demand for private correctional and detention facilities. The
principal business strategy of the Company will be to acquire correctional and
detention facilities that meet the Company's investment criteria, from both
private prison managers and government entities, to expand its existing
facilities, and to lease all such facilities under long-term leases. The Company
initially will acquire nine correctional and detention facilities (collectively,
the "Initial Facilities") which have an aggregate design capacity of 6,687 beds,
currently owned and operated by Corrections Corporation of America, a Tennessee
corporation ("CCA"). The Company will also have an option for a period of three
years following the closing of the purchase of the Initial Facilities, to
acquire up to five additional correctional and detention facilities
(collectively the "Option Facilities") which have an aggregate design capacity
of 5,638 beds, currently owned and operated or under construction or development
by CCA. (The Initial Facilities and the Option Facilities are sometimes referred
to collectively as the "Facilities"). In addition, the Company will have an
option to acquire any correctional or detention facility acquired or developed
and owned by CCA in the future for a period of three years following the date
CCA first receives inmates at such facility (the "Service Commencement Date").
As a result of these transactions, the Company and CCA will have several ongoing
relationships after the Formation Transactions, some of which could give rise to
possible conflicts of interest. See "Relationship Between CCA and the Company
after the Formation Transactions." Upon completion of the Offering and the
Formation Transactions, the Company will be the only publicly-traded,
self-administered and self-managed REIT focused on acquiring and owning
correctional and detention facilities.
The Company will lease all of the Facilities to CCA, and CCA will continue
to manage the Facilities. The Company believes that for the Initial Facilities
and, if acquired, the Option Facilities, it will benefit significantly from the
continuity of management provided by CCA. CCA is the largest manager of
privatized correctional and detention facilities worldwide. CCA has developed
and operated the Facilities since they were acquired or constructed by CCA at
various times ranging from 1984 through 1997. See "Business of the Company and
its Properties."
The Company will purchase the Initial Facilities for an aggregate cash
purchase price of approximately $308.1 million concurrent with the closing of
the Offering. The Initial Facilities will be leased to CCA pursuant to
long-term, non-cancelable "triple net" leases (the "Leases") which require CCA
to pay all operating expenses, taxes, insurance and other costs. All of the
Leases will provide for base rent with certain annual escalations and will have
primary terms ranging from 10 to 12 years which may be extended at fair market
rates for three additional five-year periods upon the mutual agreement of the
Company and CCA. The Initial Facilities are expected to generate aggregate
initial annual rent of approximately $33.9 million which represents an 11% lease
rate based on the purchase price. The Company will have general recourse to CCA
under the Leases, but CCA's payment obligations under such Leases are not
secured by any assets of CCA. The obligations of CCA under the leases are
cross-defaulted to each of the other leases with respect to payment defaults and
certain other defaults.
The Company has obtained a commitment for a $150.0 million line of credit
(the "Bank Credit Facility") from a group of banks led by First Union National
Bank of Tennessee ("First Union") which will be used for the acquisition of
additional correctional facilities, including the Option Facilities, and for
certain
1
<PAGE> 7
other purposes, including the expansion of existing facilities and working
capital, as necessary. The Company expects to close the Bank Credit Facility
immediately following the consummation of the Offering. Upon consummation of the
Offering, the Company will have no outstanding indebtedness. The Company
believes that its lack of debt, coupled with the available financing through the
Bank Credit Facility, will provide it with significant financial resources in
pursuing correctional facility acquisition and expansion opportunities,
including some or all of the Option Facilities. The Company intends to maintain
a capital structure which limits consolidated indebtedness to no more than 50%
of its total capitalization. See "Policies and Objectives With Respect to
Certain Activities -- Financing."
The Company intends to initially focus on privately-managed facilities
which are owned and operated by CCA or its subsidiaries. However, the Company
will also pursue other opportunities, including acquisitions of or financings
for correctional facilities owned and operated by various government entities.
The Company believes it has significant access to development and acquisition
opportunities by virtue of its relationship with CCA and the experience and the
industry contacts of its Chief Executive Officer, J. Michael Quinlan, former
Director of the Federal Bureau of Prisons (the "BOP"). The Company intends to
utilize Mr. Quinlan's experience in developing and managing correctional and
detention facilities to opportunistically pursue development and acquisitions of
correctional facilities from both the public and private sectors. See
"Management -- Trustees and Executive Officers."
The Company is a self-administered and self-managed real estate investment
trust that expects to qualify as a REIT for federal income tax purposes. In
order to qualify as a REIT, the Company's income must be derived from certain
sources, including rents from real property (and generally excluding income from
the operation of a correctional facility). See "Material Federal Income Tax
Considerations -- Taxation of the Company -- Income Tests." Accordingly, the
Company is precluded from operating correctional facilities and, consequently,
intends to lease such properties pursuant to long-term, non-cancelable triple
net leases.
The Company was formed as a Maryland real estate investment trust on April
23, 1997. The Company's principal executive offices are located at, and its
mailing address is, 2200 Abbott Martin Road, Suite 201, Nashville, Tennessee
37215. The Company's telephone and fax numbers are (615) 460-7452 and (615) 460-
1206, respectively.
SUMMARY RISK FACTORS
Investors should carefully consider the matters discussed under "Risk
Factors" in this Prospectus prior to making an investment decision regarding the
Common Shares offered hereby. Such risk factors include:
- The dependence on CCA, as the lessee of the Facilities, for the Company's
initial revenues and ability to make distributions to its shareholders;
- Potential conflicts of interest among affiliates of both CCA and the
Company, and risks associated with the lack of third party appraisals for
the Facilities and the lack of arm's-length negotiations in connection
with certain aspects of the Formation Transactions;
- Ownership of the Company's facilities is subject to operating risks
inherent in the corrections and detention industry;
- The taxation of the Company as a regular corporation if it fails to
qualify as a REIT;
- Actual Cash Available for Distribution (defined generally as net income
(loss) computed in accordance with generally accepted accounting
principles of the Company plus depreciation and amortization minus
capital expenditures and principal payments on indebtedness) may be
insufficient to allow the Company to maintain its proposed initial
distribution rate;
- Certain real estate investment considerations, which may affect the value
of the Common Shares and the Company's ability to make expected
distributions to shareholders, including (i) the potential liability of
the Company for unknown or future environmental matters; and (ii) the
possibility that a facility could sustain an uninsured loss;
2
<PAGE> 8
- The dependence on certain key personnel, particularly Messrs. Quinlan,
Crants and Devlin;
- The Company's lack of operating history and lack of experience in
operating in accordance with the requirements for maintaining its
qualification as a REIT;
- The Company's lack of control over CCA's day-to-day operations and
management of the Facilities;
- Immediate and substantial dilution in the net tangible book value per
share of the Common Shares purchased in the Offering;
- The restrictions on the ownership of outstanding Common Shares to ensure
compliance with certain requirements related to qualification of the
Company as a REIT;
- Anti-takeover effect of limiting actual or constructive ownership of
Common Shares of the Company by a single person to 9.8% of the
outstanding capital stock, subject to certain specified exceptions, and
certain other provisions contained in the organizational documents of the
Company, any of which may have the effect of delaying or preventing a
transaction or change in control of the Company that might involve a
premium price for the Common Shares or otherwise be in the best interests
of the Company's shareholders;
- The ability of the Company to make changes in its investment and
financing policies without the approval of its shareholders, which could
result in decisions that do not fully reflect the interests of all
shareholders of the Company;
- The lack of a prior market for the Common Shares and the potential impact
of market interest rate increases and other factors in the trading price
of the Common Shares; and
- The possibility that the Company may not be able to obtain long-term
financing on favorable terms and interest rates might increase on amounts
drawn under the Bank Credit Facility.
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table sets forth (i) selected historical financial
information for the Company and (ii) unaudited selected pro forma financial
information for the Company. The pro forma operating information is presented as
if the Formation Transactions had occurred as of the beginning of the period
indicated and therefore incorporates certain assumptions that are included in
the Notes to Pro Forma Statements of Operations. The pro forma balance sheet
information is presented as if the Formation Transactions had occurred on March
31, 1997. The pro forma information does not purport to represent what the
Company's financial position or results of operations actually would have been
had the Formation Transactions, in fact, occurred on such date or at the
beginning of the period indicated, or to project the Company's financial
position or results of operations at any future date or for any future period.
3
<PAGE> 9
CCA PRISON REALTY TRUST
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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PRO FORMA
----------------------------------
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 MARCH 31, 1997
----------------- --------------
<S> <C> <C>
OPERATING DATA:
Revenue:
Rent income(1)......................................... $33,891 $8,473
Costs and expenses:
Operating and administrative(2)........................ 1,950 487
Provision for depreciation and amortization(3)......... 8,588 2,147
------- ------
Total costs and expenses.......................... 10,538 2,634
------- ------
Net income................................................ $23,353 $5,839
======= ======
Net income per share...................................... $ 1.35 $ 0.34
======= ======
Weighted average number of shares outstanding(4).......... 17,301 17,301
======= ======
OTHER DATA:
Funds from operations(5).................................. $31,941 7,986
Cash available for distribution........................... 31,941 7,986
Distributions............................................. 29,412 7,353
Distributions per share................................... $ 1.70 $0.425
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA HISTORICAL
AS OF AS OF
MARCH 31, 1997 APRIL 23, 1997
----------------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Real estate before accumulated depreciation............... $311,103 $ --
Total assets.............................................. 316,200 1
Shareholders' equity...................................... 316,200 1
</TABLE>
- ---------------------
(1) Rent income from CCA recorded in accordance with the terms of the Leases as
if the Initial Facilities had been in operation at the leased design
capacity for the entire period. The Company will lease the Initial
Facilities to CCA under operating leases.
(2) Recurring administrative expenses of the Company, including franchise and
excise taxes, based upon management's estimates of operating and
administrative costs.
(3) Depreciation expense on fixed assets purchased from CCA based on the
estimated useful lives of the Initial Facilities.
(4) Weighted average shares outstanding include the founder's shares, shares
issued to management and Common Shares sold in the Offering as if such
shares were outstanding for the entire period.
(5) Management believes Funds from Operations is helpful to investors as a
measure of the performance of an equity REIT because, along with cash flows
from operating activities, financing activities and investing activities, it
provides investors with an understanding of the ability of the Company to
incur and service debt and make capital expenditures. Funds from Operations
is calculated by management as net income (loss) (computed in accordance
with GAAP), excluding gains (or losses) from debt restructuring and sales of
property, plus real estate related depreciation and amortization and after
adjustments for unconsolidated partnerships and joint ventures and,
accordingly, may not be comparable to other REITs' Funds from Operations
calculated under a differing methodology. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Funds from
Operations". Funds from Operations should be examined in conjunction with
net income as presented.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1996 MARCH 31, 1997
------------------ ------------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Calculations of Funds from Operations:
Pro Forma Net income...................................... $23,353 $5,839
Plus: Pro forma real estate depreciation and
amortization............................................ 8,588 2,147
------- ------
Pro forma funds from operations........................... $31,941 $7,986
======= ======
</TABLE>
Funds from Operations should not be considered as an alternative to net
income (determined in accordance with GAAP) as an indication of the
Company's financial performance or to cash flows from operating activities
(determined in accordance with GAAP) as a measure of the Company's liquidity
nor is it indicative of funds available to fund the Company's cash needs,
including its ability to make distributions.
4
<PAGE> 10
BUSINESS OBJECTIVES AND STRATEGIES
The Company's primary business objectives are to maximize current returns
to shareholders through increases in cash flow available for distribution and to
increase long-term total returns to shareholders through appreciation in the
value of the Common Shares. The Company will seek to achieve these objectives
through:
- The acquisition of the Initial Facilities and, if acquired, the Option
Facilities;
- The strategic expansion of its correctional and detention facilities
portfolio through the selective acquisition from both private prison
managers and government entities, of correctional and detention facilities
that demonstrate potential for significant revenue and cash flow;
- The expansion of its existing facilities;
- The construction and/or development of new correctional and detention
facilities;
- The improvement and enhancement of the Company's holdings through proper
maintenance and capital improvements;
- The structuring of fair market leases under which the lessees pay base
rent with certain annual escalations and pay certain expenses in
connection with the operation of the property such as real estate taxes,
insurance, utilities and services, maintenance and other operating
expenses;
- Providing mortgages or other appropriate financing vehicles to
correctional facility operators in circumstances where ownership by the
Company is not otherwise attractive;
- The monitoring of operating performance of the facilities in its
portfolio to ensure that the lessees comply with their lease obligations;
and
- The maintenance of a ratio of debt to total capitalization (i.e., total
debt of the Company as a percentage of shareholders' equity plus total
debt) of 50% or less. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
FUTURE GROWTH OF THE COMPANY
External Growth
Acquisition Opportunities. In addition to the possible acquisition of the
Option Facilities, the Company intends to acquire from both private prison
owners and operators and government entities additional correctional and
detention facilities that meet its investment criteria, as described herein. The
primary source of private correctional facilities to be initially acquired or
financed by the Company will be facilities owned and operated by CCA. The
Company believes it has a competitive advantage in the acquisition of new
correctional facilities due to its relationship with CCA and the Company's
significant capital resources. The Company also believes that attractive
opportunities exist to acquire or develop correctional facilities from or on
behalf of various government entities. In pursuing such opportunities, the
Company expects to utilize the industry knowledge, experience and relationships
of its Board of Trustees and management, particularly, J. Michael Quinlan, the
Chief Executive Officer and the former Director of the BOP.
Financing Opportunities. High occupancy rates and prison over-crowding
have resulted in an increased demand for new federal, state and local
correctional facilities. While the Company intends to grow primarily from
acquisitions and expansions of correctional facilities, the Company believes
that opportunities exist for it to provide mortgage or other appropriate
financing vehicles to government entities and private prison operators in
circumstances where ownership by the Company is not otherwise attractive.
5
<PAGE> 11
Internal Growth
Expansion Opportunities. The Company's growth objectives will also focus
on the selective expansion of its existing correctional facilities to increase
cash flows and property values. The Company believes that CCA will continue to
attempt to achieve economies of scale through expansions of existing facilities.
Management of the Company intends to actively participate in its tenants'
expansion plans and intends to provide expansion space as needed.
Rent Escalations. The rent schedule under the Leases provides for a
relatively stable source of cash flow and opportunities to participate in future
growth in revenues. The minimum rent for the first year for each Facility under
the Leases is initially set at a fixed amount. Thereafter, minimum rent will
escalate by a percentage of the rent applicable to a particular Facility in the
preceding year, such percentage being equal to the greater of (i) 4% or, (ii)
the percentage which is 25% of the percentage increase in the gross management
revenues realized by CCA from such Facility, exclusive of any increase
attributable to expansion in the size of or the number of beds in such facility
(the "Base Rent Escalation").
BUSINESS OF THE COMPANY AND ITS PROPERTIES
THE FACILITIES
The Company has negotiated a purchase agreement for the nine Initial
Facilities, and option agreements to purchase any or all of the five additional
Option Facilities that may be exercised at any time during the three-year period
following the closing of the purchase of the Initial Facilities. In addition,
the Company will have an option to acquire any correctional or detention
facility acquired or developed and owned by CCA in the future for a period of
three years following the Service Commencement Date with respect to such
facility. The Company will acquire a 100% interest in each of the facilities
purchased. Certain information for the Initial Facilities and the Option
Facilities is set forth in the following tables and accompanying descriptions.
In general, the Facilities are all of the correctional and detention facilities
owned or currently under development by CCA which will not be owned by the
contracting government entity or are not the subject of below market purchase
options held by contracting government entities.
6
<PAGE> 12
THE INITIAL FACILITIES
<TABLE>
<CAPTION>
INITIAL
ANNUAL LEASE
DESIGN DATE RENT TERM
FACILITY AND LOCATION CAPACITY(1) OPENED TYPE OF FACILITY(2) CONTRACTING ENTITIES (IN MILLIONS)(3) (YEARS)
- --------------------- ----------- --------- ------------------- -------------------- ---------------- -------
<S> <C> <C> <C> <C> <C> <C>
Houston Processing
Center.............. 411 April Medium Security INS $ 1.5 12
Houston, Texas 1984 Processing Center
Laredo Processing
Center.............. 258 March Medium Security INS and BOP 1.2 12
Laredo, Texas 1985 Processing Center
Bridgeport Pre-Parole
Transfer Facility... 200 November Minimum Security State of Texas 0.4 12
Bridgeport, Texas 1987 Pre-Parole Transfer
Facility
Mineral Wells
Pre-Parole Transfer
Facility............ 1,119 July Minimum Security State of Texas 3.0 12
Mineral Wells, Texas 1989 Pre-Parole Transfer
Facility
West Tennessee
Detention
Facility............ 600 September Multi-Security INS, USMS(4), BOP, 3.7 10
Mason, Tennessee 1990 Detention Center State of North Carolina
Leavenworth Detention
Center.............. 327 June Maximum Security USMS 3.3 10
Leavenworth, Kansas 1992 Detention Center
Eloy Detention
Center.............. 1,500(5) July Medium Security INS and BOP 6.0 12
Eloy, Arizona 1994 Detention Center
Central Arizona
Detention Center.... 1,792 October Multi-Security USMS, States of Oregon, 12.3 10
Florence, Arizona 1994 Detention Center Alaska and New Mexico
T. Don Hutto
Correctional
Center.............. 480 January Medium Security Williamson County, Texas 2.5 12
Taylor, Texas 1997 Correctional States of Colorado and
Facility Wyoming
</TABLE>
- ---------------
(1) Design capacity measures the number of beds, and accordingly the number of
inmates, each facility is designed to accommodate.
(2) Each facility is identified according to the level(s) of security maintained
and the types of inmates held. 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 detention
devices; and multi-security facilities are facilities with various areas
encompassing either minimum, medium, or maximum security. Processing centers
are used to house undocumented aliens for the U.S. Immigration and
Naturalization Service (the "INS"); pre-parole transfer facilities are used
to hold inmates that have been arrested for technical violations of their
parole agreements with the State Department of Criminal Justice, Board of
Pardons and Paroles; detention facilities are used to house inmates of all
levels, including pre-trial and pre-sentence prisoners for the United States
Marshals Service, inmates sentenced, but not yet housed in correctional
facilities, inmates awaiting trial, sentencing or hearing, and persons
detained by the INS; and correctional facilities are used to house inmates
on a permanent basis for the duration of their sentences.
(3) On an annualized basis.
(4) U.S. Marshals Service (the "USMS").
(5) Includes a 250-bed expansion which is expected to be completed in June 1997.
The Initial Facilities will be purchased from CCA for an aggregate purchase
price of approximately $308.1 million in cash. The Company will lease the
Initial Facilities to CCA pursuant to Leases with terms ranging from 10 to 12
years with aggregate initial annual rents of approximately $33.9 million.
Throughout the terms of the initial Leases, annual rents will escalate by the
Base Rent Escalation. The Leases may be extended at fair market rates for three
additional periods of five years each upon the mutual agreement of the Company
and CCA.
7
<PAGE> 13
The initial public offering price and, accordingly, the aggregate
consideration to be paid by the Company in the Formation Transactions are based
on an evaluation of CCA's operation of the Initial Facilities as a whole and the
factors discussed under "Underwriting" herein, rather than the valuation of
individual properties. Independent valuations were not obtained to determine the
purchase price to be paid by the Company for, or the fair market value of, the
Initial Facilities, and the purchase price to be paid by the Company for the
Initial Facilities exceeds their historical costs. See "Risk
Factors -- Conflicts of Interest." The purchase price for the Initial Facilities
was determined primarily based on an evaluation of the current and anticipated
cash flows and operating results of such facilities. To determine the purchase
price for each of the Initial Facilities other than the T. Don Hutto
Correctional Center, the anticipated annual cash flow from the facility less
ongoing capital expenditures, was divided by an agreed upon coverage ratio and
lease rate. Because the T. Don Hutto Correctional Center was not completed until
January 1997, the purchase price of that facility was calculated as CCA's
approximate cost of developing, constructing and equipping the center, plus 5%
of such costs. It is possible that if the Company were to have obtained
third-party valuations, the sum of the values of the Initial Facilities might
have been lower than the valuation of the Company. There has not been, nor will
there be, any valuation of the Company other than the initial public offering
price of the Common Shares.
THE OPTION FACILITIES
<TABLE>
<CAPTION>
ANTICIPATED
DESIGN OPENING
FACILITY AND LOCATION CAPACITY DATE TYPE OF FACILITY CONTRACTING ENTITIES
- --------------------- -------- ----------- --------------------- -----------------------
<S> <C> <C> <C> <C>
Northeast Ohio Correctional Center............. 2,016 June Medium Security Pending(1)
Youngstown, Ohio 1997 Correctional Facility
Torrance County Detention Facility............. 910 October Multi-Security USMS, BOP, State of New
Estancia, New Mexico 1997(2) Detention Facility Mexico, Torrance County
Southern Colorado Correctional Facility........ 752 October Medium Security State of Colorado
Walsenburg, Colorado 1997 Correctional Facility
North Fork Correctional Facility............... 960 January Medium Security Under negotiation(3)
Sayre, Oklahoma 1998 Correctional Facility
Whiteville Correctional Center................. 1,000 July Medium Security Under negotiation(4)
Whiteville, Tennessee 1998 Correctional Facility
</TABLE>
- ---------------
(1) CCA is reserving all 2,016 beds in this facility for use by the District of
Columbia on a permanent basis. CCA is currently housing 900 inmates for the
District of Columbia under a temporary contract.
(2) Anticipated opening date for a 624-bed expansion. The current 286-bed
facility was opened in December 1990.
(3) CCA is currently negotiating with the State of Colorado with respect to beds
in this facility.
(4) CCA is currently negotiating with various states with respect to beds in
this facility.
The Company will have options to purchase, for a period of three years from
the closing of the purchase of the Initial Facilities, any or all of the five
Option Facilities. See "Business of the Company and its Properties -- The Option
Facilities." The purchase price of each Option Facility shall be equal to CCA's
actual cost of developing, constructing and equipping such Option Facility, plus
5% of such costs. The initial annual rent for each Option Facility will be the
greater of (i) the fair market value of the Option Facility, or (ii) 11% of such
purchase price. Using the 11% lease rate calculation, the Company and CCA
believe that the purchase price and initial annual rent, respectively, for each
Option Facility, if purchased, will be: (a) Northeast Ohio Correctional
Center -- $58.0 million and $6.4 million; (b) Torrance County Detention
Facility -- $36.0 million and $4.0 million; (c) Southern Colorado Correctional
Facility -- $27.5 million and $3.0 million; (d) North Fork Correctional
Facility -- $29.5 million and $3.2 million; and (e) Whiteville Correctional
Center -- $42.0 million and $4.6 million. Total estimated purchase price and
first-year rent for the Option Facilities amount to approximately $193.0 million
and $21.2 million, respectively.
The Company will lease to CCA the Option Facilities, if acquired, pursuant
to long-term, non-cancelable triple net leases on substantially the same terms
and conditions as the Leases for the Initial Facilities, including the Base Rent
Escalation. The Company does not intend to acquire an Option Facility until it
is fully constructed, is the subject of an enforceable management contract
between CCA and a government entity and
8
<PAGE> 14
has an occupancy rate acceptable to the Company. See "The Company -- Business
Objectives and Strategies."
Because the Option Facilities are currently under development, construction
or expansion by CCA, the cash consideration to be paid by the Company for each
of the five Option Facilities will be determined based on CCA's costs of
developing, constructing and equipping such facilities plus 5% of such costs.
Independent valuations were not obtained to determine the purchase price of the
Option Facilities, and the purchase price to be paid by the Company for the
Option Facilities exceeds their historical costs. See "Risk Factors -- Conflicts
of Interest -- Situations in Which Conflicts of Interest Have Arisen and May
Continue to Arise -- Valuation of the Facilities."
THE PRIVATE CORRECTIONS INDUSTRY
The Company believes the United States private corrections industry is in a
period of significant growth. In the United States, there is a growing trend
toward privatization of government services and functions, including corrections
and detention services, as governments of all types face continuing pressure to
control costs and improve the quality of services. According to the Private
Adult Correctional 1996 Facility Census, prepared by Private Corrections Project
Center for Studies in Criminology and Law, University of Florida, dated March
15, 1997 (the "1996 Facility Census"), the design capacity of privately managed
adult correctional and detention facilities worldwide has increased dramatically
since the first privatized facility was opened by CCA in 1984. According to the
1996 Facility Census, the aggregate capacity of private facilities in operation
or under construction rose from 65,593 beds at December 31, 1995 to 85,201 beds
at December 31, 1996, an increase of 34%. Additionally, the 1996 Facility Census
reports that the number of private facilities for which contracts have been
awarded increased 27% from 104 in 1995 to 132 in 1996 and the prisoner
population housed in privately managed facilities expanded by 28% in 1996.
CORRECTIONS CORPORATION OF AMERICA
CCA is the largest developer and manager of privatized correctional and
detention facilities worldwide. At December 31, 1996, CCA had an estimated
United States market share of 52% and an estimated global market share of 48%.
CCA will be the sole lessee of the Initial Facilities and, if acquired, the
Option Facilities. CCA is expected to continue to sell additional correctional
and detention facilities to the Company in the future and to enter into
long-term non-cancelable leases with the Company with respect to those
facilities. CCA's facilities are located in 17 states in the United States, the
District of Columbia, Puerto Rico, Australia and the United Kingdom. As of June
10, 1997, CCA had contracts to manage 60 correctional and detention facilities
with an aggregate design capacity of 43,748 beds, of which 51 facilities
representing 32,441 beds are in operation.
RELATIONSHIP BETWEEN CCA AND THE COMPANY AFTER THE FORMATION TRANSACTIONS
For the purpose of governing certain of the ongoing relationships between
CCA and the Company after the Formation Transactions and to provide mechanisms
for an orderly transition, prior to the completion of the Formation
Transactions, CCA and the Company will have entered into the various agreements,
and will adopt policies as described herein. The Company believes that the
agreements are fair to it and contain terms which generally are comparable to
those which would have been reached in arm's-length negotiations with
unaffiliated parties. In each case, the terms of these agreements have been
reviewed by the Board of Directors of CCA and by the Independent Committee of
the Board of Trustees of the Company. Such agreements include (a) the Purchase
Agreement (as hereinafter defined), (b) the Option Agreements (as hereinafter
defined), (c) the Right to Purchase Agreement (as hereinafter defined), and (d)
the Trade Name Use Agreement (as hereinafter defined).
Purchase Agreement. Prior to the consummation of the Offering, the Company
and CCA and certain of its subsidiaries will enter into an agreement of sale and
purchase which provides the terms of the sale of the
9
<PAGE> 15
nine Initial Facilities for aggregate cash consideration of approximately $308.1
million (the "Purchase Agreement"). Pursuant to the Purchase Agreement, the
transfer of the Initial Facilities is subject to the completion of the Offering
as well as the normal and customary conditions to the closing of real estate
transactions. The Purchase Agreement will contain representations and warranties
by CCA concerning the Initial Facilities customarily found in agreements of such
types.
Option Agreements. Prior to the consummation of the Offering, the Company
and CCA and certain of its subsidiaries will enter into Option Agreements
(collectively, the "Option Agreements"), pursuant to which CCA and certain of
its subsidiaries will grant the Company exclusive options to acquire any or all
of the five Option Facilities for a period of three years following the closing
of the purchase of the Initial Facilities for a purchase price equal to CCA's
cost of developing, constructing and equipping such facilities plus 5%, which
aggregate approximately $193.0 million.
Right to Purchase. It is anticipated that CCA will acquire or develop
additional correctional or detention facilities in the future. The Company and
CCA will enter into a right to purchase agreement (the "Right to Purchase
Agreement") whereby the Company has an option to acquire, at fair market value,
and lease back to CCA, any correctional or detention facility acquired or
developed and owned by CCA in the future for a period of three years following
the Service Commencement Date with respect to such facility. For the first two
years of such option period, fair market value is deemed to be CCA's cost of
developing, constructing and equipping such facilities, plus 5% of such costs.
Thereafter, fair market value will be based on cash flows and operating results
of such facilities. For facilities acquired during the first five years of the
Right to Purchase Agreement, the initial annual rent on facilities leased back
to CCA will be the greater of (i) fair market rental rates, as determined by CCA
and the Company, or (ii) 11% of the purchase price of such facilities.
Thereafter, the initial annual rent on such facilities will be the fair market
rental rates, as determined by the Company and CCA.
Trade Name Use Agreement. Pursuant to the terms of a trade name use
agreement (the "Trade Name Use Agreement"), the Company will be granted the
right to use the trade name "CCA" as part of its name, subject to specified
terms and conditions therein, including CCA's right to terminate the Trade Name
Use Agreement upon ten days' notice to the Company.
Policies and Procedures for Addressing Conflicts. After completion of the
Formation Transactions, CCA and the Company will have significant contractual
and other ongoing relationships, as described above and under "Leases" herein.
Such ongoing relationships may present certain conflict situations for certain
trustees and officers of the Company and certain directors and officers of CCA.
See "Risk Factors -- Conflicts of Interest." The Company and CCA will adopt
appropriate policies and procedures to be followed by the Board of Trustees of
the Company and the Board of Directors of CCA to attempt to address those
conflicts. Such procedures will include requiring Doctor R. Crants to abstain
from making management decisions in his capacity as an officer, trustee or
director of the Company and CCA, respectively, and to abstain from voting as a
director or trustee of either company, with respect to matters that present a
conflict of interest between the companies. Whether or not a conflict of
interest situation exists will be determined by the Independent Committee on a
case-by-case basis in accordance with the policies and procedures to be
developed by the Board of Trustees (as hereinafter defined). See "Risk
Factors -- Conflicts of Interest."
The Board of Trustees has established an Independent Committee consisting
of the seven trustees who will not be employees of the Company or affiliated
with CCA (the "Independent Trustees") (the "Independent Committee"). The
Independent Committee will evaluate transactions involving the Company and CCA,
such as the acquisition of additional facilities from CCA and lease negotiation
and enforcement. Certain other significant actions of the Board of Trustees will
require the approval of a minimum of two-thirds of the trustees. In addition,
Michael W. Devlin, the Company's Chief Development Officer, and Vida H. Carroll,
the Company's Chief Financial Officer, both of whom have had and will have no
affiliation with CCA, will assist the Independent Committee with respect to
potential conflicts of interest between the Company and CCA, including the
negotiation and enforcement of all Leases. See "Management" and "Conflicts of
Interest."
10
<PAGE> 16
LEASES
Concurrently with CCA's conveyance of the Initial Facilities to the
Company, the Company will lease each such facility to CCA. Each Facility will be
the subject of a separate Lease that will incorporate the provisions of a master
agreement to lease between the Company as landlord and CCA as tenant (the
"Master Lease"). The Leases will have primary terms ranging from 10 to 12 years
(the "Fixed Term"). The Lease for each Facility may be extended at fair market
rates for three additional five-year terms (the "Extended Term"), upon the
mutual agreement of the Company and CCA. The Leases are triple net leases which
require CCA to pay substantially all expenses associated with the operation of
the Facilities, such as real estate taxes, insurance, utilities and services,
maintenance and other operating expenses. Each Lease requires that CCA operate
the leased property only as a correctional or detention facility.
The rent schedule under the Leases provides for a relatively stable source
of cash flow and opportunities to participate in future growth in revenues
experienced by CCA. The rent for the first year for each Facility under the
Leases is initially set at a fixed amount and will be increased each year by the
Base Rent Escalation.
The obligations of CCA under each Lease are cross-defaulted to each of the
other Leases with respect to payment defaults, certain bankruptcy and insolvency
related defaults and defaults relating to any CCA default on a material debt
obligation or any substantial adverse judgment not covered by insurance and not
promptly paid by CCA. The Company will have general recourse to CCA under the
Leases, but CCA's payment obligations under such Leases are not secured by any
assets of CCA.
Pursuant to the Master Lease, CCA shall have a right of first refusal with
respect to the sale of any Initial Facility, any Option Facility or any interest
in a correctional or detention facility acquired or developed by the Company in
the future and operated by CCA. Neither the Master Lease nor any of the other
agreements entered into by CCA in connection with the Formation Transactions
prohibits or otherwise restricts CCA's ability to lease properties from parties
(domestic or foreign) other than the Company. See "Leases" for a more detailed
discussion of the terms and conditions of the Leases.
THE FORMATION TRANSACTIONS
Prior to or simultaneously with the completion of the Offering, the Company
and CCA will engage in a series of transactions (collectively, the "Formation
Transactions") which are designed to consolidate the ownership interests in the
Facilities in the Company, to facilitate the Offering and to enable the Company
to qualify as a REIT for federal income tax purposes commencing with its taxable
year ending December 31, 1997. These transactions include the following:
- The Company, which was formed in Maryland in April 1997, will sell
17,000,000 Common Shares in the Offering for net proceeds of approximately
$313.2 million (assuming an initial public offering price of $20.00 per
share);
- Doctor R. Crants, Chairman of the Company and Chairman and Chief
Executive Officer of CCA, will acquire in the Offering approximately
500,000 Common Shares at a price per share equal to the initial public
offering price;
- The Company will use the net proceeds of the Offering to acquire the nine
Initial Facilities from CCA for an aggregate purchase price of
approximately $308.1 million payable in cash;
- The Company will lease the Initial Facilities to CCA pursuant to the
Leases for initial terms ranging from 10 to 12 years. Each Lease may be
extended at fair market rates for three additional five-year renewal terms
upon the mutual agreement of CCA and the Company. Pursuant to the Leases,
the Company will grant to CCA a right of first refusal to acquire the
Initial Facilities, the Option Facilities or any other correctional and
detention facilities subsequently acquired by the Company and operated by
CCA;
- The Company will enter into the Option Agreements with CCA pursuant to
which the Company will be granted the option to acquire any or all of the
five Option Facilities from CCA for a period of three
11
<PAGE> 17
years following the closing of the purchase of the Initial Facilities, for
a purchase price generally equal to CCA's costs of developing,
constructing and equipping such facilities plus 5%, which aggregate
approximately $193.0 million. If acquired, the Option Facilities will be
leased to CCA on terms substantially similar to those contained in the
Leases;
- In addition to the Option Agreements, CCA will grant the Company a right
to acquire, at fair market value, and lease back to CCA at fair market
rental rates, any correctional or detention facility acquired or developed
and owned by CCA in the future for a period of three years following the
Service Commencement Date with respect to such facility. For facilities
acquired during the first five years, the initial annual rent on
facilities leased back to CCA will be the greater of (i) fair market
rental rate as determined by the Company and CCA, or (ii) 11% of the
purchase price of such facilities. Thereafter, the initial annual rent on
such facilities will be the fair market rental rate as determined by the
Company and CCA. Additionally, CCA will grant the Company a right of first
refusal to acquire any CCA-owned correctional or detention facility should
CCA receive an acceptable third party-offer to acquire any such facility;
- The Company will enter into employment agreements with certain of the
Company's executive officers, including J. Michael Quinlan, Chief
Executive Officer, D. Robert Crants, III, President, and Michael W.
Devlin, Chief Development Officer; and
- Upon consummation of the Offering, D. Robert Crants, III and Michael W.
Devlin will each receive 150,000 Common Shares as a development fee and as
reimbursement for expenses incurred in connection with the promotion and
formation of the Company, the consummation of the Offering and the closing
of the purchase of the Initial Facilities which would have a valuation for
each of them, based upon the initial public offering price, of $3.0
million. The reimbursed expenses include certain costs related to property
due diligence, employee compensation, travel and overhead.
ADVANTAGES AND DISADVANTAGES TO UNAFFILIATED SHAREHOLDERS
The potential advantages of such transactions to unaffiliated shareholders
of the Company include their ability to participate in the substantial cash flow
of the Initial Facilities, through their ownership in the Company and the
Leases, and in all future acquisitions by the Company, primarily from CCA. See
"The Company -- Business Objectives and Strategies." The potential disadvantages
of such transactions to unaffiliated shareholders of the Company include the
lack of arm's-length valuations in determining the consideration in such
transactions and the fact that Doctor R. Crants, Chairman of the Board of both
the Company and CCA, will have substantial influence on the management and
operations of the Company and, as a substantial shareholder of both the Company
and CCA, on the outcome of any matters submitted to a vote of shareholders, and
that such influence might be exercised in a manner inconsistent with the
interests of other shareholders. See the more complete discussion of such
matters under "Risk Factors."
BENEFITS TO THE COMPANY AND ITS OFFICERS AND TRUSTEES
The advantages of the foregoing structure to the Company and its officers
and trustees include:
- The ability to access public capital markets;
- The creation of an entity which, through its payment of dividends, is
able to reduce or avoid the incurrence of federal income tax, allowing its
shareholders to participate in real estate investments without the "double
taxation" of income that generally results from an investment in a regular
corporation;
- The ability to expand the Company's acquisition and development
opportunities through its strong capital base;
- The Company will enter into employment agreements with J. Michael
Quinlan, D. Robert Crants, III and Michael W. Devlin providing for annual
salaries of $150,000, $100,000 and $100,000, respectively;
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- J. Michael Quinlan, Chief Executive Officer, will be granted options to
acquire 350,000 Common Shares at the initial public offering price. Each
of Doctor R. Crants, Chairman of the Board of Trustees, D. Robert Crants,
III, President and Michael W. Devlin, Chief Development Officer, will be
granted options to acquire 200,000 Common Shares at the initial public
offering price. Vida H. Carroll, Chief Financial Officer, will be granted
options to acquire 50,000 Common Shares at the initial public offering
price. The options will vest ratably over a four-year period commencing
with the consummation of the Offering;
- Upon consummation of the Offering, D. Robert Crants, III and Michael W.
Devlin will each receive 150,000 Common Shares as a development fee and as
reimbursement for expenses incurred in connection with the promotion and
formation of the Company, the consummation of the Offering and the closing
of the purchase of the Initial Facilities which would have a valuation for
each of them, based upon the initial public offering price, of $3.0
million. The reimbursed expenses include certain costs related to property
due diligence, employee compensation, travel and overhead. The development
fee compensates Messrs. Crants and Devlin for their services rendered on
behalf of the Company in connection with, among other things, the
preparation of the Company's initial business plan and capital and
operating budgets. A significant portion of this development work
commenced in the fall of 1995, and continued throughout 1996 and 1997. See
"The Formation Transactions -- Benefits to the Company and its Officers
and Trustees;" and
- Each non-employee trustee will receive options to acquire 5,000 Common
Shares at the initial public offering price.
BENEFITS TO CCA
CCA will receive the following benefits as a result of the Formation
Transactions:
- CCA will receive approximately $308.1 million in cash in exchange for the
nine Initial Facilities it will sell to the Company. The historical cost
of the Initial Facilities at March 31, 1997 was approximately $173.6
million;
- In the event the Independent Committee determines to exercise the
Company's option to purchase any or all of five Option Facilities, CCA
could receive up to approximately $193.0 million in cash;
- CCA will use certain of the proceeds of the sale of the Initial
Facilities to repay certain indebtedness incurred in connection with
facility acquisitions; and
- CCA will expand its marketing opportunities through increased access to
capital.
DISTRIBUTIONS
The Company intends to pay regular quarterly distributions to its
shareholders. The Board of Trustees, in its sole discretion, will determine the
actual distribution rate based on the Company's actual results of operations,
economic conditions, tax considerations (including those related to REITs) and
other factors. The first distribution, for the period ending September 30, 1997,
is expected to equal a pro rata share of the anticipated initial quarterly
distribution of $0.425 per Common Share. On an annualized basis, the anticipated
distribution is $1.70 per share, or approximately 8% to 9% of the estimated
range of the initial public offering price. The Company does not expect to
change its estimated initial distribution per Common Share if the Underwriters'
over-allotment option is exercised. See "The Formation Transactions."
The Company has established the initial annual distribution rate based on
the Company's estimate of Cash Available for Distribution (defined as the
Company's net income (loss) plus depreciation and amortization less capital
expenditures and principal payments on indebtedness (as defined in accordance
with generally accepted accounting principles)) for the 12 months following the
Offering, which was derived from the Company's Pro Forma Funds from Operations
(as defined in Note 6 to Pro Forma Statement of Operations) for the 12 months
ended December 31, 1996. Funds from Operations does not represent cash generated
from operating activities in accordance with generally accepted accounting
principles and should not
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be considered an alternative to net income as an indication of the Company's
performance or to cash flows as a measure of liquidity or ability to make
distributions. The expected distribution for the 12 months following completion
of the Offering will equal approximately 92.1% of the estimated Cash Available
for Distribution for the 12 months ending June 30, 1998. The Company's estimate
of Cash Available for Distribution does not include any revenues or expenses
related to the purchase of the Option Facilities or additional facilities. The
Company intends to maintain its approximate initial distribution amount for at
least 12 months following the consummation of the Offering unless actual results
of operations, economic conditions or other factors differ from the assumptions
used in calculating the estimate. Based on the Company's estimated results of
operations for the 12 months ending June 30, 1998, the Company estimates that
approximately 10% to 20% of the anticipated initial annual distribution to
shareholders will represent a return of capital for federal income tax purposes
and that the Company would have been required to distribute $22.6 million or
$1.31 per share during such 12-month period in order to maintain its status as a
REIT. If future taxable income increases above or decreases below the estimated
taxable income for the 12 months following the Offering, the percentage of the
anticipated initial annual distribution representing a return of capital will
decrease or increase, respectively. See "Distributions" for the calculation of
estimated pro forma cash available for distributions and related assumptions.
TAX CONSIDERATIONS AND TAX STATUS OF THE COMPANY
The Company will elect to be taxed as a REIT under sections 856 through 860
of the Internal Revenue Code of 1986, as amended (the "Code"), commencing with
its taxable year ending December 31, 1997. If the Company qualifies for taxation
as a REIT, with certain exceptions, the Company will not be subject to federal
income tax at the corporate level on its taxable income that is distributed to
its shareholders. A REIT is subject to a number of organizational and
operational requirements, including a requirement that it distribute at least
95% of its annual taxable income. Failure to qualify as a REIT will render the
Company subject to federal income tax (including any applicable alternative
minimum tax) on its taxable income at regular corporate rates, and distributions
to the shareholders in any such year will not be deductible by the Company. Even
if the Company qualifies for taxation as a REIT, the Company may be subject to
certain state and local taxes on its income and property. In connection with the
Company's election to be taxed as a REIT, the Company's Amended and Restated
Declaration of Trust (the "Declaration of Trust") will impose restrictions on
the transfer of Common Shares. The Company will adopt the calendar year as its
taxable year. See "Risk Factors -- Adverse Impact on Distributions of Failure of
Company to Qualify as a REIT," "-- Limits on Changes in Control," "Material
Federal Income Tax Considerations" and "Description of Capital Shares --
Restrictions on Ownership."
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<PAGE> 20
THE OFFERING
Common Shares offered by the
Company............................... 17,000,000 shares
Common Shares to be outstanding after
the Offering........................ 17,301,000 shares(1)(2)
Use of proceeds....................... To pay the purchase price for the
Initial Facilities and for working
capital. See "Use of Proceeds,"
"Capitalization" and "The Formation
Transactions."
Proposed NYSE symbol.................. PZN
- ---------------
(1) Does not include an aggregate of 1,850,000 shares reserved for issuance
pursuant to the Company's Employee Share Incentive Plan and the Company's
Trustees' Plan (each as hereinafter defined) of which 1,075,000 shares will
be subject to outstanding options at the closing of the Offering. See
"Management -- The Share Incentive Plan" and "Management -- Non-Employee
Trustees' Plan."
(2) Includes (i) 1,000 founder's shares and (ii) 300,000 shares issued to D.
Robert Crants, III and Michael W. Devlin as a development fee and as
reimbursement for certain expenses incurred in connection with the formation
of the Company and the consummation of the Offering. See "Dilution" and "The
Formation Transactions."
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<PAGE> 21
RISK FACTORS
An investment in the Common Shares offered hereby involves various risks.
Prospective investors should carefully consider the following risk factors in
conjunction with the other information contained in this Prospectus before
purchasing Common Shares in the Offering.
THE DEPENDENCE ON CCA, AS THE LESSEE OF THE FACILITIES, FOR THE COMPANY'S
INITIAL REVENUES AND ABILITY TO MAKE DISTRIBUTIONS
CCA will be the lessee of all the Initial Facilities and, if acquired, the
Option Facilities. The Company's initial revenues, and its ability to make
distributions to its shareholders, will depend on rental payments by CCA under
the Leases. The Company believes that CCA has sufficient assets and income to
enable it to satisfy its obligations under the Leases at this time; however,
there can be no assurance that CCA will have such assets or income in the
future.
Failure by CCA to materially comply with the terms of a lease would give
the Company the right to terminate such lease and enforce the obligations
thereunder, but could also require the Company to find another lessee to lease
such facility or risk losing its ability to elect or maintain REIT status, as
applicable. Moreover, there can be no assurance that CCA will elect to renew a
lease upon expiration of its initial term, which would also force the Company to
find a suitable replacement lessee. In either circumstance, due to the nature of
the corrections and detention industry, the Company may be unable to locate a
suitable lessee or to attract such a lessee, and may, therefore, be required to
reduce the rent, which would have the effect of reducing the Company's Cash
Available for Distribution. See "Corrections Corporation of America," "Leases"
and "Conflicts of Interest."
CONFLICTS OF INTEREST
Several conflicts of interest exist on the part of the Company, its
trustees and officers and CCA, and its directors and officers. The following
description sets forth the principal conflicts of interest, including the
relationships through which they arise, and the policies and procedures
implemented by the Company to address those conflicts.
RELATIONSHIPS WHICH MAY GIVE RISE TO CONFLICTS OF INTEREST
Doctor R. Crants is the Chairman and Chief Executive Officer of CCA and the
Chairman of the Board of Trustees of the Company. D. Robert Crants, III,
President of the Company, is the son of Doctor R. Crants. Doctor R. Crants and
D. Robert Crants, III, as well as certain other trustees or officers of the
Company or directors or officers of CCA, may also own, directly or indirectly,
shares in both companies following the Offering. D. Robert Crants, III and
Michael W. Devlin, Chief Development Officer of the Company, are principals of
DC Investment Partners LLC, a limited liability company which serves as the
general partner of three private investment partnerships. DC Investment Partners
LLC is owned by D. Robert Crants, III, Michael W. Devlin, Stephens Group, Inc.,
an affiliate of Stephens Inc., a managing underwriter of this Offering, and one
other individual. Doctor R. Crants and three other directors of CCA are
investors in one or more of the private investment partnerships managed by DC
Investment Partners LLC. Rusty L. Moore, a trustee, is the spouse of a
shareholder of Stokes & Bartholomew, P.A., tax and securities counsel to the
Company. Stokes & Bartholomew, P.A. also provides legal services to CCA,
including representing CCA in certain of the Formation Transactions. J. Michael
Quinlan is a former employee of CCA. C. Ray Bell, a trustee, is the principal of
a construction company which, as a part of its business, builds correctional and
detention facilities, including facilities for CCA. Because of Mr. Bell's
experience in building correctional and detention facilities, it is anticipated
that Mr. Bell's company may build correctional and detention facilities for or
on behalf of the Company.
SITUATIONS IN WHICH CONFLICTS OF INTEREST HAVE ARISEN AND MAY CONTINUE TO
ARISE
Valuation of the Facilities. The valuation of the Initial Facilities and
the Option Facilities was determined by management of CCA and management of the
Company and were not negotiated on an arm's-length basis. The purchase price of
the Initial Facilities was determined based primarily on an evaluation of
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<PAGE> 22
the current and anticipated cash flows and operating results of such facilities.
To determine the purchase price for each of the Initial Facilities other than
the T. Don Hutto Correctional Center, the anticipated annual cash flow from the
facility less ongoing capital expenditures, was divided by an agreed upon
coverage ratio and lease rate. Because the T. Don Hutto Correctional Center was
not completed until January 1997, the purchase price of that facility and of
each Option Facility was calculated as CCA's approximate cost of developing,
constructing and equipping such facilities, plus 5% of such costs. It is
possible that if such valuations had been determined on an arm's-length basis,
or been the subject of independent valuations or appraisals, the sum of the
values of the Initial Facilities and, if acquired, the Option Facilities might
have been lower than the sum of the values determined by the management of CCA
and of the Company. The terms of the purchase of the Facilities were approved by
the Independent Committee of the Company's Board of Trustees.
Terms of Leases. The Lease payment obligations with respect to the Initial
Facilities were determined by management of CCA and management of the Company
and were not negotiated on an arm's-length basis. However, the lease payments
that CCA is obligated to make are based on an initial capitalization rate of
approximately 11%, which the Company believes reflects the fair rental value of
the Initial Facilities to the Company. Moreover, the terms and conditions of the
Leases were the subject of independent negotiations between the Company and CCA,
and the amount of the Lease payment obligations and the terms and conditions of
the Leases were approved by the Independent Committee of the Company's Board of
Trustees.
Potential for Future Conflicts. After the Offering, CCA and the Company
may be in situations where they have differing interests resulting from the
ongoing relationship between the companies. Such situations include the fact
that after the Offering (i) CCA will lease the Initial Facilities which will be
owned by the Company; (ii) the Company will have an exclusive option to acquire
the Option Facilities and a right to purchase and a right of first refusal to
purchase any correctional or detention facility developed or acquired and owned
by CCA or its subsidiaries in the future and to provide mortgage financing for
any correctional or detention facilities financed in excess of 90% of their cost
by CCA or its subsidiaries in the future; and (iii) CCA will have a right of
first refusal to acquire the Facilities. Accordingly, the potential exists for
disagreements as to the compliance with the Leases or the values of the
facilities acquired or lease payments therefor in the future pursuant to the
Right to Purchase Agreement. Additionally, the possible need by the Company,
from time to time, to finance, refinance or effect a sale of any of the
properties managed by CCA may result in a need to modify the Lease with CCA with
respect to such property. Any such modification will require the consent of CCA,
and the lack of consent from CCA could adversely affect the Company's ability to
consummate such financings or sale. Because of the relationships described
above, there exists the risk that the Company will not achieve the same results
in its dealings with CCA that it might achieve if such relationships did not
exist.
CORRECTIONAL AND DETENTION INDUSTRY RISKS
The ability of lessees of the Company's facilities to make rental payments
and the value of the Company's facilities are subject to operating risks
generally inherent in the corrections and detention industry.
SHORT-TERM NATURE OF GOVERNMENT CONTRACTS. Private prison managers
typically enter into facility management contracts with government entities with
terms of up to five years, with one or more renewal options that may be
exercised only by the contracting government agency. No assurance can be given
that any agency will exercise a renewal option in the future. Moreover, the
contracting agency typically may terminate a facility contract without cause by
giving the private prison manager written notice. Therefore, there exists the
risk that a facility owned by the Company may not be the subject of a contract
with a government entity at some point during its ownership by the Company since
the Company's leases generally extend for periods substantially longer than the
underlying contracts with government entities.
DEPENDENCE ON GOVERNMENT APPROPRIATIONS. A private prison manager's cash
flow is subject to the receipt of sufficient funding and timely payment by
contracting government entities. If the appropriate government agency does not
receive sufficient appropriations to cover its contractual obligations, a
contract may be terminated, or the management fee may be deferred or reduced.
Any delays in payment could have an adverse effect on the private prison
manager's cash flow. Further, it is part of the Company's business strategy
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<PAGE> 23
to acquire facilities from government entities and to lease those facilities to
the government entity or to finance the facility for the government entity. The
ability of the government entity to make payments under such leases or in
connection with such financing may be dependent upon annual appropriations.
DEPENDENCE ON GOVERNMENT AGENCIES FOR INMATES. Private prison managers are
dependent on government agencies supplying those facilities with a sufficient
number of inmates to meet the facility's design capacities. A failure to do so
may have a material adverse effect on a private prison manager's financial
condition and results of operations which could affect the private prison
manager's ability to make payments under a lease.
DEPENDENCE ON ABILITY TO DEVELOP NEW PRISONS. The success of a private
prison manager in obtaining new awards and contracts may depend, in part, upon
its ability to locate land that can be leased or acquired under favorable terms.
Otherwise desirable locations may be in or near populated areas and, therefore,
may generate legal action or other forms of opposition from residents in areas
surrounding a proposed site. Moreover, the private corrections industry is
subject to public scrutiny. Negative publicity about an escape, riot or other
disturbance at a privately managed facility may result in publicity adverse to
the Company and the private corrections industry, thereby making it more
difficult for a private prison manager to renew existing contracts, or to obtain
new contracts or sites on which to operate new facilities.
LEGAL PROCEEDINGS. The Company's ownership and operation of correctional
and detention facilities could expose it to potential third party claims or
litigation by prisoners or other persons in personal injury or other damages
resulting from contact with a facility, its managers, personnel, or other
prisoners, including damages arising from a prisoner's escape or from a
disturbance or riot at a Company owned facility. In addition, as an owner of
real property, the Company may be subject to certain proceedings relating to
personal injury of persons at such facilities. The Company may be held
responsible under state laws for claims based on personal injury or property
damage despite contractual provisions in its leases with CCA and other managers
providing for indemnity against such claims.
Each of the foregoing factors, among others, either individually or
collectively, could adversely affect a private prison manager's or government
entity's ability to generate revenues or make lease payments to the Company,
which may, therefore, affect the Company's ability to make expected
distributions to its shareholders.
ADVERSE IMPACT ON DISTRIBUTIONS OF FAILURE OF COMPANY TO QUALIFY AS A REIT
The Company intends to operate so as to qualify as a REIT under the Code.
Although the Company believes that it will be so organized and will operate in
such a manner, no assurance can be given that the Company will qualify or remain
qualified as a REIT. Qualification as a REIT involves the application of highly
technical and complex Code provisions for which there are only limited judicial
or administrative interpretations. The determination of various factual matters
and circumstances not entirely within the Company's control may affect its
ability to qualify as a REIT. In addition, no assurance can be given that
legislation, new regulations, administrative interpretations or court decisions
will not significantly change the tax laws with respect to qualification as a
REIT or the federal income tax consequences of such qualification. The Company
is relying on the opinion of Stokes & Bartholomew, P.A., tax counsel to the
Company, regarding various issues affecting the Company's ability to qualify,
and retain qualification, as a REIT. Such opinions are not binding on the
Service or any court. See "Material Federal Income Tax Considerations."
If the Company were to fail to qualify as a REIT in any taxable year, the
Company would not be allowed a deduction for distributions to shareholders in
computing taxable income and would be subject to federal income tax on its
taxable income at regular corporate rates. Unless entitled to relief under
certain statutory provisions, the Company would also be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification was lost. As a result, the funds available for distribution to the
Company's shareholders would be reduced for each of the years involved. Although
the Company currently intends to operate in a manner designed to qualify as a
REIT, it is possible that future economic, market, legal or tax considerations
may cause the Company to fail to qualify as a REIT or may cause the Board of
Trustees to revoke the REIT election if the Board and the holders of 66 2/3% of
all outstanding shares of beneficial
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<PAGE> 24
interest of the Company determine that such factors make it no longer beneficial
to qualify as a REIT. See "Policies and Objectives with Respect to Certain
Activities" and "Material Federal Income Tax Considerations."
INITIAL DISTRIBUTION POLICY
The Company initially plans to make annual distributions, payable in
quarterly installments of approximately 8.0% to 9.0% of the estimated range of
the initial public offering price per share. If actual Cash Available for
Distribution falls short of estimates, the Company may be unable to maintain its
proposed initial distribution rate. The Company's success in implementing its
distribution policy will depend significantly on the Company's ability to
acquire additional facilities at attractive prices. Internal growth through
increases in revenues from the Facilities is not expected to provide as much
growth in Cash Available for Distribution as will the acquisition, development
or expansion of additional facilities.
There can be no assurance that CCA or other entities engaged in the private
corrections and detention industry will develop or acquire additional facilities
to transfer to the Company. See "Risk Factors -- Correctional and Detention
Industry Risks -- Dependence on Ability to Develop New Prisons." If the Company
is unable to acquire additional facilities from such entities at attractive
prices, the Company's ability to increase revenues and maintain or increase Cash
Available for Distribution per share may be adversely affected.
REAL ESTATE INVESTMENT CONSIDERATIONS
GENERAL. Investments in the Facilities and any additional properties in
which the Company may invest in the future are subject to risks typically
associated with investments in real estate. Such risks include the possibility
that the Facilities and any additional properties will generate total rental
rates lower than those anticipated or will yield returns lower than those
available through investment in comparable real estate or other investments.
Revenue from the Initial Facilities and, if acquired, the Option Facilities, and
yields from investments in such properties may be affected by many factors,
including changes in government regulation, general or local economic
conditions, the available local supply of prison beds and a decrease in the need
for prison beds.
Equity investments in real estate are relatively illiquid and, therefore,
the ability of the Company to vary its portfolio promptly in response to changed
conditions will be limited. There are no limitations on the percentage of the
Company's assets that may be invested in any one property or venture. The Board
of Trustees may establish limitations as it deems appropriate from time to time.
No limitations have been set on the number of properties in which the Company
will seek to invest or on the concentration of investments in any one geographic
region.
ENVIRONMENTAL MATTERS. Operating costs may be affected by the obligation
to pay for the cost of complying with existing environmental laws, ordinances
and regulations, as well as the cost of future legislation. Under various
federal, state and local environmental laws, ordinances and regulations, a
current or previous owner or operator of real property may be liable for the
costs of removal or remediation of hazardous or toxic substances on, under or in
such property. Such laws often impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances. The cost of complying with environmental laws could materially
adversely affect Cash Available for Distribution. Phase I environmental
assessments have been obtained on all of the Facilities. The purpose of a Phase
I environmental assessment is to identify potential environmental contamination
that is made apparent from historical reviews of the Facilities, review of
certain public records, visual investigations of the sites and surrounding
properties, toxic substances and underground storage tanks. The Phase I
environmental assessment reports have not revealed any environmental
contamination that the Company believes would have a material adverse effect on
the Company's business, assets, results of operations or liquidity, nor is the
Company aware of any such liability. Nevertheless, it is possible that these
reports do not reveal all environmental liabilities or that there are material
environmental liabilities of which the Company is unaware. In addition,
environmental conditions on properties owned by the Company may affect the
operation or expansion of facilities located on the properties.
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<PAGE> 25
UNINSURED LOSS. The Leases require CCA to maintain insurance with respect
to each of the Facilities. CCA carries comprehensive liability, fire, flood (for
certain Facilities) and extended insurance coverage with respect to such
properties with policy specifications and insurance limits customarily carried
for similar properties. There are, however, certain types of losses (such as
from earthquakes) which may be either uninsurable or not economically insurable.
See "Leases." The Company will obtain new title insurance policies for each of
the Facilities in connection with the Offering. There is no assurance, however,
that the amount of title insurance coverage for any of the Facilities accurately
reflects the current value of such correctional facilities or that title losses
would be completely covered by such insurance. Subject to the terms of the
Leases, should an uninsured loss occur, the Company could lose both its capital
invested in, and anticipated profits from, one or more of the Facilities. In the
opinion of management of the Company, the Facilities are adequately insured in
accordance with industry standards.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts of its executive officers, J.
Michael Quinlan, D. Robert Crants, III and Michael W. Devlin. In particular, the
Company expects to utilize the industry knowledge, experience and relationships
of Mr. Quinlan, its Chief Executive Officer. From July 1987 through December
1992, Mr. Quinlan served as the Director of the BOP. The loss of the services of
any one of these individuals could have a material adverse effect on the
Company. Specifically, if the Company were to lose the services of Mr. Quinlan,
it would lose the benefit of his extensive knowledge of and experience in the
prison industry. The Company has entered into employment agreements with each of
the above named executive officers. See "Management -- Employment Agreements."
LACK OF OPERATING HISTORY
The Company has been recently organized and has no operating history. There
can be no assurance that the Company will be able to generate sufficient revenue
from operations to make anticipated distributions. The Company also will be
subject to the risks generally associated with the formation of any new
business. The Company's management has no experience operating a public company
or a REIT.
LACK OF CONTROL OVER DAY-TO-DAY OPERATIONS AND MANAGEMENT OF THE FACILITIES
To qualify as a REIT for federal income tax purposes, the Company may not
operate, or participate in decisions affecting the operations of the Initial
Facilities and, if acquired, the Option Facilities. CCA will control the
operations of the Facilities under the Leases, each of which will have initial
terms ranging from 10 to 12 years and three renewal terms of five years each,
exercisable upon the mutual agreement of CCA and the Company. During the terms
of the Leases, the Company will not have the authority to require CCA to operate
the Facilities in a particular manner or to govern any particular aspect of
their operation except as set forth in the Leases. Thus, even if the Company
believes CCA is operating the Facilities inefficiently or in a manner adverse to
the Company's interests, the Company may not require CCA to change its method of
operation. The Company is limited to seeking redress only if CCA violates the
terms of a Lease, in which case the Company's primary remedy is to terminate the
Lease or, in certain circumstances, all of the Leases, and seek to recover
damages from CCA. If a Lease is terminated, the Company will be required to find
another suitable lessee or risk losing its ability to elect or maintain REIT
status, as applicable.
DILUTION
The purchasers of the Common Shares offered hereby will experience an
immediate dilution of $1.72 per share in the net tangible book value of the
Common Shares ($1.68 per share assuming full exercise of the Underwriters'
over-allotment option).
OWNERSHIP LIMIT
For the Company to maintain its qualification as a REIT, not more than 50%
in value of its outstanding shares may be owned, directly or constructively, by
five or fewer individuals (as defined in the Code). In addition, rent from
related party tenants is not qualifying income for purposes of the gross income
tests under the Code. See "Material Federal Income Tax
Considerations -- Taxation of the Company." Two sets of constructive ownership
rules (one to determine whether a REIT is closely held and one to determine
whether
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rent is from a related party tenant) apply in determining whether these
requirements are met. For the purpose of preserving the Company's REIT
qualification, the Declaration of Trust prohibits direct or constructive
ownership by any person of more than 9.8% of the Common Shares or more than 9.8%
of any preferred shares, $0.01 par value per share, of the Company (the
"Preferred Shares") (such ownership limit being referred to as the "Ownership
Limit"). The constructive ownership rules are complex and may cause Common
Shares owned, directly or constructively, by a group of related individuals
and/or entities to be deemed to be constructively owned by one individual or
entity. As a result, the acquisition of less than 9.8% of the Common Shares (or
the acquisition of an interest in an entity which owns Common Shares) by an
individual or entity could cause that individual or entity (or another
individual or entity) to own constructively in excess of 9.8% of the Common
Shares, and thus subject such Common Shares to the Ownership Limit. Direct or
constructive ownership of Common Shares in excess of the Ownership Limit would
cause the violative transfer or ownership to be void, or cause such shares to be
held in trust as Shares-in-Trust (as hereinafter defined) for the benefit of one
or more charitable organizations. See "Description of Capital
Shares -- Restrictions on Ownership."
LIMITS ON CHANGES IN CONTROL
Certain provisions of the Company's Declaration of Trust and Bylaws,
including provisions imposing the Ownership Limits (which are described
specifically in the immediately preceding paragraph and which generally
prohibits any shareholder from owning more than 9.8% of the Common Shares),
authorizing the issuance of preferred shares and requiring staggered terms for
the Board of Trustees, and certain provisions of Maryland law regarding business
combinations and "control share acquisitions" could have the effect of delaying,
deferring or preventing a change in control of the Company or the removal of
existing management and, as a result, could prevent the shareholders of the
Company from being paid a premium for their Common Shares. The Declaration of
Trust authorizes the Board of Trustees to issue preferred shares in one or more
series, to establish the number of shares in each series and to fix the
designations, powers, preferences and rights of each series and the
qualifications, limitations or restrictions thereof, all without shareholder
approval. The authorization of preferred shares may have an anti-takeover effect
because it gives the Board of Trustees the power to issue preferred shares at
its sole discretion on such terms as it, in its sole discretion, deems proper,
which may have a dilutive effect on or otherwise deter any potential acquiror of
the Company. The Declaration of Trust provides for three classes of trustees, as
nearly equal in size as is practicable. Each class of trustees holds office
until the third annual meeting for selection of trustees following the election
of such class, except that the initial terms of the three classes expire in
1998, 1999 and 2000, respectively. The Declaration of Trust further provides
that the Board of Trustees or shareholders may, at any time, remove any trustee,
with or without cause, only by an affirmative vote of a majority of trustees or
a majority of holders of shares entitled to vote in the election of trustees.
These provisions may have an anti-takeover effect because a third party will be
unable to acquire immediate control of the Board of Trustees due to the
existence of the staggered board and will further be unable to remove trustees
without majority shareholder approval. See "Description of Capital
Shares -- Certain Provisions of Maryland Law and of the Company's Declaration of
Trust and Bylaws."
CHANGES IN INVESTMENT AND FINANCING POLICIES WITHOUT VOTE OF SHAREHOLDERS
The Board of Trustees determines the Company's investment and financing
policies with respect to certain activities, including its growth,
capitalization, distribution and operating policies. Although the Board of
Trustees has no present intention to amend or revise these policies, the Board
of Trustees may do so at any time without a vote of the Company's shareholders.
See "Policies and Objectives With Respect to Certain Activities -- Investment
Objectives and Policies."
NO PRIOR MARKET FOR COMMON SHARES; FACTORS AFFECTING MARKET PRICE
Prior to the Offering, there has been no public market for the Common
Shares. Although the Common Shares have been approved for listing on the NYSE,
subject to official notice of issuance, there can be no assurance that an active
trading market will develop or be sustained or that the Common Shares may be
resold at or above the initial public offering price. The initial public
offering price will be determined through
21
<PAGE> 27
negotiations between the Company and the Underwriters and may not be indicative
of the market price for the Common Shares after the Offering. See
"Underwriting."
The market price of the Common Shares could be subject to significant
fluctuations in response to variations in quarterly and yearly operating
results, the success of the Company's business strategy, general trends in the
corrections and detention industry, competition, changes in the laws affecting
the Company and other factors. In addition, the stock market in recent years has
experienced price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of affected companies. These
fluctuations may adversely affect the market price of the Common Shares.
Moreover, the price of the Company's shares in public markets may be
affected by the amount of the annual distributions paid by the Company relative
to the price paid for Common Shares. As a result, an increase in market interest
rates could adversely affect the market price of the Common Shares to the extent
that the yield on those shares compares less favorably to yields on fixed-income
securities and other investments.
DEPENDENCE ON FINANCING FOR GROWTH AND ADVERSE CONSEQUENCES OF DEBT FINANCING ON
ABILITY TO MAKE DISTRIBUTIONS
The Company intends to continue to pursue a growth strategy which includes
acquiring correctional and detention facilities. There is a risk that the
Company will not have access to sufficient debt or equity capital it may need to
pursue its acquisition strategy. The Company may need access to debt or equity
capital for several reasons. First, the Company generally cannot retain cash
generated by operating activities. See "Material Federal Income Tax
Considerations." Second, the Company's current business strategy is to maintain
a ratio of debt to total capitalization of 50% or less. The Company believes
that this debt policy balances the Company's desire for growth with a prudent
capital structure. The Company's organizational documents, however, do not
contain any limitation on the amount or percentage of indebtedness the Company
may incur, and the Board of Trustees could alter or eliminate the Company's
current borrowing policy. If the policy were changed or eliminated, the Company
could become more highly leveraged, resulting in an increase in debt service,
which could adversely affect the Company's Funds from Operations and its ability
to make expected distributions to its shareholders, and result in an increased
risk of default on the Company's obligations. The Company intends to enter into
the Bank Credit Facility promptly following the Offering, or shortly thereafter,
although there can be no assurance that the Company will enter into the Bank
Credit Facility. Moreover, the Company may, from time to time, incur additional
indebtedness to acquire any or all of the Option Facilities or any other
facilities. Accordingly, since the Company generally cannot retain earnings, and
the amount of debt that it can incur is limited by its internal policies, the
Company's ability to continue making acquisitions will depend primarily on its
ability to obtain additional private or public equity financing. There is no
assurance that such financing will be available.
Although the Company does not intend to incur indebtedness in connection
with the Offering, the Company is authorized to raise additional funds for its
future operations through debt financing. As a result of incurring debt, the
Company will be subject to the risks normally associated with debt financing,
including the risk that the Company's Funds from Operations will be insufficient
to meet required payments of principal and interest or that Cash Available for
Distribution may decrease. In addition, the Company will be subject to the risk
that interest rates may increase, which could adversely affect its ability to
make distributions. If a property is mortgaged to secure payment of
indebtedness, and the Company is unable to meet mortgage payments, the property
could be transferred to the mortgagee with a consequent loss of income and asset
value to the Company. See "Policies and Objectives With Respect to Certain
Activities -- Financing."
ERISA RISKS
Depending upon the particular circumstances of the plan, an investment in
the Common Shares may not be an appropriate investment for an ERISA plan, a
qualified plan or individual retirement accounts and individual retirement
annuities (collectively "IRAs"). In deciding whether to purchase Common Shares,
a fiduciary of an ERISA plan, in consultation with its advisors, should
carefully consider its fiduciary responsibilities under ERISA, the prohibited
transaction rules of ERISA and the Code, and the effect of the "plan asset"
regulations issued by the U.S. Department of Labor.
22
<PAGE> 28
THE COMPANY
GENERAL
The Company has been formed to capitalize on the opportunities created by
the growing trend towards privatization in the corrections industry, including
the increasing demand for private correctional and detention facilities. The
principal business strategy of the Company will be to acquire correctional and
detention facilities that meet the Company's investment criteria, from both
private prison managers and government entities, to expand its existing
facilities, and to lease all such facilities under long-term leases. The Company
will initially acquire the nine Initial Facilities from CCA. The Company will
also have options to acquire any or all of the five Option Facilities for a
period of three years following the closing of the purchase of the Initial
Facilities. In addition, the Company will have an option to acquire any
correctional or detention facility acquired or developed and owned by CCA in the
future, for a period of three years following the Service Commencement Date with
respect to such facility. As a result of these transactions, the Company and CCA
will have several ongoing relationships after the Formation Transactions, some
of which could give rise to possible conflicts of interest. See "Relationship
Between CCA and the Company after the Formation Transactions." Upon completion
of the Offering and the Formation Transactions, the Company will be the only
self-administered and self-managed publicly-traded REIT in the United States
focused on owning and acquiring correctional and detention facilities.
The Company will lease all of the Facilities to CCA, and CCA will continue
to manage the Facilities. The Company believes that, for the Initial Facilities
purchased and, if acquired, the Option Facilities, it will benefit from the
continuity of management provided by CCA. CCA is the largest developer and
manager of privatized correctional and detention facilities worldwide. CCA has
developed and operated the Initial Facilities and the Option Facilities since
they were acquired or constructed by CCA at various times ranging from 1984
through 1997. See "Business of the Company and its Properties."
The Company will purchase the Initial Facilities for an aggregate purchase
price of approximately $308.1 million in cash concurrent with the closing of the
Offering. The Initial Facilities will be leased to CCA pursuant to triple net
Leases which require CCA to pay all operating expenses, taxes, insurance and
other costs. All of the Leases will provide for base rent with certain annual
escalation and will have primary terms of 10 to 12 years which may be extended
at fair market rates for three additional five-year periods upon the mutual
agreement of the Company and CCA. The Initial Facilities are expected to
generate aggregate initial annual rent of approximately $33.9 million which
represents an 11% lease rate based on the purchase price. The Company will have
general recourse to CCA under the Leases, but such Leases are not secured by any
properties of CCA. The obligations of CCA under the Leases are cross-defaulted
to each of the other Leases with respect to payment defaults and certain other
defaults.
The Company has obtained a commitment for the $150 million Bank Credit
Facility which will be used for acquiring additional correctional facilities,
including the Option Facilities, and for certain other purposes, including
expanding existing facilities and working capital, as necessary. The Company has
not, however, finalized negotiations on the Bank Credit Facility and there can
be no assurance that the Company will obtain the Bank Credit Facility. Upon the
consummation of the Offering, the Company will have no outstanding indebtedness.
The Company believes that its lack of debt, coupled with its ability to obtain
financing through the Bank Credit Facility will provide the Company with
significant financial resources in pursuing correctional facility acquisition
and expansion opportunities, including some or all of the Option Facilities. The
Company intends to maintain a capital structure which limits consolidated
indebtedness to no more than 50% of its total capitalization. See "Policies and
Objectives With Respect to Certain Activities -- Financing."
The Company intends to initially focus its investments on privately-managed
facilities which are owned and operated by CCA or its subsidiaries. However, the
Company will also pursue other opportunities, including acquisitions or
financings of facilities owned and operated by government entities. The Company
believes it has significant access to potential development and acquisition
opportunities by virtue of its relationship with CCA and the industry contacts
of its Chief Executive Officer, Mr. Quinlan, former Director of the BOP. The
Company intends to utilize Mr. Quinlan's experience in developing and managing
23
<PAGE> 29
correctional and detention facilities to opportunistically pursue development
and acquisitions of correctional facilities from both the public and private
sectors. See "Management."
The Company is a self-administered and self-managed REIT that expects to
qualify as a REIT for federal income tax purposes. In order to qualify as a
REIT, the Company's income must be derived from certain sources, including rents
from real property (and generally excluding income from the operation of a
correctional facility). See "Material Federal Income Tax
Considerations -- Taxation of the Company -- Income Tests." Accordingly, the
Company is precluded from operating correctional facilities and, as a
consequence, intends to lease such properties pursuant to long-term
non-cancelable leases.
The Company was formed as a Maryland real estate investment trust in April
1997. The Company's principal executive offices are located at, and its mailing
address is, 2200 Abbott Martin Road, Suite 201, Nashville, Tennessee 37215. The
Company's telephone and fax numbers are (615) 460-7452 and (615) 460-1206,
respectively.
BUSINESS OBJECTIVES AND STRATEGIES
The Company's primary business objectives are to maximize current returns
to shareholders through increases in cash flow available for distribution and to
increase long-term total returns to shareholders through appreciation in the
value of the Common Shares. The Company will seek to achieve these objectives
through:
- The acquisition of the Initial Facilities and, if acquired, the Option
Facilities;
- The strategic expansion of its correctional and detention facilities
portfolio through the selective acquisition of correctional facilities
that demonstrate potential for significant revenue and cash flow from both
private prison managers and government entities;
- The expansion of its existing facilities;
- The construction and/or development of new correctional and detention
facilities;
- The improvement and enhancement of the Company's holdings through proper
maintenance and capital improvements;
- The structuring of fair market leases under which the lessee pays base
rent with certain annual escalations and pays certain expenses in
connection with the operation of the property such as real estate taxes,
insurance, utilities and services, maintenance and other operating
expenses;
- Providing mortgages or other appropriate financing vehicles to
correctional facility operators in circumstances where ownership by the
Company is not otherwise attractive;
- The monitoring of operating performance of the facilities in its
portfolio to ensure that the lessees comply with their lease obligations;
and
- The maintenance of a ratio of debt to total capitalization (i.e., total
debt of the Company as a percentage of shareholders' equity plus total
debt) of 50% or less. See "Policies and Objectives with Respect to Certain
Activities -- Financing."
FUTURE GROWTH OF THE COMPANY
EXTERNAL GROWTH
Acquisition Opportunities. In addition to the possible acquisition of the
Option Facilities, the Company intends to acquire from both private prison
owners and operators and government entities additional correctional and
detention facilities that meet its investment criteria, as described below. The
Company believes it has a competitive advantage in the acquisition of new
private correctional facilities due to its relationship with CCA and the
Company's significant capital resources. The primary source of private
correctional facilities to be initially acquired or financed by the Company will
be facilities owned and operated by CCA. Following any such acquisition from
CCA, the Company intends to lease such properties to CCA. The Company has an
option to acquire and lease back to CCA any correctional or detention facility
acquired or developed and owned by CCA in the future, for a period of three
years following the Service
24
<PAGE> 30
Commencement Date with respect to such facility. The Company has a right of
first refusal in the event CCA decides to sell an interest in or use mortgage
financing to finance more than 90% of the cost of any correctional or detention
facilities now owned or which are acquired or developed by CCA or its affiliates
in the future. See "Relationship Between CCA and the Company after the Formation
Transactions." In 1996, CCA invested approximately $165.0 million in
approximately 15 correctional facility projects and increased its beds under
contract from 28,607 to over 41,000. Moreover, as of December 31, 1996, CCA was
the largest private prison management company in the United States with an
estimated national market share of 52%. Of the 21,706 beds awarded to the
private sector in 1996, CCA was awarded 12,872 beds, or 58%. Notwithstanding
CCA's market share and growth, less than 5% of all adult prison beds in the
United States are privately managed. Management believes that as CCA and the
private prison management industry continue to grow, many opportunities will
exist to acquire additional private correctional facilities from CCA on
attractive terms. See "Risk Factors -- Correctional and Detention Industry
Risks."
The Company also believes that attractive opportunities exist to acquire or
develop correctional facilities from various government entities. Historically,
government entities have used various methods of construction financing to
develop new correctional facilities, including but not limited to the following:
(i) one-time general revenue appropriations by the government agency for the
cost of the new facility; (ii) general obligation bonds that are secured by
either a limited or unlimited tax levied by the issuing government entity; or
(iii) lease revenue bonds secured by an annual lease payment that is subject to
annual or bi-annual legislative appropriation of funds. Many jurisdictions are
operating their correctional facilities at well above their rated capacities,
and as a result are under federal court order to alleviate prison overcrowding
within a certain time period. These jurisdictions are often not in a position to
appropriate funds or obtain financing to construct a correctional facility
because of other fiscal demands or requirements for public approval.
Accordingly, the Company believes that, in an attempt to address fiscal
pressures of matching revenue collections with projected expenses, many such
government entities have been and will be forced to consider private ownership
with respect to the development of new correctional facilities and
sale-leaseback transactions or other financing alternatives with respect to
existing correctional facilities. Management believes that such situations will
enable the Company to acquire and develop correctional facilities from and on
behalf of governments at all levels including those which might not be the
subject of a private management contract. In pursuing such opportunities, the
Company expects to utilize the industry knowledge, experience and relationships
of its Board of Trustees and management, particularly J. Michael Quinlan, its
Chief Executive Officer, and Doctor R. Crants, Chairman of the Board of
Trustees. From July 1987 through December 1992, Mr. Quinlan served as the
Director of the BOP. Mr. Crants currently serves as Chairman and Chief Executive
Officer of CCA.
In making its decision with respect to the Initial Facilities and in
evaluating the future acquisition of any or all of the Option Facilities and
other facilities, the Company has considered and will consider the following
criteria:
- The reputation and creditworthiness of the current owner, manager or
developer of the facility;
- The proposed terms for purchasing the facility;
- The proposed terms of leasing the facility, including rental payments and
lease term;
- The quality of construction of the facility;
- The quality of operations at an existing facility or the quality of other
operations of a prison manager for a new facility;
- The facility's status of accreditation by the American Correctional
Association (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; and
- The relationship between the prison manager and the contracting
correctional authority.
25
<PAGE> 31
Financing Opportunities. High occupancy rates and prison overcrowding have
resulted in an increased demand for new federal, state and local correctional
facilities. This demand has not been fully met because of budgetary constraints
and the reduced availability of construction financing. While the Company
intends to grow primarily from acquisitions and expansions of correctional
facilities, the Company believes that opportunities exist for it to provide
mortgage or other appropriate financing vehicles to government entities and
private prison managers in circumstances where ownership by the Company is not
otherwise attractive.
The Company's ability to acquire new facilities, expand its existing
facilities or provide mortgage financing will depend on its access to financing.
There can be no assurance that the Company will be able to acquire correctional
facilities that meet its investment criteria. Moreover, acquisitions and
expansions entail risks that acquired or expanded facilities will fail to
perform in accordance with expectations. See "Risk Factors -- Real Estate
Investment Considerations" and "Risk Factors -- Initial Distribution Policy."
INTERNAL GROWTH
Expansion Opportunities. The Company's growth objectives will also focus
on the selective expansion of its existing correctional facilities to increase
cash flows and property values. In 1996, CCA expanded four of its domestic
facilities by an aggregate of 992 beds and used the expansion space for its
existing contracting government entities as well as to house inmates from other
jurisdictions under new contracts. The Company believes that CCA (and other
tenants of the Company) will continue to attempt to achieve economies of scale
through expansions of existing facilities. Management of the Company intends to
actively participate in its tenants' expansion plans and intends to provide
expansion space as needed.
Rent Escalations. The rent schedule under the Leases provides for a
relatively stable source of cash flow and opportunities to participate in future
growth in revenues. The minimum rent for the first year for each Facility under
the Leases is initially set at a fixed amount. Thereafter minimum rent will
escalate by the Base Rent Escalation which is a percentage equal to the greater
of (i) 4%, or (ii) 25% of the percentage increase in the gross management
revenues realized by CCA from such Facility, exclusive of any increase
attributable to expansion in the size of a number of beds in such facility.
LEASE NEGOTIATION
Concurrently with the performance of due diligence procedures related to
new acquisition opportunities and/or the negotiation of the terms and conditions
of new acquisitions, the Company will generally begin discussions regarding
proposed lease terms. Based on current market conditions, the Company will
generally seek lease terms which provide an initial annual base rent with an
appropriate escalation factor in an amount similar to the Base Rent Escalation,
and other terms similar to the terms of the Leases. The Company may, however,
negotiate lease terms different from the foregoing.
DUE DILIGENCE PROCESS
CCA has developed a comprehensive analytical approach to bidding on and
developing new correctional projects or facilities. This deliberation process
has allowed CCA to assemble a portfolio of privatized correctional and detention
facilities that has shown sustained growth in revenues and cash flows. The
Company expects that CCA will continue to follow these procedures in acquiring
privatized correctional facilities in the future. Such procedures include:
Competitive Market Analysis. CCA generally receives inquiries from or
on behalf of government agencies that are considering privatization of
certain facilities. When it receives such an inquiry, CCA thoroughly
examines the need for its services (including the economic and demographic
indicators in the area) and the legal and political climate in which the
inquiring party operates. Generally, government agencies responsible for
correctional and detention services procure goods and services through a
competitive process involving either a Request for Proposal ("RFP") or
Request for Qualification ("RFQ"). A majority of CCA's new business is
secured through responding to RFPs. As part of CCA's process of responding
to RFPs, CCA's management meets with appropriate personnel from the
government agency making the request to best determine the agency's
distinct needs. If the project falls
26
<PAGE> 32
within CCA's strategy, CCA will then submit a written response to the RFP.
A typical RFP requires bidders to provide detailed information, including,
but not limited to, the service to be provided by the bidder, its
experience and qualifications, and the price at which the bidder is willing
to provide the services (which services may include the renovation,
improvement or expansion of an existing facility or the planning, design
and construction of a new facility).
Pro Forma Operating Budget. CCA works closely with the government
agency to develop a comprehensive pro forma budget on the property,
utilizing available financial information in addition to other information
collected from a variety of sources. The expected term of the management
contract is examined as well as the cost of construction of a new facility
or the expansion or renovation of an existing facility. Finally, in the
event of the construction of a new facility, the potential for overall
capital appreciation of the facility is reviewed.
Environmental and Legal Review. In conjunction with each prospective
acquisition, CCA conducts comprehensive real estate and legal due diligence
on the property. This due diligence includes Phase I environmental
assessments to the extent such assessments are not already existing. In
addition, CCA conducts customary real estate due diligence, including a
survey of the property, a review of all title documents, operating leases
and contracts, zoning, and government permits and licenses, and a
determination of whether the property is in compliance with all applicable
laws.
Accordingly, the Company believes it will be able to acquire or finance
correctional and detention facility properties from CCA with physical and market
characteristics similar to the Facilities. The Company will use a similar
approach in evaluating the acquisition or financing of correctional and
detention facilities, including those from government entities.
27
<PAGE> 33
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Shares offered
hereby are estimated to be approximately $313.2 million ($360.6 million if the
Underwriters' over-allotment option is exercised in full) after deduction of the
underwriting discount and estimated Offering expenses. Approximately $308.1
million of the net proceeds of the Offering will be used by the Company to
purchase the nine Initial Facilities from CCA. The purchase of the Initial
Facilities will close contemporaneously with the closing of the Offering. See
"The Formation Transactions." The remaining net proceeds from the Offering of
approximately $5.1 million, any net proceeds from the exercise of the
Underwriters' over-allotment option, and funds available from the $150 million
Bank Credit Facility, will be used by the Company for general purposes,
including the possible future acquisition of additional properties consistent
with the Company's investment policies, including the Option Facilities. While
the Company may engage from time to time in discussions regarding potential
acquisitions, other than with respect to the Option Facilities and the Right to
Purchase Agreement, it has not entered into any agreement as of the date of this
Prospectus to make any such acquisition. Pending the described uses, the
remaining net proceeds will be invested in short-term investment grade
instruments, interest bearing bank account, certificates of deposit, money
market securities, U.S. government securities or mortgage-backed securities
guaranteed by Federal agencies.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
April 23, 1997, the date of its formation, (i) after giving effect to the
Formation Transactions and (ii) as adjusted to reflect the sale by the Company
of the 17,000,000 Common Shares offered hereby and the application of the
estimated net proceeds therefrom as described under "Use of Proceeds." The
information set forth in the following table should be read in conjunction with
the financial statements and notes thereto, the pro forma financial information
and notes thereto included elsewhere in this Prospectus and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
<TABLE>
<CAPTION>
APRIL 23, 1997
------------------------
ACTUAL AS ADJUSTED(2)
------ --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Shareholders' Equity:
Preferred Shares, $0.01 par value, 10,000,000 shares
authorized, no shares issued and outstanding........... $-- $ --
Common Shares, $0.01 par value, 90,000,000 shares
authorized, 1,000 shares issued and outstanding;
17,301,000 shares, as adjusted, issued and
outstanding(1)......................................... -- 173
Additional paid-in capital................................ 1 316,027
--- --------
Total shareholders' equity........................ 1 316,200
--- --------
Total capitalization............................ $ 1 $316,200
=== ========
</TABLE>
- ---------------
(1) Does not include 1,850,000 Common Shares reserved for issuance pursuant to
the Company's Share Incentive Plan or the Company's Non-Employee Trustees'
Plan of which 1,075,000 shares will be outstanding upon consummation of the
Offering. See "Management -- The Share Incentive Plan" and " -- Non-Employee
Trustees' Plan."
(2) Includes (i) 1,000 founder's shares and (ii) 300,000 shares issued to D.
Robert Crants, III and Michael W. Devlin as a development fee and as
reimbursement for certain expenses incurred in connection with the formation
of the Company and the consummation of the Offering which are valued based
upon the initial public offering price. See "Dilution" and "The Formation
Transactions."
28
<PAGE> 34
DISTRIBUTIONS
The Company intends to pay regular quarterly distributions to its
shareholders. The Board of Trustees, in its sole discretion, will determine the
actual distribution rate based on the Company's actual results of operations,
economic conditions, tax considerations (including those related to REITs) and
other factors. The first distribution, for the period ending September 30, 1997,
is expected to equal a pro rata share of the anticipated initial quarterly
distribution of $0.425 per Common Share, which on an annualized basis, will
represent a distribution of $1.70 per share, or approximately 8% to 9% of the
estimated range of the initial public offering price. The Company does not
expect to change its estimated initial distribution per Common Share if the
Underwriters' over-allotment option is exercised. See "The Formation
Transactions."
The distribution described above is expected to represent approximately
92.1% of the Company's Pro Forma Cash Available for Distribution for the twelve
months ending December 31, 1996. The Company's estimate of the pro forma Cash
Available for Distribution is based upon pro forma Funds from Operations (as
herein defined), with certain adjustments based on the items described below.
The estimate of Cash Available for Distribution is being made solely for the
purpose of setting the initial distribution and is not intended to be a
projection or forecast of the Company's results of operations or its liquidity,
nor is the methodology upon which such adjustments were made necessarily
intended to be a basis for determining future distributions.
The following table describes the calculation of pro forma Funds from
Operations for the 12 months ended December 31, 1996 and the three months ended
March 31, 1997 and the adjustments made to pro forma Funds from Operations in
order to calculate initial estimated distributions.
<TABLE>
<CAPTION>
PRO FORMA
----------------------------------
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 MARCH 31, 1997
----------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C>
Pro forma net income........................................ $23,353 $5,839
Plus: Pro forma real estate depreciation and amortization... 8,588 2,147
------- ------
Pro forma funds from operations(1)........................ 31,941 7,986
======= ======
Estimated cash available for distribution(2)................ 31,941 7,986
Expected initial distribution(3)............................ 29,412 7,353
Expected initial distribution per common share.............. $ 1.70 $.0425
Expected initial payout ratio based on estimated cash
available for distribution(4)............................. 92.1% 92.1%
</TABLE>
- ---------------
(1) Funds from Operations does not represent cash generated from operating
activities (determined in accordance with GAAP) and should not be considered
as an alternative to net income (determined in accordance with GAAP) as an
indication of the Company's performance or to cash flows from operating
activities (determined in accordance with GAAP) as a measure of liquidity or
ability to make distributions. The Company generally considers Funds from
Operations an appropriate measure of liquidity of an equity REIT because
industry analysts have accepted it as a performance measure of equity REITs.
"Funds from Operations" as defined by NAREIT means net income (loss)
(computed in accordance with GAAP) excluding non-recurring items, gains (or
losses) from debt restructuring and sales of property, plus depreciation and
amortization on real estate assets and after adjustments for unconsolidated
partnerships and joint ventures. The Company's Funds from Operations are not
comparable to Funds from Operations reported by other REITs that do not
define the term using the current NAREIT definition or that interpret the
current NAREIT definition differently than does the Company. The Company
believes that in order to facilitate a clear understanding of the operating
results of the Company, Funds from Operations should be examined in
conjunction with net income as presented in the combined financial
statements and information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE
YEAR ENDED MONTHS ENDED
DECEMBER 31, 1996 MARCH 31, 1997
----------------- ------------------
(IN THOUSANDS)
<S> <C> <C>
Calculation of Funds from Operations:
Pro forma net income...................................... $23,353 $5,839
Plus: Pro forma real estate depreciation and
amortization............................................ 8,588 2,147
------- ------
Pro forma funds from operations........................... $31,941 $7,986
======= ======
</TABLE>
(2) To estimate Cash Available for Distribution, pro forma Funds from Operations
were adjusted (a) without giving effect to any changes in working capital
resulting from changes in current assets and current liabilities (which
changes are not anticipated to be material) or the amount of cash estimated
to be used for (i) development, acquisition and other activities and (ii)
financing activities (b) for certain known events and/or contractual
commitments that may have occurred during the period but would not have been
in effect for the full year and (c) for certain non-GAAP adjustments
consisting of an estimate of amounts anticipated for recurring tenant
improvements and capital expenditures. The estimate of Cash Available for
Distribution is being made solely for the purpose of setting the initial
distribution and is not intended to be a projection or forecast of the
Company's results of operations or its liquidity, nor is the methodology
upon which such adjustments were made necessarily intended to be a basis for
determining future distributions.
(3) Represents expected initial distribution per Common Share multiplied by the
17,301,000 Common Shares to be outstanding upon completion of the Formation
Transactions.
(4) Represents the anticipated initial aggregate distribution divided by Cash
Available for Distribution.
29
<PAGE> 35
The Company believes that its estimated Cash Available for Distribution
constitutes a reasonable basis for setting the initial distribution rate on the
Common Shares and intends to maintain its initial distribution rate for the 12
months following the Offering unless actual results from operations, economic
conditions or other factors differ from the assumptions used in its estimate.
The actual return that the Company will realize and the amount available for
distributions to shareholders will be affected by a number of factors, including
the revenues received from the Initial Facilities, the operating expenses of the
Company, the interest expense incurred on its borrowings and unanticipated
capital expenditures. No assurance can be given that the Company's estimate will
prove accurate. In addition, pro forma results of operations do not purport to
represent the actual results that can be expected for future periods. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company anticipates that Funds from Operations will exceed earnings and
profits due to non-cash expenses, primarily depreciation and amortization,
expected to be incurred by the Company. Distributions by the Company to the
extent of its current or accumulated earnings and profits for federal income tax
purposes will be taxable to shareholders as ordinary dividend income.
Distributions in excess of earnings and profits generally will be treated as a
non-taxable reduction of the shareholder's basis in the Common Shares to the
extent thereof, and thereafter as capital gain. Distributions treated as a
non-taxable reduction in basis will have the effect of deferring taxation until
the sale of a shareholder's Common Shares. The Company does not intend to reduce
the expected initial distribution per share if the Underwriters' over-allotment
option is exercised. Based on the Company's estimated results of operations for
the 12 months ending June 30, 1998, the Company estimates that approximately 10%
to 20% of the anticipated initial annual distribution to shareholders will
represent a return of capital for federal income tax purposes and that the
Company would have been required to distribute $22.6 million or $1.31 per share
during such 12-month period in order to maintain its status as a REIT. If actual
Funds from Operations or taxable income vary from these amounts, the percentage
of distributions may vary substantially in future years. For a discussion of the
tax treatment of distributions to holders of Common Shares, see "Material
Federal Income Tax Considerations -- Taxation of Taxable Domestic Shareholders"
and "-- Taxation of Foreign Shareholders." In order to qualify to be taxed as a
REIT, the Company must make annual distributions to shareholders of at least 95%
of its REIT taxable income (determined by excluding any net capital gain), which
the Company anticipates will be less than its share of adjusted Funds from
Operations. Under certain circumstances, the Company may be required to make
distributions in excess of Cash Available for Distribution in order to meet such
distribution requirements. In such a case, the Company may find it necessary to
arrange for short-term (or possible long-term) borrowings or to raise funds
through the issuance of Preferred Shares or additional Common Shares.
Future distributions by the Company will be at the discretion of the Board
of Trustees and will depend on the actual Funds from Operations of the Company,
its financial condition, capital requirements, the annual distribution
requirements under the REIT provisions of the Code (see "Material Federal Income
Tax Considerations -- Taxation of the Company -- Requirements for
Qualification"), and such other factors as the Board of Trustees deems relevant.
See "Risk Factors -- Changes in Investment and Financing Policies Without Vote
of Shareholders."
30
<PAGE> 36
DILUTION
As of April 23, 1997, the founding shareholder owned 1,000 Common Shares.
The net tangible book value of the Common Shares immediately subsequent to this
Offering (based on an initial public offering price of $20.00 per share, after
deduction of the estimated underwriting discount and Offering expenses) will be
$18.28 per share, an increase of $18.27 from the $0.01 net tangible book value
per share prior to the Offering (or a net tangible book value per share of
$18.32 and a per share increase of $18.31, respectively, assuming full exercise
of the Underwriters' over-allotment option). A $1.72 per share dilution will be
experienced by the purchasers of shares in this Offering (or $1.68 per share
dilution assuming full exercise of the Underwriters' over-allotment option).
The following table illustrates this dilution on a per share basis based on
the initial public offering price and assuming no exercise of the Underwriters'
over-allotment option:
<TABLE>
<S> <C> <C>
Initial public offering price per Common Share.............. $20.00
Historical net tangible book value per Common Share before
the Offering(1)........................................ $ 0.01
Increase in net tangible book value per Common Share
attributable to new investors.......................... 18.27
Pro forma net tangible book value per Common Share after
the Offering(2)........................................ 18.28
------
Dilution per Common Share to new investors.................. $ 1.72
======
</TABLE>
- ---------------
(1) Based on the Company's historical April 23, 1997 Balance Sheet contained
elsewhere in this Prospectus.
(2) Based on the pro forma shareholders' equity of $316.2 million divided by
17,301,000 Common Shares outstanding after the Offering and the Formation
Transactions. Does not give effect to the Common Shares issuable
under the Company's Share Incentive Plan or the Company's Non-Employee
Trustees' Plan. See "Management -- The Share Incentive Plan" and
" -- Non-Employee Trustees' Plan."
The following table summarizes, as of April 23, 1997, after giving effect
to the sale of the Common Shares offered hereby and the Formation Transactions,
(i) the number and percentage of Common Shares purchased from the Company, (ii)
the total consideration for the Common Shares and (iii) the average price per
Common Share paid by the public investors and the current shareholders.
<TABLE>
<CAPTION>
SHARES OWNED TOTAL CONSIDERATION
--------------------- ------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- -------------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Common Shares issued or to be
issued in the Formation
Transactions..................... 301,000(1) 1.7% $ 6,001(2) 1.7% $19.94
Common Shares to be sold in the
Offering......................... 17,000,000 98.3 340,000 98.3 20.00
</TABLE>
- ---------------
(1) Includes (i) 1,000 founder's shares and (ii) 300,000 shares issued to D.
Robert Crants, III and Michael W. Devlin as a development fee and as
reimbursement for certain expenses incurred in connection with the formation
of the Company and the consummation of the Offering which are valued based
upon the initial public offering price. See "Dilution" and "Formation
Transactions."
(2) Founder's shares were capitalized by $1,000; no cash proceeds were received
by the Company for the shares issued to D. Robert Crants, III and Michael W.
Devlin. See "The Formation Transactions."
Upon closing of the Offering, the Company will grant options to purchase
1,075,000 Common Shares at an exercise price equal to the initial public
offering price per share. The foregoing table assumes no exercise of outstanding
share options. See "Management -- The Share Incentive Plan" and
" -- Non-Employee Trustees' Plan."
31
<PAGE> 37
PRO FORMA FINANCIAL STATEMENTS
The following financial statements represent the unaudited pro forma
financial results for the Company as of March 31, 1997 and the three months and
year ended March 31, 1997 and December 31, 1996, respectively. The pro forma
Statements of Operations are presented as if the Formation Transactions had
occurred as of the beginning of the period indicated and therefore incorporate
certain assumptions that are included in the Notes to Pro Forma Statement of
Operations. The pro forma Balance Sheet is presented as if the Formation
Transactions had occurred on March 31, 1997. The Company is accounting for the
Facility acquisitions under the purchase method of accounting. The pro forma
information does not purport to represent what the Company's financial position
or results of operations actually would have been had the Formation
Transactions, in fact, occurred on such date or at the beginning of the period
indicated, or to project the Company's financial position or results of
operations at any future date or for any future period.
The Company's audited historical balance sheet as of April 23, 1997, and
notes thereto are included elsewhere in this Prospectus along with the Report of
the Independent Public Accountants. Total assets and shareholders' equity
totaled $1,000 each at April 23, 1997.
32
<PAGE> 38
CCA PRISON REALTY TRUST
PRO FORMA STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 THREE MONTHS ENDED MARCH 31, 1997
--------------------------------- ---------------------------------
ACTUAL ADJUSTMENTS PRO FORMA ACTUAL ADJUSTMENTS PRO FORMA
------ ----------- --------- ------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues:
Rent income................... $-- $33,891(1) $33,891 $-- $8,473(1) $ 8,473
Cost and expenses:
Operating and
administrative.............. -- 1,854(2) 1,950 -- 463(2) 487
96(3) 24(3)
Provision for depreciation and
amortization................ -- 8,588(4) 8,858 -- 2,147(4) 2,147
--- ------- ------- --- ------ -------
Total costs and
expenses............... -- 10,538 10,538 -- 2,634 2,634
--- ------- ------- --- ------ -------
Net income....................... $-- $23,353 $23,353 $-- $5,839 $ 5,839
=== ======= ======= === ====== =======
Net income per share............. $ 1.35 $ 0.34
======= =======
Weighted average number of shares
outstanding(5)................ 17,301 17,301
======= =======
OTHER DATA:
Funds from operations(6)......... $31,941 $ 7,986
Cash Available for
Distribution.................. 31,941 7,986
Distributions.................... 29,412 7,353
Number of facilities............. 9 9
</TABLE>
- ---------------
(1) To record rent income from CCA in accordance with the terms of the Leases as
if the Initial Facilities had been in operation at the leased design
capacity for the entire period. The Company will lease the Initial
Facilities to CCA under operating leases.
(2) To record recurring administrative expenses of the Company based upon
management's estimates of operating and administrative costs.
(3) To record state franchise taxes based upon the corporate structure of the
Company.
(4) To record depreciation expense on fixed assets purchased from CCA based on
the estimated useful lives of the Initial Facilities.
(5) Weighted average shares outstanding include the founder's shares, shares
issued to management and shares sold in the Offering as if such shares were
outstanding for the entire period.
(6) Management believes Funds from Operations is helpful to investors as a
measure of the performance of an equity REIT because, along with cash flows
from operating activities, financing activities and investing activities, it
provides investors with an understanding of the ability of the Company to
incur and service debt and make capital expenditures. Funds from Operations
is calculated by management as net income (loss) (computed in accordance
with GAAP), excluding gains (or losses) from debt restructuring and sales of
property, plus real estate related depreciation and amortization and after
adjustments for unconsolidated partnerships and joint ventures and,
accordingly, may not be comparable to other REITs' Funds from Operations
calculated under differing methodology. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Funds from
Operations." Funds from Operations should be examined in conjunction with
net income as presented.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1996 MARCH 31, 1997
----------------- ------------------
<S> <C> <C>
Calculation of Funds from Operations:
Pro Forma Net income...................................... $23,353 $5,839
Plus: Pro forma real estate depreciation and
amortization............................................ 8,588 2,147
------- ------
Pro forma funds from operations............................. $31,941 $7,986
======= ======
</TABLE>
Funds from Operations should not be considered as an alternative to net
income (determined in accordance with GAAP) as an indication of the Company's
financial performance or to cash flows from operating activities (determined
in accordance with GAAP) as a measure of the Company's liquidity, nor is it
indicative of funds available to fund the Company's cash needs, including its
ability to make distributions.
33
<PAGE> 39
CCA PRISON REALTY TRUST
PRO FORMA BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
----------------------------------
ACTUAL ADJUSTMENTS PRO FORMA
------ ----------- ---------
<S> <C> <C> <C>
ASSETS
Land and buildings, net..................................... $ -- $311,103(1) $311,103
Cash........................................................ -- 313,200(2) 5,097
(308,103)(1)
---- -------- --------
$ -- $316,200 $316,200
==== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Shareholders' equity:
Preferred Shares, $0.01 par value; 10,000,000 shares
approved; none outstanding............................. $ -- $ -- $ --
Common Shares, $0.01 par value; 90,000,000 shares
approved, 17,301,000 issued and outstanding, as
adjusted............................................... -- 173(2) 173
Additional paid-in capital................................ -- 313,027(2) 316,027
3,000(1)
---- -------- --------
$ -- $316,200 $316,200
==== ======== ========
</TABLE>
- ---------------
(1) To record the purchase of the nine Initial Facilities from CCA using the
purchase method of accounting. The capitalized cost of the land and
buildings includes a $3 million development fee to management of the Company
representing one-half of the value of the 300,000 shares (valued at the
assumed initial public offering price) issued to management at the closing
of the Offering. The remaining fair market value of the shares issued to
management is considered to be a non-recurring expense and such expense has
been excluded from the pro forma financial statements.
(2) Reflects the initial capitalization (1,000 shares) of the Company, 300,000
shares issued to management, and issuance of 17,000,000 Common Shares, $0.01
par value, in connection with the Offering at an assumed initial public
offering price of $20.00 per share. The estimated costs of the Offering,
including the underwriting discount, estimated Offering expenses and the
development fee, totaling $29.8 million have been reflected as an offset to
additional paid-in capital. The resulting net cash proceeds of the Offering
total $313.2 million.
34
<PAGE> 40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company was organized as a Maryland real estate investment trust in
April 1997, and intends to make an election to qualify under the Code as a REIT
commencing with its taxable year ending December 31, 1997. Substantially all of
the Company's initial revenues are expected to be 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
instruments. With respect to Leases for the Initial Facilities, base rent is the
annual rental payment set forth in such Leases. All such Leases also provide for
annual increases equal to the Base Rent Escalation.
The Company will incur operating and administrative expenses including,
principally, compensation expense for its executive officers and other
employees, office rental and related occupancy costs and various expenses
incurred in the process of acquiring additional properties. The Company will be
self-administered and managed by its executive officers and staff, and will not
engage a separate advisor or pay an advisory fee for administrative or
investment services, although the Company will engage legal, accounting, tax and
financial advisors from time to time.
The primary non-cash expense of the Company will be the depreciation of its
correctional and detention facilities. The Company expects to depreciate
buildings and improvements over a 40-year period and certain equipment
transferred with the Facilities over a seven-year period for both tax and
financial reporting purposes.
The Company also expects to leverage its portfolio of real estate equity
investments and will incur long and short-term indebtedness, and related
interest expense, from time to time. See "Risk Factors -- Dependence on Debt
Financing for Growth and Adverse Consequences of Debt Financing on Ability to
Make Distributions."
The Company intends to declare and pay dividends to its shareholders in
amounts not less than the amounts required to maintain REIT status under the
Code and, in general, in amounts exceeding taxable income. The Company's ability
to pay dividends will depend upon its Cash Available for Distribution.
RESULTS OF OPERATIONS
The Company has had no operations prior to April 23, 1997, (the date of
organization) or through the date of this Prospectus. The Company's future
results of operations will depend upon the acquisition of the Initial Facilities
and other properties, including the Option Facilities, and the terms of any
subsequent investments the Company may make.
PRO FORMA RESULTS OF OPERATIONS
The Company estimates that after giving effect to the Offering and the
acquisition of the Initial Facilities, revenues would have been $33.9 million
for the year ended December 31, 1996 and $8.5 million for the three months ended
March 31, 1997. Net income would have been $23.4 million or $1.35 per share for
the year ended December 31, 1996, and $5.8 million or $.34 per share for the
three months ended March 31, 1997. Depreciation, amortization and other non-cash
expenses would have been $8.6 million for the year ended December 31, 1996 and
$2.1 million for the three months ended March 31, 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that its initial working capital and cash from
operations, together with the Bank Credit Facility anticipated to be available
to the Company, will provide adequate liquidity to conduct its operations, fund
administrative and operating costs, interest payments, and acquisitions and
allow distributions to the Company's shareholders in accordance with the Code's
requirements for qualification as a REIT and to avoid any corporate level
federal income or excise tax.
35
<PAGE> 41
In order to qualify as a REIT for federal income tax purposes, the Company
will be required to make substantial distributions to its shareholders. The
following factors, among others, will affect funds from operations and will
influence the decisions of the Board of Trustees regarding distributions: (i)
scheduled increases in base rent under the leases with respect to the
facilities; and (ii) returns from short-term investments pending application of
the net proceeds of the Offering. Although the Company will receive most of its
rental payments on a monthly basis, it intends to pay dividends quarterly.
Amounts accumulated for distribution will be invested by the Company in
short-term money market instruments.
Under the terms of the Leases, CCA is responsible for all operating
expenses and taxes, including property and casualty insurance. See "Business of
the Company and its Properties -- The Facilities" and "Leases." As a result of
these arrangements, the Company does not believe it will be responsible for any
major expenses in connection with the Initial Facilities during the terms of the
respective Leases. The Company anticipates entering into similar leases with
respect to additional properties, including the Option Facilities. After the
terms of the respective leases expire, or in the event a lessee is unable to
meet its obligations, the Company anticipates that any expenditures it might
become responsible for in maintaining the facilities will be funded by cash from
operations and, in the case of major expenditures, possibly by borrowings. To
the extent that unanticipated expenditures or significant borrowings are
required, the Company's Cash Available for Distribution and liquidity may be
adversely affected.
The Company has a commitment for the $150.0 million Bank Credit Facility
which will be used to finance the acquisition of additional properties,
including the Option Facilities, and for other general operating purposes,
including the expansion of the Company's existing facilities. There can be no
assurance that the Bank Credit Facility will be made available to the Company.
Other than the $308.1 million purchase of the Initial Facilities using the
offering proceeds, the Company has no commitments with respect to other capital
expenditures. However, the Company has options at any time during the three-year
period following the acquisition of the Initial Facilities to purchase any or
all of the five Option Facilities for CCA's costs of developing, constructing
and equipping the Option Facilities, plus 5% of such costs, aggregating
approximately $193.0 million. In addition, the Company has an option to acquire,
at fair market value, and lease back to CCA, any correctional or detention
facility acquired or developed and owned by CCA in the future for a period of
three years following the Service Commencement Date with respect to such
facility.
The Company may raise additional long-term capital by issuing, in public or
private transactions, equity or debt securities, but the availability and terms
of any such issuance will depend upon the market and other conditions. The
Company anticipates that as a result of its initially low debt to total
capitalization and its intention to maintain a debt to total capitalization of
50% or less, it will be able to obtain financing for its long-term capital
needs. However, there can be no assurance that such additional financing or
capital will be available on terms acceptable to the Company. The Company may,
under certain circumstances, borrow additional amounts in connection with the
renovation or expansion of the Initial Facilities, the acquisition of additional
properties, including the Option Facilities or, as necessary, to meet certain
distribution requirements imposed on REITs under the Code. See "Policies and
Objectives with Respect to Certain Activities -- Investment Objectives and
Policies."
Acquisitions will be made subject to the investment objectives and policies
to maximize both current income and long-term growth in income described
elsewhere in this Prospectus. The Company's liquidity requirements with respect
to future acquisitions may be reduced to the extent the Company uses Common
Shares as consideration for such purchases.
FUNDS FROM OPERATIONS
Management believes Funds from Operations is helpful to investors as a
measure of the performance of an equity REIT because, along with cash flows from
operating activities, financing activities and investing activities, it provides
investors with an understanding of the ability of the Company to incur and
service debt and make capital expenditures. Funds from Operations is calculated
as net income (loss) (computed in accordance with GAAP), excluding gains (or
losses) from debt restructuring and sales of property, plus real
36
<PAGE> 42
estate related depreciation and amortization and after adjustments for
unconsolidated partnerships and joint ventures. The Company computes Funds from
Operations in accordance with standards established by the White Paper on Funds
from Operations approved by the NAREIT Board of Governors in March 1995, which
may differ from the methodology for calculating Funds from Operations utilized
by other equity REITs, and, accordingly, may not be comparable to such other
REITs. Further, Funds from Operations 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. The
Company believes that in order to facilitate a clear understanding of the pro
forma operating results of the Facilities and the Company, Funds from Operations
should be examined in conjunction with the income (loss) as presented in the pro
forma financial statements and information included elsewhere in this
Prospectus. Funds from Operations should not be considered as an alternative to
net income (determined in accordance with GAAP) as an indication of the
Company's financial performance or to cash flows from operating activities
(determined in accordance with GAAP) as a measure of the Company's liquidity,
nor is it indicative of funds available to fund the Company's cash needs,
including its ability to make distributions.
INFLATION
Management believes that inflation should not have a material adverse
effect on the operating expenses of the Company because such expenses are
relatively insignificant as a percentage of revenues. Because the Bank Credit
Facility provides for a variable interest rate, inflation could have a material
adverse effect on the Company's interest expense if interest rates increase
substantially during any year. Accordingly, when appropriate, based on the then
current interest rates, management may seek to replace the Bank Credit Facility
with a credit facility that provides for a fixed interest rate.
THE PRIVATE CORRECTIONS INDUSTRY
The Company believes the United States private corrections industry is in a
period of significant growth. In the United States, there is a growing trend
toward privatization of government services and functions, including corrections
and detention services, as governments of all types face continuing pressure to
control costs and improve the quality of services. According to the 1996
Facility Census (which was authored by Dr. Charles W. Thomas, an Independent
Trustee of the Company), see "Management -- Trustees and Executive Officers,"
the design capacity of privately managed adult correctional and detention
facilities worldwide has increased dramatically since the first privatized
facility was opened by CCA in 1984. The majority of this growth has occurred
since 1989 as the number of privately managed adult correctional and detention
facilities in operation or under construction worldwide increased from 26
facilities with a design capacity of 10,973 beds in 1989 to 132 facilities with
a design capacity of 85,201 beds in 1996. The majority of all private prison
management contracts are in the United States. At December 31, 1996, 118 of the
132 contracts were for United States facilities with the remaining 14 equally
divided between Australia and the United Kingdom. According to the 1996 Facility
Census, the aggregate capacity of private facilities in operation or under
construction rose from 65,593 beds at December 31, 1995 to 85,201 beds at
December 31, 1996, an increase of 34%. Additionally, the 1996 Facility Census
reports that the number of private facilities for which contracts have been
awarded increased 27% from 104 in 1995 to 132 in 1996 and the prisoner
population housed in privately managed facilities expanded by 28% in 1996.
The 1996 Facility Census reports that at December 31, 1996 there were 25
state jurisdictions, the District of Columbia and Puerto Rico, within which
there were private facilities in operation or under construction. Four of these
were state jurisdictions within which facilities were located but where the
facilities are not intended to house the local or state level prisoners of those
state jurisdictions. An additional six state jurisdictions were contracting for
the housing of state-level or local-level prisoners in private facilities
located beyond their geographical boundaries. Further, all three federal
agencies with prisoner custody responsibilities (i.e., the BOP, INS and USMS)
continued to contract with private management firms.
Management believes that the increase in the demand for privatized
correctional and detention facilities is also a result, in large part, of the
general shortage of beds available in United States correctional and
37
<PAGE> 43
detention facilities. According to reports issued by the United States
Department of Justice, Bureau of Justice Statistics (the "BJS"), the number of
inmates housed in United States federal and state prison facilities and in local
jails increased from 744,208 at June 30, 1985 to 1,630,940 at June 30, 1996, a
compound annual growth rate of 7.4%.
Industry reports also indicate that inmates convicted of violent crimes
generally serve only one-third of their sentence, with the majority of them
being repeat offenders. Accordingly, there is a perceived public demand for,
among other things, longer prison sentences, as well as prison terms for
juvenile offenders, resulting in even more overcrowding in United States
correctional and detention facilities. Finally, numerous courts and other
government entities in the United States have mandated that additional services
offered to inmates be expanded and living conditions be improved. Many
governments do not have the readily-available resources to make the changes
necessary to meet such mandates.
The demand for privately-managed correctional and detention centers is also
increasing internationally. Management believes that many countries are faced
with the same fiscal pressures as the United States and, as a result, are
seeking more cost-effective means of providing prison management services. At
December 31, 1996, there were a total of 14 privatized facilities in the United
Kingdom and Australia, with an aggregate design capacity of 7,617 beds.
At December 31, 1996, 40 of the 118 privately managed facilities in
operation or under construction in the United States were privately rather than
publicly owned. To date, all private ownership of correctional facilities has
been in connection with private prison management. However, management believes
that the number of privately owned facilities will grow, independent of the
growth in the private prison management industry. In an attempt to address the
fiscal pressures of matching revenue collections with projected expenses, many
government entities have been and will continue to be forced to consider private
ownership in connection with the development of new correctional facilities and
sale leaseback and other financing arrangements with respect to existing
facilities.
CORRECTIONS CORPORATION OF AMERICA
FACILITY OPERATIONS
CCA is the largest developer and manager of privatized correctional and
detention facilities worldwide. The Company initially will acquire the nine
Initial Facilities from CCA. The Company will also have an option to acquire any
or all of the five Option Facilities from CCA for a period of three years
following the closing of the purchase of the Initial Facilities. In addition,
the Company will have an option to acquire any correctional or detention
facility acquired or developed and owned by CCA in the future for a period of
three years following the Service Commencement Date with respect to such
facility. The Company will also have a right of first refusal to acquire and
provide mortgage financing for any correctional or detention facilities owned
and operated by CCA in the future. CCA's facilities are located in 17 states of
the United States, the District of Columbia, Puerto Rico, Australia and the
United Kingdom. As of June 11, 1997, CCA had contracts to manage 60 correctional
and detention facilities with an aggregate design capacity of 43,748 beds of
which 51 facilities representing 32,441 beds are in operation.
The services provided by CCA to government agencies include the integrated
design, construction and management of new correctional and detention facilities
and the redesign, renovation and management of older facilities. In addition to
providing the fundamental residential services relating to adult and juvenile
inmates, CCA's facilities offer a large variety of rehabilitation and education
programs including basic education, life skills and employment training and
substance abuse treatment. CCA also provides health care (including medical,
dental and psychiatric services), institutional food services, transportation
services, and work and recreational programs. CCA's management believes that its
proven ability to deliver a full range of high quality correctional and
detention facility management services on a cost-effective basis to government
agencies provides such agencies with sufficient incentives to choose CCA when
awarding new contracts or renewing existing contracts. In addition to the
opening of new facilities, over the last few years, CCA has expanded its service
capabilities and broadened its geographic presence in the United States market
through a
38
<PAGE> 44
series of strategic acquisitions of prison management companies and individual
facilities as well as the acquisition of an inmate transportation company.
In addition to its domestic operations, CCA has obtained and is pursuing
construction and management contracts for correctional and detention facilities
outside the United States. CCA presently has contracts to operate one facility
in the United Kingdom, two facilities in Australia, and also has contracts to
provide inmate transportation services in Australia. In June 1994, CCA entered
into an international strategic alliance with Sodexho S.A. ("Sodexho"), a French
conglomerate, for the purpose of pursuing prison management business outside the
United States. In connection with the alliance, Sodexho purchased a significant
ownership in CCA and entered into certain agreements with CCA relating to future
financings by the Company and corporate governance and control matters.
The Initial Facilities and the Option Facilities were owned and operated by
CCA since the facilities were acquired or developed by CCA at various times
ranging from 1984 to 1997. CCA will operate the Initial Facilities and, if
acquired, the Option Facilities under the Leases with the Company. See "Business
of the Company and its Properties" and "Leases."
CCA is a Tennessee corporation and is the successor to a corporation of the
same name originally incorporated in January 1983. CCA's principal executive
offices are located at 102 Woodmont Boulevard, Nashville, Tennessee 37205, and
its telephone and fax numbers are (615) 292-3100 and (615) 269-8635,
respectively. CCA's common stock and warrants are listed on the NYSE under the
symbols "CXC" and "CXC/WS" respectively. CCA is not offering any of the
securities offered hereby.
CERTAIN SELECTED FINANCIAL INFORMATION
The following table sets forth (i) certain selected historical financial
information concerning CCA for the three months ended March 31, 1997 and 1996
and for each of the five years ended December 31, 1996 and (ii) unaudited
selected consolidated pro forma financial information concerning CCA. The pro
forma operating information is presented as if the Formation Transactions had
occurred as of the beginning of the period indicated and therefore incorporates
certain assumptions that are included in the Notes to Pro Forma Statement of
Operations included elsewhere in this Prospectus. The pro forma balance sheet
information is presented as if the Formation Transactions had occurred on March
31, 1997. The pro forma information does not purport to represent what the
Company's financial position or results of operations actually would have been
had the Formation Transactions, in fact, occurred on such date or at the
beginning of the period indicated, or to project the Company's financial
position or results of operations at any future date or any future period. The
selected historical financial information for the three months ended March 31,
1997 and 1996 is derived from CCA's unaudited condensed consolidated financial
statements. The selected historical financial information for each of the five
years ended December 31, 1996 is derived from CCA's consolidated financial
statements. The selected historical financial information for CCA has been
included in this Prospectus due to the Company's initial dependence on CCA as
the sole lessee of the Facilities. All information contained in the following
table should be read in conjunction with the consolidated financial statements
and related notes of CCA included elsewhere in this Prospectus. Investors should
review the financial statements and other data set forth herein with respect to
CCA, as well as the financial statements and other data set forth herein with
respect to the Company and the Facilities.
39
<PAGE> 45
CORRECTIONS CORPORATION OF AMERICA
SELECTED PRO FORMA AND HISTORICAL FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
<TABLE>
<CAPTION>
HISTORICAL
---------------------
HISTORICAL PRO FORMA QUARTER
--------------------------------------------------------- ------------ ENDED
YEAR ENDED DECEMBER 31, YEAR ENDED ---------------------
--------------------------------------------------------- DECEMBER 31, MARCH 31, MARCH 31,
1992 1993 1994 1995 1996 1996(1) 1996 1997
--------- --------- --------- --------- --------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues.................. $ 95,518 $ 132,534 $ 152,375 $ 207,241 $ 292,513 $ 292,513 $ 63,277 $ 91,838
Expenses:
Operating............... 74,796 108,026 123,540 158,814 213,173 227,475 47,184 63,919
General and
administrative........ 8,408 7,885 9,413 14,288 13,428 13,342 2,925 3,595
Depreciation and
amortization.......... 5,468 5,759 5,753 6,524 11,339 9,008 2,277 3,923
--------- --------- --------- --------- --------- --------- --------- ---------
88,672 121,670 138,706 179,626 237,940 249,825 52,386 71,437
Operating income.......... 6,846 10,864 13,669 27,615 54,573 42,688 10,891 20,401
--------- --------- --------- --------- --------- --------- --------- ---------
Interest expense
(income), net......... 4,264 4,424 3,439 3,952 4,224 452 1,350 498
--------- --------- --------- --------- --------- --------- --------- ---------
Income before income
taxes................... 2,582 6,440 10,230 23,663 50,349 42,236 9,541 19,903
Provision for income
taxes................. 50 832 2,312 9,330 19,469 13,549 3,835 7,908
--------- --------- --------- --------- --------- --------- --------- ---------
Net income................ 2,532 5,608 7,918 14,333 30,880 28,687 5,706 11,995
--------- --------- --------- --------- --------- --------- --------- ---------
Preferred stock
dividends............. 71 425 204 -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Net income allocable to
common stockholders..... $ 2,461 $ 5,183 $ 7,714 $ 14,333 $ 30,880 $ 28,687 $ 5,706 $ 11,995
========= ========= ========= ========= ========= ========= ========= =========
Net income per share:
Primary................. $ 0.06 $ 0.10 $ 0.13 $ 0.19 $ 0.38 $ 0.35 $ 0.07 $ 0.14
Fully diluted........... $ 0.05 $ 0.10 $ 0.13 $ 0.18 $ 0.36 $ 0.34 $ 0.07 $ 0.14
Weighted average common
shares
outstanding............. 41,544 51,762 61,908 75,110 81,664 81,664 80,502 83,942
OTHER DATA:
Beds in operation (period
end).................... 7,844 10,368 13,404 20,252 24,310 24,310 21,098 28,062
Beds under contract
(period end)............ 8,737 12,254 19,735 28,607 41,135 41,135 31,357 43,049
Compensated mandays(2).... 2,210,682 3,338,411 3,768,095 4,799,562 7,113,794 7,113,794 1,552,509 2,127,531
Available mandays(3)...... 2,463,496 3,628,114 4,012,881 5,133,221 7,557,988 7,557,988 1,739,844 2,260,470
Average occupancy(4)...... 89.7% 92.1% 93.5% 93.9% 94.1% 94.1% 89.2% 94.1%
BALANCE SHEET DATA (END OF
PERIOD):
Total assets.............. $ 103,295 $ 109,285 $ 141,792 $ 213,478 $ 468,888 $ 231,137 $ 566,917
Total long-term debt...... 56,277 50,558 47,984 74,865 117,535 81,848 194,745
Total liabilities
excluding deferred
gain.................... 75,367 75,103 80,035 116,774 187,136 119,490 269,971
Stockholders' equity...... 27,928 34,182 61,757 96,704 281,752 111,647 296,946
<CAPTION>
PRO
FORMA
---------
QUARTER
ENDED
MARCH 31,
1997(1)
---------
<S> <C>
STATEMENT OF OPERATIONS:
Revenues.................. $ 91,838
Expenses:
Operating............... 68,332
General and
administrative........ 3,573
Depreciation and
amortization.......... 2,852
---------
74,757
Operating income.......... 17,081
---------
Interest expense
(income), net......... (684)
---------
Income before income
taxes................... 17,765
Provision for income
taxes................. 6,160
---------
Net income................ 11,605
---------
Preferred stock
dividends............. --
---------
Net income allocable to
common stockholders..... $ 11,605
=========
Net income per share:
Primary................. $ 0.14
Fully diluted........... $ 0.14
Weighted average common
shares
outstanding............. 83,942
OTHER DATA:
Beds in operation (period
end).................... 28,062
Beds under contract
(period end)............ 43,049
Compensated mandays(2).... 2,127,531
Available mandays(3)...... 2,260,470
Average occupancy(4)...... 94.1%
BALANCE SHEET DATA (END OF
PERIOD):
Total assets.............. $ 576,193
Total long-term debt...... 64,500
Total liabilities
excluding deferred
gain.................... 141,759
Stockholders' equity...... 296,946
</TABLE>
- ---------------
(1) See Corrections Corporation of America Pro Forma Consolidated Financial
Statements and related notes thereto appearing elsewhere in this Prospectus.
(2) Compensated mandays is equal to the number of beds for which CCA is paid
multiplied by the number of days the beds are occupied.
(3) Available mandays is the total number of beds in operation multiplied by the
number of days in operation.
(4) Average occupancy is the quotient of dividing compensated mandays by
available mandays.
40
<PAGE> 46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following financial analysis should be read in conjunction with the
above financial information concerning CCA.
General
CCA presently has contracts to manage 60 correctional and detention
facilities with an aggregate design capacity of 43,748 beds. Of these 60
facilities, 51 are currently in operation and nine are under development by CCA,
two of which are Option Facilities and nine of which will be financed and owned
by a contracting government entity. CCA, through its United Kingdom joint
venture, UK Detention Services ("UKDS"), manages one facility in the United
Kingdom and, through its Australian joint venture, CC Australia, manages two
facilities in Australia. CCA's ownership interest in CC Australia is accounted
for under the equity method. Of the nine facilities under development by CCA,
four are scheduled to commence operations during 1997 (third quarter) and five
are scheduled to commence operations during 1998. In addition, at June 10, 1997,
CCA had outstanding written responses to RFPs and other solicitations for 13
projects with an aggregate design capacity of 7,709 beds.
The following table sets forth the number of facilities under contract or
award at the end of the periods shown:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
--------------------------------- ---------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Contracts(1)...................... 39 47 59 48 60
Facilities in operation........... 31 38 42 37 49
Design capacity of contracts...... 19,735 28,607 41,135 31,357 43,049
Design capacity of facilities in
operation....................... 13,404 20,252 24,310 21,098 28,062
Compensated mandays(2)............ 3,768,095 4,799,562 7,113,794 1,552,509 2,127,531
</TABLE>
- ---------------
(1) Consists of facilities in operation and facilities under development for
which contracts have been finalized.
(2) Compensated mandays for a period ended are calculated, for per diem rate
facilities, as the number of beds occupied by residents on a daily basis
during the period ended and, for fixed rate facilities, as the design
capacity of the facility multiplied by the number of days the facility was
in operation during the period.
CCA derives substantially all of its revenues from the management of
correctional and detention facilities for national, federal, state and local
government agencies in the United States and abroad.
41
<PAGE> 47
Geographic Market Concentration
CCA currently manages facilities in 15 states, the District of Columbia and
Puerto Rico. Management revenues by state, as a percentage of CCA's total
revenues for years ended December 31, 1995 and 1996, respectively, and for the
periods ended March 31, 1996 and 1997, respectively, are as follows:
<TABLE>
<CAPTION>
FISCAL 1995 FISCAL 1996 MARCH 31, 1996
--------------------------- --------------------------- ---------------------------
NUMBER OF PERCENTAGE OF NUMBER OF PERCENTAGE OF NUMBER OF PERCENTAGE OF
STATE FACILITIES TOTAL REVENUES FACILITIES TOTAL REVENUES FACILITIES TOTAL REVENUES
- ----- ---------- -------------- ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Arizona.............. 2 16.5% 2 14.7% 2 14.6%
Colorado............. -- -- 1 0.3 -- --
Florida.............. 5 7.8 4 10.3 4 11.3
Indiana.............. 1 1.4 1 0.4 -- 0.0
Kansas............... 2 4.6 1 3.0 1 3.2
Louisiana............ 1 6.1 1 4.7 1 5.4
Minnesota............ -- -- 1 0.7 -- --
Mississippi.......... -- -- 1 1.1 -- --
New Jersey........... -- --
New Mexico........... 3 8.4 3 6.7 3 7.7
Oklahoma............. 1 1.9 2 3.0 1 1.4
Puerto Rico.......... 1 0.1 1 4.7 1 4.5
South Carolina....... -- -- 1 2.1 -- --
Tennessee............ 8 25.2 8 19.2 7 21.0
Texas................ 12 22.7 12 23.6 11 24.6
Washington, D.C...... -- --
<CAPTION>
MARCH 31, 1997
---------------------------
NUMBER OF PERCENTAGE OF
STATE FACILITIES TOTAL REVENUES
- ----- ---------- --------------
<S> <C> <C>
Arizona.............. 2 14.4%
Colorado............. 1 1.2
Florida.............. 5 9.3
Indiana.............. 1 0.1
Kansas............... 1 2.4
Louisiana............ 1 3.8
Minnesota............ 1 2.3
Mississippi.......... 1 2.5
New Jersey........... 1 2.7
New Mexico........... 3 4.8
Oklahoma............. 2 3.6
Puerto Rico.......... 3 5.3
South Carolina....... 1 2.9
Tennessee............ 7 15.8
Texas................ 12 21.9
Washington, D.C...... 1 1.0
</TABLE>
To the extent favorable or unfavorable changes in regulations or market
conditions occur in these markets, such changes would likely have a
corresponding impact on CCA's results of operations.
Revenues for operation of correctional and detention facilities are
recognized as the services are provided, based on a net rate per day per inmate
("per diem" rate) or on a fixed monthly rate ("fixed or determined" rate). Of
CCA's 48 domestic facilities in operation, 44 are compensated on a per diem
basis and four are compensated at fixed monthly rates. The per diem rates or
fixed monthly rates vary according to the type of facility and the extent of
services provided at the facility. Transportation revenues are based on a per
mile charge or a fixed fee per trip.
CCA incurs all facility operating expenses, except for certain debt service
and lease payments with respect to certain facilities that CCA does not own or
lease. CCA owns 13 of the domestic facilities it currently manages. CCA
currently manages 31 domestic facilities that are owned or leased by a
government agency, construction of which has been financed by the agency through
one or more of a variety of methods.
Facility payroll and related taxes constitute the majority of facility
operating expenses for CCA. Substantially all other operating expenses consist
of food, clothing, medical services, utilities, supplies, maintenance, insurance
and other general operating expenses. As inmate populations increase following
the start-up of a facility, operating expenses generally decrease as a
percentage of related revenues. Each facility is fully staffed at the time it is
opened or taken over by CCA, although it may be operating at a relatively low
occupancy rate at such time.
CCA's general and administrative costs consist of salaries of officers and
other corporate headquarters personnel, legal, accounting and other professional
fees (including pooling expenses related to certain acquisitions), travel
expenses, executive office rental, and promotional and marketing expenses. The
most significant component of these costs relates to the hiring and training of
experienced corrections and administrative personnel necessary for the
implementation and maintenance of the facility management and transportation
contracts.
Operating income for each facility depends upon the relationship between
operating costs, the rate at which CCA is compensated per manday, and the
occupancy rate. The rates of compensation are fixed by contract and
approximately two-thirds of all operating costs are fixed costs. Therefore,
operating income will vary from period to period as occupancy rates fluctuate.
Operating income will be affected adversely as CCA increases the number of
newly-constructed or expanded facilities under management and experiences
initial
42
<PAGE> 48
low occupancy rates. After a management contract has been awarded, CCA incurs
facility start-up costs that consist principally of initial employee training,
travel and other direct expenses incurred in connection with the contract. These
costs are capitalized and amortized on a straight-line basis over the shorter of
the term of the contract plus renewals, or five years. Depending on the
contract, start-up costs are either fully recoverable as pass-through costs or
are billable to the contracting agency over the original term of the contract
plus renewals. CCA has historically financed start-up costs through available
cash, the issuance of various securities, cash from operations and borrowings
under CCA's revolving credit facility.
Newly opened facilities are staffed according to contract requirements when
CCA begins receiving inmates. Inmates are typically assigned to a newly opened
facility on a regulated, structured basis over a one-to-three month period.
Until expected occupancy levels are reached, operating losses may be incurred.
Results of Operations
The following table sets forth, for the periods indicated, the percentage
of revenues of certain items in CCA's statement of operations and the percentage
change from period to period in such items:
<TABLE>
<CAPTION>
PERIOD-TO-PERIOD
PERCENTAGE CHANGES
---------------------------------
DECEMBER 31, MARCH 31, 1995 1996 MARCH 1997
--------------------- ------------- COMPARED COMPARED COMPARED TO
1994 1995 1996 1996 1997 TO 1994 TO 1995 MARCH 1996
----- ----- ----- ----- ----- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... 100.0% 100.0% 100.0% 100.0% 100.0% 36.0% 41.1% 45.1%
Expenses:
Operating................... 81.1 76.6 72.9 74.6 69.6 28.6 34.2 35.5
General and
administrative............ 6.1 6.9 4.6 4.6 3.9 51.8 (6.0) 22.9
Depreciation and
amortization.............. 3.8 3.2 3.9 3.6 4.3 13.4 73.8 72.3
----- ----- ----- ----- -----
Operating income.............. 9.0 13.3 18.6 17.2 22.2 102.0 97.6 87.3
----- ----- ----- ----- -----
Interest expense, net......... 2.3 1.9 1.4 2.1 .5 14.9 6.9 (63.1)
----- ----- ----- ----- -----
Income before income taxes.... 6.7 11.4 17.2 15.1 21.7 131.3 112.8 108.6
Provision for income taxes.... 1.5 4.5 6.6 6.1 8.6 303.5 108.7 106.2
----- ----- ----- ----- -----
Net income.................... 5.2 6.9 10.6 9.0 13.1 81.0 115.4 110.2
Preferred stock dividends..... 0.1 -- -- -- -- (100.0) -- --
----- ----- ----- ----- -----
Net income allocable to common
stockholders................ 5.1% 6.9% 10.6% 9.0% 13.1% 85.8% 115.4% 110.2%
===== ===== ===== ===== =====
</TABLE>
Three Months Ended March 31, 1997 Compared with Three Months Ended March 31,
1996
Revenues. CCA's total revenues for the first quarter of 1997 increased 45%
over the comparable period of 1996. CCA's management revenues increased
$28,302,000 or 47%, and transportation revenues increased $259,000 or 10%, in
the first three months of 1997 as compared to the same period in 1996. The
increase in management revenues was due to a 37% increase in compensated
mandays. During the first quarter of 1997, CCA opened six new facilities
totaling 3,496 beds and expanded one existing facility representing 256 beds.
CCA also realized the full period effect in the first quarter of 1997 of 3,835
beds brought on line over the course of 1996. Transportation revenues increased
due to an expanded customer base and compensated mileage realized through the
opening of two new transportation hubs. In the first quarter of 1997, CCA
recognized development fee income of $1,341,000 (after tax) related to a
contract to design, construct and equip a managed facility.
Facility Operating Expenses. CCA's operating expenses for the first
quarter of 1997 increased 35% over the comparable quarter in 1996. This increase
was due to the increased compensated mandays and compensated mileage that CCA
realized in 1997. As a percentage of revenues, however, operating expenses
declined to 70% in 1997 from 75% in 1996 as CCA continues to benefit from
economies of scale and cost containment.
General and Administrative. CCA's general and administrative expenses
increased 23% for the first quarter of 1997 as compared to the comparable
quarter of 1996. The increase was due to the expanded activity
43
<PAGE> 49
and staffing necessary to administer the increased beds under management.
General and administrative expenses decreased as a percentage of revenues to
3.9% in 1997 from 4.6% in 1996 during the comparable period.
Depreciation and Administrative. CCA's depreciation and amortization for
the first quarter of 1997 increased 72% as compared to the comparable quarter of
1996. This increase was due to the growth in total beds in facilities owned by
CCA.
Interest Expenses. CCA's interest expense, net, decreased 63% for the
first quarter of 1997 as compared to the first quarter of 1996 primarily due to
the fact that additional facilities were under construction during 1997 and the
associated interest expense was capitalized.
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
Revenues. CCA's total revenues increased 41% from 1995 to 1996 with
increases in both management and transportation services. CCA's management
revenues increased 43% in 1996, or $84.2 million. This increase is due to the
opening of new facilities and the expansion of existing facilities by CCA in
1995 and 1996. In 1996, CCA opened four new facilities with an aggregate design
capacity of 2,501 beds, assumed management of two facilities with an aggregate
design capacity of 899 beds and expanded five existing facilities to increase
their design capacity by an aggregate of 1,058 beds. Accordingly, 4,458 new beds
were brought on line in 1996. Due to the growth in beds, compensated mandays
increased 48% in 1996 from 4,799,562 to 7,113,794. Average occupancy remained
stable at 94.1% for 1996 as compared to 93.9% for 1995.
CCA's transportation revenues increased $1.1 million or 12% in 1996 as
compared to 1995. The 1996 growth was due to a continued marketing effort that
expanded the customer base and resulted in increased compensated mileage.
During the second and fourth quarters of 1996, CCA purchased the remaining
two-thirds of UKDS from its original joint venture partners. After consideration
of several strategic alternatives related to UKDS, CCA sold 20% of the entity to
Sodexho, and recognized an after-tax gain of $515,000. In conjunction with this
transaction, Sodexho was also provided the option to purchase an additional 30%
of UKDS, which option expires in 1997.
Facility Operating Expenses. CCA's facility operating expenses increased
34.2% to $213.2 million in 1996 compared to $158.8 million in 1995. This
increase was due to the additional beds on line that increased compensated
mandays and the growth in the transportation services. The average management
operating cost per manday was $28.82 for 1996 as compared to $31.59 for 1995.
The decrease in average cost per manday was due to CCA's ability to realize more
economies of scale as additional beds were brought on line. As a percentage of
revenues, facility operating expenses decreased to 73% from 77%. This decrease
is primarily attributable to the expansion of various facilities that added
lower incremental operating expenses and improved economies of scale. Salary and
related employee benefits constituted approximately 63% and 58% of facility
operating expenses for 1996 and 1995, respectively.
General and Administrative. CCA's general and administrative costs
decreased 6% in 1996 to $13.4 million as compared to $14.3 million in 1995. This
decrease is due to the non-recurring pooling expenses associated with
acquisitions during fiscal 1995 as well as CCA's ability to reduce duplication
in the general and administrative areas by integrating the acquired companies
into its systems. Management believes that as CCA continues to grow, general and
administrative expenses should increase in volume but continue to decrease as a
percentage of revenues.
Depreciation and Amortization. CCA's depreciation and amortization
increased 74% to $11.4 million in 1996 as compared to $6.5 million in 1995. The
1996 increase is due to the growth in total beds in Company-owned facilities as
well as the one-time, non-recurring reserve of $850,000 established for the
termination of CCA's contract with South Carolina.
Interest Expenses, Net. CCA's interest expense, net increased 7% in 1996,
consisting of a 48% or $2.7 million, increase in interest expense and a 151%, or
$2.4 million, increase in interest income. Interest expense
44
<PAGE> 50
increased due primarily to the addition of $50.0 million in convertible
subordinated notes issued in February and April 1996, bearing interest at 7.5%.
Interest income increased as a result of CCA investing the net proceeds from an
equity offering, which closed in June 1996.
Year Ended December 31, 1995 Compared with Year Ended December 31, 1994
In 1994 and 1995, CCA expanded its service capabilities and broadened its
geographic presence in the United States through a series of strategic
acquisitions that complemented CCA's development activities (collectively, the
"Acquisitions"). In December 1994, CCA acquired TransCor America, Inc.
("TransCor"), a nationwide provider of inmate transportation services. In April
1995, CCA acquired Concept Incorporated ("Concept"), a prison management company
with eight facilities and 4,400 beds under contract at the time of acquisition.
In August 1995, CCA acquired Corrections Partners, Inc. ("CPI"), a prison
management company with seven facilities and 2,900 beds under contract at the
time of acquisition. CCA's operating results for 1995 were significantly
affected by the Acquisitions. All of these business combinations were accounted
for as a pooling-of-interests and, accordingly, the operations of TransCor,
Concept and CPI have been combined in the accompanying consolidated financial
statements. The discussion herein is based upon the combined operations of CCA,
TransCor, Concept and CPI for all periods presented in the accompanying
consolidated financial statements.
Revenues. CCA's total revenues increased 36% from 1994 to 1995 with
increases in both management and transportation services. Management revenues
increased 37% in 1995, or $53.2 million. This increase was due to the opening of
new facilities and the expansions of existing facilities in 1994 and 1995 by CCA
and the related Acquisitions. In 1995, CCA opened five new facilities with an
aggregate design capacity 3,390 beds and assumed management of three facilities
with an aggregate design capacity 1,688 beds. CCA also realized the full-year
effect of three facilities added in 1994 with an aggregate design capacity 1,560
beds. The third contributing factor to growth was the expansion of 13 existing
facilities to increase their design capacity by 1,887 beds. Due to the growth in
the number of beds, compensated mandays increased 27% in 1995 from 3,768,095 to
4,799,562. Average occupancy remained stable at 93.9% for 1995 as compared to
93.5% for 1994.
CCA's transportation revenues increased $1.7 million or 21% in 1995 as
compared to 1994. The 1995 growth was due to a continued marketing effort that
expanded the customer base and resulted in increased compensated mileage.
During the first quarter of 1995, CCA purchased the remaining 50% of CC
Australia from its original joint venture partner. After consideration of
several strategic alternatives related to CC Australia, CCA then sold 50% of the
entity to Sodexho during the second quarter of 1995. CCA accounted for the 100%
ownership period on the equity basis of accounting and recognized an after-tax
gain of $783,000 on the sale.
Facility Operating Expenses. CCA's facility operating expenses increased
29% to $158.8 million in 1995 compared to $123.5 million in 1994. This increase
was due to the additional beds on line that increased compensated mandays and
the growth in the transportation services. The average management operating cost
per manday was $31.59 for 1995 as compared to $31.16 for 1994. The increase in
average cost per manday was due to the significant number of new beds brought on
line in 1995. As the five new facilities were opened, the full complement of
fixed costs was being incurred prior to full occupancy. As a percentage of
revenues, however, facility operating expenses decreased to 77% from 81%. This
decrease was primarily attributable to the expansion of various facilities that
added lower incremental operating expenses and improved economies of scale.
Salary and related employee benefits constituted approximately 58% and 55% of
facility operating expenses for 1995 and 1994, respectively.
General and Administrative. CCA's general and administrative costs
increased 52% in 1995 to $14.3 million as compared to $9.4 million in 1994.
Included in 1995 were approximately $950,000 of non-recurring pooling expenses
related to the Acquisitions. CCA has also expanded its management staff to
manage its significant growth. Additional staff was added to bring new business
on line, resulting in cost being incurred prior to revenue being realized. Also,
as all transition issues are finalized from the acquired operations and the
duplicate services are consolidated, general and administrative costs should
decrease as a percentage of revenues.
45
<PAGE> 51
Depreciation and Amortization. CCA's depreciation and amortization
increased $771,000, to $6.5 million in 1995 as compared to $5.8 million in 1994.
The 1995 increase was due to the growth in total beds in Company-owned
facilities.
Interest Expenses, Net. CCA's interest expense, net increased 15% in 1995
due to the assumption of debt related to the Eloy Detention Center in Eloy,
Arizona. In July 1995, CCA acquired the remaining 50% of the investment in a
partnership and assumed the assets and debts.
Income Taxes. In 1995, CCA's effective income tax rate increased to 39% as
compared to 23% in 1994. This increase in taxes was due to CCA's complete
utilization of net operating loss carry forwards, therefore becoming subject to
full statutory tax rates.
Liquidity and Capital Resources
CCA's business is capital intensive in relation to the development of a
correctional facility. CCA's efforts to obtain contracts, construct additional
facilities and maintain its day-to-day operations have required the continued
acquisition of funds through borrowings and equity offerings. Historically, CCA
has financed these activities with cash generated from operating and bank
borrowings, the issuance and sale of capital stock, subordinated convertible
notes and senior secured debt, taxable and tax-exempt bonds, and by assisting
governmental agencies in their issuance of municipal bonds.
CCA's current ratio increased to 1.79 in 1996 as compared to 1.31 in 1995.
The increase was due to the increase in accounts receivable that resulted from
additional beds on line, as well as an increase in construction receivables for
facilities being constructed by CCA. Management receivables increased 56%, from
$32.5 million to $50.6 million and construction related receivables increased
from $4.5 million to $44.5 million. The primary reason for the significant
increase in construction receivables was due to the sale of a facility to a not-
for-profit organization for which the proceeds were not received until
subsequent to year end. CCA's current ratio decreased to 1.11 as of March 31,
1997, due primarily to the aforementioned collection of the construction
receivable. The ratio of long-term debt to total capitalization was 39% at March
31, 1997 compared to 29% at December 31, 1996 and 44% at December 31, 1995. In
October 1995, CCA declared a two-for-one stock split paid in the form of a
one-share dividend for every share of its common stock held on the record date.
In June 1996, CCA declared a second two-for-one stock split paid in the form of
a one-share dividend for every share of its common stock held on the record
date. All references to number of shares have been adjusted for both stock
splits.
CCA's cash flow from operations for 1996 was approximately $24.4 million as
compared to $17.8 million in 1995 and $11.6 million in 1994. CCA's cash flow
from operations in the first quarter of 1997 was $59.2 million, which included
approximately $38.0 million from the reduction of the construction receivables,
as compared to $4.0 million in the comparable period in 1996. CCA has
strengthened its cash flow through its expanded business, additional focus on
larger, more profitable facilities, its expansion of existing facilities where
economies of scale could be realized, and its continuing effort of cost
containment.
In 1994, CCA entered into an international strategic alliance with Sodexho
for the purpose of pursuing prison management business outside the United
States. In connection with this alliance, Sodexho purchased a significant
ownership interest in CCA and entered into certain agreements with CCA relating
to future financings by CCA and certain corporate governance and control issues.
These issues included the grant by CCA to Sodexho of a preemptive right to
purchase additional shares of CCA's common stock in securities convertible into
or exchangeable for common stock in any amount necessary to enable Sodexho to
maintain a percentage ownership in CCA equal to 20% of the common stock on a
fully diluted basis.
In February 1996, CCA issued $30.0 million of its convertible subordinated
notes to an investor. The proceeds were used to repay the outstanding principal
under CCA's working capital credit facility and construction loan. The notes
bear interest at 7.5%, payable quarterly, and require CCA to maintain specific
ratio requirements relating to net worth, cash flow and debt coverage. The notes
are convertible into shares of CCA's common stock at a conversion price, as
adjusted, of $25.91 per share. In April 1996, due to the
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<PAGE> 52
triggering of its preemptive right in connection with the issuance of the
convertible subordinated notes, Sodexho purchased $20.0 million of convertible
subordinated notes under the same terms and conditions.
In June 1996, CCA completed a public offering of 3,750,000 shares of its
common stock at a price to the public of $37.50 per share. The proceeds of the
offering, after deducting all associated costs, were $131.8 million.
In August 1996, CCA issued $24.7 million of revenue bonds to finance the
construction of a 480-bed medium security detention facility located in Taylor,
Texas. These bonds are taxable and bear interest at a variable rate. The bonds
are secured by an irrevocable direct pay letter of credit issued by a group of
banks.
In September 1996, CCA entered into a new revolving credit facility with a
group of banks. The new revolving credit facility replaced the $25.0 million
revolving line of credit which was scheduled to mature in May 1997. The new
revolving credit facility provides for general corporate borrowings up to $170.0
million, which includes the issuance of a maximum of $136.0 million in letters
of credit and matures in September 1999. The credit facility is secured by the
pledge of stock of CCA's first tier domestic subsidiaries and bears interest, at
the election of CCA, at either the agent bank's prime rate or a rate which is
0.5%, 0.75% or 1.0% above the applicable 30-, 60- or 90-day LIBOR rate,
depending on CCA's leverage ratio. Interest is payable quarterly with respect to
prime rate loans and at the expiration of the applicable period with respect to
LIBOR rate-based loans. There are no prepayment penalties associated with the
credit facility. The credit facility requires CCA, among other things, to
maintain specific ratio requirements relating to net worth, leverage and debt
service coverage. The facility also limits certain payments and distributions.
As of December 31, 1996, there were $4.0 million in borrowings under the
facility. As of March 31, 1997, there was $78 million borrowed under this
facility. Letters of credit totaling $63.5 million had been issued, leaving the
unused commitment at $28.5 million as of March 31, 1997.
In September 1996, CCA also closed a $2.5 million credit facility with a
bank that provides for the issuance of letters of credit and matures in
September 1999. As of March 31, 1997, there were $1.6 million in letters of
credit issued, leaving the unused commitment at $.9 million.
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<PAGE> 53
BUSINESS OF THE COMPANY AND ITS PROPERTIES
THE FACILITIES
The Company has negotiated a purchase agreement for the nine Initial
Facilities with an aggregate design capacity of 6,687 beds, and option
agreements to purchase any or all of the five additional Option Facilities with
an aggregate design capacity of 5,638 beds at any time during the three year
period from the closing of the purchase of the Initial Facilities. In addition,
the Company will have an option to acquire any future correctional or detention
facilities acquired or developed and owned by CCA in the future for a period of
three years following the Service Commencement Date with respect to such
facility. The Company will acquire a 100% interest in each of the facilities
purchased. Certain information for the Initial Facilities and the Option
Facilities is set forth in the following tables and accompanying descriptions.
The Initial Facilities
<TABLE>
<CAPTION>
INITIAL ANNUAL LEASE
DESIGN DATE RENT TERM
FACILITY AND LOCATION CAPACITY OPENED TYPE OF FACILITY CONTRACTING ENTITIES (IN MILLIONS) (YEARS)
- --------------------- -------- ------ ---------------- -------------------- -------------- -------
<S> <C> <C> <C> <C> <C> <C>
Houston Processing
Center.................. 411 April Medium Security INS $1.5 12
Processing
Houston, Texas 1984 Center
Laredo Processing
Center.................. 258 March Medium Security INS and BOP 1.2 12
Processing
Laredo, Texas 1985 Center
Bridgeport Pre-Parole
Transfer Facility....... 200 November Minimum Security State of Texas 0.4 12
Pre-Parole
Bridgeport, Texas 1987 Transfer
Facility
Mineral Wells Pre-Parole
Transfer Facility....... 1,119 July Minimum Security State of Texas 3.0 12
Pre-Parole
Mineral Wells, 1989 Transfer
Texas Facility
West Tennessee
Detention Facility(2)... 600 September Multi-Security INS, USMS, BOP 3.7 10
Mason, Tennessee 1990 Detention Center State of North Carolina
Leavenworth Detention
Center.................. 327 June Maximum Security USMS 3.3 10
Leavenworth, 1992 Detention Center
Kansas
Eloy Detention
Center(2)............... 1,500(1) July Medium Security INS and BOP 6.0 12
Eloy, Arizona 1994 Detention Center
Central Arizona Detention
Center(2)............... 1,792 October Multi-Security USMS, States of Oregon, 12.3 10
Florence, Arizona 1994 Detention Center Alaska and New Mexico
T. Don Hutto
Correctional Center..... 480 January Medium Security Williamson County, Texas 2.5 12
Correctional
Taylor, Texas 1997 Facility States of Colorado and
Wyoming
</TABLE>
- ---------------
(1) Includes a 250-bed expansion which is expected to be completed in June 1997.
(2) Annual rentals for this facility will exceed 10% of aggregate annual pro
forma rentals of $33.9 million.
The Initial Facilities will be purchased from CCA for an aggregate purchase
price of approximately $308.1 million in cash. The Company will lease the
Initial Facilities to CCA pursuant to Leases with terms ranging from 10 to 12
years and with aggregate initial annual rents of approximately $33.9 million.
Throughout the terms of the initial Leases, annual rents will escalate by the
Base Rent Escalation. The Leases may be extended at fair market rates for three
additional periods of five years each upon the mutual agreement of the Company
and CCA.
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<PAGE> 54
The initial public offering price and, accordingly, the aggregate
consideration to be paid by the Company in the Formation Transactions are based
on an evaluation of CCA's operation of the Initial Facilities as a whole and the
factors discussed under "Underwriting" herein, rather than the valuation of
individual properties. Independent valuations were not obtained to determine the
purchase price to be paid by the Company for the fair market value of the
Initial Facilities and the purchase price paid by the Company for the Initial
Facilities exceeds their historical costs. See "Risk Factors -- Conflicts of
Interest." The purchase price for the nine Initial Facilities to be sold by CCA
to the Company was determined primarily based on an evaluation of the current
and anticipated cash flows and operating results of such facilities. To
determine the purchase price for each of the Initial Facilities other than the
T. Don Hutto Correctional Center, the anticipated annual cash flow from the
facility less capital expenditures, was divided by an agreed upon coverage rate
and lease rate. Because the T. Don Hutto Correctional Center was not completed
until January 1997, the purchase price of that facility was calculated as CCA's
approximate cost of developing, constructing and equipping the center, plus 5%
of such costs. It is possible that if the Company were to have obtained any such
third-party valuations, the sum of the values of the Initial Facilities might
have been lower than the valuation of the Company. There has not been, nor will
there be, any valuation of the Company other than the initial public offering
price of the Common Shares.
The Option Facilities
<TABLE>
<CAPTION>
DESIGN ANTICIPATED
FACILITY AND LOCATION CAPACITY OPENING DATE TYPE OF FACILITY CONTRACTING ENTITIES
- --------------------- -------- ------------ ---------------- --------------------
<S> <C> <C> <C> <C>
Northeast Ohio Correctional Center... 2,016 June Medium Security Pending(1)
Youngstown, Ohio 1997 Correctional Facility
Torrance County Detention Facility... 910 October Multi-Security State of New Mexico, Torrance
Estancia, New Mexico 1997(2) Detention Facility County, USMS, and BOP
Southern Colorado Correctional 752 October Medium Security State of Colorado
Facility...........................
Walsenburg, Colorado 1997 Correctional Facility
North Fork Correctional Facility..... 960 January Medium Security Under negotiation(3)
Sayre, Oklahoma 1998 Correctional Facility
Whiteville Correctional Center....... 1,000 July Medium Security Under negotiation(4)
Whiteville, Tennessee 1998 Correctional Facility
</TABLE>
- ---------------
(1) CCA is reserving all 2,016 beds in this facility for use by the District of
Columbia on a permanent basis. CCA is currently housing 900 inmates for the
District of Columbia under a temporary contract.
(2) Anticipated opening date for a 624-bed expansion. The current 286-bed
facility was opened in December 1990.
(3) CCA is currently negotiating with the State of Colorado with respect to beds
in this facility.
(4) CCA is currently negotiating with various states with respect to beds in
this facility.
The Company will have options to purchase, for a period of three years from
the closing of the purchase of the Initial Facilities, any or all of the five
Option Facilities. The purchase price of each Option Facility shall be equal to
CCA's actual cost of developing, constructing and equipping such Option
Facility, plus 5% of such costs. The initial annual rent for each Option
Facility will be the greater of (i) the fair market rental value of such Option
Facility or (ii) 11% of such purchase price. Using the 11% lease rate
calculation, the Company and CCA believe that the purchase price and initial
annual rent, respectively, for each Option Facility, if purchased, will be: (a)
Northeast Ohio Correctional Center -- $58.0 million and $6.4 million; (b)
Torrance County Detention Facility -- $36.0 million and $4.0 million; (c)
Southern Colorado Correctional Facility -- $27.5 million and $3.0 million; (d)
North Fork Correctional Facility -- $29.5 million and $3.2 million and (e)
Whiteville Correctional Center -- $42.0 million and $4.6 million. Estimated
aggregate purchase price and first-year rent amount to approximately $193.0
million and $21.2 million, respectively.
The Company will lease the Option Facilities, if acquired, pursuant to
long-term, non-cancelable triple net leases on substantially the same terms and
conditions as the Leases for the Initial Facilities, including Base Rent
Escalation. The Company does not intend to acquire an Option Facility until it
is fully constructed, is the subject of an enforceable management contract
between CCA and a government entity and has an occupancy rate acceptable to the
Company. See "The Company -- Business Objectives and Strategies."
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<PAGE> 55
Because the Option Facilities are currently under development, construction
or expansion by CCA, the cash consideration to be paid by the Company for each
of the five Option Facilities will be determined based on CCA's costs of
developing, constructing and equipping such facilities plus 5% of such costs.
Independent valuations were not obtained to determine the purchase price of the
Option Facilities, and the purchase price to be paid by the Company for the
Option Facilities exceeds their historical costs. See "Risk Factors -- Conflicts
of Interest -- Situations in Which Conflicts of Interest Have Arisen and May
Continue to Arise -- Valuation of the Facilities."
DESCRIPTION OF THE FACILITIES
The Initial Facilities
Set forth below are brief descriptions of each of the Initial Facilities.
Unless otherwise noted, the Company will own fee title to the Facilities, free
and clear of any material liens. In general, the Facilities are operated under
management contracts with various government entities with terms shorter than
the terms of the Leases. The contracts, generally, have current terms that
require renewals every two to five years. CCA expects to renew these contracts
for periods consistent with the remaining renewal options allowed by the
contract or other reasonable extensions. It has been CCA's experience generally
that renewals proposed by it have been accepted by the corresponding contracting
government entity. See "Risk Factors -- Correctional and Detention Industry
Risks."
Pre-Parole Transfer Facilities. Pre-parole transfer facilities are used to
hold inmates who have been arrested for technical violations of their parole
agreements with a State Department of Criminal Justice, Board of Pardons and
Paroles. Pre-parole transfer facilities are classified as minimum security
facilities. The pre-parole transfer facilities to be acquired by the Company are
the Bridgeport Pre-Parole Transfer Facility and the Mineral Wells Pre-Parole
Transfer Facility.
The Bridgeport Pre-Parole Transfer Facility is located on approximately
three acres in Bridgeport, Texas and has a design capacity of 200 beds. The
31,000 square foot facility houses females who have been arrested for technical
violations of their parole agreements with the Texas Department of Criminal
Justice, Board of Pardons and Paroles. The facility was opened in 1987 and was
managed by Concept prior to CCA's acquisition of Concept in 1995. The facility
has been operated pursuant to a contract with the State of Texas since its
opening. CCA's current management contract with the State of Texas expires in
August 1997 with a two-year renewal option available to CCA.
The Mineral Wells Pre-Parole Transfer Facility is located on a 23 acre
tract in Mineral Wells, Texas and has a design capacity of 1,119 beds. The
196,000 square foot facility houses male inmates who have been arrested for
technical violations of their parole agreements with the Texas Department of
Criminal Justice, Board of Pardons and Paroles. The facility has been in
operation since July 1989 and was previously managed by Concept. CCA's current
management contract with the State of Texas expires in August 1997 with a two-
year renewal option available to CCA.
Processing Centers. Processing centers are used to house undocumented
aliens for the INS and are classified as minimum to medium security facilities.
The processing centers to be acquired by the Company include the Houston
Processing Center and the Laredo Processing Center.
The Houston Processing Center is located on approximately six acres in
Houston, Texas and has a design capacity of 411 beds. The 68,000 square foot
medium security facility, completed in April 1984, represents CCA's first
design, construction and management contract. CCA has contracted with the INS to
detain juveniles and adults at the center. The facility was accredited by the
ACA in April 1986 and is the first privately managed adult detention facility to
be awarded this status. CCA's management contract with the INS expires in
September 1997 with a one-year renewal option available. CCA has managed this
facility since 1984 under similar contract renewals.
The Laredo Processing Center is located on approximately four acres in
Laredo, Texas and has a design capacity of 258 beds. Constructed originally as a
48,000 square foot facility, the medium security facility underwent a 50-bed,
6,400 square foot expansion in March 1990, bringing the rated capacity to its
current
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<PAGE> 56
level. Though the facility was designed and constructed under a contract with
the INS, CCA has also contracted with the BOP to detain juveniles and adults at
the center. The USMS has entered into an intergovernmental contract with the BOP
to detain inmates at the facility as well. CCA's current management contracts
with the INS and BOP expire in December 1997. CCA is currently under
negotiations with the INS, BOP and USMS regarding an additional series of
contracts totaling a five-year term. CCA has managed this facility under similar
contract renewals since 1985.
Detention Facilities. Detention facilities are multi-security level
facilities used to house inmates of all levels, including pre-trial and
pre-sentence prisoners for the USMS, inmates sentenced but not yet housed in
correctional facilities, inmates awaiting trial, sentencing or hearing and
persons detained by the INS. The detention facilities to be acquired by the
Company include the Central Arizona Detention Center, the Leavenworth Detention
Center and the West Tennessee Detention Facility.
The Central Arizona Detention Center is located on two tracts totaling 68
acres in Florence, Arizona and has a design capacity of 1,792 beds. The 275,000
square foot, minimum to medium security facility houses male prisoners for the
USMS and the States of Alaska, Oregon and New Mexico. The facility was
constructed in three phases with the original construction completed in October
1994 and the final expansion completed in February 1997. CCA anticipates the
facility will seek ACA accreditation. CCA's current contracts with the USMS and
the States of Alaska, Oregon and New Mexico expire at various times through June
1999.
The Eloy Detention Center is located on a 146 acre tract in Eloy, Arizona
and has a design capacity of 1,500 beds. The 299,500 square foot medium security
center, originally designed, built and managed by Concept, represents a joint
arrangement between INS and the BOP, each of which uses these beds to house
either illegal aliens awaiting deportation or illegal aliens serving a short
prison term prior to deportation. Originally constructed as a 1,000-bed
facility, the facility was expanded by 250 beds in October 1996 and is currently
undergoing a second 250-bed expansion. The facility is seeking ACA
accreditation. CCA's management contract with INS commenced in July 1994 with a
three-year base period that expired in February 1997 and with two one-year
option periods. The current extension will expire in February 1998 and the
remaining extension will expire in February 1999.
The Leavenworth Detention Center is located on a 20 acre tract in
Leavenworth, Kansas and has a design capacity of 327 beds. The 75,000 square
foot, maximum security facility primarily houses federal prisoners awaiting
trial, sentencing or hearing and persons detained by the USMS. Opened in June
1992, the center received ACA accreditation in August 1993. CCA's current
management contract with the USMS originally extended through June 1997. CCA has
received a six-month extension of its current contract which will now expire in
December 1997, and will be entering into negotiations with the USMS regarding a
new contract.
The West Tennessee Detention Facility is located on a 45 acre tract in
Mason, Tennessee and has a design capacity of 600 beds. The 121,000 square foot,
multi-level security facility houses adult male and male juveniles certified as
adults for the USMS, the INS, the BOP and the North Carolina Department of
Corrections (the "NCDC"). The facility received its ACA accreditation in August
1992. CCA's current management contract with the State of North Carolina expires
in September 1997. CCA's current management contract with the USMS, INS and BOP
is set to expire in August 2001.
Correctional Facilities. Correctional facilities are used to house inmates
on a permanent basis for the duration of their sentences. The correctional
facility to be acquired by the Company is the T. Don Hutto Correctional Center.
The T. Don Hutto Correctional Center is located on approximately 64 acres
in Taylor, Texas and has a design capacity of 480 beds. Opened in January 1997,
the 136,000 square foot, secure facility was developed, designed and constructed
by CCA and is CCA's newest facility. CCA anticipates the facility will seek ACA
accreditation in the next two to three years. The facility currently houses
inmates for Williamson County, Texas and the States of Wyoming and Colorado
under contracts which extend through January 2000.
Historical Occupancy Rates of the Initial Facilities. The following chart
summarizes the historical occupancy rates of the Initial Facilities for the five
year period ended December 31, 1996.
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<PAGE> 57
HISTORICAL OCCUPANCY OF INITIAL FACILITIES
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Bridgeport............................................. 48.4% 67.3% 94.2% 83.2% 98.4%
Mineral Wells.......................................... 121.4 99.6 93.9 83.0 96.9
Houston................................................ 101.0 105.3 111.6 75.5 59.8
Laredo................................................. 82.0 87.7 109.3 94.0 90.0
Central Arizona........................................ NA NA 33.7 92.7 104.9
Eloy................................................... NA NA 47.8 92.2 93.2
Leavenworth............................................ 91.2 90.6 82.9 94.2 88.4
West Tennessee......................................... 100.7 87.2 86.4 95.8 97.1
T. Don Hutto........................................... NA NA NA NA NA
</TABLE>
The Option Facilities
Of the five Option Facilities, four are medium security correctional
facilities, and one is a multi-level security detention center.
The Northeast Ohio Correctional Center is located on approximately 72 acres
in Youngstown, Ohio. The 365,000 square foot, medium security facility was
completed in March 1997 with a design capacity of 1,504 beds. A 512 bed, 60,000
square foot expansion, is scheduled for completion in July 1997, bringing the
design capacity to 2,016 beds. CCA is reserving all 2,016 beds in this facility
for use by the District of Columbia, pending the outcome of the District's
expedited solicitation process for bids to house inmates. The facility will seek
ACA accreditation.
The Southern Colorado Correctional Facility is located on two tracts
totaling 82 acres in Walsenburg, Colorado. The 207,000 square foot, medium
security facility has a design capacity of 752 beds and is scheduled to open in
October of 1997. The facility will seek ACA accreditation and will house inmates
for the State of Colorado under a contract that consists of a one-year initial
agreement with a series of automatic renewals.
The North Fork Correctional Facility is located on a 75 acre tract in
Sayre, Oklahoma. Scheduled for completion by the first quarter of 1998, the
207,000 square foot, medium security facility will have a design capacity of 960
beds. The facility will seek ACA accreditation. CCA is currently under
negotiations with the State of Colorado with regard to beds in this facility.
The Torrance County Detention Facility is located on a 2,840 acre tract in
Estancia, New Mexico and has a design capacity of 910 beds. The 60,000 square
foot, multi-security level facility houses pre-trial and pre-sentence prisoners
for the USMS and BOP and sentenced inmates for the New Mexico Department of
Corrections and Torrance County. The facility was originally constructed in
December 1990 with a design capacity of 286 beds and is currently being expanded
by 624 beds. The facility is seeking ACA accreditation. CCA's contract with
Torrance County, New Mexico extends through May 1998. CCA's contracts with USMS
and the State of New Mexico do not have specific expiration dates.
Whiteville Correctional Center will be located in Whiteville, Tennessee and
will have a design capacity of 1,000 beds. The medium security facility is
scheduled to open in July 1998, and the facility will seek ACA accreditation.
CCA is currently negotiating with various states regarding the housing of
inmates in the facility.
LEGAL PROCEEDINGS
Owners and operators of privatized correctional and detention facilities
are subject to a variety of legal proceedings arising in the ordinary course of
operating such facilities, including proceedings relating to personal injury and
property damage. Such proceedings are generally brought against the operator of
a correctional facility, but may also be brought against the owner. Although the
Company is not currently a party to any legal proceeding, it is possible that in
the future the Company could become a party to such proceedings. CCA is a party
to certain litigation relating to the Facilities arising in the ordinary course
of operations. The Company does not believe that such litigation, if resolved
against CCA, would have a material adverse effect upon its business or financial
position. The Leases provide that CCA is responsible for claims
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<PAGE> 58
based on personal injury and property damage at the Facilities and require CCA
to maintain insurance for such purposes.
COMPETITION
The Facilities are, and any additional correctional and detention
facilities acquired by the Company will be, subject to competition for inmates
from private prison managers. The number of inmates in a particular area could
have a material effect on the revenues of the Facilities. In addition, revenues
of the Facilities will be affected by a number of factors including the demand
for inmate beds and general economic conditions. The Company will also be
subject to competition for the acquisition of correction and detention
facilities with other purchasers of correctional and detention facilities.
GOVERNMENT REGULATION
Environmental Matters. Under various federal, state and local laws,
ordinances and regulations, an owner or operator of real property may become
liable for the costs of removal or remediation of certain hazardous substances
released on or in its property. Such laws often impose such liability without
regard to whether the owner or operator knew of, or was responsible for, the
release of such hazardous substances. The presence of such substances, or the
failure to remediate such substances properly when released, may adversely
affect the owner's ability to sell such real estate or to borrow funds if the
borrower is using such real estate as collateral. Neither the Company, CCA nor
any of their affiliates has been notified by any government authority of any
material non-compliance, liability or other claim in connection with any of the
Facilities and neither the Company, CCA or any of their affiliates is aware of
any other environmental condition with respect to any of the Facilities that is
likely to be material to the Company. All of the Facilities have been subjected
to a preliminary environmental investigation. No assurance can be given that
such investigation would reveal all potential environmental liabilities, that no
prior or adjacent owner created any material environmental condition not known
to the Company 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
Company does not intend to conduct any further environmental investigation in
connection with the Offering. The Leases provide that CCA will indemnify the
Company for certain potential environmental liabilities at the Facilities. See
"Leases."
Americans with Disabilities Act. The Facilities are subject to the
Americans with Disabilities Act of 1990 (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. Under
the Leases, CCA is required to make any necessary modifications or improvements
to comply with the ADA. The Company does not believe that such costs will be
material because it believes that relatively few modifications are necessary to
comply with the ADA. CCA has undertaken, where necessary, a capital improvement
program to cause the Facilities to comply with the ADA.
RELATIONSHIP BETWEEN CCA AND THE COMPANY AFTER THE
FORMATION TRANSACTIONS
For the purpose of governing certain of the ongoing relationships between
CCA and the Company after the Formation Transactions and to provide mechanisms
for an orderly transition, prior to the completion of the Formation
Transactions, CCA and the Company will have entered into the various agreements,
and will adopt policies as described herein. The Company believes that the
agreements are fair to it and contain terms which generally are comparable to
those which would have been reached in arm's-length negotiations with
unaffiliated parties. In each case, the terms of these agreements have been
reviewed by the Board of Directors of CCA and by the Independent Committee (as
hereinafter defined) of the Board of Trustees of the Company. Such agreements
include (a) the Purchase Agreement, (b) the Option Agreements, (c) the Right to
Purchase Agreement, and (d) the Trade Name Use Agreement.
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<PAGE> 59
Purchase Agreement. Prior to the consummation of the Offering, the Company
and CCA and certain of its subsidiaries will enter into the Purchase Agreement
which provides the terms of the sale of the nine Initial Facilities for
aggregate cash consideration of approximately $308.1 million. Pursuant to the
Purchase Agreement, the transfer of the Initial Facilities is subject to the
completion of the Offering as well as the normal and customary conditions to the
closing of real estate transactions. The Purchase Agreement will contain
representations and warranties by CCA concerning the Initial Facilities
customarily found in agreements of such types.
Option Agreements. Prior to the consummation of the Offering, the Company
and CCA and certain of its subsidiaries will enter into the Option Agreements,
pursuant to which CCA and certain of its subsidiaries will grant the Company
exclusive options to acquire any or all of the five Option Facilities for a
period of three years following the purchase of the Initial Facilities for CCA's
costs of developing, constructing and equipping such facilities, plus 5% of such
costs, which aggregate approximately $193.0 million.
Right to Purchase. It is anticipated that CCA will acquire or develop
additional correctional or detention facilities in the future. The Company and
CCA will enter into the Right to Purchase Agreement whereby the Company will
have an option to acquire any correctional or detention facility acquired or
developed and owned by CCA in the future, for a period of three years following
the Service Commencement Date with respect to such facility. For the first two
years of such option period, fair market value is deemed to be CCA's cost of
developing, constructing and equipping such facilities, plus 5% of such costs.
Thereafter, fair market value will be based on cash flows and operating results
of such facilities. For facilities acquired during the first five years of the
Right to Purchase Agreement, the initial annual rent on facilities leased back
to CCA will be the greater of (i) fair market rental rates, as determined by CCA
and the Company, or (ii) 11% of the purchase price of such facilities.
Thereafter, the initial annual rent on such facilities will be the fair market
rental rates, as determined by the Company and CCA. Additionally, the Company
will have a right of first refusal in the event CCA obtains an acceptable third
party offer to acquire or provide mortgage secured financing to finance more
than 90% of the cost of any correctional or detention facility now owned or
which is acquired or developed by it or its subsidiaries in the future. Pursuant
to such right, prior to selling any such facility, or mortgaging more than 90%
of the cost of such facility, CCA must first offer to sell such facility to the
Company or have the Company finance such facility, as applicable, on the same
terms and conditions contained in such third party offer. With respect to a sale
of any such facility, if the Company declines to purchase such facility at a
price or on terms set forth in such third party offer, CCA will be free to sell
such facility for a specified period of time at a price at least equal to the
price offered to the Company, and on terms and conditions substantially
consistent with those offered to the Company. With respect to a first mortgage
financing of 90% of the cost of any such facility, if the Company declines to
provide such financing on the terms set forth in such third party offer, CCA
will be free to obtain first mortgage financing from a third-party on terms and
conditions no more favorable to CCA than those contained in the third party
offer.
Trade Name Use Agreement. Pursuant to the terms of the Trade Name Use
Agreement, the Company will be granted the right to use the trade name "CCA" as
part of its name, in conformance with standards reasonably set by CCA for the
period commencing on the date of execution and terminating on the date the
Company ceases to own any correctional or detention facility managed by CCA. The
agreement may also be terminated upon 10 days written notice from CCA to the
Company; the occurrence of a change in control of the Company; the liquidation
or bankruptcy of the Company; or in the event of an unauthorized transfer of the
right to use the trade name by the Company. In addition, the Company
acknowledges that CCA owns all rights, title and interest in and to the trade
name and agrees that it will do nothing inconsistent with such ownership.
Policies and Procedures for Addressing Conflicts. After completion of the
Formation Transactions, CCA and the Company will have significant contractual
and other ongoing relationships, as described above and under "Leases" herein.
Such ongoing relationships may present certain conflict situations for certain
trustees and officers of the Company and certain directors and officers of CCA.
See "Conflicts of Interest." CCA and the Company will adopt appropriate policies
and procedures to be followed by the Board of Trustees of the Company and the
Board of Directors of CCA to attempt to address those conflicts. Such procedures
will include requiring Doctor R. Crants to abstain from making management
decisions in his capacity as an
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officer, trustee or director of the Company and CCA, respectively, and to
abstain from voting as a director or trustee of either company, with respect to
matters that present a conflict of interest between the companies. Whether or
not a conflict of interest situation exists will be determined by the
Independent Committee on a case-by-case basis in accordance with the policies
and procedures to be developed by the Board of Trustees.
The Board of Trustees has established the Independent Committee to evaluate
transactions involving the Company and CCA, such as the acquisition of
additional facilities from CCA and lease negotiation and enforcement. Certain
other significant actions of the Board of Trustees will require the approval of
a minimum of two-thirds of the trustees. In addition, Michael W. Devlin, the
Company's Chief Development Officer, and Vida H. Carroll, the Company's Chief
Financial Officer, both of whom have had and will have no affiliation with CCA,
will assist the Independent Committee of the Company's Board of Trustees with
respect to certain potential conflicts of interest between the Company and CCA,
including the negotiation and enforcement of all Leases. See "Conflicts of
Interest."
LEASES
The following summary of the Leases between the Company and CCA is
qualified in its entirety by reference to the Leases, a form of which is filed
as an exhibit to the Registration Statement, of which this Prospectus is a part.
The following description of the Leases does not purport to be complete but
contains a summary of all material provisions thereof. Capitalized terms used
below but not otherwise defined have the meanings set forth in the "Glossary."
Concurrently with CCA's conveyance of the Facilities to the Company, the
Company will lease each of the Facilities to CCA. Each such Facility will be the
subject of a separate Lease that will incorporate the provisions of the Master
Lease between the Company and CCA. The Lease of each Facility will include 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 fixtures relating to the operation of
the Facility and all personal property necessary to operate the facility for its
intended purpose, other than a limited amount of CCA's proprietary property (the
"Leased Property"). Each Facility will be leased to CCA under the Master Lease
which will have a primary term of 10 to 12 years (the "Fixed Term"). The Lease
for each Facility may be extended at fair market rates for three additional
five-year terms beyond the Fixed Term (the "Extended Terms"), but only upon the
mutual agreement of the Company and CCA. Fair market rates for Extended Terms
will be determined mutually by the Company and CCA based on their respective
analyses of the market for the relevant Facility. Such analyses may include a
review of the historical and projected economic performance of the Facility and
will take into account the interest rate environment at the time of the
extension and the creditworthiness of the tenant. The Fixed Term and Extended
Terms under each Lease shall be subject to earlier termination upon the
occurrence of certain contingencies described in the Lease. Any additional
properties acquired (other than the Facilities) will be leased pursuant to
similar terms and conditions as may be agreed upon between CCA and the Company
at the time of such acquisitions, and such terms and conditions may vary from
the terms and conditions described herein with respect to the Facilities.
Use of the Facilities. Each Lease permits CCA to operate the Leased
Property solely as a correctional or detention facility. CCA has the
responsibility in each Lease to obtain and maintain all licenses, certificates
and permits in order to use and operate each Facility.
Amounts Payable Under the Leases; Net Provisions. During the Fixed Term
and the Extended Terms, CCA will pay annual base rent ("Annual Base Rent"),
which will be payable in monthly installments. Annual Base Rent for each Leased
Property will be increased each year by the Base Rent Escalation. Annual Base
Rent and Base Rent Escalation are collectively referred to in the Master Lease
as "Rent." The Company believes that the Rent CCA will pay to the Company under
the Leases represents the fair market rate for each Leased Property. The fair
market rates for the Leased Properties are based on the Company's analysis of
the market for the Leased Properties, including the Company's review of the
historical and projected economic performance of the Leased Properties, the
current interest rate environment, and the creditworthiness of CCA.
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Each Lease of a Leased Property is what is commonly known as a triple net
lease or absolute net lease, under which CCA is to pay Annual Base Rent and all
additional charges. All additional charges include every fine, penalty, interest
expense and cost which may be added for nonpayment or late payment thereof, all
taxes, assessments and levies, excises, fees, and all other government charges
with respect to each Leased Property, and all charges for utilities and
services, including, without limitation, electricity, telephone, trash disposal,
gas, oil, water, sewer, communication and all other utilities used in each
Leased Property.
CCA's Right of First Refusal. Pursuant to the Master Lease, CCA will have
a right of first refusal in the event the Company obtains an acceptable third
party offer to acquire any interest in any Facility or in any correctional or
detention facility acquired or developed by the Company in the future and
operated by CCA (each a "Future Facility"). Pursuant to such right, prior to
selling any interest in any Facility or Future Facility, the Company must first
offer to sell each Facility or Future Facility to CCA on the same terms and
conditions contained in such third party offer. If CCA declines to purchase such
facility on such terms and conditions, the Company will be free to sell each
Facility or Future Facility for a specified period of time at a price at least
equal to the price offered to CCA and on terms and conditions substantially
consistent with those offered to CCA.
Maintenance, Modification and Capital Additions. Under each Lease, CCA
will, at its sole cost and expense, maintain each Leased Property in good order,
repair and appearance and will make structural and non-structural, interior and
exterior, foreseen and unforeseen, and ordinary and extraordinary repairs which
may be necessary and appropriate to keep such Leased Property in good order,
repair and appearance (excluding ordinary wear and tear). The Company will not
be required to build or rebuild any improvements to any Leased Property, or to
make any repairs, replacements, alterations, restorations or renewals to any
Leased Property.
CCA, at its sole cost and expense, may make alterations, additions, changes
and/or improvements to each Leased Property without the consent of the Company,
provided that the value and primary intended use of such Leased Property
(determined in the Company's reasonable judgment) is not impaired. All
machinery, equipment, furniture, furnishings, and other personal property
installed at the expense of CCA on any Leased Property, will remain the property
of CCA until the expiration or earlier termination of the Lease.
Each Lease provides that, at the request of CCA, the Company may construct
one or more new buildings or other improvements to a particular Leased Property
which are not normal or recurring to the maintenance of a Leased Property (a
"Capital Addition"). A Capital Addition to a Leased Property may necessitate an
amendment to an existing Lease or new lease agreement setting forth any changes
in the premises, rent, or other similar terms of the Lease as a result of the
Capital Addition. In certain situations, a Capital Addition to a Leased Property
may be made directly by CCA and financed by third parties. In the case of a
Capital Addition not undertaken or financed by the Company, the Company will
have an option to acquire and lease back to CCA such Capital Addition for a
period of three years following the Service Commencement Date with respect to
such Capital Addition, at a fair market price and at an annual rental rate equal
to (i) for Capital Additions acquired during the first five years, the greater
of (a) fair market rental rate or (b) 11% of the purchase price and (ii) for
Capital Additions acquired thereafter, at fair market rental rates. For the
first two years of such option, the fair market price of any such Capital
Addition is deemed to be CCA's actual cost and expense to acquire, develop,
design, construct and equip such Capital Addition ("CCA's Cost") plus 5% of
CCA's Cost.
Insurance. Each Lease provides that CCA will maintain insurance on each
Leased Property under CCA's insurance policies providing for the following
coverages: (i) fire, vandalism and malicious mischief, extended coverage perils,
and all physical loss perils; (ii) comprehensive general public liability
(including personal injury and property damage); and (iii) worker's
compensation. Under the Lease, the Company will have the right to periodically
review CCA's insurance coverage and provide input with respect thereto.
Environmental Matters. Each Lease provides that CCA makes various
representations and warranties relating to environmental matters with respect to
each Leased Property. Each Lease also requires CCA to indemnify and hold
harmless the Company and any Company Mortgagee from and against all liabilities,
costs and expenses imposed upon or asserted against the Company or the Leased
Property on account of, among
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other things, any federal, state or local law, ordinance, regulation, order or
decree relating to the protection of human health or the environment in respect
of the Leased Property. The Leases also provide, however, that CCA will not be
liable with respect to matters or events that arise after the commencement date
of the applicable Lease as a result of the negligence or misconduct of the
Company.
Assignment and Subletting. The Leases provide that CCA may not, without
the prior written consent of the Company, assign, sublease, mortgage, pledge,
hypothecate, encumber or otherwise transfer (except to a subsidiary of CCA,
performance of whose obligations will be guaranteed by CCA) any Lease or any
interest therein, all or any part of the Leased Property. The Leases further
state that such consent may be granted or withheld by the Company in its sole
discretion. An assignment of a Lease will be deemed to include any Change of
Control of CCA (as defined herein), as if such Change of Control were an
assignment of the Lease. A "Change of Control" of CCA means, for purposes of the
Leases, the sale by CCA of a controlling interest in CCA, or the sale or other
transfer of all or substantially all of the assets of CCA. A Change of Control
also means any transaction pursuant to which CCA is merged with or consolidated
into another entity, and CCA is not the surviving entity. The Leases further
provide that no assignment will in any way impair the continuing primary
liability of CCA under the Leases.
Damage to, or Condemnation of, a Leased Property. In the event of any
damage or destruction to any Facility, CCA has the obligation fully to repair or
restore the same at CCA's expense, with the Annual Base Rent, real estate taxes
and other impositions on the particular Facility being proportionately abated
during the time of restoration, but only to the extent of any rental
interruption insurance proceeds actually received by the Company. If any
Facility is damaged to such an extent that 50% of the Facility is rendered
unsuitable for use as a correctional or detention facility, and if CCA has fully
complied with the insurance obligations with respect to such Facility (including
maintaining insurance against loss of rents), CCA may terminate the Lease of
that facility, upon turning over all insurance proceeds to the Company with
respect to such Facility, together with an amount equal to the difference, if
any, between the amount of such insurance proceeds and the net book value of the
damaged facility, as reflected on the Company's financial statements on the date
of damage.
In the event of a condemnation or taking of any Leased Property, so long as
such condemnation was not due to CCA's failure to maintain the particular Leased
Property, the Lease will terminate as to the portion of the Leased Property
taken, and in the event of a partial taking, CCA is obligated to repair the
portion not taken, if the same does not render the Leased Property unsuitable
for CCA's then use and occupancy, but only to the extent of the condemnation
award. The total condemnation award shall be payable to the Company, except that
CCA may recover the value of its improvements and the value of its leasehold
interest so long as the amount of the award paid to the Company is equal to the
net book value of the facility, as reflected on the Company's financial
statements on the date of the condemnation.
Indemnification Generally. Under each Lease, CCA indemnifies, and is
obligated to save harmless, the Company from and against all liabilities, costs
and expenses (including reasonable attorneys' fees and expenses) imposed upon or
asserted against the Company as owner of the applicable Leased Property on
account of, among other things, (i) any accident, injury to or death of a person
or loss of or damage to property on or about the Leased Property; (ii) any use,
misuse, non-use, condition, maintenance or repair by CCA of the Leased Property;
(iii) any impositions (which are the obligations of CCA to pay pursuant to the
applicable provisions of such Lease); (iv) any claim of any person incarcerated
in the Leased Property, including claims alleging breach or violation of such
persons's civil or legal rights; (v) any failure on the part of CCA to perform
or comply with any of the terms of the Lease or any sublease; (vi) any claims by
a prisoner arising from or relating to such individual's incarceration or
detention in any Leased Property; and (vii) any liability the Company may incur
or suffer as a result of any permitted contest by CCA under any Lease. Under
each Lease, the Company indemnifies, and is obligated to save harmless, CCA from
and against all liabilities, costs and expenses (including reasonable attorneys'
fees) imposed upon or asserted against CCA as a result of the Company's active
negligence or willful misconduct.
Events of Default. An "Event of Default" will be deemed to have occurred
under the Master Lease and any individual Lease if CCA fails to perform any
covenant and does not diligently undertake to cure the same
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after 30 days' notice from the Company; if the interest of CCA in any Leased
Property is levied upon or attached and is not discharged in a specified period
of time; or if any representation or warranty of CCA is incorrect. An "Event of
Default" will be deemed to have occurred under the Master Lease and all of the
Leases, if CCA fails to pay any rent within 15 days after notice of non-payment
from Company, if any bankruptcy proceedings are instituted by or against CCA
and, if against CCA, they are not dismissed within 90 days; if any material part
of the property of CCA is levied upon or attached in any proceeding; CCA
defaults in any payment of any obligations for borrowed money having a principal
balance of $25.0 million or more in the aggregate are not discharged within 90
days; or CCA is the subject of a non-appeallable final judgment in an amount
greater than $10.0 million, which is not covered by insurance or discharged by
CCA within a specified period of time.
In the event of any Event of Default referable to a specific Leased
Property, the Company may evict CCA from such Leased Property and either
terminate the Lease or re-let the Leased Property. In either event, CCA shall
remain responsible for the rental value of such Leased Property for the
remainder period of the term in excess of rents received by the Company from any
successor occupant. In addition, the Company may exercise any other rights that
it may have under law. In the event the Company evicts CCA from a Leased
Property, the Master Lease will remain in full force and effect for all other
Leased Properties. With respect to certain Events of Default under the Master
Lease which are not referable to a specific Leased Property (including CCA's
failure to timely pay Rent), the Company shall have all of the foregoing rights
and remedies with respect to all of the Leased Properties.
The Leases will be governed by and construed in accordance with Tennessee
law (but not including Tennessee's conflict of laws rules) except for certain
procedural laws which must be governed by the laws of the location of each
Leased Property. 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 CCA in
connection with the Formation Transactions or otherwise restrict the Company's
ability to lease properties to parties (domestic or foreign) other than CCA.
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MANAGEMENT
TRUSTEES AND EXECUTIVE OFFICERS
The Board of Trustees consists of 13 members divided into three classes
serving staggered three-year terms. Four of the trustees include Doctor R.
Crants, the Chairman of the Board of Trustees and Chairman and Chief Executive
Officer of CCA, J. Michael Quinlan, Chief Executive Officer of the Company, D.
Robert Crants, III, President of the Company, and Michael W. Devlin, Chief
Development Officer of the Company. Of the remaining nine trustees, seven are
Independent Trustees who are not employees of the Company or affiliated with
CCA. See "Conflicts of Interest." The first annual meeting of shareholders of
the Company after the Offering at which Trustees will be elected will be held in
1998. Subject to rights pursuant to any employment agreements, executive
officers of the Company serve at the discretion of the Board of Trustees.
Set forth below is information with respect to the current trustees and
executive officers of the Company, each of whom has served in such capacity
since the formation of the Company, except for Messrs. Cardin, Carell, Eakin and
Feldman who were elected to the Board of Trustees on June 6, 1997.
<TABLE>
<CAPTION>
YEAR TERM
AS TRUSTEE
NAME AGE POSITION EXPIRES
- ---- --- -------- ----------
<S> <C> <C> <C>
Doctor R. Crants......................... 52 Chairman of the Board of Trustees 2000
J. Michael Quinlan....................... 55 Chief Executive Officer; Trustee 2000
D. Robert Crants, III.................... 28 President; Trustee 1999
Michael W. Devlin........................ 37 Chief Development Officer; Trustee 1998
C. Ray Bell.............................. 56 Trustee 1998
Richard W. Cardin........................ 62 Independent Trustee 2000
Monroe J. Carell, Jr..................... 65 Independent Trustee 1998
John W. Eakin, Jr........................ 43 Independent Trustee 1999
Ted Feldman.............................. 44 Independent Trustee 1999
Jackson W. Moore......................... 48 Independent Trustee 1999
Rusty L. Moore........................... 37 Trustee 1999
Joseph V. Russell........................ 56 Independent Trustee 2000
Charles W. Thomas, Ph.D. ................ 54 Independent Trustee 1998
Vida H. Carroll.......................... 37 Chief Financial Officer;
Secretary/Treasurer
M. Susan Smith........................... 33 Vice President, Finance
</TABLE>
DOCTOR R. CRANTS is the Chairman of the Board of Trustees. Since June 1994,
Mr. Crants has served as the Chief Executive Officer and Chairman of the Board
of CCA, which he co-founded in 1983. From June 1983 to June 1994, he served in
various capacities with CCA, including President, Chief Executive Officer, and
Vice Chairman of the Board of Directors. Mr. Crants was graduated from the
United States Military Academy at West Point in 1966, and received a joint
MBA/J.D. degree from the Harvard Business School and the Harvard Law School,
respectively, in 1974. Mr. Crants is the father of D. Robert Crants, III.
J. MICHAEL QUINLAN is a trustee and the Chief Executive Officer of the
Company. Mr. Quinlan has been employed in the corrections and detention industry
for over 25 years. Prior to joining the Company, Mr. Quinlan served as the
Director of Strategic Planning for CCA for over three years. From July 1987 to
December 1992, Mr. Quinlan served as the Director of the Federal Bureau of
Prisons. In such capacity, Mr. Quinlan was responsible for the total operations
and administration of a federal agency with an annual budget of more than $2
billion, more than 26,000 employees and 75 facilities. In 1988, Mr. Quinlan
received the Presidential Distinguished Rank Award, which is the highest award
given by the United States government to civil servants for service to the
United States. In 1992, he received the National Public Service Award of the
National Academy of Public Administration and the American Society of Public
Administration, awarded annually to the top three public administrators in the
United States. Mr. Quinlan is a 1963 graduate of Fairfield University with a BSS
in History and received a J.D. from Fordham University Law School in 1966. He
also received an LLM from the George Washington University School of Law in
1970.
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D. ROBERT CRANTS, III is a trustee and the President of the Company. Mr.
Crants also serves as a principal of DC Investment Partners LLC and will
continue to serve in such capacity after the Offering. DC Investment Partners
LLC is a Tennessee limited liability company which serves as general partner to
three investment limited partnerships and is responsible for managing the
partnerships' investment activities. Notwithstanding Mr. Crant's obligation to
DC Investment Partners LLC, Mr. Crants expects to devote the majority of his
time to the management of the Company. From 1990 through 1996, Mr. Crants was
associated with Goldman, Sachs & Company ("Goldman Sachs"), most recently
serving as an associate in the Goldman Sachs Special Investments Group. During
his tenure with Goldman Sachs, Mr. Crants was involved in structuring over $3
billion in real estate transactions, including over $1 billion in REIT public
offerings. During this time, he also negotiated triple net leases for shopping
centers, free standing stores and other properties on behalf of several clients.
Mr. Crants was graduated from Princeton University in 1990 with an A.B., summa
cum laude, in Economics. Mr. Crants is the son of Doctor R. Crants.
MICHAEL W. DEVLIN is a trustee and the Chief Development Officer of the
Company. Mr. Devlin also serves as a principal of DC Investment Partners LLC and
will continue in such capacity after the Offering. Notwithstanding Mr. Devlin's
obligation to DC Investment Partners LLC, Mr. Devlin expects to devote the
majority of his time to management of the Company. From 1993 through 1995, Mr.
Devlin was a Vice President in the Business Development Group of Goldman Sachs.
Immediately prior to joining Goldman Sachs, Mr. Devlin practiced law for four
years at the law firm of Davis Polk & Wardwell in New York working on various
corporate transactions, including leveraged leasing. During that time, he
negotiated approximately $1 billion in leases, including triple net leases. Mr.
Devlin is a graduate of Yale University and the Duke University School of Law.
C. RAY BELL is a trustee of the Company. Mr. Bell is the President and
owner of Ray Bell Construction Company, Inc. ("Ray Bell Construction"). Ray Bell
Construction specializes in the construction of a wide range of commercial
buildings, including the construction on behalf of various government entities
and private companies, including CCA, of approximately 40 correctional and
detention facilities, consisting of over 15,000 beds in seven states. Mr. Bell
is a founding member of the Middle Tennessee Chapter of Associated Builders and
Contractors. Mr. Bell is a graduate of the University of the South.
RICHARD W. CARDIN is an Independent Trustee of the Company. Mr. Cardin is
currently a consultant and private investor. Prior to his retirement in 1995,
Mr. Cardin was affiliated with, and a partner in, Arthur Andersen LLP, an
international firm of independent public accountants and consultants, for 37
years. From 1980 through 1994, Mr. Cardin served as the managing partner of
Arthur Andersen's Nashville office. Mr. Cardin is a member of the Board of
Directors of United Cities Gas Company ("United Cities"), a publicly traded
company, and will serve on the Board of Directors of Atmos Energy Corporation, a
publicly traded company into which United Cities expects to merge in July 1997.
Mr. Cardin is a certified public accountant. Mr. Cardin is a member of the Audit
Committee of the Board of Trustees and is the Chairman of the Compensation
Committee.
MONROE J. CARELL, JR. is an Independent Trustee of the Company. For the
past 18 years, Mr. Carell has served as Chief Executive Officer and Chairman of
the Board of Directors of Central Parking Corporation, a NYSE company which
provides parking services ("Central Parking"). Since 1991, Mr. Carell has served
as a trustee of Vanderbilt University in Nashville and he is currently a member
of the Board of Trust of the Urban Land Institute. Mr. Carell is also a member
of the Board of Directors of Vanderbilt University Medical Center.
JOHN W. EAKIN, JR. is an Independent Trustee of the Company. Mr. Eakin
founded Eakin & Smith, Inc., a real estate development and management company
("Eakin & Smith") in 1987, and served as its President from that time until
1996, when Eakin & Smith was merged with Highwoods Properties, Inc.
("Highwoods"), a publicly traded, self-administered and self-managed, office and
industrial REIT, based in Raleigh, North Carolina. Mr. Eakin is a Senior Vice
President and Director of Highwoods. Mr. Eakin is also a member of the Board of
Directors of Central Parking and a member of the advisory board of First
American National Bank of Nashville. Mr. Eakin is a member of the Compensation
Committee of the Board of Trustees.
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TED FELDMAN is an Independent Trustee of the Company. Mr. Feldman is
currently the Chief Operating Officer of StaffMark, Inc., a provider of
diversified staffing services to business, medical niches, professional and
service organizations and governmental agencies, a position he has held since
October 1996. Prior to joining StaffMark, Mr. Feldman founded HRA, Inc., a
Nashville provider of staffing services, in 1991, and served as its President
and Chief Executive Officer from that time until it merged with StaffMark in
March 1996. Mr. Feldman is a member of the Compensation Committee of the Board
of Trustees.
JACKSON W. MOORE is an Independent Trustee of the Company. Mr. Moore is
presently a Director and the President and Chief Operating Officer of Union
Planters Corporation, a multi-state bank and savings and loan holding company
headquartered in Memphis, Tennessee, positions he has held since 1986, 1989 and
1994, respectively. He is also Chairman of PSB Bancshares, Inc. and a Vice
President and Director of its subsidiary, The Peoples Savings Bank in Clanton,
Alabama. Prior to joining Union Planters, Mr. Moore practiced law for 16 years.
Mr. Moore is a graduate of the University of Alabama and Vanderbilt University
School of Law. Mr. Moore is not related to Rusty Moore. Mr. Moore is the
Chairman of the Independent Committee and is a member of the Audit Committee of
the Board of Trustees.
RUSTY L. MOORE is a trustee of the Company. Since 1996, Mr. Moore has been
a principal of the Nashville law firm of Moore & Waechter, PLC and the President
of its affiliate, Bankers Title & Escrow Corporation. He is also a principal and
an executive officer of a privately-held real estate investment and property
management company that owns several multi-family residential properties
throughout the Southeast. Mr. Moore has over 12 years of experience in
negotiating and structuring real estate transactions including the development,
acquisition, leasing and financing of various types of property. Prior to
forming Moore & Waechter, Mr. Moore was a partner at Stokes & Bartholomew, P.A.,
where his practice focused on all aspects of real estate law. Mr. Moore was
graduated from the University of Tennessee, where he received a B.S. in Public
Administration in 1981 and a J.D. in 1985. Mr. Moore is not related to Jackson
Moore. Mr. Moore is a member of the Audit Committee of the Board of Trustees.
JOSEPH V. RUSSELL is an Independent Trustee of the Company. Mr. Russell is
the President and Chief Financial Officer of Elan-Polo, Inc., a Nashville based,
privately-held, worldwide producer and distributor of footwear. Mr. Russell is
also the Vice President of and a Partner in RCR Building Corporation, a
Nashville based, privately-held builder and developer of commercial and
industrial properties. He also serves on the Board of Directors of Capital Bank
and Trust Company, the Footwear Distributors of America Association and US Auto
Insurance Company. Mr. Russell was graduated from the University of Tennessee in
1963 with a B.S. in Finance. Mr. Russell is the Chairman of the Audit Committee
of the Board of Trustees.
CHARLES W. THOMAS, PH.D. is an Independent Trustee of the Company. Dr.
Thomas is a university professor who has taught and written on the criminal
justice and private corrections fields for over 27 years. Currently, he is a
Professor of Criminology and the Director of the Private Corrections Project
Center for Studies in Criminology and Law (the "Center") at the University of
Florida, Gainesville, positions he has held since 1980 and 1989, respectively.
While serving as Director of the Center, Dr. Thomas authored the 1996 Facility
Census. Dr. Thomas was graduated from McMurry University in 1966 with a B.S. in
Secondary Education and from the University of Kentucky with a M.A. in Sociology
in 1969 and a Ph.D. in Sociology in 1971. Mr. Thomas is a member of the
Compensation Committee of the Board of Trustees.
VIDA H. CARROLL is Chief Financial Officer and Secretary/Treasurer. From
1991 to 1996, Ms. Carroll, as a sole proprietor, worked as a financial
consultant, specializing in accounting conversions and systems design. Prior to
this time, she worked in public accounting, including working as an audit
manager with KPMG Peat Marwick. Ms. Carroll holds a Bachelor of Science degree
from Tennessee Technological University and is a certified public accountant.
M. SUSAN SMITH is Vice President, Finance of the Company. Ms. Smith also
serves as Controller of DC Investment Partners LLC and will continue in such
capacity after the Offering. Ms. Smith was an audit manager with Arthur Andersen
LLP in Nashville from 1992 to 1996. While at Arthur Andersen LLP, Ms. Smith
worked primarily with a private investment company and a large financial
institution. Prior to this time, she worked in the banking industry. Ms. Smith
holds a Bachelor of Science degree from the University of Tennessee and is a
certified public accountant.
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COMMITTEES OF THE BOARD OF TRUSTEES
Independent Committee. The Board of Trustees has established the
Independent Committee consisting of the seven Independent Trustees to oversee
the acquisition of the Initial Facilities and, if acquired, the Option
Facilities, the selection of facilities acquired in the future and to evaluate
transactions between the Company and CCA, including the acquisition of
correctional and detention facilities and lease negotiation and enforcement.
Jackson W. Moore is the Chairman of the Independent Committee.
Audit Committee. The Board of Trustees has established an audit committee
consisting of Messrs. Cardin, Jackson W. Moore, Rusty L. Moore and Russell
(Chairman) (the "Audit Committee"). The Audit Committee will make
recommendations concerning the engagement of independent public accountants,
review with the independent public accountants the plans and results of the
audit engagement, approve professional services provided by the independent
public accountants, review the independence of the independent public
accountants, consider the range of audit and non-audit fees and review the
adequacy of the Company's internal accounting controls.
Compensation Committee. The Board of Trustees has established a
compensation committee consisting of Messrs. Cardin (Chairman), Eakin, Feldman
and Thomas (the "Compensation Committee"). The Compensation Committee will
determine compensation, including awards under the Company's 1997 Employee Share
Incentive Plan for the Company's executive officers (the "Share Incentive Plan")
and the Non-Employee Trustees' Share Option Plan (the "Non-Employee Trustees'
Plan") (the Share Incentive Plan and the Non-Employee Trustees' Plan are herein
collectively referred to as the "Plans"). The Compensation Committee will also
administer the Plans.
The Company may from time to time form other committees as circumstances
warrant. Such committees will have authority and responsibility as delegated by
the Board of Trustees.
COMPENSATION OF TRUSTEES
The Company intends to pay its non-employee trustees annual compensation of
$12,000 for their services. In addition, non-employee trustees will receive a
fee of $1,000 for each Board of Trustees meeting attended. Non-employee trustees
attending any committee meetings will receive an additional fee of $500 for each
committee meeting attended, unless the committee meeting is held on the day of a
meeting of the Board of Trustees. Non-employee trustees will also be reimbursed
for reasonable expenses incurred to attend trustee and committee meetings.
Officers of the Company who are trustees will not be paid any trustees' fees.
Non-employee trustees, other than Doctor R. Crants, will also participate in the
Non-Employee Trustees' Share Option Plan. See "Management -- Non-Employee
Trustees' Plan."
INDEMNIFICATION
The Declaration of Trust provides for the indemnification of the Company's
officers and trustees against certain liabilities to the fullest extent
permitted under Maryland law. The Declaration of Trust also provides that the
trustees and officers of the Company be exculpated from monetary damages to the
fullest extent permitted under Maryland law. The trustees and officers of the
Company will also enter into separate indemnification agreements with the
Company pursuant to which the Company will agree to indemnify such trustees and
officers against certain liabilities. In addition, the officers, trustees and
controlling persons of the Company will be indemnified against certain
liabilities by the Underwriters.
The Company intends to obtain trustees' and officers' liability insurance.
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EXECUTIVE COMPENSATION
Prior to the Offering, the Company did not pay any compensation to its
officers. The following table sets forth the annual base salary rates and other
compensation expected to be paid by the Company in 1997 to the most highly
compensated executive officers of the Company (i.e., those whose cash
compensation from the Company in 1997 on an annualized basis is expected to
exceed $100,000) (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL -------------
COMPENSATION SECURITIES
------------------------- UNDERLYING
BASE OPTIONS(#)(2) SHARE BONUS
NAME AND PRINCIPAL POSITION YEAR SALARY ($)(1) BONUS OPTION AWARD(#)(3)
- --------------------------- ---- ------------- -------- ------------- -----------
<S> <C> <C> <C> <C> <C>
J. Michael Quinlan............... 1997 150,000 -- 350,000 --
Chief Executive Officer
D. Robert Crants, III............ 1997 100,000 -- 200,000 150,000
President and Chief Operating
Officer
Michael W. Devlin................ 1997 100,000 -- 200,000 150,000
Chief Development Officer
</TABLE>
- ---------------
(1) Amounts given are annualized salaries effective for the year ended December
31, 1997.
(2) All options will vest ratably over a three-year period and will be
exercisable at a price per share equal to the initial public offering price
per Common Share offered hereby.
(3) Represents Common Shares issued as a development fee and as reimbursement
for actual costs incurred in connection with the formation of the Company,
the consummation of the Offering, and the closing of the purchase of the
Initial Facilities.
THE SHARE INCENTIVE PLAN
The Company has established the Share Incentive Plan to enable executive
officers and other key employees of the Company to participate in the ownership
of the Company. The Share Incentive Plan is designed to attract and retain
executive officers and other key employees of the Company and to provide
incentives to such persons to maximize the Company's cash flow available for
distribution. The Share Incentive Plan provides for the award to executive
officers and other key employees of the Company (subject to the Ownership Limit)
of a broad variety of share-based compensation alternatives such as nonqualified
share options, incentive share options, restricted shares, deferred shares and
other share-based awards.
The Share Incentive Plan will be administered by the Compensation
Committee, which is authorized to select from among the eligible employees of
the Company individuals to whom options, restricted shares, deferred shares and
other share-based awards are to be granted and to determine the number of shares
to be subject thereto and the terms and conditions thereof. The Compensation
Committee is also authorized to adopt, amend and rescind rules relating to the
administration of the Share Incentive Plan. No member of the Compensation
Committee will be eligible to participate in the Share Incentive Plan.
Awards Available for Issuance under the Share Incentive Plan
Nonqualified options, if granted, will provide for the right to purchase
Common Shares at a specific price which may be less than fair market value on
the date of grant and usually will become exercisable in installments after the
grant date. Nonqualified options may be granted for any reasonable term and may
be transferable in certain limited circumstances.
Incentive options, if granted, will be designed to comply with the
"incentive stock option" provisions of the Code and will be subject to
restrictions contained therein, including that the exercise price must generally
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equal at least 100% of fair market value of Common Shares on the grant date and
that the term generally must not exceed ten years. Incentive options may be
modified after the grant date to disqualify them from treatment as an "incentive
stock option."
Restricted shares, if issued, may be sold to participants at various prices
(or issued without monetary consideration) and may be made subject to such
restrictions as may be determined by the Compensation Committee. Restricted
shares typically may be repurchased by the Company at the original purchase
price if the conditions or restrictions are not met. In general, restricted
shares may not be sold, or otherwise transferred or hypothecated, until
restrictions are removed or expired. Purchasers of restricted shares, unlike
recipients of options, will have voting rights and will receive dividends prior
to the time when the restrictions lapse.
Deferred shares, if issued, will obligate the Company to issue Common
Shares upon the occurrence or nonoccurrence of conditions specified in the
deferred share award. Under a typical deferred share award, the Company may
agree to issue Common Shares to an employee if he or she achieves certain
performance goals or remains employed by the Company for a specified period of
time. Recipients of deferred shares will not have voting rights or receive
dividends until the shares are actually issued.
Other share-based awards, if granted, may be granted by the Compensation
Committee on an individual or group basis. Generally, these awards will be based
upon specific agreements and may be paid in cash or in Common Shares or in a
combination of cash and Common Shares. Other share-based awards may include
share appreciation rights and "phantom" share awards that provide for payments
based upon increases in the price of the Company's Common Shares over a
predetermined period. They may also include bonuses which may be granted by the
Compensation Committee on an individual or group basis and which may be payable
in cash or in Common Shares or in a combination of cash and Common Shares.
Shares subject to the Share Incentive Plan. A maximum of 1,700,000 shares
(including shares subject to the options listed below) will be reserved for
issuance under the Share Incentive Plan. There is no limit on the number of
awards that may be granted to any one individual so long as the grant does not
violate the Ownership Limit or cause the Company to fail to qualify as a REIT
for federal income tax purposes. See "Description of Capital
Shares -- Restrictions on Ownership."
The Compensation Committee will approve, prior to the completion of the
Offering, the grant of options to executive officers and certain key employees
of the Company, to purchase, in each case subject to the Ownership Limit, an
aggregate of 1,030,000 Common Shares. The term of each of such options will be
ten years from the date of grant. Each such option will vest ratably over a
four-year period commencing at the consummation of the Offering and will be
exercisable, at a price per share equal to the initial public offering price.
The table below sets forth the expected allocation of the options to such
persons:
<TABLE>
<CAPTION>
NAME OPTIONS
- ---- -------
<S> <C>
J. Michael Quinlan.......................................... 350,000
Doctor R. Crants............................................ 200,000
D. Robert Crants, III....................................... 200,000
Michael W. Devlin........................................... 200,000
Vida H. Carroll............................................. 50,000
Other key employees......................................... 30,000
</TABLE>
NON-EMPLOYEE TRUSTEES' PLAN
The Company intends to establish the Non-Employee Trustees' Plan to
maintain the Company's ability to attract and retain the services of experienced
and highly qualified non-employee trustees and to increase their proprietary
interest in the Company's continued success.
Shares Subject to Non-Employee Trustees' Plan. A maximum of 150,000 Common
Shares have been authorized and reserved for issuance under the Non-Employee
Trustees' Plan. The shares so reserved for issuance and the terms of outstanding
awards shall be adjusted as the Compensation Committee deems
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appropriate in the event of a share dividend, share split, combination,
reclassification, recapitalization or other similar event.
Transferability. The Non-Employee Trustees' Plan will provide that the
options may be transferred by a non-employee trustee in certain limited
circumstances to certain family members and affiliates. The options under the
Non-Employee Trustees' Plan are nonqualified options intended not to qualify as
incentive stock options under Section 422 of the Code.
Eligibility. The Non-Employee Trustees' Plan provides for the grant of
options to purchase Common Shares to each eligible trustee of the Company. No
director who is an employee of the Company or CCA is eligible to participate in
the Non-Employee Trustees' Plan.
Options. The Non-Employee Trustees' Plan provides that each non-employee
trustee who is a member of the Board of Trustees as of the date of this
Prospectus, other than Doctor R. Crants, will be awarded nonqualified options to
purchase 5,000 Common Shares on that date (each such trustee, a "Founding
Trustee"). Each non-employee trustee who is not a Founding Trustee (a
"Non-Founding Trustee") will receive nonqualified options to purchase 5,000
Common Shares on the date the Non-Founding Trustee is first elected or appointed
to the Board of Trustees. In addition, on each of the first nine anniversary
dates of the adoption of the Non-Employee Trustees' Plan, each non-employee
trustee, other than Doctor R. Crants, will receive an option to purchase 5,000
Common Shares. The options granted to Founding Trustees will have an exercise
price equal to the initial public offering price and will vest on the date of
grant. The exercise price of options under future grants will be 100% of the
fair market value of the Common Shares on the date of grant and will vest one
year from the date of grant. The exercise price may be paid in cash, cash
equivalents, Common Shares or a combination thereof, as acceptable to the
Compensation Committee. The term of options granted under the Non-Employee
Trustees' Plan generally will be ten years from the date of grant.
DIVIDEND REINVESTMENT PLAN
The Company may implement a dividend reinvestment plan in the future under
which holders of Common Shares may elect to reinvest automatically their
dividends in additional Common Shares. In the event the Company does implement
such a plan, the Company may, from time to time, repurchase Common Shares in the
open market or issue additional Common Shares for the purpose of fulfilling its
obligations under this reinvestment plan.
DEFERRED COMPENSATION PLAN
The Company may establish a deferred compensation plan under which
executive officers of the Company may elect to defer receiving a portion of
their cash compensation otherwise payable in one tax year until a later tax year
and thereby postpone payment of tax on the deferred amount. If the plan is
established prior to the beginning of any taxable year, such executive officer
may elect to defer such amount of cash compensation until a future date or until
an event selected by such persons pursuant to the terms of the plan. Deferred
compensation may be invested in a separate trust account.
EMPLOYMENT AGREEMENTS
The Company will have seven employees. J. Michael Quinlan, D. Robert
Crants, III and Michael W. Devlin have entered into employment agreements with
the Company for terms of four years (the "Employment Agreements"). The
agreements provide for annual compensation in the amounts set forth under
"Executive Compensation" and incentive compensation determined by the
Compensation Committee on the terms set forth therein. Each agreement includes
provisions restricting the officers from competing, directly or indirectly, with
the Company during employment and, except in certain circumstances, for three
years after termination of employment. Under applicable Tennessee law, which
governs the interpretation and enforceability of the Employment Agreements,
specific performance is not available as a remedy for violation of the
agreements; however the Company may generally enforce the provisions of the
agreement against the employee if the provisions contained therein are deemed
reasonable. In particular, Tennessee courts will enforce noncompetition
provisions such as the ones contained in the Employment Agreements provided the
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restrictions contain a reasonable geographic scope and duration, will impose no
undue hardship on the employee, and would cause serious damage and injury to the
Company if violated. Also, the courts will enjoin violations of the covenants
not to compete if the scope of employment is deemed to require special skills
and competence of the employees that could not be attained by another employee
of average competence.
The Company generally may terminate each employee's employment with 30
days' prior written notice upon the happening of any one of the following
events: (a) any act of the employee which constitutes fraud, gross misconduct,
gross negligence or a material breach of the employment agreement, (b) frequent
and repeated failure to perform services which have been reasonably requested by
the Board of Trustees and which are consistent with the terms of the employment
agreement, (c) the death of the employee, (d) the disability of the employee or
(e) a decision by the Company to terminate its business and liquidate; provided
that the Company generally may not terminate an employee's employment under
clause (a) or (b) unless it provides the employee with 15 days' notice of the
conduct giving rise to the Company's right of termination and gives the employee
a reasonable period of time to cure. Each employee may terminate his employment
upon 30 days' written notice to the Company.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
SHARE ACQUISITIONS BY MANAGEMENT
Doctor R. Crants, Chairman of the Board of the Company, has agreed to
purchase in the Offering approximately 500,000 of the Company's Common Shares
for a purchase price per share equal to the initial public offering price per
share sold to the public in the Offering.
Prior to the formation of the Company on April 23, 1997, D. Robert Crants,
III and Michael W. Devlin served as promoters of the Company. Upon consummation
of the Offering, Mr. Crants and Mr. Devlin, who currently serve as President and
Chief Development Officer, respectively, of the Company, will each receive
150,000 Common Shares as a development fee and as reimbursement of actual costs
incurred in connection with the promotion and formation of the Company, the
consummation of the Offering and the closing of the purchase of Initial
Facilities. The reimbursed costs include certain costs related to property due
diligence, employee compensation, travel and overhead.
PURCHASE OF INITIAL FACILITIES
CCA and the Company will enter into the Purchase Agreement pursuant to
which the Company will acquire the nine Initial Facilities, for an aggregate
cash consideration of approximately $308.1 million. The Purchase Agreement will
contain representations and warranties by CCA customarily found in agreements of
such types.
OPTION FACILITIES
CCA and the Company will enter into the Option Agreements pursuant to which
CCA will grant the Company options, each for a period of three years from the
closing of the purchase of the Initial Facilities, to acquire any of the five
Option Facilities for CCA's costs of developing, constructing and equipping such
facilities, plus 5% of such costs, aggregating approximately $193.0 million.
RIGHT TO PURCHASE
The Company and CCA will enter into the Right to Purchase Agreement whereby
the Company will have an option to acquire, at fair market value, and lease back
to CCA, any correctional or detention facility acquired or developed and owned
by CCA in the future, for a period of three years following such facility's
Service Commencement Date. The fair market value of such facilities will be
determined by the Company and CCA based on their respective analyses of the
market for such facility. Such analyses may include a review of the historical
and projected economic performance of the facility and an estimate of the value
of the facility on a replacement cost or comparative sales basis. For the first
two years following the Company's
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acquisition of the Initial Facilities, fair market value of any such future
facility will be equal to CCA's actual costs and expenses to acquire, develop,
design, construct and equip such facility, plus 5% of such costs. For facilities
acquired in the first five years, the initial annual rental rates shall be equal
to the greater of (i) fair market rental rates or (ii) 11% of the purchase price
for such facilities. Thereafter, the initial annual rental rates shall be equal
to the fair market rental rate for such properties as determined by the Company
and CCA. The fair market rental rates for such facilities will be determined by
the Company and CCA based on the fair market value of such facilities, taking
into account the interest rate environment at the time of the purchase and the
creditworthiness of the tenant.
EMPLOYMENT AGREEMENTS
The Company will enter into employment agreements with J. Michael Quinlan,
D. Robert Crants, III and Michael W. Devlin, pursuant to which Mr. Quinlan will
serve as Chief Executive Officer, Mr. Crants will serve as President, and Mr.
Devlin will serve as Chief Development Officer of the Company for a period of
four years at an initial annual compensation of $150,000 for Mr. Quinlan and
$100,000 for each of Messrs. Crants and Devlin, subject to any increases in base
compensation approved by the Compensation Committee. See
"Management -- Employment Agreements."
POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of the Company's investment objectives and
policies, financing policies and policies with respect to certain other
activities. These policies are determined by the Board of Trustees and may be
amended or revised from time to time at the discretion of the Board of Trustees
without a vote of the Company's shareholders.
INVESTMENT OBJECTIVES AND POLICIES
The Company's investment objectives are to maximize current returns to
shareholders through increases in cash flow available for distribution and to
increase long-term total returns to shareholders through appreciation in the
value of the Common Shares. The Company will seek to accomplish its objectives
through (i) its ownership interests in the Initial Facilities and, if acquired,
the Option Facilities; (ii) selective acquisitions of additional correctional
and detention facilities from both private prison managers and government
entities; (iii) expansion of its existing facilities; and (iv) construction or
development of new correctional facilities. Although the Company intends to
focus its investments on facilities owned by CCA or its affiliates in the United
States, it may pursue other opportunities as well, including the acquisition or
development of facilities directly from or on behalf of government entities. In
addition, the Company may invest in other facilities or excess land to the
extent necessary to acquire a facility.
The Company will consider a variety of factors in evaluating potential
investments including (i) the reputation and creditworthiness of the current
owner, manager or developer of the facility; (ii) the proposed terms for
purchasing the facility; (iii) the proposed terms for leasing the facility,
including rental payments and lease term; (iv) the quality of construction of
the facility; (v) the quality of operations at an existing facility or the
quality of other operations of a prison manager for a new facility; (vi) the
status of existing facilities as facilities accredited by the ACA; and (vii) the
relationship between the prison manager and the contracting correctional
authority.
The Company may purchase or lease properties for long-term investment,
expand and improve the facilities presently owned or sell such properties, in
whole or in part, when circumstances warrant. The Company 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 the equity interest of
the Company.
While the Company emphasizes equity real estate investments, it may, in its
discretion, invest in mortgages, equity or debt securities of other REITs,
partnerships and other real estate interests. Such
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mortgage investments may include participating in convertible mortgages. The
Company does not currently intend to purchase securities of, or interests in,
other entities engaged in real estate activities.
There are no limitations on the percentage of the Company's assets that may
be invested in any one property, venture or type of security. The Board of
Trustees may establish limitations as it deems appropriate from time to time. No
limitations have been set on the number of properties in which the Company will
seek to invest or on the concentration of investments in any one geographic
region.
DISPOSITIONS; CCA'S RIGHT OF FIRST REFUSAL
The Company has no current intention to cause the disposition of any of the
Facilities, although it reserves the right to do so if the Board of Trustees
determines that such action would be in the best interests of the Company.
Pursuant to the Leases, CCA shall have a right of first refusal with respect to
any sale of the Facilities or any interest in a correctional or detention
facility acquired or developed and owned by the Company in the future and
operated by CCA. See "Leases" for a more detailed discussion of the terms and
conditions of the Leases.
FINANCING
The Company presently intends to maintain a ratio of debt to total
capitalization of 50% or less. Following the completion of the Offering and the
use of net proceeds therefrom, the Company will have no indebtedness. The Board
of Trustees may, however, from time to time reevaluate this policy and decrease
or increase such ratio accordingly. The Company will determine its 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. The Company anticipates that it will obtain the
$150.0 million Bank Credit Facility which will be used in acquiring additional
correctional and detention facilities, and for certain other purposes, including
expanding existing facilities and working capital, as necessary. There is no
assurance that the Bank Credit Facility will be obtained. If the Board of
Trustees determines that additional funding is desirable, the Company may raise
such funds through additional equity offerings, debt financing or retention of
cash flow (subject to provisions in the Code concerning taxability of
undistributed REIT income and REIT qualification), or a combination of these
methods.
Indebtedness incurred by the Company 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 property owned by the Company.
There are no limits on the number or amounts of mortgages or other interests
which may be placed on any one property. In addition, such indebtedness may be
with or without recourse to all or any part of the property of the Company or
may be limited to the particular property 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 properties.
In the event that the Board of Trustees determines to raise additional
equity capital, the Board of Trustees has the authority, without shareholder
approval, to issue additional Common Shares or other equity interests (including
Preferred Shares and other securities senior to the Common Shares) of the
Company in any manner (and on such terms and for such consideration) it deems
appropriate, including in exchange for property. The Company's Bylaws require
the approval of at least two-thirds of the members of the Board of Trustees for
the Company 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 the Board of Trustees, (b) pursuant to any share
incentive or option plans of the Company, or (c) in a bona fide underwritten
public offering managed by one or more nationally recognized investment banking
firms. Existing shareholders would have no preemptive right to purchase shares
issued in any offering, and any such offering might cause a dilution of a
shareholder's investment in the Company.
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WORKING CAPITAL RESERVES
The Company will maintain working capital reserves (and when not
sufficient, access to borrowings) in amounts that the Board of Trustees
determines to be adequate to meet normal contingencies in connection with the
operation of the Company's business and investments.
CONFLICT OF INTEREST POLICIES
The Company will adopt certain policies and enter into certain agreements
designed to minimize potential conflicts of interest. However, there can be no
assurance that these policies always will be successful in eliminating the
influence of such conflicts, and if they are not successful, decisions could be
made that might fail to reflect fully the interests of all shareholders. See
"Conflicts of Interest."
Declaration of Trust and Bylaw Provisions
The Company's Declaration of Trust requires that at least three members of
the Company's Board of Trustees be comprised of Independent Trustees, defined
therein as persons who are not officers or employees of the Company and are not
affiliated with CCA, any lessee or management company operating any property of
the Company, any subsidiary of the Company or any partnership that is an
Affiliate (as hereinafter defined) of the Company. The Declaration of Trust
provides that such provisions relating to Independent Trustees may not be
amended, altered or repealed without the affirmative vote of holders of
two-thirds of the shares of the Company entitled to vote on the election of
trustees. In addition, the Company's Bylaws provide that the selection of
operators for the Company's properties and all transactions between the Company
and CCA and its affiliates, including, but not limited to, the negotiation and
enforcement of the terms of any lease of any of the Company's properties be
approved by the Independent Trustees.
Pursuant to the Declaration of Trust, each trustee is required to discharge
his or her duties in good faith, with the care an ordinarily prudent person in a
like position would exercise under similar circumstances and in a manner he
reasonably believes to be in the best interest of the Company.
OTHER POLICIES
The Company intends to operate in a manner that will not subject it to
regulation under the Investment Company Act of 1940. The Company does not intend
(i) to invest in the securities of other issuers for the purpose of exercising
control over such issuer; (ii) to underwrite securities of other issuers; or
(iii) to trade actively in loans or other investments.
The Company may make investments other than as previously described
(including bonds, preferred stocks, common stock), although it does not
currently intend to do so. The Company may repurchase or otherwise reacquire
Common Shares or any other securities it may issue and may engage in such
activities in the future. The Board of Trustees has no present intention of
causing the Company to repurchase any of the Common Shares, and any such action
would be taken only in conformity with applicable federal and state laws and the
requirements for qualifying as a REIT under the Code and the Treasury
Regulations (as defined herein). Although it may do so in the future, except in
connection with the Formation Transactions, the Company has not issued Common
Shares or any other securities in exchange for property, nor has it reacquired
any of its Common Shares or any other securities. See "The Formation
Transactions." The Company may make loans to third parties, including, without
limitation, to its officers and to joint ventures in which it decides to
participate. Such loans will generally require the approval of the Board of
Trustees, and loans to CCA and its affiliates or to a joint venture in which CCA
participates will require the approval of the Independent Committee.
At all times, the Company intends to make investments in such a manner as
to be consistent with the requirements of the Code to qualify as a REIT unless,
because of changes in future economic, market or legal conditions, or changes in
the Code or in the Treasury Regulations, the Board of Trustees determines to
revoke the Company's REIT election if the Board determines that such factors
make it no longer beneficial to qualify as a REIT.
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CONFLICTS OF INTEREST
GENERAL
Several conflicts of interest exist on the part of the Company, its
trustees and officers and CCA, and its directors and officers. The following
description sets forth the principal conflicts of interest, including the
relationships through which they arise, and the policies and procedures
implemented by the Company to address those conflicts.
RELATIONSHIPS WHICH MAY GIVE RISE TO CONFLICTS OF INTEREST
Doctor R. Crants is the Chairman and Chief Executive Officer of CCA and the
Chairman of the Board of Trustees of the Company. D. Robert Crants, III,
President of the Company, is the son of Doctor R. Crants. Doctor R. Crants and
D. Robert Crants, III, as well as certain other trustees or officers of the
Company or directors or officers of CCA, may also own, directly or indirectly,
shares in both companies following the Offering. D. Robert Crants, III and
Michael W. Devlin, Chief Development Officer of the Company, are principals of
DC Investment Partners LLC, a limited liability company which serves as the
general partner of three private investment partnerships. DC Investment Partners
LLC is owned by D. Robert Crants, III, Michael W. Devlin, and Stephens Group,
Inc., an affiliate of Stephens Inc., a managing underwriter of this Offering,
and one other individual. Doctor R. Crants and three other directors of CCA are
investors in one or more of the private investment partnerships managed by DC
Investment Partners LLC. Rusty L. Moore, a trustee, is the spouse of a
shareholder of Stokes & Bartholomew, P.A., tax and securities counsel to the
Company. Stokes & Bartholomew, P.A. also provides legal services to CCA,
including representing CCA in certain of the Formation Transactions. J. Michael
Quinlan is a former employee of CCA. C. Ray Bell, a trustee, is the principal of
a construction company which, as a part of its business, builds correctional and
detention facilities, including facilities for CCA. Because of Mr. Bell's
experience in building correctional and detention facilities, it is anticipated
that his company may build correctional or detention facilities for or on behalf
of the Company.
SITUATIONS IN WHICH CONFLICTS OF INTERESTS HAVE ARISEN AND MAY CONTINUE TO ARISE
Valuation of the Facilities. The valuation of the Initial Facilities and
the Option Facilities was determined by management of both CCA and the Company
and was not negotiated on an arm's-length basis. The purchase price of the
Initial Facilities was determined based primarily on an evaluation of the
current and anticipated cash flows and operating results of such facilities. To
determine the purchase price for each of the Initial Facilities other than the
T. Don Hutto Correctional Center, the anticipated annual cash flow from the
facility less ongoing capital expenditures, was divided by an agreed upon
coverage ratio and lease rate. Because the T. Don Hutto Correctional Center was
completed in January 1997, the purchase price of the T. Don Hutto Correctional
Center and of each Option Facility was calculated as CCA's approximate cost of
developing, constructing and equipping such facilities, plus 5% of such costs.
It is possible that if such valuations been determined on an arm's-length basis,
or been the subject of independent valuations or appraisals, the sum of the
values of the Initial Facilities and, if acquired, the Option Facilities, might
have been lower than the sum of the values determined by the management of CCA
and of the Company. The terms of the purchase of the Facilities were approved by
the Independent Committee.
Terms of Leases. The Lease payment obligations with respect to the Initial
Facilities were determined by management of CCA and management of the Company
and were not negotiated on an arm's-length basis. However, the lease payments
that CCA is obligated to make are based on an initial lease rate of
approximately 11%, which the Company believes reflects the fair rental value of
the Initial Facilities to the Company. Moreover, the terms and conditions of the
Leases were the subject of independent negotiations between the Company and CCA,
and the amount of the Lease payment obligations and the terms and conditions of
the Leases were approved by the Independent Committee.
Potential for Future Conflicts. After the Offering, CCA and the Company
may be in situations where they have differing interests resulting from the
ongoing relationship between the companies. Such situations include the fact
that after the Offering (i) CCA will lease the Initial Facilities which will be
owned by the
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Company; (ii) the Company will have an exclusive option to acquire the Option
Facilities and any correctional or detention facilities acquired or developed,
and owned, by CCA's in the future, and a right of first refusal to purchase any
and all correctional facilities owned by CCA or its subsidiaries in the future
and to provide mortgage financing for any correctional facilities financed in
excess of 90% of their cost by CCA or its subsidiaries in the future; and (iii)
CCA will have a right of first refusal to acquire the Facilities. Accordingly,
the potential exists for disagreements as to the compliance with the Leases or
the values of the facilities acquired in the future pursuant to the Company's
option. Additionally, the possible need by the Company, from time to time, to
finance, refinance or effect a sale of any of the properties managed by CCA may
result in a need to modify the Lease with CCA with respect to such property. Any
such modification will require the consent of CCA, and the lack of consent from
CCA could adversely affect the Company's ability to consummate such financings
or sale. Because of the relationships described above, there exists the risk
that the Company will not achieve the same results in its dealings with CCA that
it might achieve if such relationships did not exist.
STEPS TAKEN BY THE COMPANY TO ADDRESS POTENTIAL CONFLICTS OF INTEREST
Use of Independent Committee. Upon completion of the Offering, the
Company's Board of Trustees will consist of 13 trustees. Four of the trustees
include Doctor R. Crants, the Chairman of the Board of Trustees and Chairman and
Chief Executive Officer of CCA, J. Michael Quinlan, Chief Executive Officer of
the Company, D. Robert Crants, III, President of the Company, and Michael W.
Devlin, Chief Development Officer of the Company. Of the remaining nine
trustees, seven will be Independent Trustees who are not employees of the
Company or otherwise affiliated with CCA. The Independent Trustees will
constitute the Independent Committee of the Board of Trustees. Transactions
involving the Company and CCA such as the acquisition of additional facilities
from CCA and lease negotiation, enforcement and renegotiation, will require the
approval of the Independent Committee. Certain other significant actions of the
Board of Trustees will require the approval of a minimum of two-thirds of the
Board of Trustees. In addition, Michael W. Devlin and Vida H. Carroll, the
Company's Chief Financial Officer, both of whom have had and will have no
affiliation with CCA, will assist the Independent Committee with respect to
potential conflicts of interest between the Company and CCA, including the
negotiation and enforcement of all Leases. See "Management," and "Conflicts of
Interest."
Agreements Between CCA and the Company. Prior to the Offering, the Company
and CCA will enter into certain agreements, the terms of which are more
completely described herein, designed to address in advance certain situations
in which conflicts might arise. For example, CCA will grant the Company an
option to acquire and lease back to CCA certain future facilities and a right of
first refusal pursuant to which, prior to selling any facility, or mortgaging
more than 90% of the cost of a facility, the Company will have the right to
purchase such facility, or provide first mortgage financing for 90% of the
acquisition costs of any such facility, as applicable, on terms equal to those
offered to a third party. Pursuant to the Leases, CCA will also have a right of
first refusal with respect to any sale of the Facilities or any interest in a
correctional or detention facility acquired or developed and owned by the
Company in the future. See "Certain Relationships and Transactions" and
"Conflicts of Interest."
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THE FORMATION TRANSACTIONS
Prior to or simultaneously with the consummation of the Offering, the
Company and CCA will engage in the Formation Transactions which are designed to
consolidate the ownership interests in the Facilities in the Company, to
facilitate the Offering and to enable the Company to qualify as a REIT for
federal income tax purposes commencing with its taxable year ending December 31,
1997. None of such transactions is expected to occur unless all such
transactions occur.
- The Company, which was formed on April 23 1997, will sell 17,000,000
Common Shares in the Offering for net proceeds of approximately $313.2
million after deduction of the underwriting discount and estimated
offering expenses (assuming an initial public offering price of $20.00 per
share).
- Doctor R. Crants, Chairman of the Company and Chairman and Chief
Executive Officer of CCA will acquire in the Offering, 500,000 Common
Shares at a price per share equal to the initial public offering price.
- The Company will use the net proceeds of the Offering to acquire the nine
Initial Facilities directly from CCA for an aggregate purchase price of
approximately $308.1 million payable in cash.
- The Company will lease the Initial Facilities to CCA, pursuant to the
Leases, for initial terms ranging from 10 to 12 years. Each Lease may be
extended for three additional five-year renewal terms at fair market rates
upon the mutual agreement of CCA and the Company. Pursuant to the Leases,
the Company will grant to CCA the right of first refusal to acquire the
Initial Facilities, the Option Facilities or any other correctional or
detention facilities subsequently acquired by the Company and operated by
CCA.
- The Company will enter into the Option Agreements with CCA pursuant to
which the Company will be granted options to acquire any of the five
Option Facilities directly from CCA (for a period of three years following
their respective Service Commencement Dates) for a purchase price equal to
CCA's cost of developing, constructing and equipping such facility, plus
5% of such costs, which aggregates approximately $193.0 million. If
acquired, the Option Facilities will be leased to CCA on terms
substantially similar to those contained in the Leases.
- CCA will grant the Company a right of first refusal to acquire at fair
market value and lease back to CCA, any correctional or detention facility
acquired or developed and owned by CCA in the future for a period of three
years following the Service Commencement Date with respect to such
facilities. The initial annual rent for facilities acquired in the first
five years will be equal to the greater of (i) fair market rental rate or
(ii) 11% of the purchase price. For facilities acquired thereafter, the
initial annual rent will be equal to the fair market rental rate of the
property. Additionally, CCA will grant the Company a right of first
refusal to acquire any CCA-owned correctional or detention facility should
CCA receive an acceptable third party offer to acquire any such facility.
- Upon consummation of the Offering, D. Robert Crants, III and Michael W.
Devlin will each receive 150,000 Common Shares as a development fee and as
reimbursement of actual costs incurred in connection with the promotion
and formation of the Company, the consummation of the Offering and the
closing of the purchase of the Initial Facilities which would have a
valuation for each of them, based on the initial public offering price, of
$3.0 million. The reimbursed expenses include certain costs related to
property due diligence, employee compensation, travel and overhead. The
development fee compensates Messrs. Crants and Devlin, for their services
rendered on behalf of the Company in connection with, among other things,
the preparation of the Company's initial business plan and capital and
operating budgets. A significant portion of this development work
commenced in the fall of 1995, and continued throughout 1996 and 1997.
ADVANTAGES AND DISADVANTAGES TO UNAFFILIATED SHAREHOLDERS
The potential advantages of the Formation Transactions to unaffiliated
shareholders of the Company include their ability to participate in the
substantial cash flow of the Facilities through their ownership in the
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Company, and in all future acquisitions by the Company, primarily from CCA. See
"The Company -- Business Objectives and Operating Strategies." The potential
disadvantages of such transactions to unaffiliated shareholders of the Company
include the lack of arm's-length valuations in determining the consideration in
such transactions and the fact that Doctor R. Crants, Chairman of the Board of
both the Company and CCA, will have substantial influence on the management and
operations of the Company and, as a substantial shareholder of both the Company
and CCA, on the outcome of any matters submitted to a vote of shareholders, and
that such influence might be exercised in a manner inconsistent with the
interests of other shareholders. See the more complete discussion of such
matters under "Risk Factors."
BENEFITS TO THE COMPANY AND ITS OFFICERS AND TRUSTEES
The advantages of the foregoing structure to the Company and its officers
and trustees include:
- The ability to access public capital markets.
- The creation of an entity which, through its payment of dividends, is
able to reduce or avoid the incurrence of federal income tax, allowing its
shareholders to participate in real estate investments without the "double
taxation" of income that generally results from an investment in a regular
corporation.
- The ability to expand the Company's acquisition and development
opportunities through its strong capital base.
- The Company will enter into employment agreements with J. Michael
Quinlan, D. Robert Crants, III, and Michael W. Devlin providing for annual
salaries of $150,000 in the case of Mr. Quinlan, and $100,000 in the case
of each of Messrs. Crants, III and Devlin.
- J. Michael Quinlan, Chief Executive Officer, will be granted options to
acquire 350,000 Common Shares at the initial public offering price and
each of D. Robert Crants, III, President and Michael W. Devlin, Chief
Development Officer will be granted options to acquire 200,000 Common
Shares at the initial public offering price. Vida H. Carroll, Chief
Financial Officer, will be granted options to acquire 50,000 Common Shares
at the initial public offering price. All such options will vest ratably
over a three-year period.
- Upon consummation of the Offering, D. Robert Crants, III and Michael W.
Devlin will each receive 150,000 Common Shares as a development fee and as
reimbursement of actual costs incurred in connection with the formation of
the Company, the consummation of the Offering and the closing of the
purchase of the Initial Facilities which would have a valuation for each
of them, based on the initial public offering price, of $3.0 million. The
reimbursed expenses include certain costs related to property due
diligence, employee compensation, travel and overhead.
- Each non-employee trustee will receive options to acquire 5,000 Common
Shares at the initial public offering price.
BENEFITS TO CCA
CCA will receive the following benefits as a result of the Formation
Transactions:
- CCA will receive approximately $308.1 million in cash in exchange for the
nine Initial Facilities it will sell to the Company. The historical cost
of such Initial Facilities at March 31, 1997 is approximately $175.2
million.
- In the event the Independent Committee determines to exercise the
Company's option to purchase all of the five Option Facilities, CCA could
receive approximately $193.0 million in cash.
- CCA will use certain of the proceeds of the sale of the Initial
Facilities to discharge certain indebtedness incurred in connection with
facility acquisitions.
- CCA will expand its marketing opportunities through increased access to
capital.
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PRINCIPAL SHAREHOLDERS OF THE COMPANY
The following table sets forth certain information regarding the beneficial
ownership of Common Shares by each trustee of the Company, by each Named
Executive Officer, by all trustees and officers of the Company as a group and by
each person who is expected to be the beneficial owner of 5% or more of the
outstanding Common Shares immediately following completion of the Offering. The
table assumes (i) the consummation of the Formation Transactions and (ii) that
the Underwriters' over-allotment option will not be exercised. Each person named
in the table has sole voting and investment power with respect to all the Common
Shares shown as beneficially owned by such person except as otherwise set forth
in the notes to the table.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES OF COMMON
SHARES OUTSTANDING
NUMBER OF FOLLOWING THE
NAME OF BENEFICIAL OWNERS COMMON SHARES(1) OFFERING
- ------------------------- ---------------- ------------------
<S> <C> <C>
Doctor R. Crants............................................ 550,000 3.2%
J. Michael Quinlan.......................................... 87,500 *
D. Robert Crants, III....................................... 200,000 1.2
Michael W. Devlin........................................... 200,000 1.2
C. Ray Bell................................................. 5,000 *
Richard W. Cardin........................................... 5,000 *
Monroe J. Carell, Jr........................................ 5,000 *
John W. Eakin, Jr........................................... 5,000 *
Ted Feldman................................................. 5,000 *
Jackson W. Moore............................................ 5,000 *
Rusty L. Moore.............................................. 5,000 *
Joseph V. Russell........................................... 5,000 *
Charles W. Thomas, Ph.D..................................... 5,000 *
All executive officers and trustees as a group (15
persons).................................................. 1,098,750 6.2%
</TABLE>
- ---------------
* Less than 1%.
(1) Includes 282,500 shares subject to options that are exercisable within 60
days after completion of the Offering.
DESCRIPTION OF CAPITAL SHARES
GENERAL
Under the Declaration of Trust, the total number of shares of all classes
that the Company has authority to issue is 100,000,000 consisting of 90,000,000
Common Shares and 10,000,000 Preferred Shares. As of the date of this
Prospectus, 1,000 Common Shares were outstanding, held by one record holder. No
Preferred Shares are currently outstanding or will be outstanding immediately
after consummation of the Offering. Under Maryland law, shareholders generally
are not personally liable for the Company's obligations solely as a result of
their status as shareholders.
The holders of Common Shares are entitled to one vote per share on all
matters voted on by holders, including elections of trustees, and, except as
otherwise required by law or provided in any resolution adopted by the Board of
Trustees with respect to any series of Preferred Shares establishing the powers,
designations, preferences and relative, participating, option or other special
rights of such series, the holders of such Common Shares exclusively possess all
voting power. The Declaration of Trust does not provide for cumulative voting in
the election of trustees. Subject to any preferential rights of any outstanding
series of Preferred Shares, the holders of Common Shares are entitled to such
distributions as may be declared from time to time by the Board of Trustees from
funds available therefor, and upon liquidation are entitled to receive pro rata
all assets of the Company available for distribution to such holders. All Common
Shares issued in the Offering will be fully paid and nonassessable and the
holders thereof will not have preemptive rights.
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The Board of Trustees is authorized to provide for the issuance of shares
of Preferred Shares in one or more series, to establish the number of shares in
each series and to fix the designations, powers, preferences and rights of each
such series and the qualifications, limitations or restrictions thereof.
RESTRICTIONS ON OWNERSHIP
For the Company to qualify as a REIT under the Code, it must meet certain
requirements concerning the ownership of its outstanding shares of stock.
Specifically, not more than 50% in value of the Company's outstanding shares of
stock may be owned, directly or indirectly, by five or fewer individuals (as
defined in the Code to include certain entities) during the last half of a
taxable year, and the Company must be beneficially owned by 100 or more persons
during at least 335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year. See "Material Federal Income Tax
Considerations -- Taxation of the Company -- Requirements for Qualification." In
addition, the Company must meet certain requirements regarding the nature of its
gross income in order to qualify as a REIT. One such requirement is that at
least 75% of the Company's gross income for each year must consist of rents from
real property and income from certain other real property investments. The rents
received by the Company from the lessee will not qualify as rents from real
property, which likely would result in loss of REIT status for the Company, if
the Company owns, directly or constructively, 10% or more of the ownership
interests in the lessee within the meaning of Section 856(d)(2)(B) of the Code.
See "Material Federal Income Tax Considerations -- Taxation of the
Company -- Income Tests."
Because the Board of Trustees believes it is essential for the Company to
continue to qualify as a REIT, the Declaration of Trust, subject to certain
exceptions described below, provides that no person may own, or be deemed to own
by virtue of the attribution provisions of the Code, more than 9.8% of (i) the
number of outstanding Common Shares or (ii) the number of outstanding shares of
any series of Preferred Shares (the "Ownership Limit"). Any transfer of Common
Shares or Preferred Shares that would (i) result in any person owning, directly
or indirectly, Common Shares or Preferred Shares in excess of the Ownership
Limit, (ii) result in the Common Shares and Preferred Shares being owned by
fewer than 100 persons (determined without reference to any rules of
attribution), (iii) result in the Company being "closely held" within the
meaning of Section 856(h) of the Code, or (iv) cause the Company to own,
directly or constructively, 10% or more of the ownership interests in a tenant
of the Company's real property, within the meaning of Section 856(d)(2)(B) of
the Code, shall be null and void, and the intended transferee will acquire no
rights in such Common Shares or Preferred Shares.
Subject to certain exceptions described below, any purported transfer of
Common Shares or Preferred Shares that would (i) result in any person owning,
directly or indirectly, Common Shares or Preferred Shares in excess of the
Ownership Limit, (ii) result in the Common Shares and Preferred Shares being
owned by fewer than 100 persons (determined without reference to any rules of
attribution), (iii) result in the Company being "closely held" within the
meaning of Section 856(h) of the Code, or (iv) cause the Company to own,
directly or constructively, 10% or more of the ownership interests in a tenant
of the Company's real property, within the meaning of Section 856(d)(2)(B) of
the Code, will be designated as "Shares-in-Trust" and transferred automatically
to a trust (the "Share Trust") effective on the day before the purported
transfer of such Common Shares or Preferred Shares. The record holder of the
Common Shares or Preferred Shares that are designated as Shares-in-Trust (the
"Prohibited Owner") will be required to submit such number of Common Shares or
Preferred Shares to the Company for registration in the name of the trustee of
the Share Trust (the "Share Trustee"). The Share Trustee will be designated by
the Company, but will not be affiliated with the Company. The beneficiary of the
Share Trust (the "Beneficiary") will be one or more charitable organizations
that are named by the Company.
Shares-in-Trust will remain issued and outstanding Common Shares or
Preferred Shares and will be entitled to the same rights and privileges as all
other shares of the same class or series. The Share Trustee will receive all
dividends and distributions on the Shares-in-Trust and will hold such dividends
and distributions in trust for the benefit of the Beneficiary. The Share Trustee
will vote all Shares-in-Trust and will designate a permitted transferee of the
Shares-in-Trust, provided that the permitted transferee (i) purchases such
Shares-
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in-Trust for valuable consideration and (ii) acquires such Shares-in-Trust
without such acquisition resulting in a transfer to another Share Trust.
The Prohibited Owner with respect to Shares-in-Trust will be required to
repay the Share Trustee the amount of any dividends or distributions received by
the Prohibited Owner (i) that are attributable to any Shares-in-Trust and (ii)
the record date of which was on or after the date that such shares became
Shares-in-Trust. The Prohibited Owner generally will receive from the Share
Trustee the lesser of (i) the price per share such Prohibited Owner paid for the
Common Shares or Preferred Shares that were designated as Shares-in-Trust (or,
in the case of a gift or bequest, the Market Price (as hereinafter defined) per
share on the date of such transfer) or (ii) the price per share received by the
Share Trustee from the sale of such Shares-in-Trust. Any amounts received by the
Share Trustee in excess of the amounts to be paid to the Prohibited Owner will
be distributed to the Beneficiary.
The Shares-in-Trust will be deemed to have been offered for sale to the
Company, or its designee, at a price per share equal to the lesser of (i) the
price per share in the transaction that created such Shares-in-Trust (or, in the
case of a gift or bequest, the Market Price per share on the date of such
transfer) or (ii) the Market Price per share on the date that the Company, or
its designee, accepts such offer. The Company will have the right to accept such
offer for a period of 90 days after the later of (i) the date of the purported
transfer which resulted in such Shares-in-Trust or (ii) the date the Company
determines in good faith that a transfer resulting in such Shares-in-Trust
occurred.
"Market Price" means the last reported sales price of the Common Shares or
Preferred Shares reported on the NYSE on the trading day immediately preceding
the relevant date, or if such shares are not then traded on the NYSE, the last
reported sales price of such shares on the trading day immediately preceding the
relevant date as reported on any exchange or quotation system over which such
shares may be traded, or if such shares are not then traded over any exchange or
quotation system, then the market price of such shares on the relevant date as
determined in good faith by the Board of Trustees.
Any person who acquires or attempts to acquire Common Shares or Preferred
Shares in violation of the foregoing restrictions, or any person who owned
Common Shares or Preferred Shares that were transferred to a Share Trust, will
be required (i) to give immediately written notice to the Company of such event
and (ii) to provide to the Company such other information as the Company may
request in order to determine the effect, if any, of such transfer on the
Company's status as a REIT.
All persons who own, directly or indirectly, more than 5% (or such lower
percentages as required pursuant to regulations under the Code) of the
outstanding Common Shares and Preferred Shares must, within 30 days after
January 1 of each year, provide to the Company a written statement or affidavit
stating the name and address of such direct or indirect owner, the number of
Common Shares and Preferred Shares owned directly or indirectly by such owner,
and a description of how such shares are held. In addition, each direct or
indirect shareholder shall provide to the Company such additional information as
the Company may request in order to determine the effect, if any, of such
ownership on the Company's status as a REIT and to ensure compliance with the
Ownership Limitation.
The Ownership Limitation generally will not apply to the acquisition of
Common Shares or Preferred Shares by an underwriter that participates in a
public offering of such shares. In addition, the Board of Trustees, upon such
conditions as the Board of Trustees may direct, may exempt a person from the
Ownership Limitation under certain circumstances.
All certificates representing Common Shares or Preferred Shares will bear a
legend referring to the restrictions described above.
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S DECLARATION OF TRUST AND
BYLAWS
The Company was formed on April 23, 1997. Pursuant to Maryland law, the
Company's existence is perpetual subject to voluntary dissolution and complete
distribution of its assets.
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The summary of certain provisions of Maryland law and of the Declaration of
Trust and Bylaws of the Company set forth below and elsewhere in this Prospectus
does not purport to be complete and is subject to and qualified in its entirety
by reference to Maryland law and the Declaration of Trust and Bylaws of the
Company. Copies of the Declaration of Trust and Bylaws may be obtained as
described under "Available Information."
Staggered Board of Trustees. The Declaration of Trust provides for a
staggered Board of Trustees consisting of three classes as nearly equal in size
as practicable. Each class holds office until the third annual meeting for
selection of trustees following the election of such class, except that the
initial terms of the three classes expire in 1998, 1999 and 2000, respectively.
The provision relating to the staggered Board may be amended only upon the vote
of the holders of at least two-thirds of the outstanding Common Shares of the
Company entitled to vote for the election of trustees. Such a vote could be
undertaken at an annual or special meeting of shareholders called in accordance
with the provisions of the Company's Bylaws. The Bylaws prohibit shareholders
from calling special meetings.
Meetings of Shareholders. Pursuant to the Company's Bylaws, an annual
meeting of the Company's shareholders for the election of Trustees and the
transaction of other business shall be held during the month of May of each
year. A special meeting of the shareholders of the Company may be called by (i)
the Chairman of the Board of Trustees, (ii) a majority of the members of the
Board of Trustees; or (iii) a committee of the Board of Trustees which has been
duly designated by the Board of Trustees and whose powers and authority include
the power to call such meetings.
Business Combinations Law. Under Maryland law, certain "business
combinations" (including a merger, consolidation, share exchange, or, in certain
circumstances, an asset transfer or issuance or reclassification of equity
securities) between a Maryland real estate investment trust and any person who
beneficially owns 10% or more of the voting power of the real estate investment
trust's shares or an affiliate of the real estate investment trust who at any
time within the two-year period prior to the date in question, was the
beneficial owner of 10% or more of the voting power of the then-outstanding
voting shares of the real estate investment trust (an "Interested Shareholder")
or an affiliate thereof are prohibited for five years after the most recent date
on which the Interested Shareholder became an Interested Shareholder.
Thereafter, any such business combination must be recommended by the board of
trustees of such real estate investment trust and approved by the affirmative
vote of at least (a) 80% of the votes entitled to be cast by holders of
outstanding voting shares of the real estate investment trust and (b) two-thirds
of the votes entitled to be cast by holders of outstanding voting shares of the
real estate investment trust other than shares held by the Interested
Shareholder with whom the business combination is to be effected, unless among
other things, the real estate investment trust's shareholders receive a minimum
price (as defined in the MGCL) for their shares and the consideration is
received in cash or in the same form as previously paid by the Interested
Shareholder for its shares. The trustees of the real estate investment trust
may, by resolution, exempt business combinations specifically, generally, or
generally by types from the prohibitions of the business combinations law, but
such exemption with respect to a potential acquiror must be in place before the
acquiror becomes an Interested Shareholder.
Control Share Acquisitions. Maryland law provides that "control shares" of
a Maryland real estate investment trust acquired in a "control share
acquisition" have no voting rights except to the extent authorized by a vote of
two-thirds of the votes entitled to be cast on the matter, excluding shares
owned by the acquiror or by officers or directors who are employees of the
corporation. "Control Shares" are voting shares which, if aggregated with all
other such shares previously acquired by the acquiror, or in respect of which
the acquiror is able to exercise or direct the exercise of voting power, would
entitle the acquiror to exercise voting power in electing directors within one
of the following ranges of voting power (i) one-fifth or more but less than one-
third, (ii) one-third or more but less than a majority, or (iii) a majority of
all voting power. Control shares do not include shares the acquiring person is
then entitled to vote as a result of having previously obtained shareholder
approval. A "control share acquisition" means the acquisition of control shares,
subject to certain exceptions.
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A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of trustees to call a special meeting of shareholders to be
held within 50 days of demand to consider the voting rights of the shares. If no
request for a meeting is made, the real estate investment trust may itself
present the question as any shareholders meeting.
If voting rights are authorized at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the real estate investment trust
may redeem any or all of the control shares (except those for which voting
rights have previously been authorized) for fair value determined without regard
to the absence of voting rights for the control shares, as of the date of the
last control share acquisition or of any meeting of shareholders at which the
voting rights of such shares are considered and not authorized. If voting rights
for control shares are authorized at a shareholders meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to vote, all other
shareholders may exercise appraisal rights. The fair value of the share as
determined for purposes of such approval rights may not be less than the highest
price per share paid by the acquiror in the control share acquisition.
The control share acquisition statue does not apply to shares acquired in a
merger, consolidation or share exchange if the real estate investment trust is a
party to the transaction, or to an acquisition authorized or exempted by the
declaration of trust or bylaws of the real estate investment trust.
The Company's Bylaws contain a provision exempting from the control share
acquisition statute any and all acquisitions by any person of the Company's
Common Shares. There can be no assurance that such provision will not be amended
or eliminated at any point in the future. If the foregoing exemption in the
Bylaws is rescinded, the control share acquisition statute could have the effect
of discouraging offers to acquire the Company and of increasing the difficulty
of consummating any such offer.
Interested Trustee Transactions. The Company's Bylaws contain a provision
requiring approval by the Independent Trustees of the Company of actions by the
Board of Trustees concerning the selection of operators of the Company's
Facilities and all transactions between the Company and CCA and its affiliates.
Removal of Trustees. The Declaration of Trust provides the Board of
Trustees or shareholders may, at any time, remove any trustee, with or without
cause, by an affirmative vote of a majority of trustees or a majority of holders
of shares entitled to vote in the election of trustees.
Amendments to the Declaration of Trust and Bylaws. The Declaration of
Trust provides generally that its provisions may be amended in accordance with
Maryland law except that (a) the trustees by a majority vote may amend the
Declaration of Trust to increase or decrease the aggregate number of shares of
any class that the Company has authority to issue, and (b) the trustees by a
two-thirds vote may amend the Declaration of Trust to qualify, or continue to
qualify, as a real estate investment trust under the Code or Maryland law.
Maryland law requires amendments to the Declaration of Trust to be authorized by
shareholders, by the affirmative vote of two-thirds of all the votes entitled to
be cast on the matter,
The Bylaws provide that the Board of Trustees has the exclusive power to
adopt, alter or repeal any provision of the Bylaws and to make new Bylaws, in
accordance with the provisions as set forth in the Bylaws.
Restrictions on Investment. Maryland law requires that a Maryland real
estate investment trust hold at least 75% of the value of its assets in real
estate assets, governmental securities, cash and cash items, including
receivables.
LIMITATIONS ON CHANGES IN CONTROL
The provisions of the Declaration of Trust and the Bylaws providing for
ownership limitations, a staggered Board of Trustees, eliminating the ability of
the shareholders to call special meetings of shareholders, and authorizing the
Board of Trustees to issue Preferred Shares without shareholder approval could
have the effect of delaying, deferring or preventing a change in control of the
Company or the removal of existing management, and as a result could prevent the
shareholders of the Company from being paid a premium for
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their Common Shares. In addition, Maryland's business combinations law makes it
difficult to acquire control of the Company by means of a tender offer, open
market purchase, a proxy fight or otherwise, if the acquisition is not
authorized in advance by the Board of Trustees. The Company has, however,
elected not to be governed by the provisions of Maryland law concerning control
share acquisitions.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF TRUSTEES
Maryland law provides that shareholders and trustees of a Maryland real
estate investment trust are not personally liable for the obligations of the
real estate investment trust; provided, however, that a trustee is not relieved
from any liability to a trust or its security holders for any act that
constitutes (a) bad faith, (b) willful misfeasance, (c) gross negligence, or (d)
reckless disregard of the trustee's duties. According to the Declaration of
Trust, a trustee of the Company shall perform his duties (i) in good faith, (ii)
in a manner he reasonably believes to be in the best interest of the Company,
and (iii) with the care that an ordinarily prudent person in a like position
would use under similar circumstances.
Maryland law permits a Maryland real estate investment trust to include in
its Declaration of Trust provisions limiting the liability of its trustees and
officers to the trust and its shareholders for money damages except for, in
general, liability resulting from (a) actual receipt of an improper benefit or
profit in money, property or services or (b) active and deliberate dishonesty
established by a final judgment as being material to the matter giving rise to
the cause of action. The Declaration of Trust of the Company contains a
provision which eliminates a trustee's liability to the Company and its
shareholders for money damages to the maximum extent permitted by Maryland law.
The Declaration of Trust and the Bylaws of the Company require the Company,
to the maximum extent permitted by Maryland law, to indemnify and advance
expenses to a trustee or officer of the Company in connection with a proceeding
and to indemnify a trustee or officer who has been successful, on the merits or
otherwise, in the defense of any proceeding to which he is made a party by
reason of his service in that capacity.
Maryland law permits a Maryland real estate investment trust to indemnify
and advance expenses to its trustees, officers, employees and agents to the same
extent as permitted by the Maryland General Corporation Law (the "MGCL") for
directors, officers, employees and agents of Maryland corporations. The MGCL
permits a Maryland corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities unless it is established that (a) the act or omission of the director
or officer was material to the matter giving rise to the proceeding and (i) was
committed in bad faith or (ii) was the result of active and deliberate
dishonesty, (b) the director or officer actually received an improper personal
benefit in money, property or services or (c) in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful. However, a Maryland corporation may not indemnify for
an adverse judgment in a suit by or in the right of the corporation. Maryland
law requires a Maryland corporation to indemnify a director or officer who has
been successful on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity. In
accordance with the MGCL, the Bylaws of the Company require it, as a condition
to advancing expenses, to obtain (a) a written affirmation by the director or
officer of his good faith belief that he has met the standard of conduct
necessary for indemnification by the Company as authorized by the Bylaws and (b)
a written undertaking by or on his behalf to repay the amount paid or reimbursed
by the Company if it shall ultimately be determined that the standard of conduct
was not met. The Bylaws permit the Company to indemnify and advance expenses to
any person who served a predecessor of the Company as a trustee, director,
officer, or partner and to any employee or agent of the Company or a predecessor
of the Company.
TRANSFER AGENT AND REGISTRAR
The Company has appointed BankBoston, N.A. as its transfer agent and
registrar.
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SHARES AVAILABLE FOR FUTURE SALE
Upon the completion of the Offering, the Company will have outstanding
17,301,000 Common Shares. The Common Shares issued in the Offering will be
freely tradeable by persons other than "affiliates" of the Company without
restriction under the Securities Act, subject to the limitations on ownership
set forth in the Declaration of Trust. See "Description of Capital
Shares -- Restrictions on Ownership." The Common Shares owned by the officers
and trustees of the Company, other than those Common Shares purchased in the
Offering, or shares acquired upon the exercise of options registered on a
registration statement on Form S-8 will be "restricted" securities within the
meaning of Rule 144 promulgated under the Securities Act ("Rule 144") and may
not be sold in the absence of registration under the Securities Act unless an
exemption from registration is available, including exemptions contained in Rule
144.
Prior to the date of this Prospectus, there has been no public market for
the Common Shares. The Common Shares have been approved for listing on the NYSE,
subject to official notice of issuance. No prediction can be made as to the
effect, if any, that future sales of shares, or the availability of shares for
future sale, will have on the market price prevailing from time to time. Sales
of substantial amounts of Common Shares or the perception that such sales could
occur, could adversely affect prevailing market prices of the Common Shares. See
"Risk Factors -- No Prior Market for Common Shares" and "-- Shares Available for
Future Sale."
For a description of certain restrictions on transfers of Common Shares
held by certain shareholders of the Company, see "Underwriting" and "Description
of Capital Shares -- Restrictions on Ownership."
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax considerations
regarding the Offering is based on current law, is for general information only
and is not tax advice. The discussion does not purport to deal with all aspects
of taxation that may be relevant to particular shareholders in light of their
personal investment or tax circumstances, or to certain types of shareholders
(including insurance companies, tax-exempt organizations, financial institutions
or broker-dealers, foreign corporations, and persons who are not citizens or
residents of the United States) subject to special treatment under the federal
income tax laws.
The statements in this discussion are based on current provisions of the
Code, existing, temporary, and currently proposed Treasury regulations
promulgated under the Code ("Treasury Regulations"), the legislative history of
the Code, existing administrative rulings and practices of the Service, and
judicial decisions. No assurance can be given that future legislative, judicial,
or administrative actions or decisions, which may be retroactive in effect, will
not affect the accuracy of any statements in this Prospectus with respect to the
transactions entered into or contemplated prior to the effective date of such
changes.
EACH PROSPECTIVE PURCHASER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR
REGARDING THE TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND SALE OF THE COMMON
SHARES, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES
THEREOF AND THE POSSIBILITY THAT APPLICABLE TAX LAWS MAY CHANGE.
TAXATION OF THE COMPANY
General. The Company plans to make an election to be taxed as a REIT under
Sections 856 through 860 of the Code, commencing with its taxable year ending
December 31, 1997. The Company believes that, commencing with such taxable year,
it will be organized and will operate in such a manner as to qualify for
taxation as a REIT under the Code. Because these sections of the Code are highly
technical and complex, however, no assurance can be given that the Company will
qualify or remain qualified as a REIT.
The following sets forth the material aspects of the sections that govern
the federal income tax treatment of a REIT and its shareholders. This summary is
qualified in its entirety by the applicable Code provisions, rules and Treasury
Regulations promulgated thereunder, and administrative and judicial
interpretations thereof.
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In the opinion of Stokes & Bartholomew, P.A. and Sherrard & Roe, PLC,
commencing with its taxable year ending December 31, 1997, the Company will be
organized in conformity with the requirements for qualification as a REIT, and
its proposed method of operation will enable it to meet the requirements for
qualification and taxation as a REIT under the Code. These opinions will be
based upon, and subject to, certain assumptions and various factual
representations of the Company, which are incorporated into such opinions and
are addressed in this discussion of "Material Federal Income Tax
Considerations." Opinions of counsel are not binding on the Service or a court.
Accordingly, there can be no assurance that the Service will not successfully
assert a position contrary to the opinion of Stokes & Bartholomew, P.A. and
Sherrard & Roe, PLC, and therefore prevent the Company from qualifying as a
REIT. Qualification and taxation as a REIT also depends upon the Company's
ability to meet, through actual annual operating results, distribution
requirements, diversity of stock ownership and the various other qualification
tests imposed under the Code, the results of which will not be reviewed either
by Stokes & Bartholomew, P.A. or by Sherrard & Roe, PLC. Thus, there can be no
assurance that the actual results of the Company's operation for any particular
taxable year will satisfy such requirements. For a discussion of the tax
consequences of failure to qualify as a REIT, see "Material Federal Income Tax
Considerations -- Failure to Qualify."
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on its net income that is currently
distributed to shareholders. This treatment substantially eliminates the "double
taxation" (at the corporate and shareholder levels) of income that generally
results from investment in a regular corporation. However, the Company will be
subject to federal income tax as follows: First, the Company will be taxed at
regular corporate rates on any undistributed REIT taxable income, including
undistributed net capital gains. Second, under certain circumstances, the
Company may be subject to the "alternative minimum tax" on its items of tax
preference. Third, if the Company has (i) net income from the sale or other
disposition of "foreclosure property" which is held primarily for sale to
customers in the ordinary course of business; or (ii) other nonqualifying income
from foreclosure property, it will be subject to tax at the highest corporate
rate on such income. Fourth, if the Company has net income from prohibited
transactions (which are, in general, certain sales or other dispositions of
property held primarily for sale to customers in the ordinary course of business
other than foreclosure property), such income will be subject to a 100% tax.
Fifth, if the Company fails to satisfy the 75% gross income test or the 95%
gross income test (as discussed below), but has nonetheless maintained its
qualification as a REIT because certain other requirements have been met, it
will be subject to a 100% tax on an amount equal to (a) the gross income
attributable to the greater of the amount by which the Company fails the 75% or
95% test, multiplied by (b) a fraction intended to reflect the Company's
profitability. Sixth, if the Company fails to distribute during each calendar
year at least the sum of (i) 85% of its REIT ordinary income for such year; (ii)
95% of its REIT capital gain net income for such year; and (iii) any
undistributed taxable income from prior periods, it will be subject to a 4%
excise tax on the excess of such required distribution over the amounts actually
distributed. Seventh, with respect to any asset (a "Built-in Gain Asset")
acquired by the Company from a corporation which is or has been a C corporation
(i.e., generally a corporation subject to full corporate-level tax) in certain
transactions in which the basis of the Built-in Gain Asset in the hands of the
Company is determined by reference to the basis of the asset in the hands of the
C corporation, if the Company recognizes gain on the disposition of such asset
during the 10-year period (the "Recognition Period") beginning on the date on
which such asset was acquired by the Company, then, to the extent of the
Built-in Gain (i.e., the excess of (a) the fair market value of such asset over
(b) the Company's adjusted basis in such asset, determined as of the beginning
of the Recognition Period), such gain will be subject to tax at the highest
regular corporate rate. The results described above with respect to the
recognition of Built-in Gain assume that the Company will make an election
pursuant to IRS Notice 88-19.
Requirements for Qualification. The Code defines a REIT as a corporation,
trust or association (i) which is managed by one or more trustees; (ii) the
beneficial ownership of which is evidenced by transferable shares, or by
transferable certificates of beneficial interest; (iii) which would be taxable
as a domestic corporation, but for Sections 856 through 859 of the Code; (iv)
which is neither a financial institution nor an insurance company subject to
certain provisions of the Code; (v) the beneficial ownership of which is held by
100 or more persons; (vi) during the last half of each taxable year not more
than 50% in value of the outstanding stock of which is owned, directly or
constructively, by five or fewer individuals (as defined
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in the Code to include certain entities); and (vii) which meets certain other
tests, described below, regarding the nature of its income and assets. The Code
provides that conditions (i) to (iv), inclusive, must be met during the entire
taxable year and that condition (v) must be met during at least 335 days of a
taxable year of 12 months, or during a proportionate part of a taxable year of
less than 12 months. Conditions (v) and (vi) will not apply until after the
first taxable year for which an election is made to be taxed as a REIT.
The Company believes that it will have issued sufficient shares pursuant to
the Offering to allow it to satisfy conditions (v) and (vi). In addition, the
Company's Declaration of Trust provides for restrictions regarding the transfer
and ownership of shares, which restrictions are intended to assist the Company
in continuing to satisfy the share ownership requirements described in (v) and
(vi) above. Such transfer and ownership restrictions are described in
"Description of Capital Shares -- Restrictions on Ownership."
Income Tests. To maintain qualification as a REIT, the Company annually
must satisfy three gross income requirements. First, at least 75% of the
Company's gross income (excluding gross income from prohibited transactions) for
each taxable year must be derived directly or indirectly from investments
relating to real property or mortgages on real property (including "rents from
real property," gain from the sale of real property and, in certain
circumstances, interest) or from certain types of temporary investments. Second,
at least 95% of the Company's gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived from such real
property investments, dividends, interest and gain from the sale or disposition
of stock or securities (or from any combination of the foregoing). Third,
short-term gain from the sale or other disposition of stock or securities, gain
from prohibited transactions and gain on the sale or other disposition of real
property held for less than four years (apart from involuntary conversions and
sales of foreclosure property) must represent less than 30% of the Company's
gross income including gross income from prohibited transactions for each
taxable year.
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts or sales. Second, rents received from a tenant will not qualify as
"rents from real property" in satisfying the gross income tests if the REIT, or
an owner of 10% or more of the REIT, directly or constructively owns 10% or more
of such tenant (a "Related Party Tenant"). Third, if rent attributable to
personal property, leased in connection with a lease of real property, is
greater than 15% of the total rent received under the lease, then the portion of
rent attributable to such personal property will not qualify as "rents from real
property." Finally, for rents received to qualify as "rents from real property,"
the REIT generally must not operate or manage the property or furnish or render
services to the tenants of such property, other than through an independent
contractor from whom the REIT derives no revenue, except that the REIT may
directly perform certain services that are "usually or customarily rendered" in
connection with the rental of space for occupancy only and are not otherwise
considered "rendered to the occupant" of the property.
Pursuant to the Leases, CCA will lease from the Company the land, buildings
and improvements comprising the Facilities and certain personal property located
at the Facilities for initial terms ranging from 10 to 12 years. Upon mutual
agreement of the parties, each Lease may be extended for up to three additional
five-year terms. The Leases will be "triple net" leases which will require CCA
to pay substantially all expenses associated with the operation of the
Facilities, such as real estate taxes, insurance, utilities and services,
maintenance and other operating expenses. The minimum rent for the first year of
each Lease will be a fixed amount. Thereafter, minimum rent will be increased
each year by the Base Rent Escalation.
On an ongoing basis, the Company will use its best efforts; (i) not to
charge rent for any property that is based in whole or in part on the income or
profits of any person (except by reason of being based on a percentage of
receipts or sales, as described above); (ii) not to rent any property to a
Related Party Tenant (taking into account the constructive ownership rules),
unless the Company determines in its discretion that the rent received from such
Related Party Tenant is not material and will not jeopardize the Company's
status as a REIT; (iii) not to derive rental income attributable to personal
property (other than personal property
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leased in connection with the lease of real property, the amount of which is
less than 15% of the total rent received under the lease); or (iv) not to
perform services considered to be rendered to the occupant of the property,
other than through an independent contractor from whom the Company derives no
revenue. Because the Code provisions applicable to REITs are complex, however,
the Company may fail to meet one or more of the foregoing objectives, which
failure may jeopardize the Company's status as a REIT. For a discussion of the
consequences of any failure by the Company to qualify as a REIT, see "Failure to
Qualify."
Rents under the Leases will constitute "rents from real property" only if
the Leases are treated as true leases for federal income tax purposes and are
not treated as service contracts, joint ventures, financing arrangements or some
other type of arrangement. The determination of whether the Leases are true
leases depends on an analysis of all surrounding facts and circumstances. In
making such a determination, courts have considered a variety of factors,
including the following: (i) the intent of the parties; (ii) the form of the
agreement; (iii) the degree of control over the property that is retained by the
property owner (e.g., whether the lessee has substantial control over the
operation of the property or whether the lessee was required simply to use its
best efforts to perform its obligations under the agreement); (iv) the extent to
which the property owner retains the risk of loss with respect to the operation
of the property (e.g., whether the lessee bears the risk of increases in
operating expenses or the risk of damage to the property); and (v) the extent to
which the property owner retains the burdens and benefits of ownership of the
property.
Code Section 7701(e) provides that a contract that purports to be a service
contract (or a partnership agreement) will be treated instead as a lease of
property if the contract is properly treated as such, taking into account all
relevant factors, including whether or not: (i) the service recipient is in
physical possession of the property; (ii) the service recipient controls the
property; (iii) the service recipient has a significant economic or possessory
interest in the property (e.g., the property's use is likely to be dedicated to
the service recipient for a substantial portion of the useful life of the
property, the recipient shares the risk that the property will decline in value,
the recipient shares in any appreciation in the value of the property, the
recipient shares in savings in the property's operating costs, or the recipient
bears the risk of damage to or loss of the property); (iv) the service provider
does not bear any risk of substantially diminished receipts or substantially
increased expenditures if there is nonperformance under the contract; (v) the
service provider does not use the property concurrently to provide significant
services to entities unrelated to the service recipient; and (vi) the total
contract price does not substantially exceed the rental value of the property
for the contract period. Since the determination whether a service contract
should be treated as a lease is inherently factual, the presence or absence of
any single factor may not be dispositive in every case.
The Leases should be treated as true leases for federal income tax
purposes, based, in part, on the following facts: (i) the Company and CCA intend
for their relationship to be that of a lessor and lessee and such relationship
will be documented by lease agreements; (ii) CCA will have the right to
exclusive possession and use and quiet enjoyment of the Initial Facilities
during the term of the Leases; (iii) CCA will bear the cost of, and be
responsible for, day-to-day maintenance and repair of the Facilities, and will
dictate how the Facilities are operated, maintained, and improved; (iv) CCA will
bear all of the costs and expenses of operating the Facilities during the terms
of the Leases; (v) CCA will benefit from any savings in the costs of operating
the Facilities during the terms of the Leases; (vi) CCA will indemnify the
Company against all liabilities imposed on the Company during the term of the
Leases by reason of (a) injury to persons or damage to property occurring at the
Facilities, or (b) CCA's use, management, maintenance or repair of the
Facilities; (vii) CCA is obligated to pay substantial fixed rent for the period
of use of the Facilities; (viii) CCA stands to incur substantial losses (or reap
substantial gains) depending on how successfully it operates the Facilities;
(ix) the useful lives of the Facilities are significantly longer than the terms
of the Leases; and (x) the Company will receive the benefit of any increase in
value, and will bear the risk of any decrease in value, of the Facilities during
the terms of the Leases.
Investors should be aware that there are no controlling Treasury
Regulations, published rulings, or judicial decisions involving leases with
terms substantially similar to those contained in the Leases that address
whether such leases constitute true leases for federal income tax purposes. If
the Leases are recharacterized as service contracts or partnership agreements,
rather than true leases, part or all of the payments that the Company receives
from CCA may not be considered rent or may not otherwise satisfy the various
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requirements for qualification as "rents from real property." In that case, the
Company likely would not be able to satisfy either the 75% or 95% gross income
tests and, as a result, would lose its REIT status.
For the rents to constitute "rents from real property," the other
requirements enumerated above also must be satisfied. One requirement is that
the Rent attributable to personal property leased in connection with the lease
of a Facility must not be greater than 15% of the total Rent received under the
Leases. The Rent attributable to the personal property in a Facility is the
amount that bears the same ratio to total rent for the taxable year as the
average of the adjusted bases of the personal property in the Facility at the
beginning and at the end of the taxable year bears to the average of the
aggregate adjusted bases of both the real and personal property comprising the
Facility at the beginning and at the end of such taxable year (the "Adjusted
Basis Ratio"). The Company will lease certain personal property to CCA pursuant
to the Leases. The Adjusted Basis Ratio with respect to each Lease is
anticipated to be less than 15%. Accordingly, Rent received by the Company
should satisfy this requirement.
A second requirement for qualification of the rents as "rents from real
property" is that the Rent must not be based in whole or in part on the income
or profits of any person. The Rent paid by CCA for the Facilities will be a
fixed amount (as adjusted based in part on the gross revenues of each Facility)
and will not be based in whole or in part on the net income of the Facilities.
Thus, the Rent should also satisfy this requirement.
A third requirement for qualification of the rents as "rents from real
property" is that the Company must not own, directly or constructively, 10% or
more of CCA or any other tenant of the Facilities. The constructive ownership
rules generally provide that if 10% or more in value of the shares of the
Company are owned, directly or indirectly, by or for any person, the Company is
considered as owning the shares owned, directly or indirectly, by or for such
person. The Declaration of Trust provides that no person may own, directly or
constructively, more than 9.8% of the Company. See "Description of Capital
Shares -- Restrictions on Ownership." Assuming the Declaration of Trust is
complied with, neither CCA nor any other person should ever own, directly or
constructively, 10% or more of the Company, and thus the constructive ownership
rules should not be triggered. Furthermore, the Company has represented that it
will not rent any property to a Related Party Tenant. The constructive ownership
rules, however, are highly complex and difficult to apply, and the Company may
inadvertently enter into leases with tenants who, through application of such
rules, will constitute Related Party Tenants. In such event, Rent paid by the
Related Party Tenant will not qualify as "rents from real property," which may
jeopardize the Company's status as a REIT.
A fourth requirement for qualification of the rents as "rents from real
property" is that the Company cannot furnish or render noncustomary services to
the tenants of the Facilities, or manage or operate the Facilities, other than
through an independent contractor who is adequately compensated and from whom
the Company itself does not derive or receive any income. Provided that the
Leases are respected as true leases, the Company should satisfy this requirement
because it is not performing for CCA any services other than customary services.
Furthermore, the Company has represented that, with respect to other properties
that it acquires in the future, it will not perform noncustomary services with
respect to the tenant of the property. As described above, however, if the
Leases are recharacterized as service contracts or partnership agreements, the
rents likely would be disqualified as "rents from real property" because the
Company would be considered to furnish or render services to the occupants of
the Facilities and to manage or operate the Facilities other than through an
independent contractor who is adequately compensated and from whom the Company
derives or receives no income.
Based on the foregoing, the Rent should qualify as "rents from real
property" for purposes of the 75% and 95% gross income tests. As described
above, however, there can be no complete assurance that the Service will not
assert successfully a contrary position and, therefore, prevent the Company from
qualifying as a REIT.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions will be generally available if the Company's failure to meet such
tests was due to reasonable cause and not due to willful neglect, the Company
attaches a schedule of the sources of its income to its return, and any
incorrect information on the schedules was not due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances the
Company would be entitled to the benefit of
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these relief provisions. As discussed above in "-- General," even if these
relief provisions apply, a tax would be imposed with respect to the excess net
income.
Other Issues. Because the Facilities will be acquired from and leased back
to CCA, the Service could assert that the Company realized a prepaid rental
income in the year of purchase to the extent that the value of the facilities
exceeds the purchase price paid by the Company. In litigated cases involving
sale-leasebacks which have considered this issue, courts generally have
concluded that buyers have realized prepaid rent where both parties acknowledged
that the purported purchase price for the property was substantially less than
fair market value, and the proposed rents were substantially less than the fair
market rentals. Because of the lack of clear precedent and the inherently
factual nature of the inquiry, no assurance can be given that the Service could
not successfully assert the existence of prepaid rental income in such
circumstances. The value of property and the fair market rent for properties
involved in sale-leasebacks are inherently factual matters and always subject to
challenge.
Additionally, Section 467 of the Code (concerning leases with increasing
rents) may apply to these Leases because they provide for rents that increase
from one period to the next. Section 467 provides that in the case of a
so-called "disqualified leaseback agreement," rental income must be accrued at a
constant rate. If such constant rate accrual is required, the Company would
recognize rental income in excess of cash rents and, as a result, may fail to
meet the 95% dividend distribution requirement. "Disqualified leaseback
agreements" include leaseback transactions where a principal purpose of
providing increasing rent under the agreement is the avoidance of federal income
tax. The Company and CCA have represented that the principal purpose of rent
increases under the Leases is not the avoidance of federal income taxes.
Furthermore, under proposed Treasury Regulations, tax avoidance is not
considered a principal purpose where the lessee is required to pay third party
costs, such as insurance, maintenance and taxes, or where rent is adjusted based
on reasonable price indices. Accordingly, the Company believes that the Leases
will not be subject to rent leveling under Code Section 467. It should be noted,
however, that leases involved in sale-leaseback transactions are subject to
special scrutiny under this Section.
Asset Tests. The Company, at the close of each quarter of its taxable
year, must also satisfy three tests relating to the nature of its assets. First,
at least 75% of the value of the Company's total assets must be represented by
real estate assets (including (i) its allocable share of real estate assets held
by partnerships in which the Company owns an interest; and (ii) stock or debt
instruments held for not more than one year purchased with the proceeds of a
stock offering or long-term (at least five years) debt offering of the Company),
cash, cash items and government securities. Second, not more than 25% of the
Company's total assets may be represented by securities other than those in the
75% asset class. Third, of the investments included in the 25% asset class, the
value of any one issuer's securities owned by the Company may not exceed 5% of
the value of the Company's total assets, and the Company may not own more than
10% of any one issuer's outstanding voting securities.
The Company has represented that, as of the date of the offering, (i) at
least 75% of the value of its total assets will be represented by real estate
assets, cash and cash items (including receivables), and government securities;
and (ii) it will not own any securities that do not satisfy the 75% asset
requirement (except for the stock of subsidiaries with respect to which it has
held 100% of the stock at all times during the subsidiary's existence). In
addition, the Company has represented that it will not acquire or dispose of
assets in the future in a way that would cause it to violate either asset
requirement. Based on the foregoing, the Company should satisfy both asset
requirements for REIT status.
If the Company should fail inadvertently to satisfy the asset requirements
at the end of a calendar quarter, such a failure would not cause it to lose its
REIT status if (i) it satisfied all of the asset tests at the close of the
preceding calendar quarter; and (ii) the discrepancy between the value of the
Company's assets and the standards imposed by the asset requirements either did
not exist immediately after the acquisition of any particular asset or was not
wholly or partly caused by such an acquisition (i.e., the discrepancy arose from
changes in the market values of its assets). If the condition described in
clause (ii) of the preceding sentence were not satisfied, the Company still
could avoid disqualification by eliminating any discrepancy within 30 days after
the close of the calendar quarter in which it arose.
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Annual Distribution Requirements. The Company, to qualify as a REIT, is
required to distribute dividends (other than capital gain dividends) to its
shareholders in an amount at least equal to (i) the sum of (a) 95% of the
Company's "REIT taxable income" (computed without regard to the dividends paid
deduction and the Company's net capital gain) and (b) 95% of the net income
(after tax), if any, from foreclosure property, minus (ii) the sum of certain
items of noncash income. In addition, if the Company disposes of any Built-in
Gain Asset during its Recognition Period, the Company will be required to
distribute at least 95% of the Built-in Gain (after tax), if any, recognized on
the disposition of such asset. Such distributions must be paid in the taxable
year to which they relate, or in the following taxable year if declared before
the Company timely files its tax return for such year and if paid on or before
the first regular dividend payment after such declaration. To the extent that
the Company does not distribute all of its net capital gain or distributes at
least 95%, but less than 100% of its "REIT taxable income", as adjusted, it will
be subject to tax thereon at regular ordinary and capital gain corporate tax
rates. Furthermore, if the Company should fail to distribute during each
calendar year at least the sum of (i) 85% of its REIT ordinary income for such
year; (ii) 95% of its REIT capital gain income for such year; and (iii) any
undistributed taxable income from prior periods, the Company will be subject to
a 4% excise tax on the excess of such required distribution over the amounts
actually distributed. The Company intends to make timely distributions
sufficient to satisfy this annual distribution requirement.
It is possible that the Company, from time to time, may not have sufficient
cash or other liquid assets to meet the 95% distribution requirement due to
timing differences between (i) the actual receipt of income and actual payment
of deductible expenses; and (ii) the inclusion of such income and deduction of
such expenses in arriving at taxable income of the Company. In the event that
such timing differences occur, in order to meet the 95% distribution
requirement, the Company may find it necessary to arrange for short-term, or
possibly long-term, borrowings to pay dividends in the form of taxable stock
dividends.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency dividends"
to shareholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Thus, the Company may be able
to avoid being taxed on amounts distributed as deficiency dividends; however,
the Company will be required to pay interest based upon the amount of any
deduction taken for deficiency dividends.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distribution to shareholders in any year in which the
Company fails to qualify will not be deductible by the Company nor will they be
required to be made. In such event, to the extent of current and accumulated
earnings and profits, all distributions to shareholders will be taxable as
ordinary income, and, subject to certain limitations of the Code, corporate
distributees may be eligible for the dividends received deduction. Unless
entitled to relief under specific statutory provisions, the Company will also be
disqualified from taxation as a REIT for the four taxable years following the
year during which qualification was lost. It is not possible to state whether in
all circumstances the Company would be entitled to such statutory relief.
TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable domestic shareholders out of current or accumulated earnings
and profits (and not designated as capital gain dividends) will be taken into
account by them as ordinary income and will not be eligible for the dividends
received deduction for corporations. Distributions that are designated as
capital gain dividends generally will be taxed as long-term capital gain (to the
extent they do not exceed the Company's actual net capital gain for the taxable
year) without regard to the period for which the shareholder has held its stock.
Distributions in excess of current and accumulated earnings and profits will not
be taxable to a shareholder to the extent that they do not exceed the adjusted
basis of the shareholder's shares, but rather will reduce the adjusted basis of
such shares. To the extent that such distributions exceed the adjusted basis of
a shareholder's shares, they will be
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included in income as long-term capital gain (or short-term capital gain if the
shares have been held for one year or less) assuming the shares are a capital
asset in the hands of the shareholder. For a discussion of how the Company
anticipates that initial distributions will be characterized, see
"Distributions." In addition, any shareholder of record on a specified date in
any such month shall be treated as both paid by the Company and received by the
shareholder on December 31 of such year provided that the dividend is actually
paid by the Company during January of the following calendar year. Shareholders
may not include in their individual income tax returns any net operating losses
or capital losses of the Company.
In general, any loss upon a sale or exchange of shares by a shareholder who
has held such shares for six months or less (after applying certain holding
period rules) will be treated as a long-term capital loss to the extent of
distributions from the Company required to be treated by such shareholder as
long-term capital gain.
BACKUP WITHHOLDING
The Company will report to its domestic shareholders and the Service the
amount of dividends paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a shareholder may be
subject to backup withholding at the rate of 31% with respect to dividends paid
unless such holder (a) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact, or (b) provides a
taxpayer identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with applicable requirements of the backup
withholding rules. A shareholder that does not provide the Company with his
correct taxpayer identification number may also be subject to penalties imposed
by the Service. Any amount paid as backup withholding will be creditable against
the shareholder's income tax liability. In addition, the Company may be required
to withhold a portion of capital gain distributions made to any shareholders who
fail to certify their non-foreign status to the Company. See "-- Taxation of
Foreign Shareholders."
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts ("Exempt Organizations"),
generally are exempt from federal income taxation. However, they are subject to
taxation on their unrelated business taxable income ("UBTI"). While many
investments in real estate generate UBTI, the Service has issued a published
ruling that dividend distributions by a REIT to an exempt employee pension trust
do not constitute UBTI, provided that the shares of the REIT are not otherwise
used in an unrelated trade or business of the exempt employee pension trust.
Based on that ruling, amounts distributed by the Company to Exempt Organizations
generally should not constitute UBTI. However, if an Exempt Organization
finances its acquisition of the Common Shares with debt, a portion of its income
from the Company will constitute UBTI pursuant to the "debt-financed property"
rules. Furthermore, social clubs, voluntary employee benefit associations,
supplemental unemployment benefit trusts, and qualified group legal services
plans that are exempt from taxation under paragraphs (7), (9), (17), and (20),
respectively, of Code Section 501(c) are subject to different UBTI rules, which
generally will require them to characterize distributions from the Company as
UBTI.
Notwithstanding the above, however, a portion of the dividends paid by a
"pension held REIT" shall be treated as UBTI as to any trust which (i) is
described at Section 401(a) of the Code, (ii) tax exempt under Section 501(a) of
the Code and (iii) holds more than 10% (by value) of the interests in the REIT.
Tax exempt pension funds that are described in Section 401(a) of the Code are
referred to below as "qualified trusts."
A REIT is a "pension held REIT" if (i) it would not have qualified as a
REIT but for the fact that Section 856(h)(3) of the Code provides that stock
owned by qualified trusts shall be treated, for purposes of the "not closely
held" requirement, as owned by the beneficiaries of the trust rather than by the
trust itself and (ii) either (a) at least one such qualified trust holds more
than 25% (by value) of the interest in the REIT, or (b) one or more of such
qualified trusts, each of which owns more than 10% (by value) of the interests
in the REIT, hold in the aggregate more than 50% (by value) of the interests in
the REIT. The percentage of any REIT dividend treated as UBTI is equal to the
ratio of (i) the UBTI earned by the REIT (treating the REIT
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as if it were a qualified trust and therefore subject to tax on UBTI) to (ii)
the total gross income of the REIT. A de minimis exception applies where the
percentage is less than 5% for any year. The provisions requiring qualified
trusts to treat a portion of REIT distributions as UBTI will not apply if the
REIT is able to satisfy the "not closely held" requirement without relying upon
the look through exception with respect to qualified trusts. As a result of
certain limitations on transfer and ownership of Common Shares contained in the
Declaration of Trust, the Company does not expect to be classified as a "pension
held REIT."
While an investment in the Company by an Exempt Organization generally is
not expected to result in UBTI except in the circumstances described herein, any
gross UBTI that does arise from such an investment will be combined with all
other gross UBTI of the Exempt Organization for a taxable year and reduced by
all deductions attributable to the UBTI plus $1,000. Any amount then remaining
will constitute UBTI on which the Exempt Organization will be subject to tax. If
the gross income taken into account in computing UBTI exceeds $1,000, the Exempt
Organization is obligated to file a tax return for such year on IRS Form 990-T.
Neither the Company, the Board of Trustees, nor any of their Affiliates expects
to undertake the preparation for filing of IRS Form 990-T for any Exempt
Organization in connection with an investment by such Exempt Organization in the
Common Shares. Generally, IRS Form 990-T must be filed with the Service by April
15 of the year following the year to which it relates.
TAXATION OF FOREIGN SHAREHOLDERS
The rules governing United States federal income taxation of nonresident
alien individuals, foreign corporations, foreign partnerships and other foreign
shareholders (collectively, "Non-U.S. Shareholders") are complex and no attempt
will be made herein to provide more than a summary of such rules. Prospective
Non-U.S. Shareholders should consult with their own tax advisors to determine
the impact of federal, state and local income tax laws with regard to an
investment in shares, including any reporting requirements.
Distributions by the Company that are neither attributable to gain from
sales or exchanges by the Company of United States real property interests nor
designated by the Company as capital gains dividends will be treated as
dividends of ordinary income to the extent that they are made out of current or
accumulated earnings and profits of the Company. Such distributions, ordinarily,
will be subject to a withholding tax equal to 30% of the gross amount of the
distribution unless an applicable tax treaty reduces or eliminates that tax.
However, if income from the investment in the shares is treated as effectively
connected with the conduct by the Non-U.S. Shareholder of a United States trade
or business, the Non-U.S. Shareholder generally will be subject to a tax at
graduated rates, in the same manner as U.S. Shareholders are taxed with respect
to such dividends (and may also be subject to the 30% branch profits tax in the
case of a shareholder that is a foreign corporation). The Company expects to
withhold United States income tax at the rate of 30% on the gross amount of any
such dividends made to a Non-U.S. Shareholder unless (i) a lower treaty rate
applies; or (ii) the Non-U.S. Shareholder files the Service's Form 4224 with the
Company certifying that the investment to which the distribution relates is
effectively connected to a United States trade or business of such Non-U.S.
Shareholder. Lower treaty rates applicable to dividend income may not
necessarily apply to dividends from a REIT such as the Company, however.
Distributions in excess of current and accumulated earnings and profits of the
Company will not be taxable to a shareholder to the extent that they do not
exceed the adjusted basis of the shareholder's shares, but rather will reduce
the adjusted basis of such shares. To the extent that such distributions exceed
the adjusted basis of a Non-U.S. Shareholder's shares, they will give rise to
gain from the sale or exchange of his shares, the tax treatment of which is
described below. If it cannot be determined at the time a distribution is made
whether or not such distribution will be in excess of current and accumulated
earnings and profits, the distributions will be subject to withholding at the
same rate applicable to dividends. However, amounts thus withheld are refundable
if it is subsequently determined that such distribution was, in fact, in excess
of current and generally accumulated earnings and profits of the Company. For a
discussion of how the Company anticipates that initial distributions will be
characterized, see "Distributions."
Distributions that are designated by the Company at the time of
distribution as capital gains dividends (other than those arising from the
disposition of a United States real property interest) generally will not be
subject to taxation, unless (i) investment in the shares is effectively
connected with the Non-U.S. Shareholder's United States trade or business, in
which case the Non-U.S. Shareholder will be subject to the
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same treatment as U.S. shareholders with respect to such gain (except that a
shareholder that is a foreign corporation may also be subject to the 30% branch
profits tax); or (ii) the Non-U.S. Shareholder is a nonresident alien individual
who was present in the United States for 183 days or more during the taxable
year and has a "tax home" in the United States, in which case the nonresident
alien individual will be subject to a 30% tax on the individual's capital gains.
For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of United States
real property interests will be taxed to a Non-U.S. Shareholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980, as
amended ("FIRPTA"). Under FIRPTA, these distributions are taxed to a Non-U.S.
Shareholder as if such gain were effectively connected with a United States
trade or business. Non-U.S. Shareholders would thus be taxed at the same capital
gain rates applicable to U.S. shareholders (subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of nonresident
alien individuals). Also, distributions subject to FIRPTA may be subject to a
30% branch profits tax in the hands of a foreign corporate shareholder not
entitled to treaty exemption. The Company is required by applicable Treasury
Regulations to withhold 34% of any distribution attributable to the disposition
of a United States real property interest. This amount is creditable against the
Non-U.S. Shareholder's United States federal income tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale or other disposition
of shares generally will not be subject to United States federal income tax if
the Company is a "domestically controlled REIT", defined generally as a REIT in
which at all times during a specified testing period less than 50% in value of
the stock was held directly or indirectly by foreign persons. It is currently
anticipated that the Company will be a "domestically controlled REIT", and
therefore the sale of shares will not be subject to taxation under FIRPTA.
However, gain not subject to FIRPTA will be taxable to a Non-U.S. Shareholder if
(i) investment in the shares is effectively connected with the Non-U.S.
Shareholder's United States trade or business, in which case the Non-U.S.
Shareholder will be subject to the same treatment as U.S. shareholders with
respect to such gain (except that a shareholder that is a foreign corporation
may also be subject to the 30% branch profits tax); or (ii) the Non-U.S.
Shareholder is a nonresident alien individual who was present in the United
States for 183 days or more during the taxable year and has a "tax home" in the
United States, in which case the nonresident alien individual will be subject to
a 30% tax on the individual's capital gains. If the Company is not a
"domestically controlled REIT," the Non-U.S. Shareholder will be subject to the
same treatment as U.S. shareholders with respect to such gain (subject to
applicable alternative minimum tax and a special alternative minimum tax in the
case of nonresident alien individuals and, in the case of foreign corporations,
subject to the possible applications of the 30% branch profits tax).
The United States Treasury has recently issued proposed Treasury
Regulations regarding withholding and information reporting rules discussed
above. In general, the proposed Treasury Regulations do not alter the
substantive withholding and information reporting requirements but unify current
certification procedures and forms and clarify and modify reliance standards. If
finalized in their current form, the proposed Treasury Regulations would
generally be effective for payments made after December 31, 1997, subject to
certain transition rules.
OTHER TAX CONSEQUENCES
The Company and its shareholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its shareholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective shareholders should consult their own
tax advisors regarding the effect of state and local tax laws on an investment
in the Company.
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ERISA CONSIDERATIONS
The following is intended to be a summary only and is not a substitute for
careful planning with a professional. Employee benefit plans subject to ERISA
and other sections of the Code considering purchasing the Common Shares should
consult with their own tax or other appropriate counsel regarding the
application of ERISA and the Code to their purchase of the Common Shares. Plans
should also consider the entire discussion under the heading of "Material
Federal Income Tax Considerations", as material contained therein is relevant to
any decision by a Plan to purchase the Common Shares.
Certain employee benefit plans and IRAs (collectively, "Plans"), are
subject to various provisions of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), and the Code. Before investing in the Common Shares
of the Company, a Plan fiduciary should ensure that such investment is in
accordance with ERISA's general fiduciary standards. In making such a
determination, a Plan fiduciary should ensure that the investment is in
accordance with the governing instruments and the overall policy of the Plan,
and that the investment will comply with the diversification and composition
requirements of ERISA. In addition, provisions of ERISA and the Code prohibit
certain transactions in Plan assets that involve persons who have specified
relationships with a Plan ("disqualified persons"). The consequences of such
prohibited transactions include the imposition of excise taxes,
disqualifications of IRAs and other liabilities. A Plan fiduciary should ensure
that any investment in the Common Shares will not constitute such a prohibited
transaction.
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UNDERWRITING
Pursuant to the Underwriting Agreement, and subject to the terms and
conditions thereof, the Underwriters named below, acting through J.C. Bradford &
Co., A.G. Edwards & Sons, Inc., Legg Mason Wood Walker, Incorporated, Lehman
Brothers Inc., PaineWebber Incorporated and Stephens Inc., as representatives of
the several Underwriters (the "Representatives"), have agreed, severally, to
purchase from the Company the number of Common Shares set forth below opposite
their respective names:
<TABLE>
<CAPTION>
NUMBER OF
NAME OF UNDERWRITER SHARES
- ------------------- ----------
<S> <C>
J.C. Bradford & Co..........................................
A.G. Edwards & Sons, Inc....................................
Legg Mason Wood Walker, Incorporated........................
Lehman Brothers Inc.........................................
PaineWebber Incorporated....................................
Stephens Inc................................................
----------
Total............................................. 17,000,000
==========
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions therein set forth, to purchase all Common Shares offered
hereby if any of such shares are purchased.
The Company has been advised by the Representatives that the Underwriters
propose initially to offer the Common Shares to the public at the public
offering price set forth on the cover page of this Prospectus, and to certain
dealers, who may include the Underwriters, at such public offering price less a
selling concession not in excess of $ per share. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $
per share to certain other brokers or dealers. After the Offering, the public
offering price and the concession to certain dealers and the reallowances may be
changed by the Representatives. The Representatives have informed the Company
that the Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.
The offering of the Common Shares is made for delivery when, as, and if
accepted by the Underwriters and subject to prior sale and to withdrawal,
cancellation, or modification of the offer without notice. The Underwriters
reserve the right to reject any order for the purchase of the shares.
The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of the effectiveness of the Offering, to
purchase up to 2,550,000 Common Shares to cover over-allotments, if any. To the
extent the Underwriters exercise this option, each of the Underwriters will have
a firm commitment to purchase approximately the same percentage thereof that the
number of Common Shares to be purchased by it shown in the table above bears to
the total number of shares in such table, and the Company will be obligated,
pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of the Common Shares offered hereby. If purchased, the
Underwriters will sell these additional shares on the same terms as those on
which the shares are being offered.
The Company will pay an advisory fee equal to 0.50% of the gross proceeds
of the Offering (including any exercise of the Underwriters' over-allotment
option) to J.C. Bradford & Co. for advisory services in connection with the
evaluation, analysis and structuring of the Company's formation and the
Offering.
Subject to applicable limitations, the Underwriters, in connection with the
Offering, may place bids for or make purchases of the Common Shares in the open
market or otherwise, for long or short account, or cover short positions
incurred, to stabilize, maintain, or otherwise affect the price of the Common
Shares, which might be higher than the price that otherwise might prevail in the
open market. There can be no assurance that the price of the Common Shares will
be stabilized, or that stabilizing, if commenced, will not be discontinued at
any time. Subject to applicable limitations, the Underwriters may also place
bids or make purchases on behalf of the underwriting syndicate to reduce a short
position created in connection with the Offering.
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The Underwriting Agreement provides that the Company will indemnify the
Underwriters and their controlling persons, if any, against certain liabilities,
including liabilities under the Securities Act, or will contribute to payments
that the Underwriters or any such controlling persons may be required to make in
respect thereto.
The Company has agreed with the Representatives for a period of 180 days
after the consummation of the Offering, subject to certain exceptions, not to
offer to sell, contract to sell, or otherwise sell, dispose of, or grant any
rights with respect to any Common Shares, any options or warrants to purchase
any Common Shares, or any securities convertible into or exchangeable for Common
Shares other than the Company's sales of shares in the Offering and the
Company's issuance of options and shares under the Share Incentive Plan, without
the prior written consent of J.C. Bradford & Co. In addition, certain affiliates
of the Company have agreed that, for a period of 24 months following the
completion of the Offering, they and their affiliates will not, without prior
written consent of J.C. Bradford & Co., subject to certain exceptions, issue,
sell, contract to sell, or otherwise dispose of, any Common Shares, any options
or warrants to purchase any Common Shares or any securities convertible into,
exercisable for or exchangeable for Common Shares. J.C. Bradford & Co. may, in
its sole discretion and at any time without notice, release all or any portion
of the securities subject to lock-up agreements.
The Common Shares have been approved for listing on the NYSE, subject to
official notice of issuance. Prior to the Offering, however, there has been no
public market for the Common Shares. The initial public offering price will be
determined through negotiations among the Company and the Representatives. Among
the factors to be considered in such negotiations will be the prevailing market
conditions, the expected results of operations of the Company, evaluation of the
Initial Facilities and the Option Facilities, estimates of the business
potential and earnings prospects of the Company, the current state of the
Company's industry and the economy as a whole. The evaluation of the Initial
Facilities and the Option Facilities will be based on an evaluation of CCA's
operation of the Facilities as a whole rather than the valuation of individual
properties. The initial public offering price to be set forth on the cover page
of this Prospectus should not, however, be considered an indication of the
actual value of the Common Shares. Such price is subject to change as a result
of market conditions and other factors.
EXPERTS
The audited financial statements of CCA for each of the three years in the
period ended December 31, 1996 and the audited balance sheet of the Company as
of April 23, 1997, which are included in this Prospectus, have been included in
reliance on the reports of Arthur Andersen LLP, independent public accountants,
given on the authority of that firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the Common Shares offered hereby will be passed upon for
the Company by Stokes & Bartholomew, P.A., Nashville, Tennessee, and certain
legal matters will be passed upon for the Underwriters by Bass, Berry & Sims
PLC, Nashville, Tennessee. Stokes & Bartholomew, P.A. and Bass, Berry & Sims PLC
will rely as to all matters of Maryland law on the opinion of Miles &
Stockbridge, a Professional Corporation, Baltimore, Maryland. Certain matters
relating to the purchase and leasing of the Facilities will be passed upon for
the Company by Sherrard & Roe, PLC, Nashville, Tennessee. In addition, the
description of federal income tax consequences contained in this Prospectus
entitled "Material Federal Income Tax Considerations" is based upon the opinions
of Stokes & Bartholomew, P.A., and Sherrard & Roe, PLC. In addition to providing
services to the Company, Stokes & Bartholomew, P.A. also provides legal services
to CCA, including in connection with certain of the Formation Transactions.
Samuel W. Bartholomew, Jr., a shareholder of Stokes & Bartholomew, P.A., is a
director of CCA.
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GLOSSARY
Unless the context otherwise requires, the following capitalized terms
shall have the meanings set forth below for the purposes of this Prospectus:
"ADA" means the Americans with Disabilities Act of 1990, as amended.
"Audit Committee" means the committee to be established by the Board
of Trustees to make recommendations concerning the Company's accounting
practices, including the engagement and review of independent public
accountants.
"Bank Credit Facility" means the line of credit for which the Company
anticipates that it will obtain, which will be utilized primarily to fund
the acquisition or expansion of additional correctional facilities.
"Base Rent" means the fixed base rent payable under the Leases.
"Base Rent Escalation" means, for any year, the increase in minimum
rent equal to a percentage of the rent applicable to a particular property
for the preceding year which percentage is the greater of (i) 4% or (ii)
the percentage which is 25% of the percentage increase in the gross
management revenues realized by CCA from such leased property exclusive of
any increase attributable to expansion in the size of or number of beds in
such property.
"Beneficiary" means one or more charitable organizations that are
designated by the Company as the beneficiary of a Share Trust.
"Board of Trustees" means the Board of Trustees of the Company.
"BOP" means the Federal Bureau of Prisons.
"Built-in Gain" means the difference between the fair market value and
the adjusted basis of a Built-In Gain Asset.
"Built-in Gain Asset" means an asset acquired by the Company in
certain transactions from a corporation which is or has been a C
Corporation.
"Business Combinations" means any business combination as defined in
the Declaration of Trust.
"Bylaws" means the bylaws of the Company, as amended.
"CCA" means Corrections Corporation of America, a Tennessee
corporation.
"Cash Available for Distribution" means net income (loss) computed in
accordance with generally accepted accounting principles of the Company
plus depreciation and amortization minus capital expenditures and principal
payments on indebtedness.
"Capital Addition" means construction or other capital improvements to
a particular property which is leased between the Company as landlord and
CCA as tenant.
"Change of Control" with respect to the Company means the acquisition
of 20% or more of the combined voting power of the Company by a person or
group.
"Change of Control" with respect to CCA means, for purposes of the
Leases, any of the following transactions (individually, a "Transaction"):
(i) the issuance and/or sale by CCA or the sale by any shareholder of CCA
of a controlling interest in CCA to a person or entity other than an
affiliate of CCA, other than in either case a distribution to the public
pursuant to an effective registration statement under the Securities Act of
1933, as amended (a "Registered Offering"); (ii) the sale, conveyance or
other transfer of all or substantially all of the assets of CCA (whether by
operation of law or otherwise); (iii) any other transaction, or series of
transactions, which results in the affiliates of CCA no longer having
control of CCA (other than through a Registered Offering); or (iv) any
transaction pursuant to which CCA is merged with or consolidated into
another entity (other than an entity owned and controlled by an affiliate
of CCA), and CCA is not the surviving entity.
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"Code" means Internal Revenue Code of 1986, as amended.
"Compensation Committee" means the committee to be established by the
Board of Trustees to determine compensation for the Company's executive
officers.
"Commission" means the Securities and Exchange Commission.
"Common Shares" means the Common Shares, par value $0.01 per share, of
the Company.
"Company" means CCA Prison Realty Trust, a Maryland real estate
investment trust.
"Company Mortgagee" means any holder of a mortgage, deed of trust or
other security agreement on a Leased Property.
"Coverage Ratio" means the ratio of CCA's net operating income to
CCA's lease payment.
"Declaration of Trust" means the Amended and Restated Declaration of
Trust of the Company.
"Disqualified Persons" means those persons who have specified
relationships with Plans.
"Environmental Law" means any federal, state or local law, ordinance,
regulation, order or decree relating to the protection of human health or
the environment.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Event of Default" means an event which constitutes a default under
the Leases between the Company as landlord and CCA as tenant.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Extended Terms" means the options to extend the term of each Lease at
fair market rates for three five-year periods upon the mutual agreement of
the parties.
"Facility" or "Facilities" means the Initial Facilities and the Option
Facilities, including the land, buildings and other improvements, that are
the subject of leases between the Company as landlord and CCA as tenant.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of
1980, as amended.
"Fixed Term" means the primary term of each Lease which shall be for a
term ranging form 10 to 12 years.
"Formation Transaction" means the series of transactions described in
"The Formation Transactions" in this Prospectus.
"Funds from Operations" means in accordance with the resolution
adopted by the Board of Governors of NAREIT, net income (loss) (computed in
accordance with GAAP), excluding significant non-recurring items, gains (or
losses) from debt restructuring and sales of property, plus depreciation
and amortization on real estate assets, and after adjustments for
unconsolidated partnerships and joint ventures.
"Future Facility" means any correctional or detention facility
acquired or developed by the Company in the future.
"Independent Committee" means the independent committee of the Board
of Trustees, consisting of the seven Independent Trustees.
"Independent Trustees" means the trustees who are not employed by the
Company and who are unaffiliated with CCA.
"Initial Facilities" means the nine correctional and detention
facilities which the Company will purchase from CCA pursuant to the
Purchase Agreement.
"IRAs" means individual retirement accounts and individual retirement
annuities.
94
<PAGE> 100
"Leases" or "Lease" means the leases between the Company as landlord
and CCA as tenant with respect to the Initial Facilities.
"Leased Property" means the Company's rights and interest in and to
each Facility, including land, buildings and improvements, related
easements and rights, and fixtures and certain personal property located at
each Facility.
"Look through rule" means the ERISA rule providing that in certain
circumstances where a Plan holds an interest in an entity, the assets of
the entity are deemed to be the Plan's assets.
"Market Price" means the last reported sales price of the Common
Shares or Preferred Shares reported on the New York Stock Exchange on the
trading day immediately preceding the relevant date, or if such stock is
not then traded on the New York Stock Exchange, the last reported sales
price of such stock on the trading day immediately preceding the relevant
date as reported on any exchange or quotation system over which such stock
may be traded, or if such stock is not then traded over any exchange or
quotation system, then the market price of such stock on the relevant date
as determined in good faith by the Board of Trustees.
"Master Lease" means the lease agreement between the Company as
landlord and CCA as tenant.
"MGCL" means the Maryland General Corporation Law.
"NAREIT" means the National Association of Real Estate Investment
Trusts.
"Noncompetition Agreement" means the noncompetition agreement between
CCA and the Company.
"Non-Employee Trustees' Plan" means the Company's Non-Employee
Trustees' Share Option Plan.
"Non-U.S. Shareholders" means nonresident alien individuals, foreign
corporations, foreign partnerships and other foreign shareholders.
"NYSE" means the New York Stock Exchange.
"Offering" means the offering of Common Shares of the Company,
pursuant to this Prospectus.
"Offering Price" means the initial public offering price of the Common
Shares, estimated to be $20.00 per share.
"Option Agreements" means the agreements between CCA and the Company
pursuant to which the Company will have an option (for a period of three
years from the closing of the purchase of the Initial Facilities) to
purchase any or all of the five Option Facilities.
"Option Facilities" means the five correctional and detention
facilities which the Company has the option to purchase pursuant to the
Option Agreements.
"Ownership Limit" means the direct or constructive ownership by any
shareholder or group of affiliated shareholders of more than 9.8% of the
outstanding Common Shares or more than 9.8% of the outstanding Preferred
Shares.
"Ownership Limit Provision" means the provision of the Declaration of
Trust that prohibits the direct or constructive ownership by any
shareholder or group of affiliated shareholders of more than 9.8% of the
outstanding Common Shares or more than 9.8% of the Preferred Shares.
"Preferred Shares" means preferred shares, par value $0.01 per share,
of the Company.
"Prohibited Owner" means who would be record owner of Common Shares or
Preferred Shares but for the ownership limitations set forth in the
Declaration of Trust.
"Purchase Agreement" means the agreement between CCA and the Company
pursuant to which CCA will sell the nine Initial Facilities to the Company.
95
<PAGE> 101
"Recognition Period" means the recognition period pertaining to
Built-in Gain as defined pursuant to Treasury Regulations to be issued
under Section 337(d) of the Code.
"REIT" means real estate investment trust as defined in Section 856 of
the Code.
"Related Party Tenant" means a tenant of a REIT in which the REIT, or
an owner of 10% or more of the REIT, directly or constructively owns a 10%
or greater ownership interest.
"Rent" means rents paid by CCA pursuant to the Leases.
"Right to Purchase Agreement" means the agreement between CCA and the
Company whereby the Company has an option to acquire certain future
facilities of CCA and whereby the Company will have a right of first
refusal in the event CCA obtains an acceptable offer to acquire or provide
first mortgage financing for any correctional or detention facility.
"Rule 144" means Rule 144 promulgated under the Securities Act.
"Securities Act" means the Securities Act of 1933, as amended.
"Service" means the Internal Revenue Service.
"Service Commencement Date" means the date CCA first receives inmates
at a facility.
"Share Incentive Plan" means the Company's 1997 Employee Share
Incentive Plan.
"Share Trust" means any separate trust created pursuant to the
Declaration of Trust to hold Shares-in-Trust for the benefit of the
Beneficiary.
"Share Trustee" means any person or entity unaffiliated with both the
Company and any Prohibited Owner which is designated by the Company to
serve as trustee of the Share Trust.
"Shares-in-Trust" means Common Shares or Preferred Shares designated
as Shares-in-Trust pursuant to the Declaration of Trust, which is held in
trust by the Share Trustee for the benefit of the Beneficiary.
"Treasury Regulations" means existing, temporary and currently
proposed Treasury regulations that have been promulgated under the Code.
"UBTI" means "unrelated business taxable income" as defined in Section
512(a) of the Code.
"White Paper" means the White Paper on Funds from Operations approved
by the Board of Governors or NAREIT in March 1995.
96
<PAGE> 102
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CCA PRISON REALTY TRUST
FINANCIAL STATEMENTS
Report of Independent Public Accountants............... F-2
Balance Sheet as of April 23, 1997..................... F-3
Notes to Balance Sheet................................. F-4
CCA PRISON REALTY TRUST
PRO FORMA FINANCIAL STATEMENTS
Pro Forma Statements of Operations for the year ended
December 31, 1996 and the three months ended March 31,
1997.................................................. 35
Pro Forma Balance Sheet as of March 31, 1997........... 37
CORRECTIONS CORPORATION OF AMERICA
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Pro Forma Consolidated Balance Sheet as of March 31,
1997.................................................. F-6
Notes to Pro Forma Consolidated Balance Sheet as of
March 31, 1997........................................ F-7
Pro Forma Consolidated Statement of Operations for the
year ended December 31, 1996.......................... F-8
Pro Forma Consolidated Statement of Operations for the
three months ended March 31, 1997..................... F-9
CORRECTIONS CORPORATION OF AMERICA
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants............... F-10
Consolidated Balance Sheets as of December 31, 1996 and
1995.................................................. F-11
Consolidated Statements of Operations for the years
ended December 31, 1996, 1995 and 1994................ F-12
Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1995 and 1994................ F-13
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1995 and 1994.......... F-15
Notes to the Consolidated Financial Statements......... F-16
CORRECTIONS CORPORATION OF AMERICA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheet as of March 31,
1997.................................................. F-30
Condensed Consolidated Statements of Operations for the
three months ended March 31, 1997 and 1996............ F-31
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1997 and 1996............ F-32
Notes to Condensed Consolidated Financial Statements... F-34
</TABLE>
F-1
<PAGE> 103
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CCA Prison Realty Trust:
We have audited the accompanying balance sheet of CCA Prison Realty Trust
(a Maryland real estate investment trust) as of April 23, 1997. This financial
statement is the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. 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 audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of CCA Prison Realty Trust as of April
23, 1997, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
--------------------------------------
ARTHUR ANDERSEN LLP
Nashville, Tennessee
April 23, 1997
F-2
<PAGE> 104
CCA PRISON REALTY TRUST
(A MARYLAND REAL ESTATE INVESTMENT TRUST)
BALANCE SHEET
APRIL 23, 1997
<TABLE>
<S> <C>
ASSETS
Cash and cash equivalents................................... $1,000
======
LIABILITIES AND SHAREHOLDERS' EQUITY
Shareholders' equity:
Preferred shares, $.01 par value; 10,000,000 shares
authorized;
none outstanding....................................... $ --
Common shares, $.01 par value; 90,000,000 shares
authorized;
1,000 shares issued and outstanding.................... 1,000
------
$1,000
======
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-3
<PAGE> 105
CCA PRISON REALTY TRUST
(A MARYLAND REAL ESTATE INVESTMENT TRUST)
NOTES TO BALANCE SHEET
APRIL 23, 1997
1. ORGANIZATION
CCA Prison Realty Trust (the "Company") was formed April 23, 1997 as a
Maryland real estate investment trust. The Company has had no operations to date
but has issued 1,000 Common Shares to a founding shareholder.
2. FEDERAL INCOME TAXES
At the earliest possible date, the Company plans to qualify as a real
estate investment trust ("REIT") under the Internal Revenue Code and,
accordingly, will not be subject to federal income taxes on amounts distributed
to shareholders provided that it distributes at least 95% of its real estate
investment trust taxable income and meets certain other requirements.
3. PREFERRED SHARES
No preferred shares are outstanding. Preferred shares may be issued from
time to time without shareholder approval with terms and conditions established
by the Board of Trustees of the Company.
4. INTENTIONS OF THE COMPANY (UNAUDITED)
The Company has announced its intention to sell 17,000,000 Common Shares in
an initial public offering. Immediately after the closing of the Offering, the
Company intends to consummate the following transactions with Corrections
Corporation of America ("CCA"): (a) purchase of nine correctional and detention
facilities for $308.1 million and enter into triple net leases with CCA for
original fixed terms of 10 to 12 years with renewal terms upon the mutual
agreement of both parties for three additional five-year terms, (b) option
agreements to purchase an additional five correctional and detention facilities
at a total estimated purchase price of $193.0 million with similar leaseback
terms, (c) trade name and noncompetition agreements between the Company and CCA,
and (d) an agreement that provides the Company a right to purchase other
facilities from CCA.
The Company will be dependent on CCA for its initial revenues. Also, due to
the nature of the business and the contractual relationships with CCA, including
the operating leases, the Company's ability to be successful is dependent on a
number of factors, including key personnel, continuing qualification as a REIT
and continued availability of financial resources.
F-4
<PAGE> 106
CORRECTIONS CORPORATION OF AMERICA
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following pro forma consolidated financial statements represent the
unaudited pro forma financial results for CCA as of March 31, 1997 and for the
three months ended March 31, 1997 and the year ended December 31, 1996. The Pro
Forma Consolidated Statements of Operations are presented as if the Formation
Transactions had occurred as of the beginning of the period indicated and
incorporate certain assumptions that are included in the Notes to Pro Forma
Consolidated Statements of Operations. The Pro Forma Consolidated Balance Sheet
is presented as if the Formation Transactions had occurred on March 31, 1997.
The pro forma information does not purport to represent what CCA's financial
position or results of operations actually would have been had the Formation
Transactions, in fact, occurred on such date or at the beginning of the period
indicated, or to project CCA's financial position or results of operations at
any future date or any future period.
F-5
<PAGE> 107
CORRECTIONS CORPORATION OF AMERICA
PRO FORMA CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
----------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA
-------- -------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Cash, cash equivalents and restricted cash............. $ 7,101 $ 298,953(a) $174,701
(131,940)(c)
587(d)
Accounts receivable, net of allowances................. 69,743 69,743
Other.................................................. 6,604 6,604
-------- --------
Total current assets......................... 83,448 251,048
-------- --------
Property and equipment................................. 382,492 (173,557)(a) 208,935
Accumulated depreciation............................... (25,767) 12,742(a) (13,025)
-------- --------
Property and equipment, net.................. 356,725 195,910
-------- --------
Restricted investments................................. 587 (587)(d) --
Notes receivable....................................... 22,748 22,748
Other assets........................................... 34,787 3,728(b)(c) 37,865
(650)(a)
Investment in direct financing leases.................. 68,622 68,622
-------- --------- --------
Total assets................................. $566,917 $ 9,276 $576,193
======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt...................... $ 7,249 $ (7,249)(c) $ --
Accounts payable....................................... 42,214 42,214
Other accrued expenses................................. 25,763 8,540(b) 34,303
-------- --------
Total current liabilities.................... 75,226 76,517
-------- --------
Long-term debt:
Revolving line of credit............................. 79,568 (79,568)(c) --
Notes payable, less current portion.................. 45,123 (45,123)(c) --
Convertible subordinated notes....................... 64,500 64,500
-------- --------
Total long-term debt......................... 189,191 64,500
-------- --------
Deferred tax liabilities............................... 4,812 (4,812)(b) --
Deferred gain on sale of Facilities.................... -- 137,488(a) 137,488
Other noncurrent liabilities........................... 742 742
Total stockholders' equity............................. 296,946 296,946
-------- --------- --------
Total liabilities and stockholders' equity... $566,917 $ 9,276 $576,193
======== ========= ========
</TABLE>
F-6
<PAGE> 108
CORRECTIONS CORPORATION OF AMERICA
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
The Company's anticipated transactions, reflected on a pro forma basis, as
if the transactions had occurred on March 31, 1997, are as follows:
(a) To record the sale of the nine Initial Facilities to CCA Prison
Realty Trust for $308.1 million. The Facilities' net book value of $162.5
million and other costs of the sale result in a total deferred gain of
$137.5 million which will be amortized over the lives of the leases entered
into coincident with the sale. Prepayment obligations, the reduction in
unamortized loan costs incurred as a result of the retirement of certain
debt obligations and certain other costs of the sale reduced the deferred
gain on the sale.
(b) To record current liabilities and deferred tax assets for the
future recognition of the gain and related taxes over the lives of the
Initial Facility leases. An effective tax rate of 39% is assumed on the
deferred gain.
(c) To record the retirement of debt and reduction of unamortized debt
costs as a result of the sale of the nine Initial Facilities.
(d) Cash no longer restricted due to the early repayment of related
debt is reclassified to current assets.
(e) CCA plans to account for the Leases of the nine Initial Facilities
as operating leases.
F-7
<PAGE> 109
CORRECTIONS CORPORATION OF AMERICA
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA
-------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:.................................................. $292,513 $ -- $292,513
Costs and expenses:
Operating................................................ 213,173 14,302(a) 227,475
General and administrative............................... 13,428 (86)(d) 13,342
Depreciation and amortization............................ 11,339 (2,331)(b) 9,008
-------- ------- --------
237,940 11,885 249,825
Operating income........................................... 54,573 (11,885) 42,688
Interest expense, net.................................... 4,224 (3,772)(c) 452
-------- ------- --------
Income before income taxes................................. 50,349 (8,113) 42,236
Provision for income taxes............................... 19,469 (5,920)(e) 13,549
-------- ------- --------
Net income................................................. 30,880 (2,193) 28,687
Preferred stock dividends................................ -- -- --
-------- ------- --------
Net income allocable to common stockholders................ $ 30,880 $(2,193) $ 28,687
======== ======= ========
Net income per common share:
Primary.................................................. $ 0.38 $ (0.03) $ 0.35
Fully-diluted............................................ $ 0.36 $ (0.02) $ 0.34
Weighted average common shares outstanding................. 81,664 81,664 81,664
</TABLE>
The Company's anticipated transactions, reflected on a pro forma basis, as
if the transactions had occurred on January 1, 1996, are as follows:
(a) To record rent expense, net of the amortized gain on the sale of
the Initial Facilities. Actual results of operations as reported do not
include a full year of earnings for certain Initial Facilities with
increased capacity becoming operational during 1996 and one facility
opening during 1997; accordingly, the lease payments and deferred gain
amortization have been reduced by $11.0 million and $4.3 million,
respectively. The additional expenses also reflect an amount expected to be
expended by CCA each year to maintain the facilities according to the lease
requirements.
(b) To reduce depreciation expense on facilities sold.
(c) To reduce interest expense on debt no longer outstanding as a
result of the sale of facilities.
(d) To record a reduction in state franchise taxes based upon the sale
of the facilities.
(e) To adjust income tax expense to the expected effective tax rate.
(f) The pro forma income statement has not provided for interest
income on the cash balances expected as a result of the sale of the
facilities. Assuming a return on investment of 5%, average cash balances on
hand after the sale, payment of related taxes, payment of monthly lease
payments, and debt retirement would yield interest income of $7,166 for the
year ended December 31, 1996.
(g) CCA plans to account for the Leases of the nine Initial Facilities
as operating leases.
F-8
<PAGE> 110
CORRECTIONS CORPORATION OF AMERICA
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1997
-----------------------------------
ACTUAL ADJUSTMENTS PRO FORMA
------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:................................................... $91,838 $ -- $91,838
Costs and expenses:
Operating................................................. 63,919 4,413(a) 68,332
General and administrative................................ 3,595 (22)(d) 3,573
Depreciation and amortization............................. 3,923 (1,071)(b) 2,852
------- ------- -------
71,437 3,320 74,757
Operating income............................................ 20,401 (3,320) 17,081
------- ------- -------
Interest expense (income), net............................ 498 (1,182)(c) (684)
------- ------- -------
Income before income taxes.................................. 19,903 (2,138) 17,765
Income tax provision...................................... 7,908 (1,748)(e) 6,160
------- ------- -------
Net income.................................................. 11,995 (390) 11,605
Preferred stock dividends................................. -- -- --
------- ------- -------
Net income allocable to common stockholders................. $11,995 $ (390) $11,605
======= ======= =======
Net income per common share:
Primary................................................... $ 0.14 $ -- $ 0.14
Fully-diluted............................................. $ 0.14 $ -- $ 0.14
Weighted average common shares outstanding.................. 83,942 83,942 83,942
</TABLE>
The Company's anticipated transactions, reflected on a pro forma basis, as
if the transactions had occurred on January 1, 1996, are as follows:
(a) To record rent expense, net of the amortized gain on the sale of
the Initial Facilities. Actual results of operations as reported do not
include a full quarter of earnings for certain Initial Facilities with
increased capacity becoming operational during first quarter 1997;
accordingly, the lease payments and deferred gain amortization have been
reduced by $1.3 million and $0.4 million, respectively. The additional
expenses also reflect an amount expected to be expended by CCA each year to
maintain the facilities according to the lease requirements.
(b) To reduce depreciation expense on facilities sold.
(c) To reduce interest expense on debt no longer outstanding as a
result of the sale of facilities.
(d) To record a reduction in state franchise taxes based upon the sale
of the facilities.
(e) To adjust income tax expense to the expected effective tax rate.
(f) The pro forma income statement has not provided for interest
income on the cash balances expected as a result of the sale of the
facilities. Assuming a return on investment of 5%, average cash balances on
hand after the sale, payment of related taxes, payment of monthly lease
payments, and debt retirement would yield interest income of $1,257 for the
three months ended March 31, 1997.
(g) CCA plans to account for the Leases of the nine Initial Facilities
as operating leases.
F-9
<PAGE> 111
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Corrections Corporation of America and Subsidiaries:
We have audited the accompanying consolidated balance sheets of CORRECTIONS
CORPORATION OF AMERICA AND SUBSIDIARIES as of December 31, 1996 and 1995, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Corrections Corporation of
America and Subsidiaries as of December 31, 1996 and 1995, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
February 18, 1997
F-10
<PAGE> 112
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash, cash equivalents and restricted cash................ $ 8,282 $ 2,714
Accounts receivable, net of allowances.................... 100,551 39,661
Prepaid expenses.......................................... 2,940 1,569
Deferred tax assets....................................... 1,026 1,646
Other..................................................... 1,643 1,020
-------- --------
Total current assets.............................. 114,442 46,610
-------- --------
RESTRICTED INVESTMENTS...................................... 587 443
OTHER ASSETS................................................ 29,405 18,752
PROPERTY AND EQUIPMENT, NET................................. 288,697 137,019
NOTES RECEIVABLE............................................ 22,859 890
INVESTMENT IN DIRECT FINANCING LEASES....................... 12,898 9,764
-------- --------
$468,888 $213,478
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 39,224 $ 10,757
Accrued salaries and wages................................ 5,487 3,480
Accrued property taxes.................................... 1,675 1,623
Other accrued expenses.................................... 9,227 8,637
Current portion of long-term debt......................... 8,281 11,020
-------- --------
Total current liabilities......................... 63,894 35,517
-------- --------
LONG-TERM DEBT, NET OF CURRENT PORTION...................... 117,535 74,865
DEFERRED TAX LIABILITIES.................................... 4,717 4,164
OTHER NONCURRENT LIABILITIES................................ 990 2,228
-------- --------
Total liabilities................................. 187,136 116,774
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock -- $1 (one dollar) par value; 150,000 shares
authorized............................................. 75,029 64,540
Additional paid-in capital................................ 165,317 16,560
Retained earnings......................................... 42,132 15,641
Treasury stock, at cost................................... (726) (37)
-------- --------
Total stockholders' equity........................ 281,752 96,704
-------- --------
$468,888 $213,478
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-11
<PAGE> 113
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUES................................................... $292,513 $207,241 $152,375
EXPENSES:
Operating................................................ 213,173 158,814 123,540
General and administrative............................... 13,428 14,288 9,413
Depreciation and amortization............................ 11,339 6,524 5,753
-------- -------- --------
OPERATING INCOME........................................... 54,573 27,615 13,669
INTEREST EXPENSE, NET...................................... 4,224 3,952 3,439
-------- -------- --------
INCOME BEFORE INCOME TAXES................................. 50,349 23,663 10,230
PROVISION FOR INCOME TAXES................................. 19,469 9,330 2,312
-------- -------- --------
NET INCOME................................................. 30,880 14,333 7,918
PREFERRED STOCK DIVIDENDS.................................. -- -- 204
-------- -------- --------
NET INCOME ALLOCABLE TO COMMON STOCKHOLDERS................ $ 30,880 $ 14,333 $ 7,714
======== ======== ========
NET INCOME PER COMMON SHARE:
Primary.................................................. $ .38 $ .19 $ .12
======== ======== ========
Fully diluted............................................ $ .36 $ .18 $ .12
======== ======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING................. 81,664 75,110 61,908
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-12
<PAGE> 114
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 30,880 $ 14,333 $ 7,918
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................ 11,339 6,524 5,753
Deferred and other noncash income taxes.............. 13,117 6,162 878
Other noncash items....................................... 524 -- --
(Gain) loss on disposal of assets......................... (3,501) (1,284) 11
Equity in earnings of unconsolidated entities........ (1,098) (619) (422)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable.................................. (55,993) (12,750) (7,901)
Prepaid expenses..................................... (1,371) (18) (70)
Other current assets................................. (623) (87) (259)
Accounts payable..................................... 28,467 1,991 4,537
Accrued expenses..................................... 2,649 3,514 1,192
--------- -------- --------
Net cash provided by operating activities......... 24,390 17,766 11,637
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment....................... (165,703) (25,926) (24,891)
Acquisition of UCLP....................................... -- (5,250) --
Increase in restricted cash and investments............ (3,025) (619) (7)
Increase in other assets............................... (11,163) (8,500) (1,836)
Investment in affiliates, net.......................... (3,138) (3,717) (426)
Proceeds from disposals of assets......................... 6,747 3,763 25
Purchase of notes receivable.............................. (22,500) -- (900)
Increase in direct financing leases.................... (3,693) -- --
Payments received on direct financing leases and notes
receivable........................................... 553 328 286
--------- -------- --------
Net cash used in investing activities............. (201,922) (39,921) (27,749)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt.................. 74,700 7,111 15,974
Payments on long-term debt................................ (24,443) (8,648) (14,159)
Payments on notes payable to stockholders.............. -- -- (403)
(Payments on) proceeds from line of credit, net........ (10,500) 13,715 270
Payment of debt issuance costs............................ (433) (260) --
Payments of dividends.................................. -- -- (291)
Proceeds from issuance of common stock.................... 131,006 7,859 10,571
Proceeds from exercise of stock options and warrants...... 9,889 868 1,137
Purchase of treasury stock and warrants................ -- (630) --
--------- -------- --------
Net cash provided by financing activities.............. 180,219 20,015 13,099
--------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 2,687 (2,140) (3,013)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 2,145 4,285 7,298
--------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 4,832 $ 2,145 $ 4,285
========= ======== ========
</TABLE>
F-13
<PAGE> 115
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amounts capitalized)................ $ 8,979 $ 5,145 $ 4,854
========= ======== ========
Income taxes......................................... $ 6,630 $ 3,060 $ 1,572
========= ======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
The company entered into an international alliance and
equity participation which included the deferral of the
payment of certain issuance costs:
Other assets........................................... $ -- $ -- $ (3,488)
Other accrued expenses................................. -- -- 990
--------- -------- --------
Other noncurrent liabilities........................... -- -- 2,970
--------- -------- --------
Additional paid-in capital............................. -- -- (472)
--------- -------- --------
$ -- $ -- $ --
========= ======== ========
Long-term debt was converted into common stock through the
exercise of stock warrants:
Other assets........................................... $ -- $ 27 $ 9
Long-term debt......................................... -- (1,428) (357)
Common stock........................................... -- 400 100
Additional paid-in capital............................. -- 1,001 248
--------- -------- --------
$ -- $ -- $ --
========= ======== ========
Redeemable convertible preferred stock was converted into
common stock:
Other assets........................................... $ -- $ -- $ 290
Preferred stock........................................ -- -- (5,000)
Common stock........................................... -- -- 1,400
Additional paid-in capital............................. -- -- 3,310
--------- -------- --------
$ -- $ -- $ --
========= ======== ========
Long-term debt was converted into common stock:
Other assets........................................... $ -- $ 53 $ 26
Long-term debt......................................... -- (6,700) (3,000)
Common stock........................................... -- 887 419
Additional paid-in capital............................. -- 5,760 2,555
--------- -------- --------
$ -- $ -- $ --
========= ======== ========
The company acquired property and equipment by assuming
long-term debt:
Property and equipment................................. $ -- $(27,392) $ --
Long-term debt......................................... -- 27,392 --
--------- -------- --------
$ -- $ -- $ --
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-14
<PAGE> 116
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------------------
ISSUED TREASURY
---------------- ----------------
SHARES AMOUNT SHARES AMOUNT
------ ------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993.................................. 48,600 $48,600 (148) $ (340)
------ ------- ------ -------
Issuance of common stock.................................... 3,712 3,712 -- --
Stock options exercised and warrants converted to stock..... 3,432 3,432 70 33
Income tax benefits of incentive stock option exercises..... -- -- -- --
Conversion of long-term debt and preferred stock............ 3,636 3,636 -- --
Preferred stock dividends................................... -- -- -- --
Net income.................................................. -- -- -- --
------ ------- ------ -------
BALANCE, DECEMBER 31, 1994.................................. 59,380 59,380 (78) (307)
------ ------- ------ -------
Issuance of common stock.................................... 1,158 1,158 -- --
Stock options exercised and warrants repurchased or
converted to stock........................................ 2,228 2,228 74 270
Income tax benefits of incentive stock option exercises..... -- -- -- --
Conversion of long-term debt................................ 1,774 1,774 -- --
Net income.................................................. -- -- -- --
------ ------- ------ -------
BALANCE, DECEMBER 31, 1995.................................. 64,540 64,540 (4) (37)
------ ------- ------ -------
Issuance of common stock.................................... 3,700 3,700 -- --
Stock options exercised and warrants converted to stock..... 6,789 6,789 (19) (689)
Income tax benefits of incentive stock option exercises..... -- -- -- --
Compensation expense related to deferred stock awards....... -- -- -- --
Net income.................................................. -- -- -- --
------ ------- ------ -------
BALANCE, DECEMBER 31, 1996.................................. 75,029 $75,029 (23) $ (726)
====== ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL RETAINED TOTAL
PAID-IN EARNINGS STOCKHOLDERS'
CAPITAL (DEFICIT) EQUITY
---------- --------- -------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1993.................................. $(10,780) $(3,298) $ 34,182
-------- ------- --------
Issuance of common stock.................................... 6,387 -- 10,099
Stock options exercised and warrants converted to stock..... (1,430) (550) 1,485
Income tax benefits of incentive stock option exercises..... 593 -- 593
Conversion of long-term debt and preferred stock............ 4,048 -- 7,684
Preferred stock dividends................................... -- (204) (204)
Net income.................................................. -- 7,918 7,918
-------- ------- --------
BALANCE, DECEMBER 31, 1994.................................. (1,182) 3,866 61,757
-------- ------- --------
Issuance of common stock.................................... 7,184 -- 8,342
Stock options exercised and warrants repurchased or
converted to stock........................................ 1,699 (2,558) 1,639
Income tax benefits of incentive stock option exercises..... 3,987 -- 3,987
Conversion of long-term debt................................ 4,872 -- 6,646
Net income.................................................. -- 14,333 14,333
-------- ------- --------
BALANCE, DECEMBER 31, 1995.................................. 16,560 15,641 96,704
-------- ------- --------
Issuance of common stock.................................... 128,112 -- 131,812
Stock options exercised and warrants converted to stock..... 8,177 (4,389) 9,888
Income tax benefits of incentive stock option exercises..... 11,944 -- 11,944
Compensation expense related to deferred stock awards....... 524 -- 524
Net income.................................................. -- 30,880 30,880
-------- ------- --------
BALANCE, DECEMBER 31, 1996.................................. $165,317 $42,132 $281,752
======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-15
<PAGE> 117
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Corrections Corporation of America (together with its subsidiaries,
referred to as the "company"), a Delaware corporation, operates and manages
prisons and other correctional facilities and provides prisoner transportation
services for governmental agencies. The company provides a full range of related
services to governmental agencies, including managing, financing, designing and
constructing new facilities and redesigning and renovating older facilities. The
consolidated financial statements include the accounts of the company and its
wholly-owned subsidiaries, TransCor America, Inc. ("TransCor"), Concept
Incorporated ("Concept"), Corrections Management Affiliates, Inc. ("CMA"),
Correctional Services Group, Inc. ("CSG") and CCA International, Inc. CCA
International, Inc. has two wholly-owned subsidiaries, CCA France, Inc. and CCA
(UK) Limited. CCA (UK) Limited has a majority owned subsidiary, UK Detention
Services Limited ("UKDS"). Concept has two wholly-owned subsidiaries, Mineral
Wells R.E. Holding Corp. ("Mineral Wells") and United-Concept Inc.
("United-Concept"). Concept, together with Mineral Wells, wholly owns
United-Concept Limited Partnership ("UCLP"). CMA, together with CSG, wholly owns
Corrections Partners, Inc. ("CPI"). The accompanying consolidated financial
statements and note information reflect the accounting for the acquisitions in
1994 and 1995 of TransCor, Concept, CMA and CSG in transactions accounted for
under the pooling-of-interests method of accounting and the acquisitions in 1995
and 1996 of United-Concept, UCLP and UKDS accounted for under the purchase
method of accounting. All material intercompany transactions and balances have
been eliminated.
At December 31, 1996, the company has a 50% interest in Corrections
Corporation of Australia PTY LTD ("CC Australia"). CC Australia provides
services similar to the company in Australia and surrounding countries. The
company accounts for this investment under the equity method. Assets and
liabilities are converted from their functional currency into the U.S. dollar
utilizing the conversion rate in effect at the balance sheet date. Revenue and
expense items are converted using the weighted average rate during the period.
The excess of the company's investment in this unconsolidated subsidiary over
the underlying equity is being amortized over twenty-five years.
Deferred project development costs consist of costs that can be directly
associated with a specific anticipated contract and, if recovery from that
contract is probable, are deferred until the anticipated contract has been
awarded. At the time the contract is awarded to the company, the deferred
project development costs are either capitalized as part of property and
equipment or are transferred to project development costs. Costs of unsuccessful
or abandoned contracts are charged to depreciation and amortization expense when
their recovery is not considered probable. Internal costs incurred in securing
new clients including costs of responding to requests for proposals are expensed
as incurred. Facility start-up costs, principally costs of initial employee
training, travel and other direct expenses incurred in connection with opening
of new facilities, to the extent recoverable under each negotiated contract, are
deferred and recorded as other assets. Project development costs and start-up
costs are amortized on a straight-line basis over the lesser of the initial term
of the contract plus renewals or five years.
Debt issuance costs are amortized on a straight-line basis over the life of
the related debt. This amortization is charged to depreciation and amortization
expense.
Property and equipment is carried at cost. Betterments, renewals and
extraordinary repairs that extend the life of the asset are capitalized; other
repairs and maintenance are expensed. Interest is capitalized to the asset to
which it relates in connection with the construction of major facilities. The
cost and accumulated depreciation applicable to assets retired are removed from
the accounts and the gain or loss on disposition is recognized in income.
Depreciation is computed by the straight-line method for financial reporting
purposes and accelerated methods for tax reporting purposes based upon the
estimated useful lives of the related assets.
F-16
<PAGE> 118
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Investment in direct financing leases represent the portion of the
company's management contract with a governmental agency that represents
payments on building and equipment leases. The leases are accounted for using
the financing method and, accordingly, the minimum lease payments to be received
over the term of the leases less unearned income are capitalized as the
company's investment in the leases. Unearned income is recognized as income over
the term of the leases using the interest method.
Income taxes are accounted for under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
This statement generally requires the company to record deferred income taxes
for the differences between book and tax bases of its assets and liabilities.
The company maintains contracts with various governmental entities to
manage their facilities for fixed per diem rates or monthly fixed rates. The
company also maintains contracts with various federal, state and local
governmental entities for the housing of inmates in company owned facilities at
fixed per diem rates. These contracts usually contain expiration dates with
renewal options ranging from annual to multi-year renewals. Most of these
contracts have current terms that require renewal every two to five years. The
company expects to renew these contracts for periods consistent with the
remaining renewal options allowed by the contracts or other reasonable
extensions. Fixed monthly rate revenue is recorded in the month earned and fixed
per diem revenue is recorded based on the per diem rate multiplied by the number
of inmates housed during the respective period. The company recognizes
development revenue on the percentage-of-completion method.
To meet the reporting requirements of SFAS 107, "Disclosures About Fair
Value of Financial Instruments," the company calculates the fair value of
financial instruments using quoted market prices. At December 31, 1996, there
were no material differences in the book values of the company's financial
instruments and their related fair values, except for the company's convertible
subordinated notes (see Note 8) and the forward contract for convertible
subordinated notes (see Note 13), which based on the conversion rate on the
underlying equity securities, have an estimated fair market value of
approximately $339,000.
For purposes of the statements of cash flows, the company excludes
restricted cash from cash and cash equivalents. The company considers all highly
liquid debt instruments with a maturity of three months or less to be cash
equivalents.
The preparation of financial statements in conformity with generally
accepted accounting principles 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 period. Actual results could differ from those estimates.
In March, 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of." This statement imposes stricter criteria for
long-term assets by requiring that such assets be probable of future recovery at
each balance sheet date. The company adopted SFAS 121 effective January 1, 1996.
The company did not experience a material impact on its results of operations,
financial condition or cash flows as a result of adoption.
SFAS No. 128, "Earnings per Share" has been issued effective for fiscal
years ending after December 15, 1997. SFAS No. 128 establishes standards for
computing and presenting earnings per share. The company is required to adopt
the provisions of SFAS No. 128 in the fourth quarter of 1997 and does not expect
adoption thereof to have a material effect on the company's results of
operations.
F-17
<PAGE> 119
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Certain reclassifications of 1995 and 1994 amounts have been made to
conform with the 1996 presentation.
2. MERGERS AND ACQUISITIONS
On August 18, 1995, the company issued 2,800 shares of its common stock for
all the outstanding shares of CMA and CSG. CMA and CSG operate and manage
prisons and other correctional facilities for governmental agencies.
On April 25, 1995, the company issued 5,450 shares of its common stock for
all the outstanding shares of Concept. Concept operates and manages prisons and
other correctional facilities for governmental agencies. Of the shares issued,
273 are held in escrow for the resolution of precombination contingencies.
On December 30, 1994, the company issued 5,200 shares of its common stock
for all the outstanding shares of TransCor, a prisoner transportation company.
Of the shares issued, 520 are held in escrow for the resolution of certain
precombination contingencies.
The transactions above were accounted for under the pooling-of-interests
method of accounting and the company has previously filed restated financial
statements. In the preparation of the consolidated financial statements, the
company made certain immaterial adjustments and reclassifications to the
historical financial statements of TransCor, Concept, CMA and CSG to be
consistent with the accounting policies of the company.
During the second and fourth quarters of 1996, the company purchased the
remaining two-thirds of UKDS from its original joint venture partners. After
consideration of several strategic alternatives related to UKDS, the company
sold 20% of the entity to Sodexho, S.A. ("Sodexho"), a French conglomerate, and
recognized an after-tax gain of $515. In conjunction with this transaction,
Sodexho was also provided the option to purchase an additional 30% of UKDS. This
option expires June 30, 1997.
As discussed in Note 7, the company exercised its option to acquire the
remaining 50% of its investment in UCLP during 1995. The acquisition was
accounted for under the purchase method of accounting. The purchase price was
allocated to assets acquired and liabilities assumed based on the estimated fair
market value at the date of the acquisition. The operations of UCLP on a
consolidated basis prior to the acquisition are not material to the company's
results of operations.
During the first quarter of 1995, the company purchased the remaining 50%
of CC Australia from its original joint venture partner. After consideration of
several strategic alternatives related to CC Australia, the company sold 50% of
the entity to Sodexho during the second quarter of 1995. The company accounted
for the 100% ownership period on the equity basis of accounting and recognized
an after-tax gain of $783 on the sale.
F-18
<PAGE> 120
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------- -------
<S> <C> <C>
Deferred project development costs.......................... $ 284 $ 1,230
Project development costs, less accumulated amortization of
$499 and $487, respectively............................... 3,989 2,275
Facility start-up costs, less accumulated amortization of
$4,296 and $2,728, respectively........................... 11,404 6,705
Debt issuance costs, less accumulated amortization of $1,698
and $1,289, respectively.................................. 2,555 1,669
Deferred placement fees..................................... 2,404 2,404
Investments in affiliates................................... 7,893 3,756
Other assets................................................ 876 713
------- -------
$29,405 $18,752
======= =======
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
-------- --------
<S> <C> <C>
Land........................................................ $ 14,276 $ 3,953
Buildings and improvements.................................. 140,470 114,863
Equipment................................................... 19,376 13,486
Office furniture and fixtures............................... 2,937 2,262
Construction in progress.................................... 137,405 23,083
-------- --------
314,464 157,647
Less accumulated depreciation............................... (25,767) (20,628)
-------- --------
$288,697 $137,019
======== ========
</TABLE>
Depreciation expense was $7,147, $4,428 and $3,469 for 1996, 1995 and 1994,
respectively.
5. NOTES RECEIVABLE
Notes receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
------- ------
<S> <C> <C>
Note receivable, principal and interest payments of $206
monthly through September 2016, interest at 9.25%, secured
by a first mortgage on a facility......................... $22,401 $ --
Notes receivable, $700 is secured by a third mortgage on a
facility and is due in January 1999, remaining balance is
due in monthly principal and interest payments through
April 1999, weighted average interest rate at 11.14%...... 876 890
------- ------
23,277 890
Less current portion in accounts receivable................. (418) --
------- ------
$22,859 $ 890
======= ======
</TABLE>
F-19
<PAGE> 121
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
6. INVESTMENT IN DIRECT FINANCING LEASES
At December 31, 1996, the company's investment in direct financing leases
represents building and equipment leases between the company and the State of
New Mexico for the New Mexico Women's Correctional Facility. The agreements
contain provisions that allow the state to purchase the buildings and equipment
for predetermined prices at specific intervals during the contract period.
A schedule of minimum future rentals to be received under the direct
financing leases at December 31, 1996, is as follows:
<TABLE>
<CAPTION>
DIRECT
FINANCING
LEASES RENTAL
RECEIVABLE
-------------
<S> <C>
1997...................................................... $ 1,807
1998...................................................... 1,807
1999...................................................... 1,807
2000...................................................... 1,807
2001...................................................... 1,807
Thereafter................................................ 17,465
--------
Total minimum obligation.................................... 26,500
Less unearned income........................................ (13,129)
--------
Present value of direct financing leases.................... 13,371
Less current portion in accounts receivable................. (473)
--------
Long-term portion at December 31, 1996...................... $ 12,898
========
</TABLE>
7. INVESTMENT IN UCLP
At December 31, 1994, Concept and its affiliates owned 49.9% of UCLP and
Concept owned 50% of the common stock of United-Concept, which owned .2% of UCLP
and was the managing general partner of UCLP. In addition, Concept had an option
to purchase from its partner in UCLP the other 50% partnership interests in UCLP
and the other 50% of the common stock of United-Concept. On July 17, 1995,
Concept exercised its option and acquired the remaining interests of UCLP for
$5,250.
United-Concept has issued and outstanding one thousand shares of common
stock (which Concept owns) and one share of voting preferred stock, which is
owned by The First National Bank of Chicago under an indenture agreement related
to the financing of the Eloy Facility. Each share of stock, common and
preferred, has one vote. The preferred stock does not participate in income
distribution by United-Concept and has a ten dollar liquidation value. The
by-laws of United-Concept require 100% shareholder approval of significant
corporate actions, and also require an independent director. Concept is entitled
to 100% of the income of UCLP, but the independent director effectively has veto
power over certain actions of United-Concept.
The company's investment in UCLP was accounted for under the equity method
from inception through July 17, 1995. Since July 17, 1995, the company is
entitled to 100% of the income and has responsibility for all the debt and for
satisfying the contractual obligation of UCLP. As a result, the company has
included UCLP in the consolidated financial statements.
F-20
<PAGE> 122
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
-------- --------
<S> <C> <C>
Senior Secured Notes, principal payments of $1,773 annually
through 1997, increasing to $2,660 in 1998 with the unpaid
balance due in 2000, interest payable semi-annually at
11.08%, collateralized by property and equipment with a
carrying value of $8,424 at December 31, 1996, and by
revenues from certain contracts........................... $ 10,328 $ 12,215
Secured Notes Payable, principal payments due annually in
various amounts through 1997, interest payable monthly at
9.6%, collateralized by property and equipment with a
carrying value of $10,935 at December 31, 1996, and by
revenues from a contract.................................. 1,210 2,981
Detention Center Revenue Bonds, interest payable monthly at
variable rates (5.85% at December 31, 1996), principal due
at maturity in 2015, collateralized by a letter of credit
issued by a group of banks................................ 24,700 --
Industrial Development Revenue Bonds, principal paid in full
in November 1996.......................................... -- 2,385
Notes payable to a bank, principal and interest at 10%,
payable monthly until maturity in March 2000,
collateralized by property and equipment with a carrying
value of $30,709 at December 31, 1996, and by revenues
from a contract........................................... 20,911 25,608
Revolving Credit Facility payable to a group of banks,
principal due September 1999, interest payable quarterly
at the bank's prime rate (8.25% at December 31, 1996) or
LIBOR plus .5% (6.0% at December 31, 1996), collateralized
by the pledge of stock of the company's first tier
domestic subsidiaries..................................... 4,000 --
Bank Loan, principal paid in full in February 1996.......... -- 12,580
Line of credit payable to a bank, principal paid in full in
February 1996............................................. -- 14,500
Convertible Subordinated Notes, principal due at maturity in
2002 with call provisions beginning in March 2000,
interest payable quarterly at 7.5%........................ 50,000 --
Convertible Subordinated Notes, principal due at maturity in
1999 with call provisions beginning in June 1999, interest
payable semi-annually at 8.5%............................. 7,000 7,000
Convertible Subordinated Notes, principal due at maturity in
1998 with call provisions beginning in June 1997, interest
payable quarterly at 8.5%................................. 7,500 7,500
Other....................................................... 167 1,116
-------- --------
125,816 85,885
Less current portion........................................ (8,281) (11,020)
-------- --------
$117,535 $ 74,865
======== ========
</TABLE>
At December 31, 1996, the company's revolving credit facility provides for
borrowings up to $170,000. The facility bears interest at the bank's prime rate
or LIBOR plus .50%, .75% or 1.0%, depending on the company's leverage ratio. The
facility consists of a working capital line, which includes letters of credit.
F-21
<PAGE> 123
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Letters of credit totaling $65,011 have been issued to support an industrial
development bond, a taxable bond and to secure performance bonds. The unused
commitment at December 31, 1996, was $100,989. The facility is subject to
renewal on September 6, 1999.
At December 31, 1996, the company has a $2,500 letter of credit facility.
Letters of credit totaling $1,393 have been issued to secure the company's
worker's compensation insurance policy, performance bonds and utility deposits.
The unused commitment at December 31, 1996, was $1,107. The facility is subject
to renewal on September 6, 1999.
Restricted cash of $3,450 and $569 at December 31, 1996 and 1995,
respectively, represents cash held in sinking funds established for the funding
of current year principal and interest on certain bonds and current construction
obligations.
The company does not maintain any significant formal or informal
compensating balance arrangements with financial institutions.
The Convertible Subordinated Notes are convertible into the company's
common stock at prices ranging from $1.69 to $25.91 per share. The company may
require conversion under certain conditions after the stock has a market value
of 150% of the conversion price for a specified period. In 1995, Convertible
Subordinated Notes with a face value of $6,700 were converted into 1,774 shares
of common stock.
The provisions of the credit facilities, bonds, and notes contain
restrictive covenants, the most restrictive of which are limits on the payment
of dividends, incurrence of additional indebtedness, investments and mergers.
The agreements also require that the company maintain specific ratio
requirements relating to cash flow, tangible net worth, interest coverage and
earnings. The company was in compliance with the covenants at December 31, 1996.
The company capitalized interest of $502, $717 and $377 in 1996, 1995 and
1994, respectively. Interest expense, net is comprised of the following for each
year:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Interest expense.......................................... $ 8,200 $ 5,534 $ 4,954
Interest income........................................... (3,976) (1,582) (1,515)
------- ------- -------
$ 4,224 $ 3,952 $ 3,439
======= ======= =======
</TABLE>
Maturities of long-term debt for the next five years and thereafter are:
1997 -- $8,281; 1998 -- $16,357; 1999 -- $21,007; 2000 -- $5,471; 2001 -- $0 and
thereafter -- $74,700.
F-22
<PAGE> 124
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
9. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The provision for income
taxes is comprised of the following components:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------
1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
CURRENT PROVISION
Federal................................................... $ 5,567 $2,853 $1,319
State..................................................... 785 315 115
------- ------ ------
6,352 3,168 1,434
------- ------ ------
INCOME TAXES CHARGED TO EQUITY
Federal................................................... 10,719 3,567 531
State..................................................... 1,225 420 62
------- ------ ------
11,944 3,987 593
------- ------ ------
DEFERRED PROVISION
Federal................................................... 1,052 1,946 99
State..................................................... 121 229 186
------- ------ ------
1,173 2,175 285
------- ------ ------
Provision for income taxes........................ $19,469 $9,330 $2,312
======= ====== ======
</TABLE>
Significant components of the company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1995
------ ------
<S> <C> <C>
CURRENT DEFERRED TAX ASSETS
Asset reserves and liabilities not yet deductible for tax... $2,067 $1,473
Alternative minimum tax carryforward........................ -- 173
------ ------
Total current deferred tax assets................. 2,067 1,646
------ ------
CURRENT DEFERRED TAX LIABILITY
Income item not yet taxable................................. 1,041 --
------ ------
Total current deferred tax liability.............. 1,041 --
------ ------
Net current deferred tax assets................... $1,026 $1,646
====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1995
------ ------
<S> <C> <C>
NONCURRENT DEFERRED TAX ASSETS
Other..................................................... $ 788 $ 35
------ ------
Total noncurrent deferred tax assets.............. 788 35
------ ------
NONCURRENT DEFERRED TAX LIABILITIES
Tax in excess of book depreciation and amortization....... 3,876 3,565
Income items not yet taxable and other.................... 1,629 634
------ ------
Total noncurrent deferred tax liabilities......... 5,505 4,199
------ ------
Net noncurrent deferred tax liabilities........... $4,717 $4,164
====== ======
</TABLE>
F-23
<PAGE> 125
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
A reconciliation of the statutory federal income tax rate and the effective
tax rate as a percentage of pretax income for the years ended December 31, is as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory federal rate...................................... 35.0% 34.0% 34.0%
State taxes, net of federal tax benefit..................... 4.0 4.0 4.0
Utilization of net operating loss carryforward.............. -- -- (15.4)
Other items, net............................................ (.3) 1.4 --
---- ---- ----
38.7% 39.4% 22.6%
==== ==== ====
</TABLE>
10. EARNINGS PER SHARE
Primary net income per common share is computed using the weighted average
number of shares of common stock and common stock equivalents outstanding. Stock
warrants and stock options are considered common stock equivalents. The
convertible subordinated notes are not common stock equivalents. In computing
fully diluted net income per common share, the 8.5% convertible subordinated
notes are considered dilutive using the if-converted method. In 1994, the 8.5%
convertible subordinated notes were antidilutive. The following table presents
information necessary to calculate fully diluted earnings per share for the
years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Net income allocable to common stockholders............... $30,880 $14,333 $ 7,714
Interest expense applicable to convertible subordinated
notes, net of tax....................................... 752 740 --
------- ------- -------
Adjusted net income....................................... $31,632 $15,073 $ 7,714
======= ======= =======
Fully diluted weighted average common shares
outstanding............................................. 81,740 77,355 62,440
Conversion of convertible subordinated notes.............. 6,249 6,249 --
------- ------- -------
Adjusted fully diluted common shares outstanding.......... 87,989 83,604 62,440
======= ======= =======
Fully diluted earnings per share.......................... $ .36 $ .18 $ .12
======= ======= =======
</TABLE>
11. STOCKHOLDERS' EQUITY
Preferred Stock
The company has authorized 1,000 shares of $1 par value preferred stock.
In December 1991, the company sold 50 shares of Series A preferred stock
for $5,000. The preferred stock earned dividends at 8.5% and were paid quarterly
from January 31, 1993 through June 23, 1994. Each share of the Series A
preferred stock was convertible into 56 shares of common stock. In June 1994,
the Series A preferred stock was converted at par value into 2,800 shares of
common stock. At December 31, 1996, no preferred stock was issued or
outstanding.
Stock Offering
On June 5, 1996, the company completed a secondary public offering of 3,700
new shares of its common stock. The net proceeds of $131,812 were used to
develop, acquire and expand correctional and detention facilities.
F-24
<PAGE> 126
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Stock Split
On June 5, 1996, the Board of Directors declared a two-for-one stock split
of the company's common stock to be effective on July 2, 1996. An amount equal
to the par value of the common shares outstanding as of July 2, 1996, was
transferred from additional paid-in capital to the common stock account. On
October 4, 1995, the Board of Directors declared a two-for-one stock split of
the company's common stock to be effective on October 31, 1995. An amount equal
to the par value of the common shares outstanding as of October 31, 1995, was
transferred from additional paid-in capital to the common stock account. All
references to number of shares and to per share data in the consolidated
financial statements have been adjusted for these stock splits.
Stock Warrants
The company has issued stock warrants to certain affiliated and
unaffiliated parties for providing certain financing, consulting and brokerage
services to the company and to stockholders as a dividend. Stock warrants
outstanding at December 31, 1996, are as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE EXPIRATION
DATE OF ISSUANCE WARRANTS PRICE DATE
---------------- --------- ------------ ------------------
<S> <C> <C> <C>
September 4, 1992................... 839 $ 8.50/share September 14, 1997
June 23, 1994....................... 1,100 $15.80/share December 31, 1999
</TABLE>
Each warrant entitles the warrant holder to four common shares upon
exercise. The warrants are exercisable from the date of issuance except for the
warrants issued September 4, 1992, which were exercisable beginning April 30,
1993. In 1996, the company extended the expiration date of the warrants issued
June 23, 1994, from December 31, 1998, to December 31, 1999.
In 1996, 1,313 warrants were exercised at $8.50 per share. In 1995, 268
warrants were exercised at prices ranging from $7.14 to $8.50 per share. In
1995, the company purchased 60 warrants at the market price of $18 per share
from a warrant holder.
Stock Option Plans
The company has incentive and nonqualified stock option plans under which
options may be granted to "key employees" as designated by the Board of
Directors. The options are granted with exercise prices that equal market value
on the date of grant. The options are exercisable after the later of two years
from the date of employment or one year after the date of grant until ten years
after the date of the grant.
The company's Board of Directors authorized a stock repurchase program for
up to an aggregate of 400 shares of the company's stock for the purpose of
funding the employee stock options, stock ownership and stock award plans.
F-25
<PAGE> 127
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Stock option transactions relating to the company's incentive and
nonqualified stock option plans are summarized below:
<TABLE>
<CAPTION>
1996
-----------------------------
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding at beginning of period........................ 3,916 $ 3.73
Granted................................................. 903 27.06
Exercised............................................... (1,297) 2.92
Canceled................................................ (19) 22.97
------ -------
Outstanding at end of period............................ 3,503 $ 9.96
====== =======
Available for future grant.............................. 2,950 --
====== =======
Exercisable............................................. 2,601 $ 4.06
====== =======
</TABLE>
<TABLE>
<CAPTION>
1995
-----------------------------
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding at beginning of period........................ 3,470 $ 2.31
Granted................................................... 1,248 7.61
Exercised................................................. (754) 3.49
Canceled.................................................. (48) 5.82
------ -------
Outstanding at end of period.............................. 3,916 $ 3.73
====== =======
Available for future grant................................ 3,818 --
====== =======
Exercisable............................................... 2,680 $ 1.93
====== =======
</TABLE>
<TABLE>
<CAPTION>
1994
---------
NUMBER OF
SHARES
---------
<S> <C> <C>
Outstanding at beginning of period........................ 6,382
Granted................................................... 178
Exercised................................................. (3,060)
Canceled.................................................. (30)
------
Outstanding at end of period.............................. 3,470
======
Available for future grant................................ 1,020
======
Exercisable............................................... 3,386
======
</TABLE>
The weighted average fair value of options granted during 1996 and 1995 was
$12.28 and $3.21 per option, respectively. The options outstanding at December
31, 1996, have exercise prices between $.96 and $33.13 and a weighted average
remaining contractual life of 7 years.
In addition to the plans mentioned above, the company has a nonqualified
stock option plan to encourage stock ownership by selected employees of the
company. Pursuant to the plan, stock options may be granted to key employees
upon authorization by the Board of Directors. The aggregate number of options
that may be granted under the plan is 1,440. As of December 31, 1996, 240
options were outstanding at an option price of $1.35 per share.
F-26
<PAGE> 128
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
During 1995, the company authorized the issuance of 337 shares of common
stock to certain key employees as a deferred stock award. The award becomes
fully vested ten years from the date of grant based on continuous employment
with the company. The company is expensing the $3,670 of awards over the vesting
period.
In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation." SFAS 123 establishes new financial accounting and reporting
standards for stock-based compensation plans. The company has adopted the
disclosure-only provisions of SFAS 123. As a result, no compensation cost has
been recognized for the company's stock option plans. Had compensation cost for
the stock option plans been determined based on the fair value at the grant date
for awards in 1996 and 1995 consistent with the provisions of SFAS 123, the
company's net income and net income per share would have been reduced to the pro
forma amounts indicated below for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Net income -- as reported................................... $30,880 $14,333
Net income -- pro forma..................................... 25,995 13,550
Net income per share -- Primary -- as reported.............. $ .38 $ .19
Net income per share -- Primary -- pro forma................ .32 .17
Net income per share -- Fully Diluted -- as reported........ $ .36 $ .18
Net income per share -- Fully Diluted -- pro forma.......... .30 .16
</TABLE>
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the pro forma compensation cost may not be
representative of that to be expected in future years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Expected dividend yield..................................... 0.0% 0.0%
Expected stock price volatility............................. 49.5% 50.3%
Risk-free interest rate..................................... 5.9% 6.8%
Expected life of options.................................... 4 years 4 years
</TABLE>
Employee Stock Ownership Plan
The company has an Employee Stock Ownership Plan whereby each employee of
the company who is at least 18 years of age is eligible for membership in the
plan as of January 1 of their first anniversary year in which they have
completed at least one thousand hours of service.
Benefits, which become 40% vested after four years of service and 100%
vested after five years of service, are paid on death, retirement or
termination. The Board of Directors has discretion in establishing the amount of
the company contributions. The company's contributions to the plan may be in the
form of common stock, cash or other property. Contributions to the plan amounted
to $2,086, $1,366 and $1,059 for the years ended December 31, 1996, 1995 and
1994, respectively.
12. REVENUES AND EXPENSES
Approximately 99% of the company's revenues for the years ended December
31, 1996, 1995 and 1994, relate to amounts earned from federal, state and local
governmental management and transportation contracts.
The company had revenues of 21%, 23% and 17% from the federal government
and 54%, 49% and 54% from state governments for the years ended December 31,
1996, 1995 and 1994, respectively. One state
F-27
<PAGE> 129
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
government had revenues of 16%, 18% and 24% for the years ended December 31,
1996, 1995 and 1994, respectively. In addition, another state government had
revenues of 11% for the year ended December 31, 1994.
Accounts receivable include $55,924 and $37,057 due from federal, state and
local governments at December 31, 1996 and 1995, respectively. Accounts
receivable and accounts payable at December 31, 1996, consist of the following:
<TABLE>
<CAPTION>
ACCOUNTS ACCOUNTS
RECEIVABLE PAYABLE
---------- --------
<S> <C> <C>
Trade....................................................... $ 50,618 $10,766
Construction................................................ 44,469 28,458
Other....................................................... 5,464 --
-------- -------
$100,551 $39,224
======== =======
</TABLE>
Salaries and related benefits represented 63%, 58% and 54% of operating
expenses for the years ended December 31, 1996, 1995 and 1994, respectively.
For the year ended December 31, 1996, the company recognized development
fee income of $1,629 (after tax) related to a contract to design, construct and
equip a managed detention facility.
13. INTERNATIONAL ALLIANCE
The company has entered into an International Alliance (the "Alliance")
with Sodexho to pursue prison management business outside the United States. In
conjunction with the Alliance, Sodexho purchased an equity position in the
company by acquiring several instruments. In 1994, the company sold Sodexho
2,800 shares of common stock at $3.75 per share and a $7,000 convertible
subordinated note bearing interest at 8.5%. Sodexho also received 1,100 warrants
at $15.80 per warrant that expire December 1999. Each warrant entitles Sodexho
to four common shares upon exercise. In consideration of the placement of the
aforementioned securities, the company agreed to pay Sodexho $3,960 over a
four-year period ending in 1998. These fees include debt issuance costs and
private placement equity fees. These fees have been allocated to the various
instruments and are charged to debt issuance costs or equity as the respective
financings are completed. Sodexho is subject to a standstill agreement that
limits their ownership to 25% in the company and has certain preemptive rights
to retain its percentage ownership.
In 1995, Sodexho purchased 1,090 shares of common stock for $7.63 per share
pursuant to their contractual preemptive right. Also during 1995, the company
and Sodexho entered into a forward contract whereby Sodexho would purchase up to
$20,000 of convertible subordinated notes at any time prior to December 1997.
The notes will bear interest at LIBOR plus 1.35% and will be convertible into
common shares at a conversion price of $6.83 per share.
In 1996, the company sold $20,000 of convertible notes to Sodexho pursuant
to their contractual preemptive right. The notes bear interest at 7.5% and are
convertible into common shares at a conversion price of $25.91 per share.
14. RELATED PARTY TRANSACTIONS
The company pays legal fees to a law firm of which one of the partners is a
stockholder and a member of the Board of Directors of the company. Legal fees,
including fees related to the company's mergers and acquisitions, paid to the
law firm amounted to $683, $675 and $140 in 1996, 1995 and 1994, respectively.
F-28
<PAGE> 130
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
15. COMMITMENTS AND CONTINGENCIES
The company leases certain facilities, office space and equipment under
long-term operating leases expiring through 2001. Rental expense was
approximately $2,786, $5,904 and $3,490 for the years ended December 31, 1996,
1995 and 1994, respectively. Minimum rental commitments for noncancelable leases
are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ---- ------
<S> <C>
1997........................................................ $4,147
1998........................................................ 3,520
1999........................................................ 1,741
2000........................................................ 322
2001........................................................ 37
</TABLE>
The nature of the company's business results in claims and litigation
alleging that the company is liable for damages arising from the conduct of its
employees or others. In the opinion of management, there are no pending legal
proceedings that would have a material effect on the consolidated financial
position or results of operations of the company.
The company has an employment agreement with its chief executive officer
through September 30, 1997. The agreement includes a non-compete agreement
covering the same period and requires payments during the period if employment
is terminated.
Each of the company's management contracts and the statutes of certain
states require the maintenance of insurance. The company maintains various
insurance policies including employee health, workers compensation, automobile
liability and general liability insurance. These policies are fixed premium
policies with various deductible amounts that are self-funded by the company.
Reserves are provided for estimated incurred claims within the deductible
amounts.
The company guarantees $113 of a bank facility for CC Australia. The
company has provided a $1,000 performance bond in connection with UKDS's
management contract with the United Kingdom.
The company provides a limited guarantee related to a bond issue on the
Eden Detention Center in Eden, Texas. The maximum obligation as of December 31,
1996 was $22,875. In the event the company is required to fund amounts pursuant
to this limited guarantee, the company will obtain ownership rights to the
facility.
16. EVENT SUBSEQUENT TO DECEMBER 31, 1996 (UNAUDITED)
On January 30, 1997, the company purchased the fixed and movable assets of
a correctional treatment facility in Washington, D.C. for $52,000. The company
has entered into additional agreements to manage this facility and to lease the
facility to Washington, D.C. over a period of twenty years. At the end of the
lease, the facility reverts to the District of Columbia authorities. The Company
intends to account for the purchase and lease as a financing transaction.
F-29
<PAGE> 131
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and restricted cash................ $ 7,101 $ 8,282
Accounts receivable, net of allowances.................... 69,743 100,551
Prepaid expenses.......................................... 4,144 2,940
Deferred tax assets....................................... 22 1,026
Other..................................................... 2,438 1,643
-------- --------
Total current assets.............................. 83,448 114,442
Restricted investments...................................... 587 587
Other assets................................................ 34,787 29,405
Property and equipment, net................................. 356,725 288,697
Notes receivable............................................ 22,748 22,859
Investment in direct financing leases....................... 68,622 12,898
-------- --------
$566,917 $468,888
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 42,214 $ 39,224
Accrued salaries and wages................................ 6,410 5,487
Accrued property taxes.................................... 605 1,675
Other accrued expenses.................................... 18,748 9,227
Current portion of long-term debt......................... 7,249 8,281
-------- --------
Total current liabilities......................... 75,226 63,894
Long-term debt, net of current portion...................... 189,191 117,535
Deferred tax liabilities.................................... 4,812 4,717
Other noncurrent liabilities................................ 742 990
-------- --------
Total liabilities................................. 269,971 187,136
-------- --------
Stockholders' equity:
Common stock.............................................. 75,945 75,029
Additional paid-in capital................................ 167,082 165,317
Retained earnings......................................... 54,127 42,132
Treasury stock, at cost................................... (208) (726)
-------- --------
Total stockholders' equity........................ 296,946 281,752
-------- --------
$566,917 $468,888
======== ========
</TABLE>
F-30
<PAGE> 132
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
----------------------
1997 1996
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenues.................................................... $91,838 $63,277
Expenses:
Operating................................................. 63,919 47,184
General and administrative................................ 3,595 2,925
Depreciation and amortization............................. 3,923 2,277
------- -------
71,437 52,386
------- -------
Operating income............................................ 20,401 10,891
Interest expense, net....................................... 498 1,350
------- -------
Income before income taxes.................................. 19,903 9,541
Provision for income taxes.................................. 7,908 3,835
------- -------
Net income.................................................. $11,995 $ 5,706
======= =======
Net income per common share:
Primary................................................... $ 0.14 $ 0.07
======= =======
Fully diluted............................................. $ 0.14 $ 0.07
======= =======
Weighted average common shares outstanding:
Primary................................................... 83,942 80,502
======= =======
Fully diluted............................................. 89,659 87,168
======= =======
</TABLE>
F-31
<PAGE> 133
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1997 1996
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income................................................ $ 11,995 $ 5,706
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 3,923 2,277
Deferred and other noncash income taxes................ 2,329 6,077
Other noncash items.................................... 92 --
Loss (gain) on disposal of assets...................... (20) 11
Equity in earnings of unconsolidated entities.......... (252) (150)
Changes in assets and liabilities:
Accounts receivable.................................. 30,830 (8,034)
Prepaid expenses..................................... (1,204) 62
Other current assets................................. (795) (309)
Accounts payable..................................... 2,990 2,250
Accrued expenses..................................... 9,374 (3,823)
--------- --------
Net cash provided by operating activities......... 59,262 4,067
--------- --------
Cash Flows from Investing Activities:
Decrease (increase) in restricted and escrow cash......... 1,365 (402)
Increase in other assets.................................. (6,165) (2,771)
Additions of property and equipment....................... (70,919) (9,602)
Proceeds from disposals of assets......................... 8 6
Increase in direct financing leases....................... (55,850) --
Payments received on direct financing leases and notes
receivable............................................. 215 91
--------- --------
Net cash used in investing activities............. (131,346) (12,678)
--------- --------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt.................. -- 30,000
Payments on long-term debt................................ (2,476) (15,444)
Proceeds from (payments on) line of credit, net........... 74,000 (9,723)
Payment of debt issuance cost............................. (248) (496)
Proceeds from exercise of stock options and warrants...... 992 3,044
--------- --------
Net cash provided by financing activities......... 72,268 7,381
--------- --------
Net increase (decrease) in cash............................. 184 (1,230)
CASH AND CASH EQUIVALENTS, beginning of period............ 4,832 2,145
--------- --------
CASH AND CASH EQUIVALENTS, end of period.................. $ 5,016 $ 915
========= ========
</TABLE>
F-32
<PAGE> 134
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
----------------
1997 1996
----- -------
(IN THOUSANDS)
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest............................................... $ 840 $ 1,986
===== =======
Income taxes........................................... $ 609 $ 1,565
===== =======
Supplemental Schedule of Noncash Investing and Financing
Activities:
The Company acquired treasury stock and issued common
stock through the exercise of stock options:
Common stock........................................... $ 134 $ 911
Additional paid-in capital............................. 411 2,885
Retained earnings...................................... -- (2,847)
Treasury stock, at cost................................ (545) (949)
----- -------
$ -- $ --
===== =======
Long term debt was converted into common stock:
Other assets.............................................. $ 15 $ --
Long-term debt............................................ (900) --
Common Stock.............................................. 531 --
Additional paid-in capital................................ 354 --
----- -------
$ -- $ --
===== =======
</TABLE>
F-33
<PAGE> 135
CORRECTIONS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet as of March 31, 1997, and the consolidated
statements of operations and cash flows for the three month periods ended March
31, 1997 and 1996, have been prepared by the Company in accordance with the
accounting policies described in its Annual Report to Stockholders for the year
ended December 31, 1996 and should be read in conjunction with the notes
thereto.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial positions,
results of operations and changes in cash flows at March 31, 1997 and for all
periods presented have been made. The results of operations for the period ended
March 31, 1997, are not necessarily indicative of the operating results for the
full year.
2. INVESTMENT IN DIRECT FINANCING LEASES
In January 1997, the Company purchased the fixed and movable assets of a
correctional treatment facility in Washington, D.C. for $52,000,000, and agreed
to make certain renovations totaling $3,850,000. The Company has entered into
additional agreements to manage this facility and to lease the facility back to
Washington, D.C. over a period of twenty years. At the end of the lease, the
facility reverts to the District of Columbia authorities. The Company is
accounting for the purchase and lease as a financing transaction.
3. EARNINGS PER SHARE
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128"), has been issued effective for fiscal periods ending after December
15, 1997. SFAS 128 establishes standards for computing and presenting earnings
per share. The Company is required to adopt the provisions of SFAS 128 in the
fourth quarter of 1997. Under the standards established by SFAS 128, earnings
per share is measured at two levels: basic earnings per share and diluted
earnings per share. Basic earnings per share is computed by dividing net income
by the weighted average number of common shares outstanding during the year.
Diluted earnings per share is computed by dividing net income by the weighted
average number of common shares after considering the additional dilution
related to preferred stock, convertible debt, options and warrants.
The following pro forma amounts represent the basic earnings per share and
diluted earnings per share as if the Company had adopted SFAS 128 for the
quarters presented:
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
MARCH 31,
-----------
1997 1996
---- ----
<S> <C> <C>
Basic earnings per share.................................... $.16 $.09
==== ====
Diluted earnings per share.................................. $.14 $.07
==== ====
</TABLE>
F-34
<PAGE> 136
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN APPROVED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN APPROVED BY
THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY THE COMMON SHARES OFFERED HEREBY BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT APPROVED,
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH SOLICITATION OR OFFER.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
UNTIL (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING
TRANSACTIONS IN THE SECURITIES OFFERED HEREBY, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................... ii
Prospectus Summary....................... 1
Risk Factors............................. 16
The Company.............................. 23
Use of Proceeds.......................... 28
Capitalization........................... 28
Distributions............................ 29
Dilution................................. 31
Pro Forma Financial Statements........... 32
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 35
The Private Corrections Industry......... 37
Corrections Corporation of America....... 38
Business of the Company and its
Properties............................. 48
Relationship Between CCA and the Company
After the Formation Transactions....... 53
Leases................................... 55
Management............................... 59
Certain Relationships and Transactions... 66
Policies and Objectives with Respect to
Certain Activities..................... 67
Conflicts of Interest.................... 70
The Formation Transactions............... 72
Principal Shareholders of the Company.... 74
Description of Capital Shares............ 74
Shares Available for Future Sale......... 80
Material Federal Income Tax
Considerations......................... 80
ERISA Considerations..................... 90
Underwriting............................. 91
Experts.................................. 92
Legal Matters............................ 92
</TABLE>
======================================================
======================================================
17,000,000 SHARES
CCA PRISON REALTY TRUST
COMMON SHARES
J.C. BRADFORD & CO
A.G. EDWARDS & SONS, INC.
LEGG MASON WOOD WALKER
INCORPORATED
LEHMAN BROTHERS
PAINE WEBBER INCORPORATED
STEPHENS INC.
, 1997
======================================================
<PAGE> 137
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below are certain registration, filing and listing fees and an
estimate of the other fees and expenses to be incurred in connection with the
issuance and distribution of the Common Shares offered hereby.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 124,410
NASD Filing Fee............................................. 30,500
New York Stock Exchange Original Listing Fee................ 152,730
Blue Sky Fees and Expenses (including attorneys' fees)...... 2,500
Accounting Fees and Expenses................................ 400,000
Attorneys' Fees and Expenses................................ *
Printing and Engraving Expenses............................. 500,000
Transfer Agent's Fees....................................... 12,000
Trustees' and Officers' Insurance........................... 175,000
Miscellaneous Expenses...................................... *
----------
Total............................................. $ *
==========
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 31. SALES TO SPECIAL PARTIES.
The Company was formed as a Maryland real estate investment trust in April
1997, with Jim Phillips being issued 1,000 Common Shares in consideration of
$1,000.
Upon consummation of the Offering, D. Robert Crants, III and Michael W.
Devlin will each receive 150,000 Common Shares as a development fee and for
services rendered and as reimbursement of actual costs incurred in connection
with the formation of the Company, the consummation of the Offering and the
closing of the Initial Facilities. The reimbursed costs include certain costs
related to property due diligence, employee compensation, travel and overhead.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES.
All of the Common Shares issued by the Company discussed in Item 31 above
were issued pursuant to an exemption from the registration requirements of the
Securities Act contained in Section 4(2) of the Securities Act.
ITEM 33. INDEMNIFICATION OF TRUSTEES AND OFFICERS.
The Declaration of Trust of the Company provides for indemnification of
trustees and officers to the full extent permitted by the laws of the State of
Maryland.
Section 8-301 of the Corporation and Associations Article of the Annotated
Code of Maryland permits a Maryland real estate investment trust to indemnify
trustees, officers, employees and agents of the real estate investment trust to
the same extent as is permitted for directors, officers, employees and agents of
a Maryland corporation under Section 2-418 of the MGCL.
Section 2-418 of the MGCL generally permits indemnification of any trustee
made a party to any proceedings by reason of service as a trustee unless it is
established that (i) the act or omission of such person was material to the
matter giving rise to the proceeding and was committed in bad faith or was the
result of active and deliberate dishonesty; or (ii) such person actually
received an improper personal benefit in money, property or services; or (iii)
in the case of any criminal proceeding, such person had reasonable cause to
II-1
<PAGE> 138
believe that the act or omission was unlawful. The indemnity may include
judgments, penalties, fines, settlements and reasonable expenses actually
incurred by the trustee in connection with the proceeding; but, if the
proceeding is one by, or in the right of, the corporation, indemnification is
not permitted with respect to any proceeding in which the trustee has been
adjudged to be liable to the corporation, or if the proceeding is one charging
improper personal benefit to the trustee, whether or not involving action in the
trustee's official capacity, indemnification of the trustee is not permitted if
the trustee was adjudged to be liable on the basis that personal benefit was
improperly received. The termination of any proceeding by conviction or upon a
plea of nolo contendere or its equivalent, or an entry of an order of probation
prior to judgment, creates a rebuttable presumption that the trustee did not
meet the requisite standard of conduct required for permitted indemnification.
The termination of any proceeding by judgment, order or settlement, however,
does not create a presumption that the trustee failed to meet the requisite
standard of conduct for permitted indemnification.
Indemnification under the provisions of the MGCL is not deemed exclusive of
any other rights, by indemnification or otherwise, to which a trustee may be
entitled under the Declaration of Trust, Bylaws, any resolution of shareholders
or trustees, any agreement or otherwise.
The statute permits a Maryland real estate investment trust to indemnify
its officers, employees and agents to the same extent as its trustees. The
Company's Declaration of Trust provides for indemnification of the Company's
officers, employees or agents to the fullest extent permitted by law.
The Company will enter into indemnification agreements (the
"Indemnification Agreements") with its trustees and certain of its executive
officers. The Indemnification Agreements are intended to provide indemnification
to the maximum extent allowable by or not in violation of any law of the State
of Maryland. Each Indemnification Agreement provides that the Company shall
indemnify a trustee or officer who is a party to the agreement (the
"Indemnitee") if he or she was or is a party to or otherwise involved in any
proceeding (other than a derivative proceeding) by reason of the fact that he or
she was or is a trustee or officer of the Company, against losses incurred in
connection with the defense or settlement of such proceeding. The
indemnification provided under each Indemnification Agreement is limited to
instances where the act or omission giving rise to the claim for which
indemnification is sought was not otherwise indemnified by the Company or
insurance maintained by the Company, was not established to have been committed
in bad faith or the result of active and deliberate dishonesty, did not involve
receipt of improper personal benefit, did not result in a judgment of liability
to the Company in a proceeding by or in the right of the Company, did not
involve an accounting of profits pursuant to Section 16(b) of the Securities
Exchange Act of 1934, as amended, and, with respect to any criminal proceeding,
the Indemnitee had no reasonable cause to believe his or her conduct was
unlawful.
The Company will obtain trustees and officers liability insurance.
ITEM 34. TREATMENT OF PROCEEDS FROM SECURITIES BEING REGISTERED.
Not applicable.
II-2
<PAGE> 139
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements Included in this Registration Statement, including
the Prospectus:
<TABLE>
<S> <C>
CCA Prison Realty Trust
Report of Independent Public Accountants.................. F-2
Balance Sheet as of April 23, 1997........................ F-3
Notes to Balance Sheet.................................... F-4
CCA Prison Realty Trust
Pro Forma Financial Statements
Pro Forma Statements of Operations for the year ended
December 31, 1996 and the three months ended March 31,
1997.................................................. 35
Pro Forma Balance Sheet as of March 31, 1997........... 37
CCA
Pro Forma Condensed Consolidated Balance Sheet as of March
31, 1997............................................... F-6
Pro Forma Condensed Consolidated Statement of Operations
for the year ended December 31, 1996................... F-8
Report of Independent Public Accountants.................. F-9
Consolidated Balance Sheets as of December 31, 1996 and
1995................................................... F-10
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994....................... F-11
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994....................... F-12
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1995 and 1994........... F-14
Notes to Consolidated Financial Statements................ F-15
CCA Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet as of March 31,
1997.................................................. F-30
Condensed Consolidated Statements of Operations for the
three months ended March 31, 1997 and 1996............ F-31
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1997 and 1996............ F-32
Notes to Condensed Consolidated Financial Statements... F-34
</TABLE>
(B) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- --------
<C> <C> <S>
**1 -- Form of Underwriting Agreement
*2 -- Form of Agreement of Sale and Purchase Between CCA Prison
Realty Trust and Corrections Corporation of America
**3.1 -- Amended and Restated Declaration of Trust of CCA Prison
Realty Trust
**3.2 -- Amended and Restated Bylaws of CCA Prison Realty Trust
**3.3 -- Specimen of certificate representing the Common Shares
*4 -- Provisions defining the rights of shareholders are found
Sections 8-10 and 15 and Article II in the Amended and
Restated Declaration of Trust and Amended and Restated
Bylaws, respectively, of CCA Prison Realty Trust (included
as Exhibits 3.1 and 3.2 to the Registration Statement)
***5.1 -- Opinion of Stokes & Bartholomew, P.A. regarding the validity
of the Common Shares being offered hereby
***5.2 -- Opinion of Miles & Stockbridge, A Professional Corporation,
regarding the validity of the Common Shares being offered
hereby
***8.1 -- Opinion of Stokes & Bartholomew, P.A. regarding certain
federal income tax matters.
***8.2 -- Opinion of Sherrard & Roe, PLC regarding certain federal
income tax matters
</TABLE>
II-3
<PAGE> 140
<TABLE>
<C> <C> <S>
*10.1 -- Form of Option Agreement Between CCA Prison Realty Trust and Corrections Corporation of America with
respect to the Option Facilities
*10.2 -- Form of Master Agreement to Lease Between CCA Prison Realty Trust and Corrections Corporation of
America
*10.3 -- Form of Supplemental Lease Between CCA Prison Realty Trust and Corrections Corporation of America
with respect to the Leased Properties
*10.4 -- Form of Right to Purchase Agreement Between CCA Prison Realty Trust and Corrections Corporation of
America
*10.5 -- Form of Trade Name Use Agreement Between CCA Prison Realty Trust and Corrections Corporation of
America
**10.6 -- Commitment for Arrangement of Bank Credit Facility and Financing with Summary of Terms and Conditions
from First Union National Bank of Tennessee and First Union Capital Market Corp. and accepted by CCA
Prison Realty Trust
*10.7 -- Form of Officer and Trustee Indemnification Agreement between CCA Prison Realty Trust and its
trustees and officers
*10.8 -- Form of Employment Agreement between J. Michael Quinlan and CCA Prison Realty Trust
*10.9 -- Form of Employment Agreement between D. Robert Crants, III and CCA Prison Realty Trust
*10.10 -- Form of Employment Agreement between Michael W. Devlin and CCA Prison Realty Trust
*10.11 -- Form of CCA Prison Realty Trust 1997 Employee Share Incentive Option Plan
**10.12 -- Form of CCA Prison Realty Trust Non-Employee Trustees' Share Option Plan, as amended
*21 -- List of Subsidiaries of CCA Prison Realty Trust
***23.1 -- Consent of Stokes & Bartholomew, P.A. (included in Exhibits 5.1 and 8.1)
**23.2 -- Consent of Arthur Andersen LLP (with respect to Corrections Corporation of America)
**23.3 -- Consent of Arthur Andersen LLP (with respect to CCA Prison Realty Trust)
***23.4 -- Consent of Miles & Stockbridge, A Professional Corporation (included in Exhibit 5.2)
***23.5 -- Consent of Sherrard & Roe, PLC (included in Exhibit 8.2)
***23.6 -- Consent of Private Corrections Project Center for Studies in Criminology and Law -- University of
Florida at Gainesville
**24 -- Power of Attorney (included in the signature pages)
*27 -- Financial Data Schedules
</TABLE>
- ---------------
* Previously filed
** Filed herewith
*** To be filed by a future Amendment
ITEM 36. UNDERTAKINGS.
(1) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required
by the Underwriters to permit prompt delivery to each purchaser.
(2) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a trustee, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such trustee, officer or
controlling person in connection with
II-4
<PAGE> 141
the Common Shares, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Securities Act and will
be governed by the final adjudication of such issue.
(3) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A under the Securities
Act and contained in a form of prospectus filed by the Registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed
to be part of this Registration Statement as of the time it was declared
effective.
(4) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 142
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment Number 1 to its Registration Statement to be
signed on its behalf by the undersigned, thereunto duly approved, in the City of
Nashville, State of Tennessee, on the 16th day of June, 1997.
CCA PRISON REALTY TRUST
By: /s/ J. MICHAEL QUINLAN
------------------------------------
J. Michael Quinlan
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
J. Michael Quinlan, D. Robert Crants, III and Michael W. Devlin and each of
them, the true and lawful attorneys-in-fact and agents of the undersigned, with
full power of substitution and resubstitution, for and in the name, place and
stead of the undersigned, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Amendment Number 1 to
the Registration Statement, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, and hereby grants to such attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Amendment
Number 1 to the Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <C>
/s/ J. MICHAEL QUINLAN Chief Executive Officer (Principal June 16, 1997
- --------------------------------------------------- Executive Officer) and Trustee
J. Michael Quinlan
/s/ D. ROBERT CRANTS, III President and Trustee June 16, 1997
- ---------------------------------------------------
D. Robert Crants, III
/s/ MICHAEL W. DEVLIN Chief Development Officer and June 16, 1997
- --------------------------------------------------- Trustee
Michael W. Devlin
/s/ VIDA H. CARROLL Chief Financial Officer (Principal June 16, 1997
- --------------------------------------------------- Financial and Accounting Officer)
Vida H. Carroll
/s/ DOCTOR R. CRANTS Chairman; Trustee June 16, 1997
- ---------------------------------------------------
Doctor R. Crants
/s/ C. RAY BELL Trustee June 16, 1997
- ---------------------------------------------------
C. Ray Bell
/s/ RICHARD W. CARDIN Trustee June 16, 1997
- ---------------------------------------------------
Richard W. Cardin
/s/ MONROE J. CARELL, JR. Trustee June 16, 1997
- ---------------------------------------------------
Monroe J. Carell, Jr.
</TABLE>
II-6
<PAGE> 143
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <C>
/s/ JOHN W. EAKIN, JR. Trustee June 16, 1997
- ---------------------------------------------------
John W. Eakin, Jr.
/s/ TED FELDMAN Trustee June 16, 1997
- ---------------------------------------------------
Ted Feldman
/s/ JACKSON W. MOORE Trustee June 16, 1997
- ---------------------------------------------------
Jackson W. Moore
/s/ RUSTY L. MOORE Trustee June 16, 1997
- ---------------------------------------------------
Rusty L. Moore
/s/ JOSEPH V. RUSSELL Trustee June 16, 1997
- ---------------------------------------------------
Joseph V. Russell
/s/ CHARLES W. THOMAS, PH.D Trustee June 16, 1997
- ---------------------------------------------------
Charles W. Thomas, Ph.D
</TABLE>
II-7
<PAGE> 144
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBITS PAGE
- ------- ----------------------- ------------
<C> <C> <S> <C>
**1 -- Form of Underwriting Agreement..............................
*2 -- Form of Agreement of Sale and Purchase Between CCA Prison
Realty Trust and Corrections Corporation of America.........
**3.1 -- Amended and Restated Declaration of Trust of CCA Prison
Realty Trust................................................
**3.2 -- Amended and Restated Bylaws of CCA Prison Realty Trust......
**3.3 -- Specimen of certificate representing the Common Shares......
*4 -- Provisions defining the rights of shareholders are found
Sections 8-10 and 15 and Article II in the Amended and
Restated Declaration of Trust and Amended and Restated
Bylaws, respectively, of CCA Prison Realty Trust (included
as Exhibits 3.1 and 3.2 to the Registration Statement)......
***5.1 -- Opinion of Stokes & Bartholomew, P.A. regarding the validity
of the Common Shares being offered hereby...................
***5.2 -- Opinion of Miles & Stockbridge, A Professional Corporation,
regarding the validity of the Common Shares being offered
hereby
***8.1 -- Opinion of Stokes & Bartholomew, P.A. regarding certain
federal income tax matters..................................
***8.2 -- Opinion of Sherrard & Roe, PLC regarding certain federal
income tax matters..........................................
*10.1 -- Form of Option Agreement Between CCA Prison Realty Trust and
Corrections Corporation of America with respect to the
Option Facilities...........................................
*10.2 -- Form of Master Agreement to Lease Between CCA Prison Realty
Trust and Corrections Corporation of America................
*10.3 -- Form of Supplemental Lease Between CCA Prison Realty Trust
and Corrections Corporation of America with respect to the
Leased Properties...........................................
*10.4 -- Form of Right to Purchase Agreement Between CCA Prison
Realty Trust and Corrections Corporation of America.........
*10.5 -- Form of Trade Name Use Agreement Between CCA Prison Realty
Trust and Corrections Corporation of America................
**10.6 -- Commitment for Arrangement of Bank Credit Facility and
Financing with Summary of Terms and Conditions from First
Union National Bank of Tennessee and First Union Capital
Market Corp. and accepted by CCA Prison Realty Trust........
*10.7 -- Form of Officer and Trustee Indemnification Agreement
between CCA Prison Realty Trust and its trustees and
officers....................................................
*10.8 -- Form of Employment Agreement between J. Michael Quinlan and
CCA Prison Realty Trust.....................................
*10.9 -- Form of Employment Agreement between D. Robert Crants, III
and CCA Prison Realty Trust.................................
*10.10 -- Form of Employment Agreement between Michael W. Devlin and
CCA Prison Realty Trust.....................................
*10.11 -- Form of CCA Prison Realty Trust 1997 Employee Share
Incentive Option Plan.......................................
**10.12 -- Form of CCA Prison Realty Trust Non-Employee Trustees' Share
Option Plan, as amended.....................................
*21 -- List of Subsidiaries of CCA Prison Realty Trust.............
***23.1 -- Consent of Stokes & Bartholomew, P.A. (included in Exhibits
5.1 and 8.1)................................................
**23.2 -- Consent of Arthur Andersen LLP (with respect to Corrections
Corporation of America).....................................
**23.3 -- Consent of Arthur Andersen LLP (with respect to CCA Prison
Realty Trust)...............................................
***23.4 -- Consent of Miles & Stockbridge, A Professional Corporation
(included in Exhibit 5.2)...................................
***23.5 -- Consent of Sherrard & Roe, PLC (included in Exhibit 8.2)....
***23.6 -- Consent of Private Corrections Project Center for Studies in
Crimonology and Law -- University of Florida at Gainesville
**24 -- Power of Attorney (included in the signature pages).........
*27 -- Financial Data Schedules....................................
</TABLE>
- ---------------
* Previously filed
** Filed herewith
*** To be filed by a future Amendment
<PAGE> 1
Exhibit 1
CCA PRISON REALTY TRUST
17,000,000 COMMON SHARES
UNDERWRITING AGREEMENT
June __, 1997
J.C. BRADFORD & CO., L.L.C.
A.G. EDWARDS & SONS, INC.
LEGG MASON WOOD WALKER, INCORPORATED
LEHMAN BROTHERS INC.
PAINEWEBBER INCORPORATED
STEPHENS INC.
As Representatives of the Several Underwriters
c/o J.C. Bradford & Co.
J.C. Bradford Financial Center
330 Commerce Street
Nashville, Tennessee 37201
Ladies and Gentlemen:
CCA Prison Realty Trust, a Maryland real estate investment trust (the
"Company"), proposes to issue and sell to the underwriters named in Schedule I
hereto (the "Underwriters") for whom you are acting as the representatives (the
"Representatives") 17,000,000 shares (collectively, the "Firm Shares"), of the
Common Shares, $.01 par value per share (the "Common Shares"), of the Company.
Such Common Shares are to be sold to the Underwriters, acting severally and not
jointly, in such amounts as are set forth in Schedule I hereto opposite the name
of such Underwriter. The Company proposes to grant to the Underwriters an option
to purchase up to 2,550,000 additional Common Shares as provided for in Section
2 of this Agreement for the purpose of covering over-allotments (the "Option
Shares"). The Firm Shares and the Option Shares purchased pursuant to this
Agreement are herein called the "Shares."
1. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, each of the Underwriters that:
(a) The Company has filed with the Securities and Exchange Commission
(the "Commission") under the Securities Act of 1933, as amended (the
"Securities Act"), a registration statement on Form S-11 (Registration No.
333-25727), including the related
<PAGE> 2
preliminary prospectus relating to the Shares. Copies of such registration
statement and any amendments, including any post-effective amendments, and
all forms of the related prospectuses contained therein and any supplements
thereto, have been delivered to you. Such registration statement, including
the prospectus, Part II, all financial schedules and exhibits thereto, all
information deemed to be a part of such registration statement pursuant to
Rule 430A under the Securities Act and any related registration statement
filed pursuant to Rule 462(b) under the Securities Act, at the time when
they shall become effective are herein referred to as the "Registration
Statement," and the prospectus included as part of the Registration
Statement on file with the Commission that discloses all the information
that was omitted from the prospectus on the effective date pursuant to Rule
430A of the Rules and Regulations (as defined below) and in the form filed
pursuant to Rule 424(b) under the Securities Act is herein referred to as
the "Final Prospectus." The prospectus included as part of the Registration
Statement on the date when the Registration Statement became effective is
referred to herein as the "Effective Prospectus." Any prospectus included
in the Registration Statement and in any amendment thereto prior to the
effective date of the Registration Statement is referred to herein as a
"Preliminary Prospectus." For purposes of this Agreement, "Rules and
Regulations" mean the rules and regulations promulgated by the Commission
under either the Securities Act or the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), as applicable.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus, and each Preliminary Prospectus, at
the time of filing thereof, complied with the requirements of the
Securities Act and the Rules and Regulations, and did not include any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading; except that the foregoing does not apply to statements or
omissions made in reliance upon and in conformity with written information
relating to any Underwriter furnished to the Company by any Underwriter
specifically for use therein. When the Registration Statement becomes
effective and at all times subsequent thereto up to and including the First
Closing Date (as hereinafter defined), (i) the Registration Statement, the
Effective Prospectus and Final Prospectus and any amendments or supplements
thereto will contain all statements which are required to be stated therein
in accordance with the Securities Act and the Rules and Regulations and
will comply with the requirements of the Securities Act and the Rules and
Regulations, and (ii) neither the Registration Statement, the Effective
Prospectus nor the Final Prospectus nor any amendment or supplement thereto
will include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they are made,
not misleading; except that the foregoing does not apply to statements or
omissions made in reliance upon and in conformity with written information
relating to any Underwriter furnished to the Company by any Underwriter
specifically for use therein.
2
<PAGE> 3
(c) The Company is duly formed and validly existing and in good
standing under the laws of the State of Maryland with full power and
authority to own its properties and conduct its business as now conducted
and is duly qualified or authorized to do business and is in good standing
in all jurisdictions where the failure to so qualify could have a material
adverse effect upon the conduct of business or the ownership or leasing of
property by the Company in such jurisdiction. The Company holds all
material licenses, consents and approvals, and has satisfied all material
eligibility and other similar requirements imposed by federal and state
regulatory bodies, administrative agencies or other governmental bodies,
agencies or officials, in each case as required for the conduct of the
business in which it is engaged and is contemplated to be engaged in the
Effective Prospectus and the Final Prospectus. The Company does not have a
direct or indirect ownership interest in any corporation, joint venture,
partnership or other entity.
(d) The capitalization of the Company is as set forth under the
caption "Capitalization" in the Effective Prospectus and the Final
Prospectus, and the Company's capital shares conform to the description
thereof contained under the caption "Description of Capital Shares" in the
Effective Prospectus and the Final Prospectus. All the issued capital
shares of the Company have been duly authorized and validly issued, are
fully paid and nonassessable. None of the issued capital of the Company
have been issued in violation of, or are subject to, any preemptive or
similar rights. The Shares to be sold by the Company hereunder have been
duly and validly authorized and, upon issuance and delivery and payment
therefor in the manner herein described, will be validly issued, fully paid
and nonassessable and will not be subject to preemptive rights or other
rights to subscribe for or to purchase. Except as set forth in the
Effective Prospectus and the Final Prospectus, (i) the Company does not
have outstanding any options to purchase, or any rights or warrants to
subscribe for, or any securities or obligations convertible into, or any
contracts or commitments to issue or sell, any Common Shares and (ii) there
are no preemptive rights or other rights to subscribe for or to purchase,
or any restriction upon the transfer of, any Common Shares pursuant to the
Company's declaration of trust, bylaws or any agreement or other instrument
to which the Company is a party or by which it may be bound. Neither the
filing of the Registration Statement nor the offer or sale of the Shares as
contemplated by this Agreement gives rise to any rights, other than those
which have been waived or satisfied, for or relating to the registration of
any Common Shares or any other securities of the Company. The Underwriters
will receive good and marketable title to the Shares to be issued and
delivered hereunder, free and clear of all liens, encumbrances, claims,
security interests, restrictions, shareholders' agreements and voting
trusts whatsoever.
(e) The form of share certificate to be used to evidence the Common
Shares will be in due and proper form and will comply with all applicable
legal requirements.
(f) All offers and sales by the Company of the Company's securities
prior to the date hereof were at all relevant times duly registered or the
subject of an available
3
<PAGE> 4
exemption from the registration requirements of the Securities Act, and
were duly registered or the subject of an available exemption from the
registration requirements of the applicable state securities or Blue Sky
laws.
(g) The Company has full legal right, power and authority to enter
into this Agreement and to sell and deliver the Shares to be sold by it to
the several Underwriters as provided herein, and this Agreement has been
duly authorized, executed and delivered by the Company and constitutes a
valid and binding agreement of the Company enforceable against the Company
in accordance with its terms. No consent, approval, authorization or order
of any court or governmental agency or body or third party is required for
the performance of this Agreement by the Company or the consummation by the
Company of the transactions contemplated hereby, except such as have been
obtained and such as may be required by the National Association of
Securities Dealers, Inc. ("NASD") or under the Securities Act or state
securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the several Underwriters. The issue and sale
of the Shares by the Company, the Company's performance of this Agreement
and the consummation of the transactions contemplated hereby will not
result in a breach or violation of, or conflict with, any of the terms and
provisions of, or constitute a default by the Company under, any indenture,
mortgage, deed of trust, loan agreement, lease or other agreement or
instrument to which the Company is a party or to which the Company or any
of its properties is subject, the declaration of trust, bylaws or other
governing instruments of the Company or any statute or any judgment,
decree, order, rule or regulation of any court or governmental agency or
body applicable to the Company or any of its properties, except for such
breach, violation or conflict which could, singly or in the aggregate, have
a material adverse effect on the Company or could, singly or in the
aggregate, materially impair the performance by the Company of its
obligations under this Agreement. The Company is not in violation of its
declaration of trust, bylaws or other governing instruments or any law,
administrative rule or regulation or arbitrators' or administrative court
decree, judgment or order or in violation or default (there being no
existing state of facts which with notice or lapse of time or both would
constitute a default) in the performance or observance of any material
obligation, agreement, covenant or condition contained in any contract,
indenture, deed of trust, mortgage, loan agreement, note, lease, agreement
or other instrument or permit to which it is a party or by which it or any
of its properties is or may be bound, except for such violation or conflict
which could, singly or in the aggregate, have a material adverse effect on
the Company or could singly or in the aggregate, materially impair the
performance by the Company of its obligations under this Agreement.
(h) At the Closing Date, each of the Purchase Agreement, the Option
Agreements, the Right to Purchase Agreement, the Trade Name Use Agreement,
the Leases, the Master Lease, (each as defined in the Effective
Prospectus), and the employment agreements with each of J. Michael
Quinlan, D. Robert Crants III and Michael W. Devlin (collectively, the
"Employment Agreements") will have
4
<PAGE> 5
been duly and validly authorized, executed and delivered by the Company and
will be valid and binding agreements of the Company enforceable in
accordance with their respective terms. At the Closing Date, the agreements
pursuant to which certain persons have agreed not to sell their Common
Shares for a specified period of time (the "Lockup Agreements") will have
been duly and validly authorized, executed and delivered by the parties
thereto and will be valid and binding agreements, enforceable in accordance
with their terms. The Purchase Agreement, the Option Agreements, the Right
to Purchase Agreement, the Trade Name Use Agreement, the Leases, the Master
Lease, the Employment Agreements and the Lockup Agreements are
sometimes hereinafter called the "Operative Documents." The execution,
delivery and performance of the Operative Documents and the consummation
of the transactions contemplated therein and compliance by the Company
with its obligations thereunder have been duly authorized by all necessary
action and will not contravene any provision of applicable law or the
declaration of trust or by-laws of the Company or any agreement or other
instrument binding upon the Company, or any judgment, order or decree of
any governmental body, agency or court having jurisdiction over the
Company, and no consent, approval, authorization or order of or
qualification with any governmental body or agency is required for the
performance by the Company of its obligations under the Operative
Documents, except (i) such as may be required by the federal securities
laws or the securities or Blue Sky laws of the various states in
connection with the offer and sale of the Shares and (ii) to the extent
that the failure to obtain such would not, singly or in the aggregate,
have a material adverse effect on the Company.
(i) The historical and pro forma financial statements, together with
the related schedules and notes, of the Company, included in the
Registration Statement, the Effective Prospectus and the Final Prospectus,
conform to the requirements of the Securities Act and the Rules and
Regulations. Such historical financial statements fairly present the
financial position of the Company at the respective dates indicated in
accordance with generally accepted accounting principles applied on a
consistent basis for the periods indicated. Such pro forma financial
statements have been prepared on a basis consistent with such historical
statements, except for the pro forma adjustments specified therein, and
give effect to assumptions made on a reasonable basis and present fairly
the transactions reflected thereby as indicated in the Prospectus. The
financial and statistical data set forth in the Effective Prospectus and
the Final Prospectus fairly presents the information set forth therein on
the basis stated in the Effective Prospectus and the Final Prospectus.
Arthur Andersen LLP, whose report is included in the Effective Prospectus
and the Final Prospectus, are independent accountants as required by the
Securities Act and the Rules and Regulations.
(j) Subsequent to April 23, 1997, the Company has not sustained any
material loss or interference with its business or properties from fire,
flood, hurricane, accident or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action, order
or decree, which is not disclosed in the Effective Prospectus
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<PAGE> 6
and the Final Prospectus; and subsequent to the respective dates as of
which information is given in the Registration Statement, the Effective
Prospectus and the Final Prospectus, (i) the Company has not incurred any
material liabilities or obligations, direct or contingent, or entered into
any transactions not in the ordinary course of business, and (ii) there has
not been any issuance of options, warrants or rights to purchase interests
in, or the capital shares of, the Company, or any adverse change, or any
development involving a prospective adverse change, in the general affairs,
management, business, prospects, financial position, net worth or results
of operations of the Company, except in each case as described in the
Effective Prospectus and the Final Prospectus.
(k) Except as described in the Effective Prospectus and the Final
Prospectus, there is not pending, or to the knowledge of the Company
threatened, any legal or governmental action, suit, proceeding, inquiry or
investigation, to which the Company or any of its officers or trustees is a
party, or to which the property of the Company is subject, before or
brought by any court or governmental agency or body, wherein an unfavorable
decision, ruling or finding could prevent or materially hinder the
consummation of this Agreement or the Operative Documents or result in a
material adverse change in the business condition (financial or other),
prospects, financial position, net worth or results of operations of the
Company.
(l) (i) Except as has been disclosed in writing to the Representatives
or their counsel prior to the date hereof, to the knowledge of the Company,
the Initial Facilities (as defined in the Effective Prospectus) are
presently operated in compliance in all material respects with all
Environmental Laws (as defined below).
(ii) Except as has been disclosed in the Effective Prospectus and
the Final Prospectus, there are no Environmental Laws requiring any
material remediation, clean up, repairs, constructions or capital
expenditures (other than normal maintenance) with respect to the Initial
Facilities.
(iii) Except as has been disclosed in writing to the
Representatives or their counsel prior to the date hereof, (A) no notices
of any violation or alleged violation of any Environmental Laws relating to
the Initial Facilities or their uses have been received by the Company, or,
to the best knowledge of the Company, by Corrections Corporation of America
("CCA") or any prior owner, operator or occupant of the Initial Facilities,
and (B) there are no writs, injunctions, decrees, orders or judgments
outstanding, or any actions, suits, claims, proceedings or investigations
pending, or to the knowledge of the Company threatened, relating to the
ownership, use, maintenance or operation of the Initial Facilities.
(iv) Except as has been disclosed in writing to the Representatives
or their counsel prior to the date hereof, all material permits and
licenses required under any Environmental Laws in respect of the operations
of the Initial Facilities have been
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<PAGE> 7
obtained, and the Initial Facilities and CCA are in compliance, in all
material respects, with the terms and conditions of such permits and
licenses.
(v) All reports of environmental surveys, audits, investigations
and assessments in the possession or control of the Company or CCA relating
to the Initial Facilities have been disclosed to the Representatives or
their counsel.
(vi) "Environmental Law" means all applicable statutes,
regulations, rules, ordinances, codes, licenses, permits, orders, demands,
approvals, authorizations and similar items of all governmental agencies,
departments, commissions, boards, bureaus or instrumentalities of the
United States, states and political subdivisions thereof and all applicable
judicial, administrative and regulatory decrees, judgments and orders
relating to the protection of human health or the environment as in effect
as of the date hereof, including but not limited to those pertaining to
reporting, licensing, permitting, investigation and remediation of
emissions, discharges, releases or threatened releases of "Hazardous
Materials," substances, pollutants, contaminants or hazardous or toxic
substances, materials or wastes whether solid, liquid or gaseous in nature,
into the air, surface water, ground water or land, or relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of substances, pollutants, contaminants or hazardous
or toxic substances, materials or wastes, whether solid, liquid or gaseous
in nature, including by way of illustration and not by way of limitation,
(x) the Comprehensive Environmental Response, Compensation and Liability
Act (42 U.S.C. ss.ss. 960111 et seq.), the Resource Conservation and
Recovery Act (42 U.S.C. ss.ss.69011 et seq.), the Clean Air Act (42 U.S.C.
ss.ss. 7401 et seq.), the Federal Water Pollution Control Act (33 U.S.C.
ss.ss. 1251), the Safe Drinking Water Act (42 U.S.C. ss.ss. 300f et seq.),
the Toxic Substances Control Act (15 U.S.C. ss.ss. 2601 et seq.), the
Endangered Species Act (16 U.S.C. ss.ss. 1531 et seq.), the Emergency
Planning and Community Right-to-Know Act of 1986 (42 U.S.C. ss.ss. 11001 et
seq.) and (y) analogous state and local provisions.
(vii) "Hazardous Material" means any chemical substance:
(A) the presence of which requires investigation or
remediation under any federal, state or local statute,
regulation, ordinance, order, action or policy, administrative
request or civil complaint under any of the foregoing or under
common law; or
(B) which is defined as a "hazardous waste" or "hazardous
substance" under any federal, state or local statute, regulation
or ordinance or amendments thereto as in effect as of the date
hereof, or as hereafter amended, including, without limitation,
the Comprehensive Environmental Response, Compensation and
Liability Act (42 U.S.C. Section 9601 et seq.)
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<PAGE> 8
and or the Resource Conservation and Recovery Act (42 U.S.C.
Section 6901 et seq.); or
(C) which is toxic, explosive, corrosive, flammable,
infectious, radioactive, carcinogenic, mutagenic or otherwise
hazardous and is regulated by any governmental authority, agency,
department, commission, board, agency or instrumentality of the
United States, or any state or any political subdivision thereof
having or asserting jurisdiction over any of the Initial
Facilities; or
(D) the presence of which on any of the Initial Facilities
causes a nuisance upon such facilities or to adjacent properties
or poses a hazard to the health or safety of persons on or about
any of the Initial Facilities; or
(E) the presence of which on adjacent properties constitutes
a trespass by any owner or operator of the Initial Facilities; or
(F) which contains gasoline, diesel fuel or other petroleum
hydrocarbons, polychlorinated biphenyls (PCBs) or asbestos or
asbestos-containing materials or urea formaldehyde foam
insulation; or
(G) radon gas.
(m) Except as disclosed in the Operative Documents, (i) on the Closing
Date, the Company will have good and marketable title to the Initial
Facilities and good and marketable title to all personal property owned or
proposed to be owned by it which is material to the business of the
Company, in each case free and clear of all liens, encumbrances and defects
except such as are described in the Effective Prospectus and Final
Prospectus or in the title policies delivered to the Company on such date
or such as do not materially affect the value of such property and do not
interfere materially with the use made and proposed to be made of such
property by the Company; (ii) all permits which are necessary for the
operation of the Initial Facilities at the Closing Date (A) shall remain in
full force and effect and (B) permit the Initial Facilities to be operated
in compliance with all laws, rules, codes and regulations; (iii) the
operation of the buildings, fixtures and other improvements located on the
Initial Facilities as presently conducted is not in violation of any
applicable building code, zoning ordinance or other law or regulation; (iv)
neither the Company nor CCA has received notice of any proposed special
assessment or any proposed material change in any property tax, zoning or
land use laws; (v) there do not exist any material violations of any
declaration of covenants, conditions and restrictions with respect to any
of the Initial Facilities, nor, to the best of the Company's knowledge, is
there any existing state of facts or circumstances or condition or event
which could, with the giving of notice or passage of time, or both,
constitute such a violation; and (vi) the
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<PAGE> 9
improvements comprising any portion of the Initial Facilities (the
"Improvements") are free of undue infestation and are free of any and all
material physical, mechanical, structural, design and construction defects;
the Improvements (including, without limitation, all water, electric,
sewer, plumbing, heating, ventilating, gas and air conditioning servicing
the Improvements) are in good condition and proper working order and are
free of material defects, except as disclosed in the Operative Documents or
except as is not material in the aggregate.
(n) At the Closing Date, the Company will be organized in conformity
with the requirements for qualification as a real estate investment trust
under Sections 856 through 860 of the Internal Revenue Code of 1986, as
amended (the "Code"), and its proposed method of operation as described in
the Registration Statement will enable it to meet the requirements for
taxation as a real estate investment trust under the Code for the taxable
period commencing with the year ending December 31, 1997.
(o) __________ Common Shares, including the Shares, have been approved
for listing on the New York Stock Exchange (the "NYSE"), subject to
official notice of issuance.
(p) The Company has obtained title insurance on all of the Initial
Facilities and such title insurance is in full force and effect.
(q) Neither the Company, nor any of its trustees, officers or
controlling persons, has taken or will take, directly or indirectly, any
action resulting in a violation of Regulation M under the Exchange Act, or
designed to cause or result under the Exchange Act or otherwise in, or
which has constituted or which reasonably might be expected to constitute,
the stabilization or manipulation of the price of any securities of the
Company or facilitation of the sale or resale of the Shares.
(r) None of the entities that prepared environmental inspection
reports with respect to the Initial Facilities was employed for such
purpose on a contingent basis or has any substantial interest in the
Company or, to the knowledge of the Company, CCA, and none of them nor any
of their directors, officers or employees is connected with the Company or,
to the knowledge of the Company, CCA as a promoter, selling agent, voting
trustee, trustee, officer or employee.
(s) There are no contracts or other documents required by the
Securities Act or by the Rules and Regulations to be described in the
Registration Statement, the Effective Prospectus or the Final Prospectus or
to be filed as exhibits to the Registration Statement which have not been
described or filed as required. All such contracts to which the Company is
a party have been duly authorized, executed and delivered by the Company,
constitute valid and binding agreements of the Company and are enforceable
against the Company in accordance with the terms thereof. The Company has
performed all material
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<PAGE> 10
obligations required to be performed by it, and is neither in default in
any material respect nor has it received notice of any default or dispute
under, any such contract or other material instrument to which it is a
party or by which its property is bound or affected. To the best knowledge
of the Company, no other party under any such contract or other material
instrument to which it is a party is in default in any material respect
thereunder.
(t) The Company's system of internal accounting controls is sufficient
to meet the broad objectives of internal accounting controls insofar as
those objectives pertain to the prevention or detection of errors or
irregularities in amounts that would be material in relation to the
Company's financial statements.
(u) The Company has filed all foreign, federal, state and local income
and franchise tax returns required to be filed through the date hereof and
has paid all taxes shown as due therefrom to the extent such taxes have
become due and are not being contested in good faith; and there is no tax
deficiency that has been, nor does the Company have knowledge of any tax
deficiency which is likely to be, asserted against the Company, which if
determined adversely could materially and adversely affect the earnings,
assets, affairs, business prospects or condition (financial or other) of
the Company.
(v) The Company operates its business in conformity in all material
respects with all applicable statutes, common laws, ordinances, decrees,
orders, rules and regulations of governmental bodies. The Company has all
licenses, approvals or consents to operate its businesses in all locations
in which such businesses are currently being operated, and the Company is
not aware of any existing or imminent matter which may materially adversely
impact its operations or business prospects other than as specifically
disclosed in the Effective Prospectus and the Final Prospectus.
(w) The Company has not failed to file with the applicable regulatory
authorities any material statements, reports, information or forms required
by all applicable laws, regulations or orders; all such filings or
submissions were in material compliance with applicable laws when filed,
and no material deficiencies have been asserted by any regulatory
commission, agency or authority with respect to such filings or
submissions. The Company has not failed to maintain in full force and
effect any material licenses, registrations or permits necessary or proper
for the conduct of its business, or received any notification that any
revocation or limitation thereof is threatened or pending, and there is not
to the knowledge of the Company pending any change under any law,
regulation, license or permit which would materially adversely affect the
business, operations, property or business prospects of the Company. The
Company has not received any notice of violation of or been threatened with
a charge of violating and is not under investigation with respect to a
possible violation of any provision of any law, regulation or order.
(x) No labor dispute exists or is imminent with any of the employees
of the Company or otherwise which could materially adversely affect the
Company. The
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<PAGE> 11
Company is not aware of any existing or imminent labor disturbance by
employees of the Company or CCA which could be expected to materially
adversely affect the condition (financial or otherwise), results of
operations, properties, affairs, management, business affairs or business
prospects of the Company. The Company is in compliance with all federal,
state and local employment and labor laws, including, but not limited to,
laws relating to non-discrimination in hiring, promotion and pay of
employees.
(y) The Company owns or is in the process of obtaining or can obtain
on reasonable terms all material licenses, copyrights, trademarks, service
marks and trade names presently employed by it in connection with the
businesses proposed to be operated by it, and the Company has not received
any notice of infringement of or conflict with asserted rights of others
with respect to any of the foregoing which, alone or in the aggregate, if
the subject of an unfavorable decision, ruling or finding, could result in
any material adverse change in the condition, financial or otherwise, or in
the earnings, business affairs or business prospects of the Company.
(z) The Company is insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are
prudent and customary in the businesses in which it is engaged and in which
it proposes to engage; and the Company has no reason to believe that it
will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may
be necessary to continue its business.
(aa) Neither the Company nor, to the knowledge of the Company, any
trustee, officer, agent, employee or other person acting on behalf of the
Company has (i) used, or authorized the use of, any corporate or other
funds for unlawful payments, contributions, gifts or entertainment, (ii)
made unlawful expenditures relating to political activity to government
officials or others, or (iii) established or maintained any unlawful or
unrecorded funds in violation of any federal, state, local or foreign law
or regulation, including Section 30A of the Exchange Act. Neither the
Company nor, to the knowledge of the Company, any trustee, officer, agent,
employee or other person acting on behalf of the Company has accepted or
received any unlawful contributions, payments, gifts or expenditures.
(bb) The Company is not, will not become as a result of the
transactions contemplated hereby, and does not intend to conduct its
business in a manner that would cause it to become, an "investment company"
or a company "controlled" by an "investment company" within the meaning of
the Investment Company Act of 1940.
2. Purchase, Sale and Delivery of the Shares.
(a) On the basis of the representations, warranties, agreements and
covenants herein contained and subject to the terms and conditions herein
set forth, the Company
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<PAGE> 12
agrees to sell to the several Underwriters the Firm Shares, and each of the
Underwriters, severally and not jointly, agrees to purchase at a purchase
price of $______ per share, the number of Firm Shares set forth opposite
such Underwriter's name in Schedule I hereto. The Underwriters agree to
offer the Firm Shares to the public on the terms set forth in the Final
Prospectus under the caption "Underwriting."
(b) The Company hereby grants to the Underwriters an option to
purchase, solely for the purpose of covering over-allotments in the sale of
Firm Shares, all or any portion of the Option Shares at the purchase price
per share set forth above. The option granted hereby may be exercised as to
all or any part of the Option Shares at any time (but only once) within 30
days after the date of the Final Prospectus. The Underwriters shall not be
under any obligation to purchase any Option Shares prior to the exercise of
such option. The option granted hereby may be exercised by the Underwriters
by J.C. Bradford & Co. ("Bradford") giving written notice to the Company
setting forth the number of Option Shares to be purchased and the date and
time for delivery of and payment for such Option Shares and stating that
the Option Shares referred to therein are to be used for the purpose of
covering over-allotments in connection with the distribution and sale of
the Firm Shares. If such notice is given prior to the First Closing Date
(as defined herein), the date set forth therein for such delivery and
payment shall not be earlier than two full business days thereafter or the
First Closing Date, whichever occurs later. If such notice is given on or
after the First Closing Date, the date set forth therein for such delivery
and payment shall not be earlier than three full business days thereafter.
In either event, the date so set forth shall not be more than four full
business days after the date of such notice. The date and time set forth in
such notice is herein called the "Option Closing Date." Upon exercise of
the option, the Company shall become obligated to sell to the Underwriters,
and, subject to the terms and conditions herein set forth, the Underwriters
shall become obligated to purchase, for the account of each Underwriter,
from the Company, severally and not jointly, the number of Option Shares
specified in such notice. Option Shares shall be purchased for the accounts
of the Underwriters in proportion to the number of Firm Shares set forth
opposite such Underwriter's name in Schedule I hereto, except that the
respective purchase obligations of each Underwriter shall be adjusted so
that no Underwriter shall be obligated to purchase fractional Option
Shares.
(c) The Company shall not be obligated to deliver any of the Shares to
be delivered on the First Closing Date or on the Option Closing Date, as
the case may be, except upon payment for all the Shares to be purchased on
such Closing Date, as provided herein.
(d) Certificates in definitive form for the Firm Shares which each
Underwriter has agreed to purchase hereunder shall be delivered by or on
behalf of the Company to the Representatives for the account of each
Underwriter against payment by each such Underwriter or on its behalf of
the purchase price therefor by wire transfer of federal or other
immediately available funds to the order of the Company at an account
previously
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designated by the Company, at the offices of Bradford, 330 Commerce Street,
Nashville, Tennessee 37201, or at such other place as may be agreed upon by
Bradford and the Company, at 10:00 A.M., Nashville time, on the third full
business day after this Agreement becomes effective, or, at the election of
the Representatives, on the fourth full business day after this Agreement
becomes effective, if it becomes effective after 4:30 P.M. Eastern time, or
at such other time not later than the seventh full business day thereafter
as the Representatives and the Company may determine, such time of delivery
against payment being herein referred to as the "First Closing Date." The
First Closing Date and the Option Closing Date are herein individually
referred to as the "Closing Date" and collectively referred to as the
"Closing Dates." Certificates in definitive form for the Option Shares
which each Underwriter shall have agreed to purchase hereunder shall be
similarly delivered by or on behalf of the Company on the Option Closing
Date. The certificates in definitive form for the Shares to be delivered
will be in good delivery form and in such denominations and registered in
such names as Bradford may request not less than 48 hours prior to the
First Closing Date or the Option Closing Date, as the case may be. Such
certificates will be made available for checking and packaging at a
location in New York, New York as may be designated by Bradford, on a
business day at least 24 hours prior to the First Closing Date or the
Option Closing Date, as the case may be. It is understood that Bradford may
(but shall not be obligated to) make payment on behalf of any Underwriter
or Underwriters for the Shares to be purchased by such Underwriter or
Underwriters. No such payment shall relieve such Underwriter or
Underwriters from any of its or their obligations hereunder.
3. Offering by the Underwriters. After the Registration Statement becomes
effective, the several Underwriters propose to offer for sale to the public the
Firm Shares and any Option Shares which may be sold at the price and upon the
terms set forth in the Final Prospectus.
4. Covenants of the Company. The Company covenants and agrees with each of
the Underwriters that:
(a) The Company shall comply with the provisions of and make all
requisite filings with the Commission pursuant to Rules 424 and 430A of the
Rules and Regulations and shall notify the Representatives promptly (in
writing, if requested) of all such filings. The Company shall notify the
Representatives promptly of any request by the Commission for any amendment
of or supplement to the Registration Statement, the Effective Prospectus or
the Final Prospectus or for additional information; the Company shall
prepare and file with the Commission, promptly upon the Representatives'
request, any amendments of or supplements to the Registration Statement,
the Effective Prospectus or the Final Prospectus which, in the
Representatives' opinion, may be necessary or advisable in connection with
the distribution of the Shares; and the Company shall not file any
amendment of or supplement to the Registration Statement, the Effective
Prospectus or the Final Prospectus which is not approved by the
Representatives after reasonable notice thereof. The Company shall advise
the Representatives promptly of the issuance by the
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<PAGE> 14
Commission or any jurisdiction or other regulatory body of any stop order
or other order suspending the effectiveness of the Registration Statement,
suspending or preventing the use of any Preliminary Prospectus, the
Effective Prospectus or the Final Prospectus or suspending the
qualification of the Shares for offering or sale in any jurisdiction, or of
the institution of any proceedings for any such purpose; and the Company
shall use its best efforts to prevent the issuance of any stop order or
other such order and, should a stop order or other such order be issued, to
obtain as soon as possible the lifting thereof.
(b) The Company will take or cause to be taken all necessary action
and furnish to whomever the Representatives direct such information as may
be reasonably required in qualifying the Shares for offer and sale under
the securities or Blue Sky laws of such jurisdictions as the Underwriters
may designate and will continue such qualifications in effect for as long
as may be reasonably necessary to complete the distribution of the Shares.
(c) Within the time during which a Final Prospectus relating to the
Shares is required to be delivered under the Securities Act, the Company
shall comply with all requirements imposed upon it by the Securities Act,
as now and hereafter amended, and by the Rules and Regulations, as from
time to time in force, so far as is necessary to permit the continuance of
sales of or dealings in the Shares as contemplated by the provisions hereof
and the Final Prospectus. If during such period any event occurs as a
result of which the Final Prospectus as then amended or supplemented would
include an untrue statement of a material fact or omit to state a material
fact necessary to make the statements therein, in the light of the
circumstances then existing, not misleading, or if during such period it is
necessary to amend the Registration Statement or supplement the Final
Prospectus to comply with the Securities Act, the Company shall promptly
notify the Representatives and shall amend the Registration Statement or
supplement the Final Prospectus (at the expense of the Company) so as to
correct such statement or omission or effect such compliance.
(d) The Company will furnish without charge to the Representatives and
make available to the Underwriters copies of the Registration Statement
(four of which shall be signed and shall be accompanied by all exhibits,
each Preliminary Prospectus, the Effective Prospectus and the Final
Prospectus, and all amendments and supplements thereto, including any
prospectus or supplement prepared after the effective date of the
Registration Statement, in each case as soon as available and in such
quantities as the Underwriters may reasonably request.
(e) The Company will (A) deliver to the Representatives at such office
or offices as the Representatives may designate as many copies of the
Preliminary Prospectus and Final Prospectus as the Representatives may
reasonably request, (B) for a period of not more than nine months after the
Registration Statement becomes effective, send to the Underwriters as many
additional copies of the Final Prospectus and any supplement thereto
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<PAGE> 15
as the Representatives may reasonably request, and (C) following nine
months after the Registration Statement becomes effective, send to the
Underwriters at their expense as many additional copies of the Final
Prospectus and any supplement thereto as the Representatives may reasonably
request.
(f) The Company shall make generally available to its security
holders, in the manner contemplated by Rule 158(b) under the Securities Act
as promptly as practicable and in any event no later than 45 days after the
end of its fiscal quarter in which the first anniversary of the effective
date of the Registration Statement occurs, an earnings statement satisfying
the provisions of Section 11(a) of the Securities Act covering a period of
at least 12 consecutive months beginning after the effective date of the
Registration Statement.
(g) The Company will apply the net proceeds from the sale of the
Shares to be sold by it as set forth under the caption "Use of Proceeds" in
the Final Prospectus and will timely file reports on Form SR with the
Commission in accordance with Rule 463 of the Securities Act or any
successor provision.
(h) During a period of five years from the effective date of the
Registration Statement or such longer period as the Representatives may
reasonably request, the Company will furnish to the Representatives copies
of all reports and other communications (financial or other) furnished by
the Company to its shareholders and, as soon as available, copies of any
reports or financial statements furnished or filed by the Company to or
with the Commission or any national securities exchange on which any class
of securities of the Company may be listed.
(i) The Company will, from time to time, after the effective date of
the Registration Statement file with the Commission such reports as are
required by the Securities Act, the Exchange Act and the Rules and
Regulations, and shall also file with foreign, state and other governmental
securities commissions in jurisdictions where the Shares have been sold by
the Underwriters (as the Representatives shall have advised the Company in
writing) such reports as are required to be filed by the securities acts
and the regulations of those states.
(j) Except pursuant to this Agreement or with the Representatives'
written consent, for a period of 180 days from the effective date of the
Registration Statement, the Company will not, and the Company has provided
agreements executed by each of its officers and trustees providing that for
a period of 24 months from the effective date of the Registration
Statement, such person will not, offer for sale, sell (other than the
issuance by the Company of Common Shares pursuant to the exercise of
options granted pursuant to existing employee benefit plans and
agreements), grant any options (other than pursuant to existing employee
benefit plans and agreements), rights or warrants with respect to any
Common Shares, securities convertible into Common Shares or any other
capital shares
15
<PAGE> 16
of the Company, or otherwise dispose of, directly or indirectly, any Common
Shares or such other securities or capital shares.
(k) Neither the Company nor any of its officers, trustees or
affiliates will take, directly or indirectly, any action resulting in a
violation of Regulation M under the Exchange Act, or designed to cause or
result in, or which might constitute or be expected to constitute,
stabilization or manipulation of the price of the Common Shares.
(l) The Company will either conduct its business and operations as
described in the Final Prospectus or, if the Company makes any material
change to its business or operations as so conducted, promptly disclose
such change generally to the Company's security holders.
(m) If at any time during the 25 day period after the Registration
Statement is declared effective, any rumor, publication or event relating
to or affecting the Company shall occur as a result of which, in the
Representatives' opinion, the market price for the Shares has been or is
likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the Final
Prospectus), the Company will, after written notice from the
Representatives advising it as to the effect set forth above, prepare,
consult with the Representatives concerning the substance of and, subject
to the Rules and Regulations, disseminate a press release or other public
statement, reasonably satisfactory to the Representatives, responding to or
commenting on such rumor, publication or event.
(n) The Company will use its best efforts to effect the listing of the
Common Shares, subject to notice of issuance, on the NYSE on or before the
effective date of the Registration Statement.
(o) The Company will use its best efforts to meet the requirements to
qualify, effective for the taxable period commencing with the year ending
December 31, 1997 and in each year thereafter, as a real estate investment
trust under the Code.
(p) Subject to the terms thereof, the Company will do and perform its
obligations under each of the Operative Documents to which it is a party to
the extent required to consummate the transactions set forth therein and
all things required to be done or performed prior to the Closing Date
pursuant to this Agreement.
5. Expenses. The Company agrees with the Underwriters that (a) whether or
not the transactions contemplated by this Agreement are consummated or this
Agreement becomes effective or is terminated, the Company will pay all fees and
expenses incident to the performance of the obligations of the Company
hereunder, including, but not limited to, (i) the Commission's registration fee,
(ii) the expenses of printing (or reproduction) and distributing the
Registration Statement (including the financial statements therein and all
amendments and exhibits thereto),
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<PAGE> 17
each Preliminary Prospectus, the Effective Prospectus, the Final Prospectus, any
amendments or supplements thereto, any Marketing Materials (as defined herein)
and this Agreement and other underwriting documents, including Underwriter's
Questionnaires, Underwriter's Powers of Attorney, Blue Sky Memoranda, Agreements
Among Underwriters and Selected Dealer Agreements, (iii) fees and expenses of
accountants and counsel for the Company, (iv) expenses of registration or
qualification of the Shares under state Blue Sky and securities laws, including
the fees and disbursements of counsel to the Underwriters in connection
therewith, (v) filing fees paid or incurred by the Underwriters in connection
with filings with the NASD, (vi) expenses of listing the outstanding Common
Shares on the NYSE, (vii) all travel, lodging and reasonable living expenses
incurred by the Company in connection with marketing, dealer and other meetings
attended by the Company and the Underwriters in marketing the Shares, (viii) the
costs and charges of the Company's transfer agent and registrar and the cost of
preparing the certificates for the Shares, and (ix) all other costs and expenses
incident to the performance of its obligations hereunder not otherwise provided
for in this Section; and (b) all out-of-pocket expenses, including counsel fees,
disbursements and expenses, incurred by the Underwriters in connection with
investigating, preparing to market and marketing the Shares and proposing to
purchase and purchasing the Shares under this Agreement, will be borne and paid
by the Company if the sale of the Shares provided for herein is not consummated
(i) by reason of the termination of this Agreement by the Company pursuant to
Section 12(a)(i) or (ii) by reason of the termination of this Agreement by the
Representatives pursuant to Section 12(b)(ii), (iii), (iv) or (v) of this
Agreement.
6. Conditions of the Underwriters' Obligations. The respective obligations
of the Underwriters to purchase and pay for the Firm Shares shall be subject to
the accuracy of the representations and warranties of the Company herein as of
the date hereof and as of the Closing Date as if made on and as of the Closing
Date, to the accuracy of the statements of the Company's officers made pursuant
to the provisions hereof, to the performance by the Company of all of its
covenants and agreements hereunder and to the following additional conditions:
(a) The Registration Statement and all post-effective amendments
thereto shall have become effective not later than 5:30 P.M., Washington,
D.C. time, on the day following the date of this Agreement, or such later
time and date as shall have been consented to by the Representatives and
all filings required by Rule 424 and Rule 430A of the Rules and Regulations
shall have been made; no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been instituted or threatened or, to the knowledge of
the Company or the Underwriters, shall be contemplated by the Commission;
any request of the Commission for additional information (to be included in
the Registration Statement or the Final Prospectus or otherwise) shall have
been complied with to the Representatives' satisfaction; and the NASD, upon
review of the terms of the public offering of the Shares, shall not have
objected to such offering, such terms or the Underwriters' participation in
the same.
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<PAGE> 18
(b) No Representative shall have advised the Company that the
Registration Statement, Preliminary Prospectus, the Effective Prospectus or
Final Prospectus, or any amendment or any supplement thereto, contains an
untrue statement of fact which, in the Representatives' reasonable
judgment, is material, or omits to state a fact which, in the
Representatives' reasonable judgment, is material and is required to be
stated therein or necessary to make the statements therein not misleading.
(c) The Representatives shall have received opinions, dated the
Closing Date, from Stokes & Bartholomew, P.A., and Sherrard & Roe, PLC,
counsel for the Company, to the effect that:
(i) The Company has been duly formed and is validly existing as a
real estate investment trust under the laws of the State of Maryland,
with corporate power and authority to own its properties and conduct
its business as now conducted, and, based solely on certificates from
public officials, the Company is duly qualified to transact business
as a foreign corporation and is in good standing under the laws of the
States of Arizona, Kansas and Texas. The Company holds all licenses,
certificates, permits, franchises and authorizations from governmental
authorities necessary for the conduct of its business.
(ii) The Company does not have any interest, directly or
indirectly, in any corporation, joint venture, partnership or other
entity.
(iii) As of the dates specified therein, the Company had
authorized and issued capital stock as set forth under the caption
"Capitalization" in the Final Prospectus. All of the outstanding
Common Shares have been duly authorized and are validly issued, fully
paid and nonassessable, and the Shares to be sold by the Company have
been duly authorized, and upon issuance thereof and payment therefor
as provided herein, will be validly issued, fully paid and
nonassessable; none of the issued shares have been issued in violation
of or subject to any preemptive rights provided for by law, agreement
or the Company's declaration of trust or bylaws. To the knowledge of
such counsel, the Company does not have outstanding any options to
purchase, or any rights or warrants to subscribe for, or any
securities or obligations convertible into, or any contracts or
commitments to issue or sell any capital shares, and there are no
preemptive rights or other rights to subscribe for or purchase any
capital shares of the Company, or any restriction upon the transfer
of, the Shares pursuant to the Company's declaration of trust or
bylaws or any agreement or other instrument to which the Company is a
party or by which it may be bound, except as described in the
Effective Prospectus and Final Prospectus. Neither the filing of the
Registration Statement nor the offer or sale of the Shares as
contemplated by this Agreement gives rise to any rights, other than
those which have been waived or satisfied, for or relating to the
registration of any Common Shares or any other securities of the
Company. The Underwriters
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<PAGE> 19
will receive valid title to the Shares to be issued and delivered by
the Company pursuant to this Agreement, free and clear of all liens,
encumbrances, claims, security interests, restrictions, shareholders
agreements and voting trusts whatsoever. The capital shares of the
Company and the Shares conform in all material respects to the
description thereof contained in the Final Prospectus. All offers and
sales of the Company's interests and securities prior to the date
hereof were at all relevant times duly registered or exempt from the
registration requirements of the Securities Act and were duly
registered or the subject of an exemption from the registration
requirements of applicable state securities or Blue Sky laws.
(iv) The form of shares certificate to be used to evidence the
Common Shares will be in due and proper form and will comply with all
applicable legal requirements under the Maryland General Corporation
Law.
(v) No consent, approval, authorization or order of any court or
federal, Arizona, Kansas, Maryland, Tennessee or Texas governmental
agency or body or third party is required for the performance of this
Agreement by the Company or the consummation by the Company of the
transactions contemplated hereby, except such as have been obtained
under the Securities Act and such as may be required by the NASD and
under state securities or Blue Sky laws in connection with the
purchase and distribution of the Shares by the several Underwriters,
as to which such counsel need not express an opinion. The performance
of this Agreement by the Company and the consummation by the Company
of the transactions contemplated hereby will not conflict with or
result in a breach or violation by the Company of any of the terms or
provisions of, or constitute a default by the Company under, any
material indenture, mortgage, deed of trust, loan agreement, lease or
other agreement or instrument known to such counsel to which the
Company is a party or to which the Company or its properties is
subject, the declaration of trust or bylaws of the Company, any
statute, or any judgment, decree, order, rule or regulation of any
court or governmental agency or body known to such counsel to be
applicable to the Company or its properties.
(vi) The Company has full legal right, power and authority to
enter into this Agreement and to issue, sell and deliver the Shares to
be sold by it to the Underwriters as provided herein, and this
Agreement has been duly authorized, executed and delivered by the
Company and constitutes the valid and legally binding obligation of
the Company enforceable against the Company in accordance with its
terms, subject to the effect of bankruptcy, insolvency,
reorganization, arrangement, moratorium, fraudulent conveyance,
fraudulent transfer and other similar laws relating to or affecting
the rights of creditors.
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<PAGE> 20
(vii) No consent, approval, authorization or order of any court
or governmental agency or body or third party is required for the
performance of the Operative Documents by the Company or the
consummation by the Company of the transactions contemplated thereby,
except such as have been obtained under the Securities Act and such as
may be required and under state securities or Blue Sky laws in
connection with the purchase and distribution of the Shares by the
several Underwriters. The performance of the Operative Documents by
the Company and the consummation by the Company of the transactions
contemplated thereby will not conflict with or result in a breach or
violation by the Company of any of the terms or provisions of, or
constitute a default by the Company under, any material indenture,
mortgage, deed of trust, loan agreement, lease or other agreement or
instrument known to such counsel to which the Company is a party or to
which the Company or its properties is subject, the declaration of
trust or bylaws of the Company, any statute, or any judgment, decree,
order, rule or regulation of any court or governmental agency or body
known to such counsel to be applicable to the Company or its
properties.
(viii) The Company has full legal right, power and authority to
enter into each of the Operative Documents to which it is a party, and
each of the Operative Documents to which it is a party has been duly
authorized, executed and delivered by the Company and constitutes the
valid and legally binding obligation of the Company enforceable
against the Company in accordance with its terms, subject to the
effect of bankruptcy, insolvency, reorganization, arrangement,
moratorium, fraudulent conveyance, fraudulent transfer and other
similar laws relating to or affecting the rights of creditors.
(ix) Except as described in the Final Prospectus, there is not
pending or, to the knowledge of such counsel, threatened any action,
suit, proceeding, inquiry or investigation, to which the Company is a
party, or to which the property of the Company is subject, before or
brought by any court or governmental agency or body, which, if
determined adversely to the Company, could result in any material
adverse change in the business, financial position, net worth or
results of operations, or could materially adversely affect the
properties or assets, of the Company.
(x) To the knowledge of such counsel, no default exists, and no
event has occurred which with notice or after the lapse of time to
cure or both, would constitute a default, in the due performance and
observance of any term, covenant or condition of any material
indenture, mortgage, deed of trust, loan agreement, lease or other
agreement or instrument known to such counsel to which the Company is
a party or to which its properties are subject, or of the declaration
of trust or bylaws of the Company.
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<PAGE> 21
(xi) To the knowledge of such counsel, the Company is not in
violation of any law, ordinance, administrative or governmental rule
or regulation applicable to the Company or any decree of any court or
governmental agency or body having jurisdiction over the Company which
would have a material adverse effect on the Company.
(xii) To the knowledge of such counsel, there are no contracts or
documents of the Company which are required to be filed as exhibits to
the Registration Statement by the Securities Act or by the Rules and
Regulations which have not been so filed.
(xiii) The Company is not an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in
the Investment Company Act of 1940, as amended.
(xiv) The Registration Statement and all post-effective
amendments thereto have become effective under the Securities Act,
and, to the knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or, to the knowledge
of such counsel, are threatened, pending or contemplated by the
Commission. All filings required by Rule 424 and Rule 430A of the
Rules and Regulations have been made; the Registration Statement, the
Effective Prospectus and Final Prospectus, and any amendments or
supplements thereto, as of their respective effective or issue dates,
complied as to form in all material respects with the applicable
requirements of the Securities Act and the Rules and Regulations; the
descriptions in the Registration Statement, the Effective Prospectus
and the Final Prospectus of statutes, regulations, legal and
governmental proceedings, and contracts and other documents are
accurate in all material respects and present fairly in all material
respects the information required to be stated; and such counsel does
not know of any pending or threatened legal or governmental
proceedings, statutes or regulations required to be described in the
Final Prospectus which are not described as required nor of any
contracts or documents of a character required to be described in the
Registration Statement or the Final Prospectus or to be filed as
exhibits to the Registration Statement which are not described and
filed as required.
In addition to the matters set forth above, such opinion shall also include
a statement to the effect that nothing has come to the attention of such counsel
which leads them to believe that the Registration Statement, the Effective
Prospectus and the Final Prospectus or any amendment or supplement thereto
contains an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in light of the circumstances under which they were made (except
that such counsel need express no view as to financial statements, schedules and
other financial or statistical information included therein).
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<PAGE> 22
(d) The Representatives shall have received an opinion, dated the
Closing Date, of Stokes & Bartholomew, P.A., tax counsel to the Company,
reasonably acceptable to the Representatives that, upon completion of the
Formation Transactions, the Company will be in compliance with the
requirements for qualification as a real estate investment trust under the
Code, and the proposed method of operation of the Company as described in
the Registration Statement and the Final Prospectus and a certificate of a
responsible officer of the Company will enable the Company to meet the
requirements for taxation as a real estate investment trust under the Code
beginning with the year ended December 31, 1997.
(e) The Representatives shall be entitled to rely on the opinions
rendered by Sherrard & Roe, PLC, counsel to the Company, pursuant to the
Operative Documents.
The opinions to be rendered pursuant to paragraphs (c), (d) and (e) may be
limited to federal law, and as to foreign and state law matters, to the laws of
the states or jurisdictions in which such counsel is admitted to practice. As to
matters of Maryland law, such counsel may rely upon the opinion of Miles &
Stockbridge, a Professional Corporation, and as to matters of fact, on
certificates of officers of the Company and public officials.
(f) The Underwriters shall have received an opinion or opinions, dated
the Closing Date, of Bass, Berry & Sims PLC, counsel for the Underwriters,
with respect to the Registration Statement and the Final Prospectus, and
such other related matters as the Underwriters may require, and the Company
shall have furnished to such counsel such documents as they may reasonably
request for the purpose of enabling them to pass upon such matters.
(g) The Representatives shall have received from Arthur Andersen LLP,
a letter dated the date hereof and, at the Closing Date, a second letter
dated the Closing Date, in form and substance satisfactory to the
Representatives, stating that they are independent public accountants with
respect to the Company within the meaning of the Securities Act and the
applicable Rules and Regulations, and containing statements and information
of the type ordinarily included in accountants' "comfort letters" to
underwriters with respect to the financial statements and certain financial
information of the Company contained in the Registration Statement and the
Prospectus.
(h) The Representatives shall have received from Arthur Andersen LLP,
a letter dated the date hereof and, at the Closing Date, a second letter
dated the Closing Date, in form and substance satisfactory to the
Representatives, stating that they are independent public accountants with
respect to CCA within the meaning of the Securities Act and the applicable
Rules and Regulations, and to the effect that:
(i) In their opinion, the consolidated financial statements and
schedules of CCA examined by them and included in the Registration
Statement comply as to form in all material respects with the
applicable accounting
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<PAGE> 23
requirements of the Securities Act and the published Rules and
Regulations and are presented in accordance with generally accepted
accounting principles; and they have made a review in accordance with
standards established by the American Institute of Certified Public
Accountants of the interim consolidated financial statements, selected
financial data and/or condensed financial statements derived from
audited financial statements of CCA;
(ii) The unaudited selected consolidated financial information of
CCA included in the Preliminary Prospectus and the Final Prospectus
under the caption "CORRECTIONS CORPORATION OF AMERICA -- CERTAIN
SELECTED FINANCIAL INFORMATION" for the five years ended December 31,
1996, agrees with the corresponding amounts in the audited
consolidated financial statements included in the Final Prospectus or
previously reported on by them;
(iii) On the basis of a reading of the latest available interim
financial statements (unaudited) of CCA and its subsidiaries, a
reading of the minute books of CCA and its subsidiaries, inquiries of
officials of CCA and its subsidiaries responsible for financial and
accounting matters and other specified procedures, all of which have
been agreed to by the Representatives, nothing came to their attention
that caused them to believe that:
(A) The amounts included in the Preliminary Prospectus and
the Final Prospectus under the caption "CORRECTIONS CORPORATION
OF AMERICA -- CERTAIN SELECTED FINANCIAL INFORMATION" for the
five years ended December 31, 1996 do not agree with the
corresponding amounts in the audited consolidated financial
statements included in the Final Prospectus or previously
reported on by them;
(B) The unaudited pro forma financial information included
in the Registration Statement does not comply as to form in all
material respects with the applicable accounting requirements of
the Securities Act and the Rules and Regulations or that the pro
forma adjustments have not been properly applied to the
historical amounts in the compilation of the pro forma
information.
(C) The unaudited consolidated financial statements of CCA
included in the Registration Statement, including the amounts
included under the caption "CORRECTIONS CORPORATION OF AMERICA --
CERTAIN SELECTED FINANCIAL INFORMATION" do not comply as to form
in all material respects with the accounting requirements of the
federal securities laws and the related published rules and
regulations thereunder or are not in conformity with generally
accepted accounting
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<PAGE> 24
principles applied on a basis substantially consistent with the
basis for the audited financial statements contained in the
Registration Statement;
(D) Any other unaudited consolidated financial statement
data included in the Final Prospectus do not agree with the
corresponding items in the audited consolidated financial
statements from which data was derived and any such unaudited
data were not determined on a basis substantially consistent with
the basis for the corresponding amounts in the audited financial
statements contained in the Final Prospectus;
(E) at a specified date not more than five days prior to the
date of delivery of such respective letter, there was any change
in the capital stock, decline in total assets or stockholders'
equity or increase in long-term debt of CCA and its subsidiaries,
in each case as compared with amounts shown in the latest balance
sheets included in the Final Prospectus, except in each case for
changes, decreases or increases which are described in such
letters; and
(F) for the period from the closing date of the latest
statements of earnings included in the Effective Prospectus and
the Final Prospectus to a specified date not more than five days
prior to the date of delivery of such respective letter, there
were any decreases in revenues, net income and net income per
share of CCA, in each case as compared with the corresponding
period of the preceding year, except in each case for decreases
which are described in such letter.
(iv) They have carried out certain specified procedures, not
constituting an audit, with respect to certain amounts, percentages
and financial information specified by you which are derived from the
general accounting records of CCA and its subsidiaries, which appear
in the Effective Prospectus and the Final Prospectus and have compared
and agreed such amounts, percentages and financial information with
the accounting records of CCA and its subsidiaries or to analyses and
schedules prepared by CCA and its subsidiaries from its detailed
accounting records.
In the event that the letters to be delivered referred to above set forth
any such changes, decreases or increases, it shall be a further condition
to the obligations of the Underwriters that the Underwriters shall have
determined, after discussions with officers of CCA responsible for
financial and accounting matters and with Arthur Andersen LLP, that such
changes, decreases or increases as are set forth in such letters do not
reflect a material adverse change in the total assets, stockholders' equity
or long-term debt of CCA as compared with the amounts shown in the latest
balance sheets of CCA included in the Final
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<PAGE> 25
Prospectus, or a material adverse change in revenues or net income of CCA,
in each case as compared with the corresponding period of the prior year.
(i) There shall have been furnished to the Representatives a
certificate, dated the Closing Date and addressed to you, signed by the
Chief Executive Officer and Chief Financial Officer of the Company, to the
effect that:
(i) the representations and warranties of the Company in Section
1 of this Agreement are true and correct, as if made at and as of the
Closing Date, and the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied
at or prior to the Closing Date;
(ii) no stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for that
purpose have been initiated or are pending, or to their knowledge,
threatened under the Securities Act;
(iii) all filings required by Rule 424 and Rule 430A of the Rules
and Regulations have been made;
(iv) they have carefully examined the Registration Statement, the
Effective Prospectus and the Final Prospectus, and any amendments or
supplements thereto, and such documents do not include any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances under which they
were made; and
(v) since the effective date of the Registration Statement, there
has occurred no event required to be set forth in an amendment or
supplement to the Registration Statement, the Effective Prospectus or
the Final Prospectus which has not been so set forth.
(j) The Formation Transactions shall have been effected in accordance
with all the terms and conditions set forth in the Operative Documents,
subject only to the transfer of funds related thereto, or shall occur
simultaneously with the purchase and sale of the Firm Shares hereunder.
(k) CCA and the Company shall have entered into an agreement with the
Underwriters in form and substance satisfactory to the Representatives and
the representations and warranties of CCA set forth therein shall be true
and correct, as if made at and as of the Closing Date, and CCA shall have
complied with all the agreements on its part to be performed pursuant to
such agreement at or prior to the Closing Date.
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<PAGE> 26
(l) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Final Prospectus, and except as
stated therein, the Company has not sustained any material loss or
interference with its business or properties from fire, flood, hurricane,
accident or other calamity, whether or not covered by insurance, or from
any labor dispute or any court or governmental action, order or decree, or
become a party to or the subject of any litigation which is material to the
Company, nor shall there have been any material adverse change, or any
development involving a prospective material adverse change, in the
business, properties, key personnel, capitalization, prospects, net worth,
results of operations or condition (financial or other) of the Company,
which loss, interference, litigation or change, in the Representatives'
reasonable judgment shall render it unadvisable to commence or continue the
offering of the Shares at the offering price to the public set forth on the
cover page of the Prospectus or to proceed with the delivery of the Shares.
(m) The Shares shall be approved for listing on the NYSE, subject only
to official notice of issuance and evidence of satisfactory distribution.
(n) The Representatives shall have received the Lockup Agreements.
All such opinions, certificates, letters and documents delivered pursuant
to this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory to the Representatives and their counsel. The Company
shall furnish to the Representatives such conformed copies of such opinions,
certificates, letters and documents in such quantities as the Representatives
shall reasonably request.
The respective obligations of the Underwriters to purchase and pay for the
Option Shares shall be subject, in their discretion, to the conditions of this
Section 6, except that all references to the "Closing Date" shall be deemed to
refer to the Option Closing Date, if it shall be a date other than the Closing
Date.
7. Condition of the Company's Obligations. The obligations hereunder of the
Company are subject to the condition set forth in Section 6(a) hereof.
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each
Underwriter, and each person, if any, who controls any Underwriter within
the meaning of the Securities Act, against any losses, claims, damages or
liabilities to which such Underwriter or controlling person may become
subject under the Securities Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of
or are based in whole or in part upon: (i) any inaccuracy in the
representations and warranties of the Company contained herein; (ii) any
failure of the Company to perform its obligations hereunder or under law;
(iii) any untrue statement or alleged untrue statement
26
<PAGE> 27
of any material fact contained in (A) the Registration Statement, any
Preliminary Prospectus, the Effective Prospectus or Final Prospectus, or
any amendment or supplement thereto, (B) any audio or visual materials
supplied by the Company expressly for use in connection with the marketing
of the Shares, including without limitation, slides, videos, films and tape
recordings (the "Marketing Materials") or (C) in any Blue Sky application
or other written information prepared or executed by the Company filed in
any state or other jurisdiction in order to qualify any or all of the
Shares under the securities laws thereof (a "Blue Sky Application"); or
(iv) the omission or alleged omission to state in the Registration
Statement, any Preliminary Prospectus, the Effective Prospectus or Final
Prospectus or any amendment or supplement thereto, any Marketing Materials
or Blue Sky Application a material fact required to be stated therein or
necessary to make the statements therein not misleading; and will reimburse
each Underwriter and each such controlling person for any legal or other
expenses reasonably incurred by such Underwriter or such controlling person
in connection with investigating or defending any such loss, claim, damage,
liability or action as such expenses are incurred; provided, however, that
the Company will not be liable in any such case to the extent that any such
loss, claim, damage, or liability arises out of or is based upon any untrue
statement or alleged untrue statement or omission or alleged omission made
in the Registration Statement, the Preliminary Prospectus, the Effective
Prospectus or Final Prospectus, or any amendment or supplement thereto, or
any Marketing Materials or Blue Sky Application in reliance upon and in
conformity with written information relating to any Underwriter furnished
to the Company by any Underwriter specifically for use therein; and,
provided, further, that the foregoing indemnity with respect to any
Preliminary Prospectus shall not inure to the benefit of any Underwriter
from whom the person asserting any such loss, claim, damage or liability
purchased Shares if a copy of the Final Prospectus (or any Preliminary
Prospectus as supplemented) was not sent or given by or on behalf of such
Underwriter to such person at or prior to the written confirmation of the
sale of such Shares to such person in any case where such delivery is
required by the Securities Act and the Final Prospectus would have cured
the defect giving rise to such loss, claim, damage or liability.
(b) Each Underwriter will indemnify and hold harmless the Company,
each of its trustees, each of the Company's officers who signed the
Registration Statement and each person, if any, who controls the Company
within the meaning of the Securities Act against any losses, claims,
damages or liabilities to which the Company or any such trustee, officer or
controlling person may become subject, under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Effective
Prospectus or Final Prospectus, or any amendment or supplement thereto, or
arise out of or are based upon the omission or the alleged omission to
state in the Registration Statement, any Preliminary Prospectus, the
Effective Prospectus or Final Prospectus, or any amendment or supplement
thereto, a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but
27
<PAGE> 28
only to the extent, that such untrue statement or alleged untrue statement
or omission or alleged omission was made in reliance upon and in conformity
with written information relating to any Underwriter furnished to the
Company by any Underwriter specifically for use therein; and will reimburse
any legal or other expenses reasonably incurred by the Company and each
such controlling person in connection with investigating or defending any
such loss, claim, damage, liability or action as such expenses are
incurred.
(c) Promptly after receipt by an indemnified party under this Section
8 of notice of the commencement of any action, including governmental
proceedings, such indemnified party will, if a claim in respect thereof is
to be made against the indemnifying party under this Section 8 notify the
indemnifying party of the commencement thereof; but the omission so to
notify the indemnifying party will not relieve it from any liability which
it may have to any indemnified party hereunder except to the extent the
indemnifying party hereunder has been materially prejudiced thereby and in
any event shall not relieve it from liability otherwise than under this
Section 8. In case any such action is brought against any indemnified
party, and it notifies the indemnifying party of the commencement thereof,
the indemnifying party will be entitled to participate therein, and to the
extent that it may wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel
satisfactory to such indemnified party; and after notice from the
indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section 8 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation except that
the indemnified party shall have the right to employ separate counsel if,
in the indemnified party's reasonable judgment, it is advisable for the
indemnified party to be represented by separate counsel, and in that event
the fees and expenses of separate counsel shall be paid by the indemnifying
party.
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnity agreement provided for in the
preceding part of this Section 8 is for any reason held to be unavailable
to the Underwriters or the Company or is insufficient to hold harmless an
indemnified party, then the Company shall contribute to the damages paid by
the Underwriters, and the Underwriters shall contribute to the damages paid
by the Company; provided, however, that no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities
Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation. The amount of such contribution shall
(i) be in such proportion as shall be appropriate to reflect the relative
benefits received by the Company on the one hand and the Underwriters on
the other from the offering of the Shares and the consummation of the
Formation Transactions or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, be in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause
(i) above but also the relative fault of the Company on the one hand and
the Underwriters on the other with respect to the statements or omissions
which resulted in
28
<PAGE> 29
such loss, claim, damage or liability, or action in respect thereof, as
well as any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the Underwriters on the other
with respect to such offering shall be deemed to be in the same proportion
as the total net proceeds from the offering of the Shares purchased under
this Agreement (before deducting expenses) received by the Company, in the
case of the Company, and the total underwriting discounts and commissions
received by the Underwriters with respect to the Shares purchased under
this Agreement, in the case of the Underwriters, bear to the total gross
proceeds from the offering of the Shares under this Agreement, in each case
as set forth in the Prospectus. The relative fault shall be determined by
reference to whether the untrue or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact relates to
information supplied by the Company or the Underwriters, the intent of the
parties and their relative knowledge, access to information and opportunity
to correct or prevent such statement or omission. The Company and the
Underwriters agree that it would not be equitable if the amount of such
contribution were determined by pro rata or per capita allocation (even if
the Underwriters were treated as one entity for such purpose).
Notwithstanding the foregoing, no Underwriter or person controlling such
Underwriter shall be obligated to make contribution hereunder which in the
aggregate exceeds the underwriting discount applicable to the Shares
purchased by such Underwriter under this Agreement, less the aggregate
amount of any damages which such Underwriter and its controlling persons
have otherwise been required to pay in respect of the same or any similar
claim. The Underwriters' obligations to contribute hereunder are several in
proportion to their respective obligations and not joint. For purposes of
this Section, each person, if any, who controls an Underwriter within the
meaning of Section 15 of the Securities Act shall have the same rights to
contribution as such Underwriter, and each trustee of the Company, each
officer of the Company who signed the Registration Statement, and each
person, if any, who controls the Company within the meaning of Section 15
of the Securities Act, shall have the same rights to contribution as the
Company.
(e) No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
action, suit or proceeding in respect of which any indemnified party is a
party or is (or would be, if a claim were to be made against such
indemnified party) entitled to indemnity hereunder, unless such settlement
includes an unconditional release of such indemnified party from all
liability on claims that are the subject matter of such action, suit or
proceeding.
9. Default of Underwriters. If any Underwriter defaults in its obligation
to purchase Shares hereunder and if the total number of Shares which such
defaulting Underwriter agreed but failed to purchase is ten percent or less of
the total number of Shares to be sold hereunder, the non-defaulting Underwriters
shall be obligated severally to purchase (in the respective proportions which
the number of Shares set forth opposite the name of each non-defaulting
Underwriter in Schedule I hereto bears to the total number of Shares set forth
opposite the names of all the non-defaulting Underwriters), all the Shares which
such defaulting Underwriter or Underwriters agreed
29
<PAGE> 30
but failed to purchase. If any Underwriter so defaults and the total number of
Shares with respect to which such default or defaults occur is more than ten
percent of the total number of Shares to be sold hereunder, and arrangements
satisfactory to the other Underwriters and the Company for the purchase of such
Shares by other persons (who may include the non-defaulting Underwriters) are
not made within 36 hours after such default, this Agreement, insofar as it
relates to the sale of the Shares, will terminate without liability on the part
of the non-defaulting Underwriters or the Company except for (i) the provisions
of Section 8 hereof, and (ii) the expenses to be paid or reimbursed by the
Company pursuant to Section 5. As used in this Agreement, the term "Underwriter"
includes any person substituted for an Underwriter under this Section 9. Nothing
herein shall relieve a defaulting Underwriter from liability for its default.
10. Survival Clause. The respective representations, warranties,
agreements, covenants, indemnities and other statements of the Company, its
officers and the Underwriters set forth in this Agreement or made by or on
behalf of them, respectively, pursuant to this Agreement shall remain in full
force and effect, regardless of (a) any investigation made by or on behalf of
the Company, any of its officers, directors or trustees, any Underwriter or any
controlling person, (b) any termination of this Agreement and (c) delivery of
and payment for the Shares.
11. Effective Date. This Agreement shall become effective at whichever of
the following times shall first occur: (i) at 11:30 A.M., Washington, D.C. time,
on the next full business day following the date on which the Registration
Statement becomes effective or (ii) at such time after the Registration
Statement has become effective as the Representatives shall release the Firm
Shares for sale to the public; provided, however, that the provisions of
Sections 5, 8, 10 and 11 hereof shall at all times be effective. For purposes of
this Section 11, the Firm Shares shall be deemed to have been so released upon
the release by the Representatives for publication, at any time after the
Registration Statement has become effective, of any newspaper advertisement
relating to the Firm Shares or upon the release by the Representatives of
telegrams offering the Firm Shares for sale to securities dealers, whichever may
occur first.
12. Termination.
(a) The Company's obligations under this Agreement may be terminated
by the Company by notice to the Representatives (i) at any time before it
becomes effective in accordance with Section 11 hereof, or (ii) in the
event that the condition set forth in Section 7 shall not have been
satisfied at or prior to the First Closing Date.
(b) This Agreement may be terminated by the Representatives by notice
to the Company (i) at any time before it becomes effective in accordance
with Section 11 hereof; (ii) in the event that at or prior to the First
Closing Date the Company shall have failed, refused or been unable to
perform any agreement on the part of the Company to be performed hereunder
or any other condition to the obligations of the Underwriters hereunder is
not fulfilled; (iii) if at or prior to the Closing Date trading in
securities on the NYSE, the American Stock Exchange or the over-the-counter
market shall have been
30
<PAGE> 31
suspended or materially limited or minimum or maximum prices shall have
been established on either of such exchanges or such market, or a banking
moratorium shall have been declared by Federal or state authorities; (iv)
if at or prior to the Closing Date trading in securities of the Company
shall have been suspended; or (v) if there shall have been such a material
adverse change in general economic, political or financial conditions or if
the effect of international conditions on the financial markets in the
United States shall be such as, in your reasonable judgment, makes it
inadvisable to commence or continue the offering of the Shares at the
offering price to the public set forth on the cover page of the Prospectus
or to proceed with the delivery of the Shares.
(c) Termination of this Agreement pursuant to this Section 12 shall be
without liability of any party to any other party other than as provided in
Sections 5 and 8 hereof.
13. Notices. All communications hereunder shall be in writing and, if sent
to any of the Underwriters, shall be mailed or delivered or telegraphed and
confirmed in writing to the Representatives in care of J. C. Bradford & Co., J.
C. Bradford Financial Center, 330 Commerce Street, Nashville, Tennessee 37201,
Attention: Catherine Gemmato-Smith, or if sent to the Company shall be mailed,
delivered or telegraphed and confirmed in writing to the Company at 2200 Abbott
Martin Road, Suite 201, Nashville, Tennessee 37215, Attention: J. Michael
Quinlan.
14. Miscellaneous. This Agreement shall inure to the benefit of and be
binding upon the several Underwriters, the Company and their respective
successors and legal representatives. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any other person any legal
or equitable right, remedy or claim under or in respect of this Agreement. This
Agreement and all conditions and provisions hereof are intended to be for the
sole and exclusive benefit of the Company and the several Underwriters and for
the benefit of no other person except that (a) the representations and
warranties and indemnities of the Company contained in this Agreement shall also
be for the benefit of any person or persons who control any Underwriter within
the meaning of Section 15 of the Securities Act, and (b) the indemnities by the
Underwriters shall also be for the benefit of the trustees of the Company,
officers of the Company who have signed the Registration Statement and any
person or persons who control the Company within the meaning of Section 15 of
the Securities Act. No purchaser of Shares from any Underwriter will be deemed a
successor because of such purchase. The validity and interpretation of this
Agreement shall be governed by the laws of the State of Tennessee. This
Agreement may be executed in two or more counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument. Bradford hereby represents and warrants to the Company that it has
authority to act hereunder on behalf of the several Representatives and
Underwriters, and any action hereunder taken by the Representatives will be
binding upon all the Underwriters.
If the foregoing is in accordance with your understanding of our agreement,
please indicate your acceptance thereof in the space provided below for that
purpose, whereupon this
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<PAGE> 32
letter shall constitute a binding agreement among the Company and each of the
several Underwriters.
Very truly yours,
CCA PRISON REALTY TRUST
By:_______________________________________
Title:____________________________________
Confirmed and accepted as of the
date first above written.
J.C. BRADFORD & CO., L.L.C.
A.G. EDWARDS & SONS, INC.
LEGG MASON WOOD WALKER, INCORPORATED
LEHMAN BROTHERS INC.
PAINEWEBBER INCORPORATED
STEPHENS INC.
For themselves and as
Representatives of the Several
Underwriters
By:________________________________
Partner
32
<PAGE> 33
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
Number of
Firm Shares to
Underwriter be Purchased
- ----------- ------------
<S> <C>
J.C. Bradford & Co.................................
A.G. Edwards & Sons, Inc...........................
Legg Mason Wood Walker, Incorporated...............
Lehman Brothers Inc................................
PaineWebber Incorporated...........................
Stephens Inc.......................................
----------
Total.............................................. 17,000,000
==========
</TABLE>
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
DECLARATION OF TRUST
OF
CCA PRISON REALTY TRUST
1. Name. The name of the trust is CCA Prison Realty Trust (the
"Trust").
2. Purposes and Powers. The Trust is a for-profit real estate
investment trust organized for the purpose of engaging in any activity
permitted to real estate investment trusts under the laws of the State of
Maryland. The Trust shall have all the powers granted to real estate
investment trusts generally by the Maryland REIT Law or any successor statute
and shall have further powers as are not inconsistent with and are appropriate
to promote and attain its purposes.
3. Registered and Principal Office. The address of the Trust's
initial registered office is 32 South Street, Baltimore, Maryland 21202. The
address of the Trust's initial principal office is 2200 Abbott Martin Road,
Suite 201, Nashville, Tennessee 37215.
4. Registered Agent. The name of the Trust's initial registered
agent at that office is Corporation Trust Incorporated.
5. Authorized Capital Shares. The total number of shares which
the Trust has authority to issue is ninety million (90,000,000) shares of a
class denominated Common Shares, $.01 par value per share, and ten million
(10,000,000) shares of a class denominated Preferred Shares, $.01 par value per
share.
Common Shares maybe issued from time to time upon authorization by the
Board of Trustees of the Trust. The Preferred Shares may be issued from time
to time upon authorization by the Board of Trustees of the Trust, in such
series and with such preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications or other provisions
as may be fixed by the Board of Trustees, except as otherwise set forth in this
Declaration of Trust. Shares may be issued for such consideration as the Board
of Trustees determines, or, if issued as a result of a share dividend or share
split, without any consideration, and all shares so issued will be fully paid
and non-assessable by the Trust.
6. Annual Meeting. A meeting of shareholders shall be held
annually after the delivery of the annual report at a convenient location upon
proper notice as set forth in the Bylaws of the Trust.
7. Trustees. (a) The Trust shall have a Board of Trustees
consisting of not less than three (3) nor more than fifteen (15) members, as
determined from time to time by the Board of Trustees by resolution of the
Board of Trustees in accordance with the Bylaws of the Trust, provided that the
number of trustees shall never be less than the minimum number required by the
Maryland REIT Law. The Board of Trustees shall initially consist of nine (9)
trustees. At lease three (3) members of the Board of Trustees must be
Independent Trustees. An "Independent Trustee" is defined to be an individual
who qualifies as a trustee under the Bylaws of the Company but who is neither
an officer or an employee of the Trust nor an officer or an employee of
Corrections
<PAGE> 2
Corporation of America, a Delaware corporation ("CCA"), or any lessee or tenant
of Trust property. A trustee need not be a shareholder. The business and affairs
of the Trust shall be managed under the direction of the trustees and the
trustees shall have full, exlusive and absolute power, control, and authority
over the assets of the Trust and over the business of the Trust as if they, in
their own right, are the sole owners of the Trust. This Declaration of Trust
shall be construed with the presumption in favor of the grant of power and
authority to the trustees.
(b) The trustees of the Trust (other than any trustees who may be
elected by holders of Preferred Shares as provided for pursuant to Section 5
hereof) shall be and are divided into three classes: Class I, Class II and
Class III. The number of trustees in each class shall be as nearly equal as
the then-authorized number of trustees constituting the Board of Trustees
permits. Each trustee shall serve for a term ending on the date of the third
Annual Meeting following the Annual Meeting at which such trustee was elected;
provided, however, that each initial director in Class I shall serve for a term
ending on the date of the Annual Meeting held in 1998, each initial trustee in
Class II shall serve for a term ending on the date of the Annual Meeting held
in 1999, and each trustee in Class III shall serve for a term ending on the
date of the Annual Meeting held in 2000. Any trustee who may be elected by
holders of Preferred Shares as provided for pursuant to Section 5 hereof shall
serve for a term ending on the date of the Annual Meeting next following the
Annual Meeting at which such trustee was elected. The names of the initial
Class I trustees are: Charles Ray Bell, Michael W. Devlin, and Charles W.
Thomas. The names of the initial Class II trustees are: D. Robert Crants, III,
Jackson W. Moore, and Rusty L. Moore. The names of the initial Class III
trustees are: Doctor R. Crants, Jr., J. Michael Quinlan, and Joseph V.
Russell.
(c) In the event of any increase or decrease in the authorized
number of trustees:
1. Each trustee then serving shall nevertheless continue
as a trustee of the class of which he is a member until the expiration
of his term or his prior death, retirement, resignation or removal;
and
2. Except to the extent that an increase or decrease in
the authorized number of trustees occurs in connection with the rights
of holders of Preferred Shares to elect additional trustees, the
newly-created or eliminated trusteeships resulting from any increase
or decrease shall be apportioned by the Board of Trustees among the
three classes so as to keep the number of trustees in each class as
nearly equal as possible.
(d) Notwithstanding the provisions of subsections (b) and (c) of
this Section 7, each trustee shall serve until his successor is elected and
qualified or until his death, retirement, resignation or removal.
(e) The Board of Trustees or shareholders may, at any time, remove
any trustee, with or without cause, by an affirmative vote of a majority of
trustees or a majority of holders of shares entitled to vote in the election of
trustees, as the case may be.
(f) Except as may otherwise be provided pursuant to Section 5
hereof with respect to any rights of holders of Preferred Shares to elect
additional trustees or any agreement relating to the right to designate
nominees for election to the Board of Trustees, should a vacancy in the Board
of Trustees occur or be created (whether arising through death, retirement,
resignation or removal or
2
<PAGE> 3
through an increase but not a decrease in the number of authorized trustees),
such vacancy shall be filled by the affirmative vote of a majority of the
remaining trustees, even though less than a quorum of the Board of Trustees
may exist. A trustee so elected to fill a vacancy shall serve for the
remainder of the term of the class to which he was elected.
(g) During any period when the holders of any series of Preferred
Shares have the right to elect additional trustees as provided for or fixed
pursuant to the provisions of Section 5 hereof, then upon commencement and for
the duration of the period during which such right continues (i) the then
otherwise total and authorized number of trustees of the Trust shall
automatically be increased by the number of such additional trustees, and such
holders of Preferred Shares shall be entitled to elect the additional trustees
so provided for or fixed pursuant to said provisions, and (ii) each such
additional trustee shall serve until such trustee's successor shall have been
duly elected and qualified, or until such trustee's right to hold such office
terminates pursuant to said provisions, whichever occurs earlier, subject to
his earlier death, disqualification, resignation or removal.
(h) The provisions set forth in this Section 7 may not be repealed
or amended in any respect, and no provision imposing cumulative voting in the
election of trustees may be added, unless such action is approved by the
affirmative vote of the holders of not less than two-thirds (2/3) of all of the
outstanding shares of the Trust entitled to vote generally in the election of
trustees.
(i) (a) A trustee shall perform his or her duties as a trustee,
including his or her duties as a member of a committee of the
board of Trustees on which he or she serves:
(i) in good faith;
(ii) in a manner he or she reasonably believes to
be in the best interest of the Trust; and
(iii) with the care that an ordinarily prudent
person in a like position would use under
similar circumstances.
(b) In performing his or her duties, a trustee is entitled to
rely on any information, opinion, report or statement,
including any financial statement or other financial data,
prepared or presented by:
(i) an officer or employee of the Trust whom the
trustee reasonably believes to be reliable
and competent in the manners presented;
(ii) a lawyer, certified public accountant or
other person, as to the matter which the
trustee reasonably believes to be within the
person's professional or expert competence;
or
3
<PAGE> 4
(iii) a committee of the Board of Trustees
on which the trustee does not serve,
as to a matter within its designated
authority, if the trustee reasonable
believes the committee to merit
confidence.
8. Dividends and Rights Upon Liquidation. After the provisions
with respect to preferential dividends of any series of Preferred Shares, if
any, shall have been satisfied, and subject to any other conditions that may be
fixed in accordance with the provisions of Section 5, then, and not otherwise,
all Common Shares will participate equally in dividends payable to holders of
shares of Common Shares when and as declared by the Board of Trustees at their
discretion. In the event of voluntary or involuntary dissolution or
liquidating of the Trust, after distribution in full of the preferential
amounts, if any, to be distributed to the holders of Preferred Shares, the
holders of Common Shares shall, subject to the additional rights if any of the
holders of Preferred Shares fixed in accordance with Section 5, be entitled to
receive all of the remaining assets of the Trust, tangible and intangible, of
whatever kind available for distribution to shareholders ratably in proportion
to the number of Common Shares held by them respectively.
9. Voting. Each holder of Common Shares shall be entitled to one
vote per share on all matters to be voted on by the shareholders of the Trust.
The holders of Preferred Shares shall have no voting rights and shall have no
rights to receive notice of any meetings, except as required by law or as
expressly provided in the resolution establishing any series thereof.
10. Preemptive Rights. No holder of Common Shares or Preferred
Shares of the Trust shall have any preemptive or preferential rights to
subscribe to or purchase (i) any shares of any class of the Trust, whether now
or hereafter authorized; (ii) any warrants, rights, or options to purchase any
such shares; or (iii) any securities or obligations convertible into any such
shares or into warrants, rights, or options to purchase any such shares.
11. Limitation on Liability. To the maximum extent that Maryland
law in effect from time to time permits limitation of liability of trustees or
officers of real estate investment trusts, no trustee or officer of the Trust
shall be liable to the Trust or its shareholders for money damages. Neither
the amendment nor repeal of this provision, nor the adoption or amendment of
any other provision of this Declaration of Trust or Bylaws inconsistent with
this provision, shall apply to or affect in any respect the applicability of
the preceding sentence with respect to any act or failure to act which occurred
prior to such amendment, repeal or adoption.
12. Indemnification. The Trust shall indemnify and advance
expenses to a trustee, officer, employee or agent of the Trust in connection
with a proceeding to the fullest extent permitted by and in accordance with the
laws of the State of Maryland in effect from time to time.
13. Insurance. The Trust may purchase and maintain insurance on
behalf of any person who is or was a trustee, officer, employee or agent of the
Trust or who, while a trustee, officer, employee or agent of the Trust is or
was serving at the request of the Trust as a director, officer, partner,
trustee, employee or agent of another foreign or domestic corporation,
partnership, joint
4
<PAGE> 5
venture, trust, employee benefit plan or other enterprise, against liability
asserted against or incurred by such person in that capacity or arising from
such person's status as a trustee, officer, employee or agent, whether or not
the Trust would have power to indemnify such person against the same liability
under Section 12 hereof.
14. REIT Status. The Trust is intended to qualify as a real
estate investment trust under the Maryland REIT Law, or any successor statutes.
The Trust shall seek to elect and maintain status as a real estate investment
trust ("REIT") under Sections 856-860 of the Internal Revenue Code of 1986, as
amended from time to time (the "Code"). It shall be the duty of the Board of
Trustees to ensure that the Trust satisfies the requirements for qualification
as a REIT under the Code, including, but not limited to, the ownership of its
outstanding shares, the nature of its assets, the sources of its income, and
the amount and timing of its distributions to its shareholders. The Board of
Trustees shall take no action to disqualify the Trust as a REIT or to otherwise
revoke the Trust's election to be taxed as a REIT without the affirmative vote
of the holders of not less than two-thirds (2/3) of all of the outstanding
shares of the Trust entitled to vote on such matter at a meeting of the
Shareholders.
15. Restrictions.
(a) Restrictions on Transfer.
(1) Definitions. The following terms shall have the
following meanings:
(A) "Beneficial Ownership" shall mean ownership
of Equity Shares by a Person who would be treated as an owner of such Equity
Shares either directly or indirectly through the application of Section 544 of
the Code, as modified by Section 856(b)(1)(B) of the Code. The terms
"Beneficial Owner", "Beneficially Owns", and "Beneficially Owned" shall have
correlative meanings.
(B) "Beneficiary" shall mean, with respect to any
Share Trust, one or more organizations described in each of Section
170(b)(1)(A) and Section 170(c) of the Code that are named by the Trust as the
beneficiary or beneficiaries of such Share Trust, in accordance with the
provisions of Section 15(a) hereof.
(C) "Board of Trustees shall mean the Board of
Trustees of the Trust.
(D) "Code" shall mean the Internal Revenue Code
of 1986, as amended from time to time.
(E) "Constructive Ownership" shall mean ownership
of equity interests by a Person who would be treated as an owner of such
interests either directly or indirectly through the application of Section 318
of the Code, as modified by Section 856(d)(5) of the Code. The terms
5
<PAGE> 6
"Constructive Owner", "Constructively Owns", and "Constructively Owned" shall
have correlative meanings.
(F) "Equity Shares" shall mean Preferred Shares
and Common Shares. The term "Equity Shares" shall include all Preferred Shares
and Common Shares that are held as Shares-in-Trust in accordance with the
provisions of Section 15 hereof.
(G) "Initial Public Offering" means the sale of
Common Shares pursuant to the Trusts's first effective registration statement
for such Common Shares filed under the Securities Act of 1933, as amended.
(H) "Market Price" shall mean, with respect to
Common Shares or Preferred Shares, the last reported sales price of such shares
reported on the New York Stock Exchange on the trading day immediately
preceding the relevant date, or if such shares are not then traded on the New
York Stock Exchange, the last reported sales price of such shares on the
trading day immediately preceding the relevant date as reported on any exchange
or quotation system over which such shares may be traded, or if such shares are
not then traded over any exchange or quotation system, then the market price of
such shares on the relevant date as determined in good faith by the Board of
Trustees of the Trust.
(I) "Non-Transfer Event" shall mean an event
other than a purported Transfer that would cause any Person to Beneficially Own
or Constructively Own Equity Shares in excess of the Ownership Limit,
including, but not limited to, the granting of any option or entering into any
agreement for the sale, transfer or other disposition of Equity Shares or the
sale, transfer, assignment or other disposition of any securities or rights
convertible into or exchangeable for Equity Shares.
(J) "Ownership Limit" shall mean, with respect to
the Common Shares, 9.8% of the number of outstanding Common Shares and, with
respect to the Preferred Shares, 9.8% of the number of outstanding Preferred
Shares.
(K) "Permitted Transferee" shall mean any Person
designated as a Permitted Transferee in accordance with the provisions of
subparagraph 15(b)(5) hereof.
(L) "Person" shall mean an individual,
corporation, partnership, estate, trust (other than a trust qualified under
Section 401(a) or 501(c)(17) of the Code), a portion of a trust permanently set
aside for or to be used exclusively for the purposes described in Section
642(c) of the Code, association, private foundation within the meaning of
Section 509(a) of the Code, joint stock company or other entity and also
includes a group as that term is used for purposes of Section 13(d)(3) of the
Securities Exchange Act of 1934, as amended.
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(M) "Prohibited Owner" shall mean, with respect
to any purported Transfer or Non-Transfer Event, any Person who, but for the
provisions of Section 15(b) hereof, would own record title to Equity Shares.
(N) "REIT" shall mean a real estate investment
trust under Section 856 of the Code.
(O) "Restriction Termination Date" shall mean the
first day after the date of the Initial Public Offering on which the Board of
Trustees and the shareholders of the Trust determine that it is no longer in
the best interests of the Trust to attempt to, or continue to, qualify as a
REIT.
(P) "Shares-in-Trust" shall mean any Equity
Shares designated Shares-in-Trust pursuant to Section 15(a)(3) hereof.
(Q) "Share Trust" shall mean any separate trust
created pursuant to Section 15(a)(3) hereof and administered in accordance with
the terms of Section 15(b) hereof, for the exclusive benefit of any
Beneficiary.
(R) "Share Trustee" shall mean any person or
entity unaffiliated with both the Trust and any Prohibited Owner, such Share
Trustee to be designated by the Trust to act as trustee of any Share Trust, or
any successor trustee thereof.
(S) "Transfer" shall mean any sale, transfer,
gift, assignment, devise or other disposition of Equity Shares, whether
voluntary or involuntary, whether of record, constructively or beneficially and
whether by operation of law or otherwise.
(2) Restriction on Transfers.
(A) Except as provided in subparagraph 15(a)(7)
hereof, from the date of the Initial Public Offering and prior to the
Restriction Termination Date, (i) no person shall Beneficially Own or
Constructively Own outstanding Equity Shares in excess of the Ownership Limit
and (ii) any Transfer or Non-Transfer Event that, if effective, would result in
any Person Beneficially Owning or Constructively Owning Equity Shares in excess
of the Ownership Limit shall be void ab initio as to that number of Equity
Shares which would be otherwise Beneficially Owned or Constructively Owned by
such Person in excess of the Ownership Limit, and the intended transferee shall
acquire no rights with respect to such excess Equity Shares.
(B) Except as provided in subparagraph 15(a)(7)
hereof, from the date of the Initial Public Offering and prior to the
Restriction Termination Date, any Transfer or Non-Transfer Event that, if
effective, would result in the Equity Shares being beneficially owned by fewer
than 100 Persons (determined without reference to any rules of attribution)
shall be void ab initio as to the Transfer of that number of shares which would
result in the Equity Shares being beneficially
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<PAGE> 8
owned by fewer than 100 persons, and the intended transferee shall acquire no
rights with respect to such excess Equity Shares.
(C) From the date of the Public Offering and
prior to the Restriction Termination Date, any Transfer or Non-Transfer Event
that, if effective, would result in the Trust being "closely held" within the
meaning of Section 856(b) of the Code shall be void ab initio as to that number
of Equity Shares which would cause the Trust to be "closely held" within the
meaning of Section 856(b) of the Code, and the intended transferee shall
acquire no rights with respect to such excess Equity Shares.
(D) From the date of the Initial Public Offering
and prior to the Restriction Termination Date, any Transfer or Non-Transfer
Event that, if effective, would cause the Trust to Constructively Own 10% or
more of the ownership interests in a tenant of the Trust's real property,
within the meaning of Sections 856(d)(2) of the Code, shall be void ab initio
as to that number of Equity Shares which would cause the Trust to
Constructively Own 10% or more of the ownership interests in a tenant of the
Trust's real property, within the meaning of Section 856(d)(2) of the Code, and
the intended transferee shall acquire no rights with respect to such excess
Equity Shares.
(3) Transfer to Share Trust.
(A) If, notwithstanding the other provisions
contained in this Section 15, at any time after the date of the Initial Public
Offering and prior to the Restriction Termination Date, there is a purported
Transfer or Non-Transfer Event such that any Person would either Beneficially
Own or Constructively Own Equity Shares in excess of the Ownership Limit, then,
(i) except as otherwise provided in Section 15(a)(7) hereof, the purported
transferee shall acquire no right or interest (and, in the case of a
Non-Transfer Event, the person holding record title to the Equity Shares
Beneficially Owned or Constructively Owned by such Beneficial Owner or
Constructive Owner, shall cease to own any right or interest) in such number of
Equity Shares which would cause such Beneficial Owner or Constructive Owner to
Beneficially Own or Constructively Own Equity Shares in excess of the Ownership
Limit, and (ii) such number of Equity Shares in excess of the Ownership Limit
(rounded up to the nearest whole share) shall be designated Shares-in-Trust
and, in accordance with the provisions of Section 15(b) hereof, transferred
automatically and by operation of law to a Share Trust to be held in accordance
with that Section 15(b). Such transfer to a Share Trust and the designation of
shares as Shares-in-Trust shall be effective as of the close of business on the
business day prior to the date of the Transfer or Non-Transfer Event, as the
case may be.
(B) If, notwithstanding the provisions contained
in this Section 15, at any time after the date of the Initial Public Offering
and prior to the Restriction Termination Date, there is a purported Transfer or
Non-Transfer Event that, if effective, would cause the Trust to become
"closely held" within the meaning of Section 856(b) of the Code or would cause
the Trust to Constructively Own 10% or more of the ownership interests in a
tenant of the Trust's real property, within the meaning of Section 856(b)(2)(B)
of the Code, then (i) the purported transferee shall not acquire any right or
interest (and, in the case of a Non-Transfer Event, the person holding record
title
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to the Equity Shares with respect to which such Non-Transfer Event, occurred,
shall cease to own any right or interest) in such number of Equity Shares the
ownership of which by such purported transferee or record holder would cause
the Trust to be "closely held" within the meaning of Section 856(b) of the Code
or would cause the Trust to Constructively Own 10% or more of the ownership
interests in a tenant of the Trust's real property, within the meaning of
Sections 856(b)(2)(B) of the Code, and (ii) such number of Equity Shares
(rounded up to the nearest whole share) shall be designated Shares-in-Trust
and, in accordance with the provisions of Section 15(b) hereof, transferred
automatically and by operation of law to a Share Trust to be held in accordance
with that Section 15(b). Such transfer to a Share Trust and the designation of
shares as Shares-In-Trust shall be effective as of the close of business on the
business day prior to the date of the Transfer or Non-Transfer Event, as the
case may be.
(4) Remedies For Breach. If the Trust or its designees
shall at any time determine in good faith that a Transfer has taken place in
violation of Section 15(a)(2) hereof or that a Person intends to acquire or has
attempted to acquire Beneficial Ownership or Constructive Ownership of any
Equity Shares in violation of Section 15(a)(2) hereof, the Trust shall take
such action as it deems advisable to refuse to give effect to or to prevent
such Transfer or acquisition, including, but not limited to, refusing to give
effect to such Transfer on the books of the Trust or instituting proceedings to
enjoin such Transfer or acquisition.
(5) Notice of Restricted Transfer. Any Person who
acquires or attempts to acquire Equity Shares in violation of Section 15(a)(2)
hereof, or any Person who owned Equity Shares that were transferred to a Share
Trust pursuant to the provisions of Section 15(a)(3) hereof, shall immediately
give written notice to the Trust of such event and shall provide to the Trust
such other information as the Trust may request in order to determine the
effect, if any, of such Transfer or the Non-Transfer Event, as the case may be,
on the Trust's status as a REIT.
(6) Owners Required to Provide Information. From the
date of the Initial Public Offering and prior to the Restriction Termination
Date:
(a) Every Beneficial Owner or Constructive Owner
of more than 5%, or such lower percentages as required pursuant to regulations
under the Code, of the outstanding Equity Shares of the Trust shall, within 30
days after January 1 of each year, give written notice to the Trust stating the
name and address of such Beneficial Owner or Constructive Owner, the number of
shares of Equity Shares Beneficially Owned or Constructively Owned, and a
description of how such shares are held. Each such Beneficial Owner or
Constructive Owner shall provide to the Trust such additional information as
the Trust may request in order to determine the effect, if any, of such
Beneficial Ownership or Constructive Ownership on the Trust's status as a REIT
and to ensure compliance with the Ownership Limit.
(b) Each person who is a Beneficial Owner or
Constructive Owner of Equity Shares and each Person (including the shareholder
of record) who is holding Equity Shares for a Beneficial Owner or Constructive
Owner shall provide to the Trust such information as the
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Trust may request in order to determine the Trust's status as a REIT and to
ensure compliance with the Ownership Limit.
(7) Exception. The Board of Trustees, in its discretion,
may exempt a Person from the Ownership Limit, if such Person is (i) not an
individual for purposes of Section 542(a)(2) of the Code or (ii) is an
underwriter which participates in a public offering of the Equity Shares for a
period of 90 days following the purchase by such underwriter of the Equity
Shares, provided that the Board of Trustees obtains such representations and
undertakings from such Person as are reasonably necessary to ascertain that the
Trust's status as a REIT will not be adversely affected.
(b) Shares-in-Trust.
(1) Share Trust. Any Equity Shares transferred to a
Share Trust and designated Shares-in-Trust pursuant to Section 15(a)(3) hereof
shall be held for the exclusive benefit of the Beneficiary. The Trust shall
name a Beneficiary of each Share Trust within five days after discovery of the
existence thereof. Any transfer to a Share Trust, and subsequent designation
of Equity Shares as Shares-in-Trust pursuant to Section 15(a)(3) hereof, shall
be effective as of the close of business on the business day prior to the date
of the Transfer or Non-Transfer Event that results in the transfer to the Share
Trust. Shares-in-Trust shall remain issued and outstanding Equity Shares of
the Trust and shall be entitled to the same rights and privileges on identical
terms and conditions as are all other issued and outstanding Equity Shares of
the same class and series. When transferred to the Permitted Transferee in
accordance with the provisions of Section 15(b)(5) hereof, such Shares-in-Trust
shall cease to be designated as Shares-in-Trust.
(2) Dividend Rights. The Share Trustee, as record holder
of Shares-in-Trust, shall be entitled to receive all dividends are
distributions as may be declared by the Board of Trustees on such Equity Shares
and shall hold such dividends or distributions in trust for the benefit of the
Beneficiary. The Prohibited Owner with respect to Shares-in-Trust shall repay
to the Share Trustee the amount of any dividends or distributions received by
it that (i) are attributable to any Equity Shares designated Shares-in-Trust
and (ii) the record date of which was on or after the date that such shares
became Shares-in-Trust. The Trust shall take all measures that it determines
are reasonably necessary to recover the amount of any such dividend or
distribution paid to a Prohibited Owner, including, if necessary, withholding
any portion of future dividends or distributions payable on Equity Shares
Beneficially Owned or Constructively Owned by the Person who, but for the
provisions of Section 15(a)(3) hereof, would Constructively Own or Beneficially
Own the Shares-in-Trust; and, as soon as reasonably practicable following the
Trust's receipt or withholding thereof, received or withheld, as the case may
be.
(3) Rights Upon Liquidation. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of, or in a
distribution of the assets of, the Trust. The Share Trustee of Shares-in-Trust
shall be entitled to receive on behalf of each Share Trust, ratably with each
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other holder of Equity Shares of the same class or series, that portion of the
assets of the Trust which is available for distribution to the holders of such
class and series of Equity Shares. The Share Trustee shall distribute to the
Prohibited Owner the amounts received upon such liquidation, dissolution, or
winding up, or distribution; provided, however, that the Prohibited Owner shall
not be entitled to receive amounts pursuant to this Section 15(b)(3) in excess
of, in the case of a purported Transfer in which the Prohibited Owner gave
value for Equity Shares and which Transfer resulted in the transfer of the
shares to the Share Trust, the price per share, if any, such Prohibited Owner
paid for the Equity Shares and, in the case of a Non-Transfer Event or Transfer
in which the Prohibited Owner did not give value for such shares (e.g., if the
shares were received through a gift or devise) and which Non-Transfer Event or
Transfer, as the case may be, resulted in the transfer of shares to the Share
Trust, the price per share equal to the Market Price on the date of such
Non-Transfer Event or Transfer. Any remaining amount in such Share Trust shall
be distributed to the Beneficiary.
(4) Voting Rights. The Share Trustee shall be entitled
to vote all Shares-in-Trust. Any vote by a Prohibited Owner as a holder of
Equity Shares prior to the discovery by the Trust that the Equity Shares are
Shares-in-Trust shall, subject to applicable law, be rescinded and shall be
void ab initio with respect to such Shares-in-Trust and the Prohibited Owner
shall be deemed to have given, as of the close of business on the business day
prior to the date of the purported Transfer or Non-Transfer Event that results
in the transfer to the Share Trust of Equity Shares under Section 15(a)(3)
hereof, an irrevocable proxy to the Share Trustee to vote the Shares-in-Trust
in the manner in which the Share Trustee, in its sole and absolute discretion,
desires.
(5) Designation of Permitted Transferee. The Share
Trustee shall have the exclusive and absolute right to designate a Permitted
Transferee of any and all Shares-in-Trust. As soon as reasonably practicable,
in an orderly fashion so as not to materially adversely affect the Market Price
of the Shares-in-Trust, the Share Trustee shall designate any Person as
Permitted Transferee, provided, however, that (i) the Permitted Transferee so
designated purchases for valuable consideration (whether in a public or private
sale) the Shares-in-Trust, and (ii) the Permitted Transferee so designated may
acquire such Shares-in-Trust without such acquisition resulting in a transfer
to a Share Trust and the redesignation of such Equity Shares so acquired as
Shares-in-Trust under Section 15(a)(3) hereof. Upon the designation by the
Share Trustee of a Permitted Transferee in accordance with the provisions of
this Section 15(b)(5), the Share Trustee of a Share Trust shall (i) cause to be
transferred to the Permitted Transferee that number of Shares-in-Trust acquired
by the Permitted Transferee, (ii) cause to be recorded on the books of the
Trust that the Permitted Transferee is the holder of record of such number of
Equity Shares, and (iii) distribute to the Beneficiary any and all amounts held
with respect to the Shares-in-Trust after making that payment to the Prohibited
Owner pursuant to Section 15(b)(6) hereof.
(6) Compensation to Record Holder of Equity Shares that
Become Shares-in-Trust. Any Prohibited Owner shall be entitled (following
discovery of the Shares-in-Trust and subsequent designation of the Permitted
Transferee in accordance with Section 15(b)(5) hereof) to receive from the
Share Trustee the lesser of (i) in the case of (a) a purported Transfer in
which the
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Prohibited Owner gave value for Equity Shares and which purported Transfer
resulted in the transfer of the shares to the Share Trust, the price per share,
if any, such Prohibited Owner paid for the Equity Shares, or (b) a Non-Transfer
Event or Transfer in which the Prohibited Owner did not give value for such
shares (e.g., if the shares were received through a gift or devise) and which
Non-Transfer Event or Transfer, as the case may be, resulted in the transfer of
shares to the Share Trust, the price per share equal to the Market Price on the
date of such Non-Transfer Event or Transfer, and (ii) the price per share
received by the Share Trustee of the Share Trust from the sale or other
disposition of such Shares-in-Trust in accordance with Section 15(b)(5) hereof.
Any amounts received by the Share Trustee in respect of such Shares-in-Trust
and in excess of such amounts to be paid the Prohibited Owner pursuant to this
Section 15(b)(6) shall be distributed to the Beneficiary in accordance with the
provisions of Section 15(b)(5) hereof. Each Beneficiary and Prohibited Owner
waive any and all claims that they may have against the Share Trustee and the
Share Trust arising out of the disposition of Shares-in-Trust, except for
claims arising out of the gross negligence or willful misconduct of, or any
failure to make payments in accordance with this Section 15 by such Share
Trustee or the Trust.
(7) Purchase Right in Shares-in-Trust. Shares-in-Trust
shall be deemed to have been offered for sale to the Trust, or its designee, at
a price per share equal to the lesser of (i) the price per share in the
transaction that created such Shares-in-Trust (or, in the case of devise, gift
or Non-Transfer Event, the Market Price at the time of such devise, gift, or
Non-Transfer Event) and (ii) the Market Price on the date the Trust, or its
designee, accepts such offer. The Trust shall have the right to accept such
offer for a period of ninety (90) days after the later of (i) the date of the
Non-Transfer Event or purported Transfer which resulted in such Shares-in-Trust
and (ii) the date the Trust determines in good faith that a Transfer or
Non-Transfer Event resulting in Shares-in-Trust has occurred, if the Trust does
not receive a notice of such Transfer or Non-Transfer Event pursuant to Section
15(a)(3) hereof.
(c) Remedies not Limited. Nothing contained in this Article 15
shall limit the authority of the Trust to take such other action as it deems
necessary or advisable to protect the Trust and the interests of its
shareholders by preservation of the Trust's status as a REIT and to ensure
compliance with the Ownership Limit; provided, however, that nothing in this
Section 15 shall preclude settlement of any transaction entered into through
the facilities of the New York Stock Exchange.
(d) Ambiguity. In the case of an ambiguity in the application of
any of the provisions of Articled 15, including any definition contained in
Section 15(a) hereof, the Board of Trustees shall have the power to determine
the application of the provisions of this Article 15 with respect to any
situation based on the facts known to it.
(e) Legend. Each certificate for Equity Shares shall bear the
following legend:
"The [Common or Preferred] Shares represented by this certificate are
subject to restrictions on transfer as set forth in the Declaration of Trust of
the Trust. No Person may (i) Beneficially Own or Constructively Own Common
Shares in excess of 9.8% of the number of outstanding Common Shares, (ii)
Beneficially Own or Constructively Own Preferred Shares in excess of 9.8% of
the
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number of outstanding Preferred Shares, (iii) Beneficially Own Equity Shares
that would result in the Trust being "closely held" under Section 856(b) of the
Internal Revenue Code of 1986, as amended (the "Code"), or (iv) Constructively
Own Equity Shares that would cause the Trust to Constructively Own 10% or more
of the ownership interests in a tenant of the Trust's real property, within the
meaning of Sections 856(d)(2)(B) of the Code. Any Person who attempts to
Beneficially Own or Constructively Own shares of Equity Shares in excess of the
above limitations must immediately notify the Trust in writing. If the
restrictions above are violated, the Equity Shares represented hereby will be
transferred automatically and by operation of law to a Share Trust and shall be
designated Shares-in-Trust. All capitalized terms in this legend have the
meanings defined in the Trust's Declaration of Trust, as the same may be
further amended from time to time, a copy of which, including the restrictions
on transfer, will be sent without charge to each shareholder who so requests."
(f) Severability. If any provision of this Section 15 or any
application of any such provision is determined to be invalid by any federal or
state court having jurisdiction over the issues, the validity of the remaining
provisions shall not be affected and other applications of such provision shall
be affected only to the extent necessary to comply with the determination of
such court.
16. Amendment. This Declaration of Trust may be amended only in
accordance with the applicable laws of the State of Maryland, except that (a)
Section 7 of this Declaration of Trust may be amended only as provided therein,
(b) the trustees by a majority vote may amend this Declaration of Trust to
increase or decrease the aggregate number of shares or the number of shares of
any class that the Trust has authority to issue, and (c) the trustees by a
two-thirds (2/3) vote may amend this Declaration of Trust to qualify, or
continue to qualify, as a real estate investment trust under the Code or under
Maryland law.
17. Miscellaneous. Notwithstanding any provision contained herein
to the contrary, nothing in this Declaration of Trust shall preclude the
settlement of a transaction entered into or through the facilities of the New
York Stock Exchange.
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IN WITNESS WHEREOF, these Articles of Amendment and Restatement have
been executed on May 29, 1997 by the undersigned trustees, representing a
majority of the entire number of trustees of the Trust, each of whom
acknowledges that this document is the act of the Trust, that to the best of
his knowledge, information, and belief, the matters and facts set forth herein
are true in all material respects and that this statement is made under the
penalty of perjury.
/s/ DOCTOR R. CRANTS /s/ D. ROBERT CRANTS, III
- ----------------------------- ------------------------------
DOCTOR R. CRANTS D. ROBERT CRANTS, III
/s/ MICHAEL W. DEVLIN /s/ JOSEPH V. RUSSELL
- ----------------------------- ------------------------------
MICHAEL W. DEVLIN JOSEPH V. RUSSELL
/s/ RUSTY L. MOORE
- -----------------------------
RUSTY L. MOORE
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EXHIBIT 3.2
AMENDED AND RESTATED
BYLAWS OF
CCA PRISON REALTY TRUST
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICE. The principal office of the Trust shall be
located at such place or places as the Trustees may designate.
Section 2. ADDITIONAL OFFICES. The Trust may have additional offices
at such places as the Trustees may from time to time determine or the business
of the Trust may require.
Section 3. FISCAL AND TAXABLE YEARS. The fiscal and taxable years of
the Trust shall begin on January 1 and end on December 31.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. PLACE. All meetings of shareholders shall be held at the
principal office of the Trust or at such other place within the United States
as shall be stated in the notice of the meeting.
Section 2. ANNUAL MEETING. An annual meeting of the shareholders for
the election of Trustees and the transaction of any business within the powers
of the Trust shall be held during the month of May of each year, after the
delivery of the annual report, referred to in Section 12 of this Article II, at
a convenient location and on proper notice, on a date and at the time set by
the Trustees, beginning with the year 1998. Failure to hold an annual meeting
does not invalidate the Trust's existence or affect any otherwise valid acts of
the Trust.
Section 3. SPECIAL MEETINGS. The Chairman of the Board, a majority of
the Trustees or a committee of the Board of Trustees which has been duly
designated by the Board of Trustees and whose powers and authority, as provided
in a resolution of the Board of Trustees or these Bylaws, include the power to
call such meetings may call special meetings of the shareholders. Special
meetings may not be called by any other person or persons or entity.
Section 4. NOTICE. Not less than 10 nor more than 90 days before each
meeting of shareholders, the secretary shall give to each shareholder entitled
to vote at such meeting and to each shareholder not entitled to vote who is
entitled to notice of the meeting written or printed notice stating the time
and place of the meeting and, in the case of a special meeting or as otherwise
may be required by any statute, the purpose for which the meeting is called,
either by mail or by presenting it to such shareholder personally or by leaving
it at his residence or usual place of business. If mailed,
<PAGE> 2
such notice shall be deemed to be given when deposited in the United States
mail addressed to the shareholder at his post office address as it appears on
the records of the Trust, with postage thereon prepaid.
Section 5. SCOPE OF NOTICE. Any business of the Trust may be
transacted at an annual meeting of shareholders without being specifically
designated in the notice, except such business as is required by any statute to
be stated in such notice. No business shall be transacted at a special meeting
of shareholders except as specifically designated in the notice.
Section 6. ORGANIZATION. At every meeting of the shareholders, the
Chairman of the Board, if there be one, shall conduct the meeting or, in the
case of vacancy in office or absence of the Chairman of the Board, one of the
following officers present shall conduct the meeting in the order stated: the
Vice Chairman of the Board, if there be one, the President, the Vice Presidents
in their order of rank and seniority and the Secretary, or, in his absence, an
assistant secretary, or in the absence of both the Secretary and assistant
secretaries, a person appointed by the Chairman shall act as Secretary.
Section 7. QUORUM. At any meeting of shareholders, the presence in
person or by proxy of shareholders entitled to cast a majority of all the votes
entitled to be cast at such meeting shall constitute a quorum; but this Section
shall not affect any requirement under any statute or the Declaration of Trust
for the vote necessary for the adoption of any measure. If, however, such
quorum shall not be present at any meeting of the shareholders, the
shareholders entitled to vote at such meeting, present in person or by proxy,
shall have the power to adjourn the meeting from time to time to a date not
more than 120 days after the original record date without notice other than
announcement at the meeting. At such adjourned meeting at which a quorum shall
be present, any business may be transacted which might have been transacted at
the meeting as originally notified.
Section 8. VOTING. A plurality of all the votes cast at a meeting of
shareholders duly called and at which a quorum is present shall be sufficient
to elect a Trustee. Each share may be voted for as many individuals as there
are Trustees to be elected and for whose election the share is entitled to be
voted. A majority of the votes cast at a meeting of shareholders duly called
and at which a quorum is present shall be sufficient to approve any other
matter which may properly come before the meeting, unless more than a majority
of the votes cast is required herein or by statute or by the Declaration of
Trust. Unless otherwise provided in the Declaration, each outstanding share,
regardless of class, shall be entitled to one vote on each matter submitted to
a vote at a meeting of shareholders.
Section 9. PROXIES. A shareholder may vote the shares owned of record
by him, either in person or by proxy executed in writing by the shareholder or
by his duly authorized attorney in fact. Such proxy shall be filed with the
secretary of the Trust before or at the time of the meeting. No proxy shall be
valid after eleven months from the date of its execution, unless otherwise
provided in the proxy.
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Section 10. VOTING OF SHARES BY CERTAIN HOLDERS. Shares of the Trust
registered in the name of a corporation, partnership, trust or other entity, if
entitled to be voted, may be voted by the president or a vice president, a
general partner or trustee thereof, as the case may be, or a proxy appointed by
any of the foregoing individuals, unless some other person who has been
appointed to vote such shares pursuant to a bylaw or a resolution of the
governing board of such corporation or other entity or agreement of the
partners of the partnership presents a certified copy of such bylaw, resolution
or agreement, in which case such person may vote such shares. Any trustee or
other fiduciary may vote shares registered in his name as such fiduciary,
either in person or by proxy.
The Trustees may adopt by resolution a procedure by which a
shareholder may certify in writing to the Trust that any shares registered in
the name of the shareholder are held for the account of a specified person
other than the shareholder. The resolution shall set forth the class of
shareholders who may make the certification, the purpose for which the
certification may be made, the form of certification and the information to be
contained in it; if the certification is with respect to a record date or
closing of the share transfer books, the time after the record date or closing
of the share transfer books within which the certification must be received by
the Trust; and any other provisions with respect to the procedure which the
Trustees consider necessary or desirable. On receipt of such certification, the
person specified in the certification shall be regarded as, for the purposes
set forth in the certification, the shareholder of record of the specified
shares in place of the shareholder who makes the certification.
Title 3, Subtitles 7 of the Corporations and Associations Article of
the Annotated Code of Maryland (or any successor statute) shall not apply to
any acquisition by any person of shares of beneficial interest of the Trust.
Section 11. INSPECTORS. At any meeting of shareholders, the chairman
of the meeting may, or upon the request of any shareholder shall, appoint one
or more persons as inspectors for such meeting. Such inspectors shall
ascertain and report the number of shares represented at the meeting based upon
their determination of the validity and effect of proxies, count all votes,
report the results and perform such other acts as are proper to conduct the
election and voting with impartiality and fairness to all the shareholders.
Each report of an inspector shall be in writing and signed by him or
by a majority of them if there is more than one inspector acting at such
meeting. If there is more than one inspector, the report of a majority shall
be the report of the inspectors. The report of the inspector or inspectors on
the number of shares represented at the meeting and the results of the voting
shall be prima facie evidence thereof.
Section 12. REPORTS TO SHAREHOLDERS.
(a) Not later than 90 days after the close of each fiscal
year of the Trust, the Trustees shall deliver or cause to be delivered a report
of the business and operations of the Trust
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during such fiscal year to the shareholders, containing a balance sheet and a
statement of income and surplus of the Trust, accompanied by the certification
of an independent certified public accountant based on the accountant's full
examination of the books and records of the real estate investment trust in
accordance with generally accepted auditing procedure, and such further
information as the Trustees may determine is required pursuant to any law or
regulation to which the Trust is subject. A signed copy of the annual report
and the accountant's certificate shall be placed on file at the principal
office of the Trust and filed by the Trustees with such governmental agencies,
if any, as may be required by law and as the Trustees may deem appropriate.
(b) Not later than 45 days after the end of each of the
first three quarterly periods of each fiscal year, the Trustees shall deliver
or cause to be delivered an interim report to the shareholders containing
unaudited financial statements for such quarter and for the period from the
beginning of the fiscal year to the end of such quarter, and such further
information as the Trustees may determine is required pursuant to any law or
regulation to which the Trust is subject.
Section 13. NOMINATIONS AND SHAREHOLDER BUSINESS.
(a) Annual Meetings of Shareholders.
(1) Nominations of persons for election to the
Board of Trustees and the proposal of business to be considered by the
shareholders may be made at an annual meeting of shareholders (i) pursuant to
the Trust's notice of meeting, (ii) by or at the direction of the Trustees or
(iii) by any shareholder of the Trust who was a shareholder of record at the
time of giving of notice provided for in this Section 13 (a), who is entitled
to vote at the meeting and who complied with the notice procedures set forth in
this Section 13(a).
(2) For nominations or other business to be
properly brought before an annual meeting by a shareholder pursuant to clause
(iii) of paragraph (a)(1) of this Section 13, the shareholder must have given
timely notice thereof in writing to the secretary of the Trust. To be timely,
a shareholder's notice shall be delivered to the secretary at the principal
executive offices of the Trust not less than 60 days nor more than 90 days
prior to the first anniversary of the preceding year's annual meeting;
provided, however, that in the event that the date of the annual meeting is
advanced by more than 30 days or delayed by more than 60 days from such
anniversary date, notice by the shareholder to be timely must be so delivered
not earlier than the 90th day prior to such annual meeting and not later than
the close of business on the later of the 60th day prior to such annual meeting
or the tenth day following the day on which public announcement of the date of
such meeting is first made. Such shareholder's notice shall set forth (i) as
to each person whom the shareholder proposes to nominate for election or
reelection as a Trustee all information relating to such person that is
required to be disclosed in solicitations of proxies for election of Trustees,
or is otherwise required, in each case pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") (including
such person's written consent to being named in the proxy statement as a
nominee and to serving as a Trustee if elected); (ii) as to any other business
that the shareholder proposes to bring before the meeting, a brief description
of the business desired to be
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brought before the meeting, the reasons for conducting such business at the
meeting and any material interest in such business of such shareholder and of
the beneficial owner, if any, on whose behalf the proposal is made; and (iii)
as to the shareholder giving the notice and the beneficial owner, if any, on
whose behalf the nomination or proposal is made, (y) the name and address of
such shareholder, as they appear on the Trust's books, and of such beneficial
owner and (z) the number of each class of shares of the Trust which are owned
beneficially and of record by such shareholder and such beneficial owner.
(3) Notwithstanding anything in the second
sentence of paragraph (a)(2) of this Section 13 to the contrary, in the event
that the number of Trustees to be elected to the Board of Trustees is increased
and there is no public announcement naming all of the nominees for Trustee or
specifying the size of the increased Board of Trustees made by the Trust at
least 70 days prior to the first anniversary of the preceding year's annual
meeting, a shareholder's notice required by this Section 13 (a) shall also be
considered timely, but only with respect to nominees for any new positions
created by such increase, if it shall be delivered to the secretary at the
principal executive offices of the Trust not later than the close of business
on the tenth day following the day on which such public announcement is first
made by the Trust.
(b) Special Meetings of Shareholders. Only such business
shall be conducted at a special meeting of shareholders as shall have been
brought before the meeting pursuant to the Trust's notice of meeting.
Nominations of persons for election to the Board of Trustees may be made at a
special meeting of shareholders at which Trustees are to be elected (i)
pursuant to the Trust's notice of meeting (ii) by or at the direction of the
Board of Trustees or (iii) provided that the Board of Trustees has determined
that Trustees shall be elected at such special meeting, by any shareholder of
the Trust who was a shareholder of record at the time of giving of notice
provided for in this Section 13(b), who is entitled to vote at the meeting and
who complied with the notice procedures set forth in this Section 13(b). In the
event the Trust calls a special meeting of shareholders for the purpose of
electing one or more Trustees to the Board of Trustees, any such shareholder
may nominate a person or persons (as the case may be) for election to such
position as specified in the Trust's notice of meeting, if the shareholder's
notice containing the information required by paragraph (a)(2) of this Section
13 shall be delivered to the secretary at the principal executive offices of
the Trust not earlier than the 90th day prior to such special meeting and not
later than the close of business on the later of the 60th day prior to such
special meeting or the tenth day following the day on which public announcement
is first made of the date of the special meeting and of the nominees proposed
by the Trustees to be elected at such meeting.
(c) General.
(1) Only such persons who are nominated in
accordance with the procedures set forth in this Section 13 shall be eligible
to serve as Trustees and only such business shall be conducted at a meeting of
shareholders as shall have been brought before the meeting in accordance with
the procedures set forth in this Section 13. The presiding officer of the
meeting shall have the power and duty to determine whether a nomination or any
business proposed to be brought
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before the meeting was made in accordance with the procedures set forth in this
Section 13 and, if any proposed nomination or business is not in compliance
with this Section 13, to declare that such defective nomination or proposal be
disregarded.
(2) For purposes of this Section 13, "public
announcement" shall mean disclosure in a press release reported by the Dow
Jones News Service, Associated Press or comparable news service or in a
document publicly filed by the Trust with the Securities and Exchange
Commission pursuant to Sections 13, 14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of
this Section 13, a shareholder shall also comply with all. applicable
requirements of state law and of the Exchange Act and the rules and regulations
thereunder with respect to the matters set forth in this Section 13. Nothing
in this Section 13 shall be deemed to affect any rights of shareholders to
request inclusion of proposals in the Trust's proxy statement pursuant to Rule
14a-8 under the Exchange Act.
Section 14. INFORMAL ACTION BY SHAREHOLDERS. Any action required or
permitted to be taken at a meeting of shareholders may be taken without a
meeting if a consent in writing, setting forth such action, is signed by each
shareholder entitled to vote on the matter and any other shareholder entitled
to notice of a meeting of shareholders (but not to vote thereat) has waived in
writing any right to dissent from such action, and such consent and waiver are
filed with the minutes of proceedings of the shareholders.
Section 15. VOTING BY BALLOT. Voting on any question or in any
election may be viva voce unless the presiding officer shall order or any
shareholder shall demand that voting be by ballot.
ARTICLE III
TRUSTEES
Section 1. GENERAL POWERS; QUALIFICATIONS; TRUSTEES HOLDING OVER. The
business and affairs of the Trust shall be managed under the direction of its
Board of Trustees. A Trustee shall be an individual at least 21 years of age
who is not under legal disability. Unless otherwise agreed between the Trust
and the Trustee, each individual Trustee, including each Independent Trustee
(as defined in the Trust's Declaration of Trust) , may engage in other business
activities of the type conducted by the Trust and is not required to present to
the Trust any investment opportunities presented to them even though the
investment opportunities may be within the scope of the Trust's investment
policies. In case of failure to elect Trustees at an annual meeting of the
shareholders, the Trustees holding over shall continue to direct the management
of the business and affairs of the Trust until their successors are elected and
qualify.
Section 2. ANNUAL AND REGULAR MEETINGS. An annual meeting of the
Trustees shall be held immediately after and at the same place as the annual
meeting of shareholders, no notice
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other than this Bylaw being necessary. The Trustees may provide, by
resolution, the time and place, either within or without the State of Maryland,
for the holding of regular meetings of the Trustees without other notice than
such resolution.
Section 3. SPECIAL MEETINGS. Special meetings of the Trustees may be
called by or at the request of the Chairman of the Board, the Chief Executive
Officer or the President or by a majority of the Trustees then in office. The
person or persons authorized to call special meetings of the Trustees may fix
any place, either within or without the State of Maryland, as the place for
holding any special meeting of the Trustees called by them.
Section 4. NOTICE. Notice of any special meeting shall be given by
written notice delivered personally, telegraphed or mailed to each Trustee at
his business or residence address. Personally delivered or telegraphed notices
shall be given at least two days prior to the meeting. Notice by mail shall be
given at least five days prior to the meeting. Telephone notice shall be given
at least 24 hours prior to the meeting. If mailed, such notice shall be deemed
to be given when deposited in the United States mail properly addressed, with
postage thereon prepaid. If given by telegram, such notice shall be deemed to
be given when the telegram is delivered to the telegraph company. Telephone
notice shall be deemed given when the Trustee is personally given such notice
in a telephone call to which he is a party. Neither the business to be
transacted at, nor the purpose of, any annual, regular or special meeting of
the Trustees need be stated in the notice, unless specifically required by
statute or these Bylaws.
Section 5. QUORUM. Except as provided in subsection (b) of Section 6,
a majority of the entire Board of Trustees shall constitute a quorum for
transaction of business at any meeting of the Trustees, provided that, if less
than a majority of such Trustees are present at said meeting, a majority of the
Trustees present may adjourn the meeting from time to time without further
notice, and provided further that if, pursuant to the Declaration of Trust or
these Bylaws, the vote of a majority of a particular group of Trustees is
required for action, a quorum must also include a majority of such group.
The Trustees present at a meeting which has been duly called and
convened may continue to transact business until adjournment, notwithstanding
the withdrawal of enough Trustees to leave less than a quorum.
Section 6. VOTING.
(a) Except as provided in subsection (b) of this Section 6,
the action of the majority of the Trustees present at a meeting at which a
quorum is present shall be the action of the Trustees, unless the concurrence
of a greater proportion is required for such action by the Declaration of
Trust, these Bylaws or applicable statute.
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(b) Notwithstanding the foregoing, two-thirds of the
Trustees shall be necessary to constitute a quorum to approve the actions set
forth below in clauses (1) through (5), and such action shall not be effective
unless approved by two-thirds of the Trustees. Such action includes:
(1) A Change in Control (as hereinafter defined)
of the Trust;
(2) Any amendment to the Declaration of Trust or
these Bylaws (except for such amendments as may be required in the reasonable
discretion of two-thirds (2/3) of the Board of Trustees to maintain the Trust's
status as a real estate investment trust under the Internal Revenue Code of
1986, as amended);
(3) Any waiver or modification of the Ownership
Limit (as defined in the Declaration of Trust);
(4) The issuance of any 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 the Board of
Trustees, (b) pursuant to any share incentive or option plans of the Company,
or (c) in a bona fide underwritten public offering managed by one or more
nationally recognized investment banking firms) or rights to acquire any such
securities; and
(5) Acquisitions, dispositions or financings of
asset by the Trust in excess of 25% of Total Market Capitalization (as
hereinafter defined) whether by merger, purchase, sale or otherwise. The value
of the assets of the Trust for the purpose of determining whether such assets
constitute in excess of 25% of Total Market Capitalization shall be the book
value of such assets as reflected in the Trust's most recent fiscal year-end
consolidation balance sheet at the time the determination is being made or, if
materially different and the transaction involves (A) an acquisition or
disposition, the amount of the consideration involved in such acquisition or
disposition or (B) a financing, the value of assets being financed as reflected
in the financing transaction.
For purposes of this Section 6(b):
(A) The term "Change in Control" of the Trust shall mean any
transaction or series of transactions (whether by purchase of existing Common
Shares, issuance of Common Shares, merger, consolidation or otherwise) the
result of which is that either (i) any Person or Group becomes the Beneficial
Owner, directly or indirectly, 20% or more of the total voting power in the
aggregate of all classes of beneficial interests of the Trust then outstanding
normally entitled to vote in the election of Trustees of the Trust (or any
surviving entity) or (ii) the Beneficial Owners of the beneficial interests of
the Trust normally entitled to vote in the election of Trustees immediately
prior to the transaction beneficially own less than 80% of the total voting
power in the aggregate of all classes of beneficial interests of the Trust then
outstanding normally entitled to vote in the election of Trustees of the Trust
(or any surviving entity) immediately after such transaction.
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(B) The term "Person" as used herein shall have the same meaning
as such term has for purposes of Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended.
(C) The term "Group" has used herein shall have the same meaning
as such term has for purposes of Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended.
(D) The term "Beneficial Owner" as used herein shall have the same
meaning as such term has for purposes of Rule 13d-3 promulgated under the
Securities Exchange Act of 1934, as amended, except that a Person shall be
deemed to have beneficial ownership of all shares that a Person has the right
to acquire, whether or not such right is immediately exercisable.
(E) The term "Ownership Limit" as used herein shall have the same
meaning as such term has in the Declaration of Trust.
(F) The term "Total Market Capitalization" shall mean the sum of
(i) the Market Value (as hereinafter defined) of the then outstanding Common
Shares and Preferred Shares, and (ii) the total principal amount of
indebtedness of the Trust as reflected in the Trust's most recent fiscal
year-end consolidation balance sheet existing at the time the Trustees would be
required to approve a transaction set forth in subparagraph (iv) of this
Section 6(b).
(G) The term "Market Value" with respect to Common Shares shall
mean the average of the daily market price for the ten (10) consecutive trading
days immediately prior to the date beginning fifteen (15) days before the
directors would be required to approve a transaction set forth in subparagraph
(v) of this Section 6(b). The market price for each such trading date shall be
the last reported sales price of such stock reported on the New York Stock
Exchange on the trading day immediately preceding the relevant date, or if such
stock is not then traded on the New York Stock Exchange, the last reported
sales price of such stock on the trading day immediately preceding the relevant
date as reported on any exchange or quotation system over which such stock may
be traded, or if such stock is not then traded over any exchange or quotation
system, then the market price of such stock on the relevant date as determined
in good faith by the Board of Trustees of the Trust.
Section 7. TELEPHONE MEETINGS. Trustees may participate in a meeting
by means of a conference telephone or similar communications equipment if all
persons participating in the meeting can hear each other at the same time.
Participation in a meeting by these means shall constitute presence in person
at the meeting.
Section 8. INFORMAL ACTION BY TRUSTEES. Any action required or
permitted to be taken at any meeting of the Trustees may be taken without a
meeting, if a consent in writing to such action is signed by each Trustee and
such written consent is filed with the minutes of proceedings of the Trustees.
Section 9. VACANCIES. If for any reason any or all the Trustees cease
to be Trustees, such event shall not terminate the Trust or affect these Bylaws
or the powers of the remaining Trustees
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hereunder (even if fewer than two Trustees remain). Any vacancy (including a
vacancy created by an increase in the number of Trustees) shall be filled, at
any regular meeting or at any special meeting called for that purpose, by a
majority of the Trustees. Any individual so elected as Trustee shall hold
office for the unexpired term of the Trustee he is replacing.
Section 10. COMPENSATION. Trustees shall not receive any stated salary
for their services as Trustees but, by resolution of the Trustees, may receive
cash compensation or a fixed sum of common shares of the Trust for any service
or activity they performed or engaged in as Trustees. By resolution of the
Trustees, Trustees may receive a fee for and may be reimbursed for expenses in
connection with attendance, if any, at each annual, regular or special meeting
of the Trustees or of any committee thereof; and for their expenses, if any, in
connection with each property visit and any other service or activity performed
or engaged in as Trustees; but nothing herein contained shall be construed to
preclude any Trustees from serving the Trust in any other capacity and
receiving compensation therefor.
Section 11. REMOVAL OF TRUSTEES. The shareholders may, at any time,
remove any Trustee in the manner provided in the Declaration of Trust.
Section 12. LOSS OF DEPOSITS. No Trustee shall be liable for any
loss which may occur by reason of the failure of the bank, trust company,
savings and loan association, or other institution with whom moneys or shares
have been deposited.
Section 13. SURETY BONDS. Unless required by law, no Trustee shall
be obligated to give any bond or surety or other security for the performance
of any of his duties.
Section 14. QUALIFICATIONS. Trustees need not be shareholders of the
Trust.
Section 15. INTERESTED TRUSTEE TRANSACTIONS. Notwithstanding any
other provision of these Bylaws, the following actions of the Board of Trustees
shall require the approval of the Independent Committee, as defined in Article
IV of these Bylaws: (i) the election of operators for the Trust's properties;
and (ii) all transactions between the Trust and Corrections Corporation of
America and its affiliates, including, but not limited to, the negotiation,
enforcement and renegotiation of the terms of any lease of any of the Trust's
properties.
ARTICLE IV
COMMITTEES
Section 1. GENERAL. The Board of Trustees may, by resolution passed
by a majority of the whole board, designate one or more committees, each such
committee to consist of one or more
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of the Trustees of the Trust. The board may designate one or more Trustees as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee. Any such committee, to the extent
provided in the resolution of the Board of Trustees shall have and may exercise
all the powers and authority of the Board of Trustees in the management of the
business and affairs of the Trust, and may authorize the seal of the Trust to
be affixed to all papers which may require it; but no such committee shall have
the power or authority in reference to amending the Declaration of Trust
(except that a committee may, to the extent authorized in the resolution or
resolutions providing for the issuance of shares adopted by the Board of
Trustees, fix the designations and any of the preferences or rights of such
shares relating to dividends, redemption, dissolution, any distribution or
assets of the Trust or the conversion into, or the exchange of such shares for,
shares of any other class or classes or any other series of any series of
shares or authorize the increase or decrease of the shares of any series),
adopting an agreement of merger or consolidation, recommending to the
shareholders the sale, lease or exchange of all or substantially all of the
Trust's property and assets, recommending to the shareholders a dissolution of
the Trust or a revocation of a dissolution, or amending the Bylaws of the
Trust; and, unless the resolution or the Declaration of Trust expressly so
provides, no such committee shall have the power or authority to declare a
dividend, to authorize the issuance of shares or to adopt a certificate of
ownership and merger.
Section 2. COMMITTEES. The Trust shall initially have the following
committees, the specific authority and members of which shall be as designated
herein or by resolution of the Board of Trustees.
(a) An Independent Committee, which shall consist solely
of Independent Trustees and which shall have the authority to approve the
actions of the Board of Trustees as specified in Section 15 of Article III.
(b) An Audit Committee, which will consist solely of
Independent Trustees and which shall make recommendations concerning the
engagement of independent public accounts, review with the independent public
accountants the plans and results of the audit engagement, approve professional
services provided by the independent public accounts, review the independence
of the independent public accounts, consider the range of audit and non-audit
fees and review the adequacy of the Trust's initial accounting controls.
(c) A Compensation Committee, which shall determine
compensation for the Trust's executive officers and administer any share
incentive plans adopted by the Trust.
Section 3. RECORDS OF COMMITTEE MEETINGS. Each committee shall keep
regular minutes of its meetings and report the same to the Board of Trustees
when required. The presence of a majority of the total membership of any
committee shall constitute a quorum for the transaction of business at any
meeting of such committee and the act of a majority of those present shall be
necessary and sufficient for the taking of any action at such meeting.
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ARTICLE V
OFFICERS
Section 1. GENERAL PROVISIONS. The officers of the Trust may consist
of a Chairman of the Board, a Vice Chairman of the Board, a Chief Executive
Officer, a President, one or more Vice Presidents, a Treasurer, one or more
Assistant Treasurers, a Secretary, and one or more Assistant Secretaries. In
addition, the Trustees may from time to time appoint such other officers with
such powers and duties as they shall deem necessary or desirable. The officers
of the Trust shall be elected annually by the Trustees at the first meeting of
the Trustees held after each annual meeting of shareholders. If the election
of officers shall not be held at such meeting, such election shall be held as
soon thereafter as may be convenient. Each officer shall hold office until his
successor is elected and qualifies or until his death, resignation or removal
in the manner hereinafter provided. Any two or more off ices except President
and Vice President may be held by the same person. In their discretion, the
Trustees may leave unfilled any office except that of President and Secretary.
Election of an officer or agent shall not of itself create contract rights
between the Trust and such officer or agent.
Section 2. REMOVAL AND RESIGNATION. Any officer or agent of the Trust
may be removed by the Trustees if in their judgment the best interests of the
Trust would be served thereby, but such removal shall be without prejudice to
the contract rights, if any, of the person so removed. Any officer of the
Trust may resign at any time by giving written notice of his resignation to the
Trustees, the Chairman of the Board, the President or the Secretary. Any
resignation shall take effect at any time subsequent to the time specified
therein or, if the time when it shall become effective is not specified
therein, immediately upon its receipt. The acceptance of a resignation shall
not be necessary to make it effective unless otherwise stated in the
resignation. Such resignation shall be without prejudice to the contract
rights, if any, of the Trust.
Section 3. VACANCIES. A vacancy in any office may be filled by the
Trustees for the balance of the term.
Section 4. CHAIRMAN AND VICE CHAIRMAN OF THE BOARD. The Chairman of
the Board shall preside over the meetings of the Trustees and of the
shareholders at which he shall be present and shall in general oversee all of
the business and affairs of the Trust. In the absence of the Chairman of the
Board, the Vice Chairman of the Board shall preside at such meetings at which
he shall be present. The Chairman and the Vice Chairman of the Board may
execute any deed, mortgage, bond, contract or other instrument, except in cases
where the execution thereof shall be expressly delegated by the Trustees or by
these Bylaws to some other officer or agent of the Trust or shall be required
by law to be otherwise executed. The Chairman of the Board and the Vice
Chairman of the Board shall perform such other duties as may be assigned to him
or them by the Trustees.
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Section 5. CHIEF EXECUTIVE OFFICER. The Trustees may designate a
Chief Executive Officer from among the elected officers. The Chief Executive
Officer shall have responsibility for implementation of the policies of the
Trust, as determined by the Trustees, and for the administration of the
business affairs of the Trust. In the absence of both the Chairman and Vice
Chairman of the Board, the Chief Executive Officer shall preside over the
meetings of the Trustees and of the shareholders at which he shall be present.
Section 6. CHIEF OPERATING OFFICER. The Trustees may designate a Chief
Operating Officer from among the elected officers. Said officer will have the
responsibilities and duties as set forth by the Trustees or the Chief Executive
Officer.
Section 7. CHIEF DEVELOPMENT OFFICER. The Trustees may designate a
Chief Development Officer from among the elected officers. Said officer will
have the responsibilities and duties as set forth by the Trustees or the Chief
Executive Officer.
Section 8. CHIEF FINANCIAL OFFICER. The Trustees may designate a Chief
Financial Officer from among the elected officers. Said officer will have the
responsibilities and duties as set forth by the Trustees or the Chief Executive
Officer.
Section 9. PRESIDENT. In the absence of the Chairman, the Vice
Chairman of the Board and the Chief Executive Officer, the President shall
preside over the meetings of the Trustees and of the shareholders at which he
shall be present. In the absence of a designation of a Chief Executive Officer
by the Trustees, the President shall be the Chief Executive Officer and shall
be ex officio a member of all committees that may, from time to time, be
constituted by the Trustees. The President may execute any deed, mortgage,
bond, contract or other instrument, except in cases where the execution thereof
shall be expressly delegated by the Trustees or by these Bylaws to some other
officer or agent of the Trust or shall be required by law to be otherwise
executed; and in general shall perform all duties incident to the office of
President and such other duties as may be prescribed by the Trustees from time
to time.
Section 10. VICE PRESIDENTS. In the absence of the president or in the
event of a vacancy in such office, the Vice President (or in the event there be
more than one Vice President, the Vice Presidents in the order designated at
the time of their election or, in the absence of any designation, then in the
order of their election) shall perform the duties of the President and when so
acting shall have all the powers of and be subject to all the restrictions upon
the President; and shall perform such other duties as from time to time may be
assigned to him by the President or by the Trustees. The Trustees may
designate one or more Vice Presidents as Executive Vice President or as Vice
President for particular areas of responsibility.
Section 11. SECRETARY. The Secretary shall (a) keep the minutes of the
proceedings of the shareholders, the Trustees and committees of the Trustees in
one or more books provided for that purpose; (b) see that all notices are duly
given in accordance with the provisions of these Bylaws or as required by law;
(c) be custodian of the trust records and of the seal of the Trust; (d) keep a
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register of the post office address of each shareholder which shall be
furnished to the Secretary by such shareholder; (e) have general charge of the
share transfer books of the Trust; and (f) in general perform such other duties
as from time to time may be assigned to him by the Chief Executive Officer, the
President or by the Trustees.
Section 12. TREASURER. The Treasurer shall have the custody of the
funds and securities of the Trust and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Trust and shall deposit
all moneys and other valuable effects in the name and to the credit of the
Trust in such depositories as may be designated by the Trustees.
The Treasurer shall disburse the funds of the Trust as may be ordered
by the Trustees, taking proper vouchers for such disbursements, and shall
render to the President and Trustees, at the regular meetings of the Trustees
or whenever they may require it, an account of all his transactions as
Treasurer and of the financial condition of the Trust.
If required by the Trustees, the Treasurer shall give the Trust a bond
in such sum and with such surety or sureties as shall be satisfactory to the
Trustees for the faithful performance of the duties of his office and for the
restoration to the Trust, in case of his death, resignation, retirement or
removal from office, of all books, papers, vouchers, moneys and other property
of whatever kind in his possession or under his control belonging to the Trust.
Section 13. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The
Assistant Secretaries and Assistant Treasurers, in general, shall perform such
duties as shall be assigned to them by the Secretary or Treasurer,
respectively, or by the President or the Trustees. The Assistant Treasurers
shall, if required by the Trustees, give bonds for the faithful performance of
their duties in such sums and with such surety or sureties as shall be
satisfactory to the Trustees.
Section 14. SALARIES. The salaries of the officers shall be fixed
from time to time by the Trustees and no officer shall be prevented from
receiving such salary by reason of the fact that he is also a Trustee.
14
<PAGE> 15
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. CONTRACTS. The Trustees may authorize any officer or agent
to enter into any contract or to execute and deliver any instrument in the name
of and on behalf of the Trust and such authority may be general or confined to
specific instances. Any agreement, deed, mortgage, lease or other document
executed by one or more of the Trustees or by an authorized person shall be
valid and binding upon the Trustees and upon the Trust when authorized or
ratified by action of the Trustees.
Section 2. CHECKS AND DRAFTS. All checks, drafts or other orders for
the payment of money, notes or other evidences of indebtedness issued in the
name of the Trust shall be signed by such officer or officers, agent or agents
of the Trust in such manner as shall from time to time be determined by the
Trustees.
Section 3. DEPOSITS. All funds of the Trust not otherwise employed
shall be deposited from time to time to the credit of the Trust in such banks,
trust companies or other depositories as the Trustees may designate.
ARTICLE VII
SHARES
Section 1. CERTIFICATES. Each shareholder shall be entitled to a
certificate or certificates which shall represent and certify the number of
shares of each class of beneficial interests held by him in the Trust. Each
certificate shall be signed by the Chief Executive Officer, the President or a
Vice President and countersigned by the Secretary or an Assistant Secretary or
the Treasurer or an Assistant Treasurer and may be sealed with the seal, if
any, of the Trust. The signatures may be either manual or facsimile.
Certificates shall be consecutively numbered; and if the Trust shall, from time
to time, issue several classes of shares, each class may have its own number
series. A certificate is valid and may be issued whether or not an officer who
signed it is still an officer when it is issued. Each certificate representing
shares which are restricted as to their transferability or voting powers, which
are preferred or limited as to their dividends or as to their allocable portion
of the assets upon liquidation or which are redeemable at the option of the
Trust, shall have a statement of such restriction, limitation, preference or
redemption provision, or a summary thereof, plainly stated on the certificate.
In lieu of such statement or summary, the Trust may set forth upon the face or
back of the certificate a statement that the Trust will furnish to any
shareholder, upon request and without charge, a full statement of such
information.
Section 2. TRANSFERS. Certificates shall be treated as negotiable, and
title thereto and to the shares they represent shall be transferred by delivery
thereof to the same extent as those of a
15
<PAGE> 16
Maryland stock corporation. No transfers of shares of the Trust shall be made
if (i) void ab initio pursuant to any provision of the Declaration of Trust or
(ii) the Board of Trustees, pursuant to any provision of the Declaration of
Trust, shall have refused to permit the transfer of such shares. Permitted
transfers of shares of the Trust shall be made on the share records of the
Trust only upon the instruction of the registered holder thereof, or by his
attorney thereunto authorized by power of attorney duly executed and filed with
the Secretary or with a transfer agent or transfer clerk, and upon surrender of
the certificate or certificates, if issued, for such shares properly endorsed
or accompanied by a duly executed share transfer power and the payment of all
taxes thereon. Upon surrender to the Trust or the transfer agent of the Trust
of a certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, as to any transfers not
prohibited by any provision of the Declaration of Trust or by action of the
Board of Trustees thereunder, it shall be the duty of the Trust to issue a new
certificate to the person entitled thereto, cancel the old certificate and
record the transaction upon its books.
Section 3. REPLACEMENT CERTIFICATE. Any officer designated by the
Trustees may direct a new certificate to be issued in place of any certificate
previously issued by the Trust alleged to have been lost, stolen or destroyed
upon the making of an affidavit of that fact by the person claiming the
certificate to be lost, stolen or destroyed. When authorizing the issuance of
a new certificate, the officer designated by the Trustees may, in his
discretion and as a condition precedent to the issuance thereof , require the
owner of such lost, stolen or destroyed certificate or the owner's legal
representative to advertise the same in such manner as he shall require and/or
to give bond, with sufficient surety, to the Trust to indemnify it against any
loss or claim which may arise as a result of the issuance of a new certificate.
Section 4. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. The
Trustees may set, in advance, a record date for the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders
or determining shareholders entitled to receive payment of any dividend or
the allotment of any other rights, or in order to make a determination of
shareholders for any other purpose. Such date, in any case, shall not be
prior to the close of business on the day the record date is fixed and shall
be not more than 90 days and in the case of a meeting of shareholders not
less than ten days, before the date on which the meeting or particular action
requiring such determination of shareholders of record is to be held or taken.
In lieu of fixing a record date, the Trustees may provide that the
share transfer books shall be closed for a stated period but not longer than 20
days. If the share transfer books are closed for the purpose of determining
shareholders entitled to notice of or to vote at a meeting of shareholders,
such books shall be closed for at least ten days before the date of such
meeting.
If no record date is fixed and the share transfer books are not closed
for the determination of shareholders, (a) the record date for the
determination of shareholders entitled to notice of or to vote at a meeting of
shareholders shall be at the close of business on the day on which the notice
of meeting is mailed or the 30th day before the meeting, whichever is the
closer date to the meeting; and (b) the record date for the determination of
shareholders entitled to receive payment of a dividend
16
<PAGE> 17
or an allotment of any other rights shall be the close of business on the day
on which the resolution of the Trustees, declaring the dividend or allotment of
rights, is adopted.
When a determination of shareholders entitled to vote at any meeting
of shareholders has been made as provided in this section, such determination
shall apply to any adjournment thereof, except when (i) the determination has
been made through the closing of the transfer books and the stated period of
closing has expired or (ii) the meeting is adjourned to a date more than 120
days after the record date fixed for the original meeting, in either of which
case a new record date shall be determined as set forth herein.
Section 5. SHARE LEDGER. The Trust shall maintain at its principal
office or at the office of its counsel, accountants or transfer agent, an
original or duplicate share ledger containing the name and address of each
shareholder and the number of shares of each class held by such shareholder.
Section 6. FRACTIONAL SHARES; ISSUANCE OF UNITS. The Trustees may
issue fractional shares or provide for the issuance of scrip, all on such terms
and under such conditions as they may determine. Notwithstanding any other
provision of the Declaration of Trust or these Bylaws, the Trustees may issue
units consisting of different securities of the Trust. Any security issued in
a unit shall have the same characteristics as any identical securities issued
by the Trust, except that the Trustees may provide that for a specified period
securities of the Trust issued in such unit may be transferred on the books of
the Trust only in such unit.
ARTICLE VIII
DISTRIBUTIONS
Section 1. AUTHORIZATION. Dividends and other distributions upon the
shares of the Trust may be authorized and declared by the Board Trustees in
their discretion, subject to the provisions of law and the Declaration of
Trust. Dividends may be paid in cash, property or shares of the Trust, subject
to the provisions of law and the Declaration of Trust.
Section 2. CONTINGENCIES. Before payment of any dividends, there may
be set aside out of any funds of the Trust available for dividends such sum or
sums as the Trustees may from time to time, in their absolute discretion, think
proper as a reserve fund for contingencies, for equalizing dividends, for
repairing or maintaining any property of the Trust or for such other purpose as
the Trustees shall determine to be in the best interest of the Trust, and the
Trustees may modify or abolish any such reserve in the manner in which it was
created.
17
<PAGE> 18
ARTICLE IX
SEAL
Section 1. SEAL. The Trustees may authorize the adoption of a seal by
the Trust. The seal shall have inscribed thereon the name of the Trust and the
year of its formation. The Trustees may authorize one or more duplicate seals
and provide for the custody thereof.
Section 2. AFFIXING SEAL. Whenever the Trust is required to place its
seal to a document, it shall be sufficient to meet the requirements of any law,
rule or regulation relating to a seal to place the word "(SEAL)" adjacent to
the signature of the person authorized to execute the document on behalf of the
Trust.
ARTICLE X
INDEMNIFICATION AND ADVANCES FOR EXPENSES
To the maximum extent permitted by Maryland law in effect from time to
time, the Trust, without requiring a preliminary determination of the ultimate
entitlement to indemnification, shall indemnify (a) any Trustee or officer or
any former Trustee or officer (including among the foregoing, for all purposes
of this Article X and without limitation, any individual who, while a Trustee
or officer and at the express request of the Trust, serves or has served
another corporation, partnership, joint venture, trust, employee benefit plan
or any other enterprise as a director, officer, shareholder, partner or trustee
of such corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise) who has been successful, on the merits or otherwise, in
the defense of a proceeding to which he was made a party by reason of service
in such capacity, against reasonable expenses incurred by him in connection
with the proceeding, and (b) any Trustee or officer or any former Trustee or
officer against any claim or liability to which he may become subject by reason
of such status unless it is established that (i) his act or omission was
material to the matter giving rise to the proceeding and was committed in bad
faith or was the result of active and deliberate dishonesty, (ii) he actually
received an improper personal benefit in money, property or services or (iii)
in the case of a criminal proceeding, he had reasonable cause to believe that
his act or omission was unlawful. In addition, the Trust shall pay or
reimburse, in advance of final disposition of a proceeding, reasonable expenses
incurred by a Trustee or officer or former Trustee or officer made a party to
a proceeding by reason such status, provided that, the Trust shall have
received (i) a written affirmation by the Trustee or officer of his good faith
belief that he has met the applicable standard of conduct necessary for
indemnification by the Trust as authorized by these Bylaws and (ii) a written
undertaking by or on its behalf to repay the amount paid or reimbursed by the
Trust if it shall ultimately be determined that the applicable standard of
conduct was not met. The Trust may, with the approval of its Trustees, provide
such indemnification or payment or reimbursement of
18
<PAGE> 19
expenses to any Trustee or officer or any former Trustee or officer who served
a predecessor of the Trust and to any employee or agent of the Trust or a
predecessor of the Trust. Neither the amendment nor repeal of this Article,
nor the adoption or amendment of any other provision of the Declaration of
Trust or these Bylaws inconsistent with this Article, shall apply to or affect
in any respect the applicability of this Article with respect to any act or
failure to act which occurred prior to such amendment, repeal or adoption.
Any indemnification or payment or reimbursement of the expenses
permitted by these Bylaws shall be furnished in accordance with the procedures
provided for indemnification or payment or reimbursement of expenses, as the
case may be, under Section 2-418 of the Maryland General Corporation Law (the
"MGCL") for directors of Maryland corporations. The Trust may provide to
Trustees, officers and shareholders such other and further indemnification or
payment or reimbursement of expenses, as the case may be, to the fullest extent
permitted by the MGCL, as in effect from time to time, for directors of
Maryland corporations.
ARTICLE XI
WAIVER OF NOTICE
Whenever any notice is required to be given pursuant to the
Declaration of Trust or Bylaws or pursuant to applicable law, a waiver thereof
in writing, signed by the person or persons entitled to such notice, whether
before or after the time stated therein, shall be deemed equivalent to the
giving of such notice. Neither the business to be transacted at nor the
purpose of any meeting need be set forth in the waiver of notice, unless
specifically required by statute. The attendance of any person at any meeting
shall constitute a waiver of notice of such meeting, except where such person
attends a meeting for the express purpose of objecting to the transaction of
any business on the ground that the meeting is not lawfully called or convened.
ARTICLE XII
AMENDMENT OF BYLAWS
The Trustees shall have the exclusive power to adopt, alter or repeal
any provision of these Bylaws and to make new Bylaws in accordance with Article
III hereof.
19
<PAGE> 20
ARTICLE XIII
MISCELLANEOUS
All references to the Declaration of Trust shall include any amendments
thereto.
20
<PAGE> 1
EXHIBIT 3.3
COMMON SHARES COMMON SHARES
NUMBER SHARES
PZN
CCA PRISON REALTY TRUST
FORMED UNDER THE LAWS OF THE STATE OF MARYLAND
THIS CERTIFICATE IS TRANSFERABLE CUSIP 12486R 10-8
IN NEW YORK, NEW YORK SEE REVERSE FOR CERTAIN DEFINITIONS
OR BOSTON, MASSACHUSETTS
THIS CERTIFIES THAT
is the registered holder of
FULLY-PAID AND NON-ASSESSABLE COMMON SHARES, PAR VALUE $.01 PER SHARE, OF
[SHARE CERTIFICATE WATERMARK]
CCA Prison Realty Trust transferable on the books of the Company by the holder
hereof in person or by duly authorized attorney upon surrender of his
certificate properly endorsed. This certificate is not valid until
countersigned by the Transfer Agent and registered by the Registrar.
In Witness Whereof, the Company has caused the facsimile signatures of its duly
authorized officers and the facsimile of its seal to be printed hereon.
Dated:
COUNTERSIGNED AND REGISTERED:
BANKBOSTON, N.A.
TRANSFER AGENT
AND REGISTRAR,
BY:
AUTHORIZED SIGNATURE
/s/ Vida H. Carroll /s/ D. Robert Crants, III
- ------------------- -------------------------
Vida H. Carroll D. Robert Crants, III
CHIEF FINANCIAL OFFICER, SECRETARY
AND TREASURER PRESIDENT
[CCA PRISON REALTY TRUST
CORPORATE
SEAL
1997
MARYLAND SEAL]
<PAGE> 2
CCA PRISON REALTY TRUST
The securities represented by this certificate are subject to
restrictions on transfer as set forth in the Declaration of Trust of the
Company. No Person may (i) Beneficially Own or Constructively Own Common Shares
in excess of 9.8% of the number of outstanding Common Shares, (ii) Beneficially
Own or Constructively Own Preferred Shares in excess of 9.8% of the number of
outstanding Preferred Shares, (iii) Beneficially Own Equity Shares that would
result in the Trust being "closely held" under Section 856(b) of the Internal
Revenue Code of 1986, as amended (the "Code"), or (iv) Constructively Own
Equity Shares that would cause the Trust to Constructively Own 10% or more of
the ownership interests in a tenant of the Trust's real property, within the
meaning of Sections 856(d)(2)(8) of the Code. Any Person who attempts to
Beneficially Own or Constructively Own shares of Equity Shares in excess of the
above limitations must immediately notify the Trust in writing. If the
restrictions above are violated, the Equity Shares represented hereby will be
transferred automatically and by operation of law to a Share Trust and shall be
designated Shares-in-Trust. All capitalized terms in this legend have the
meanings defined in the Company's Declaration of Trust, as the same may be
further amended from time to time, a copy of which, including the restrictions
on transfer, will be sent without charge to each shareholder who so requests.
THE COMPANY HAS THE AUTHORITY TO ISSUE SHARES OF MORE THAN ONE CLASS.
THE COMPANY WILL, ON REQUEST AND WITHOUT CHARGE, FURNISH A FULL STATEMENT OF THE
DESIGNATIONS AND ANY PREFERENCES, CONVERSION AND OTHER RIGHTS, VOTING POWERS,
RESTRICTIONS, LIMITATIONS AS TO DIVIDENDS, QUALIFICATIONS, AND TERM AND
CONDITIONS OF REDEMPTION OF THE SHARES OF EACH CLASS WHICH THE COMPANY IS
AUTHORIZED TO ISSUE. SUCH REQUEST MAY BE MADE TO THE SECRETARY OF THE COMPANY
AT ITS PRINCIPAL OFFICE.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT Custodian
TEN ENT -- as tenants by the entireties ------------- --------
JT TEN -- as joint tenants with right of (Cust) (Minor)
survivorship and not as tenants Under Uniform Gifts to Minors
in common Act
------------------
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received, ______________hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
--------------------------------------
--------------------------------------
- -------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OR ASSIGNEE)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- ------------------------------------------------------------------------ shares
of the Common Shares represented by the within certificate, and do hereby
irrevocably constitute and appoint ___________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated:
<TABLE>
<S> <C>
Signature:
----------------------------------------------------------------------------------------------------
Notice: The signature to this assignment must correspond with the name as written upon the face
of the certificate in every particular, without alteration or enlargement or any change whatever.
Signature guaranteed:
-----------------------------------------------------------------------------------------------------
THE SIGNATUE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17 Act 10.
</TABLE>
<PAGE> 1
Exhibit 10.6
May 2, 1997
CCA Prison Realty Trust
2200 Abbott Martin Road, Suite 201
Nashville, Tennessee 37215
Attention: D. Robert Crants, III, President
Re: Commitment for Arrangement of Facility and Financing
Dear Bob:
You have advised us that CCA Prison Realty Trust (the "Borrower"), a
Maryland real estate investment trust, seeks financing to fund the acquisition
of public and private sector completed correctional facilities and the other
purposes set forth in the attached Summary of Terms and Conditions (the "Term
Sheet"). The Term Sheet describes the general terms and conditions for an
aggregate $150 million senior secured revolving credit facility (the
"Facility").
First Union Capital Markets Corp. ("FUCMC") is pleased to advise you of
its commitment, as Arranger for the Facility, to use its reasonable best efforts
to secure commitments for the Facility from a syndicate of banks and financial
institutions (the "Lenders") reasonably acceptable to the Borrower upon the
terms and subject to the conditions set forth herein, in the Term Sheet and in
the fee letter of even date delivered to you with this commitment letter (the
"Fee Letter"). Furthermore, First Union National Bank of Tennessee ("First
Union") is pleased to advise you of its commitment to serve as Administrative
Agent of the Facility and provide $40 million in aggregate principal amount of
the Facility upon the terms and subject to the conditions set forth herein, in
the Term Sheet and in the Fee Letter.
The commitments of FUCMC and First Union hereunder are based upon the
financial and other information regarding the Borrower previously provided to
FUCMC and First Union. Accordingly, the commitments hereunder are subject to the
condition, among others, that (i) there shall not have occurred after the date
of such financial and other information any material adverse change in the
business, assets, liabilities (actual or contingent), operations, condition
(financial or otherwise) or prospects of the Borrower, (ii) FUCMC and First
Union continue to be satisfied, upon completion of their due diligence, with
such business, assets, liabilities, operations condition and prospects of the
Borrower, (iii) the information concerning the Borrower shall not differ in any
material respect from the information previously provided to FUCMC and First
Union by or on behalf of the Borrower or any representative thereof, (iv) no
change in governmental regulations or change in or disruption of financial or
capital market conditions occurring after the
<PAGE> 2
CCA Prison Realty Trust
Page 2
date hereof that in the opinion of First Union or FUCMC could reasonably be
expected to adversely affect the proposed financing or the satisfactory
syndication of the Facility, (v) the determination of First Union and FUCMC
that, prior to and during the primary syndication of the Facility, there shall
be no competing issuance of debt, securities or commercial bank facilities of
the Borrower being offered, placed or arranged except with the prior written
consent of First Union and FUCMC (other than the issuance of common stock of the
Borrower in a fully underwritten initial public offering raising at least $250
million in net proceeds prior to the closing of the Facility (the "Offering")),
(vi) FUCMC shall have binding commitments from other banks or financial
institutions for the Facility totaling at least $110 million, (vii) the
Administrative Agent's and Lenders' satisfaction with the terms of all
underlying agreements with respect to the sale-leaseback transactions to be
entered into by Corrections Corporation of America ("CCA") and the Borrower,
including but not limited to the initial Leases, Master Lease, Purchase
Agreements, Option Agreements, Right to Purchase Agreement, Trade Name Use
Agreement and Non-Competition Agreement and (viii) all representations and
warranties of the Borrower and CCA contained in such underlying agreements
remain true and correct and such parties remain in compliance with all covenants
and agreements contained therein.
The Borrower agrees to actively assist FUCMC in achieving a syndication
of the Facility that is satisfactory to FUCMC and the Borrower. In the event
that such syndication cannot be achieved in a manner satisfactory to FUCMC under
the structure outlined in the Term Sheet, the Borrower agrees to cooperate with
FUCMC in developing an alternative structure that will permit a syndication of
the Facility in a manner satisfactory to FUCMC, First Union and the Borrower.
Such syndication may be accomplished by a variety of means, including direct
contact during the syndication between senior management and advisors of the
Borrower and the proposed syndicate members. To assist FUCMC in the syndication
efforts, the Borrower hereby agrees (i) to provide and cause its advisors to
provide FUCMC and the other syndicate members, upon request, with all
information deemed reasonably necessary by FUCMC to complete the syndication,
including but not limited to information and evaluations prepared by the
Borrower and its advisors, or on their behalf, relating to the transactions
contemplated hereby, (ii) to assist FUCMC upon its reasonable request in the
preparation of an Information Memorandum to be used in connection with the
syndication of the Facility and (iii) to otherwise assist FUCMC in its
syndication efforts, including making officers and advisors of the Borrower
available from time to time to attend and make presentations regarding the
business and prospects of the Borrower, as appropriate, at a meeting or meetings
of Lenders or prospective Lenders.
It is understood and agreed that FUCMC will manage and control all
aspects of the syndication, including decisions as to the selection of proposed
Lenders and any titles offered to proposed Lenders, when commitments will be
accepted and the final allocations of the commitments among the Lenders, all on
terms reasonably satisfactory to FUCMC, First Union and the Borrower. It is
understood that no Lender participating in the Facility will receive
<PAGE> 3
CCA Prison Realty Trust
Page 3
compensation from the Borrower or anyone acting on its behalf outside the terms
contained herein, in the Term Sheet and Fee Letter in order to obtain its
commitment.
The Borrower hereby represents and covenants that to the best of its
knowledge (i) all information, other than Projections (as defined below), which
has been or is hereafter made available thereby or its representatives to FUCMC,
First Union or the Lenders in connection with the transactions contemplated
hereby ("Information") is and will be complete and correct in all material
respects and does not and will not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements contained
therein not materially misleading and (ii) all financial projections concerning
the Borrower that have been or are hereafter made available thereby or its
representatives to FUCMC, First Union or the Lenders (the "Projections") have
been or will be prepared in good faith based upon reasonable assumptions. The
Borrower agrees to supplement the Information and the Projections from time to
time until the closing date so that the representation and warranty in the
preceding sentence is correct on the closing date. In arranging and syndicating
the Facility, FUCMC and First Union will be using and relying on the Information
and the Projections.
By executing this letter agreement, the Borrower agrees to reimburse
FUCMC and First Union from time to time on demand for all reasonable
out-of-pocket fees and expenses (including, but not limited to, syndication
expenses and the reasonable fees, disbursements and other charges of Kennedy,
Covington, Lobdell & Hickman, L.L.P., counsel to FUCMC and First Union, and
professional fees of consultants and other experts) incurred through the date of
each corresponding invoice in connection with the Facility, including the
preparation of definitive documentation for the Facility and the other
transactions contemplated hereby. The Borrower agrees that such counsel shall
submit periodic invoices during such preparation and on the closing date. Such
counsel estimates such fees, based upon a customary negotiation and closing
process, shall be $125,000 plus expenses as incurred. (Such figure excludes fees
and expenses of local counsel, if any.)
By executing this letter agreement, the Borrower further agrees to
indemnify and hold harmless FUCMC, First Union, each other Lender and each
director, officer, employee, attorney and affiliate of FUCMC, First Union and
each other Lender (each such person or entity referred to hereafter in this
paragraph as an "Indemnified Person") from any losses, claims, costs, damages,
expenses or liabilities (or actions, suits or proceedings, including any inquiry
or investigation, with respect thereto) to which any Indemnified Person may
become subject, insofar as such losses, claims, costs, damages, expenses or
liabilities (or actions, suits, or proceedings, including any inquiry or
investigation, with respect thereto) arise out of, in any way relate to, or
result from, this letter, the Facility or the other transactions contemplated
hereby and thereby and to reimburse upon demand each Indemnified Person for any
and all legal and other expenses incurred in connection with investigating,
preparing to defend or defending any such loss, claim, cost, damage, expense or
inquiry or investigation, with respect thereto; provided, that the
<PAGE> 4
CCA Prison Realty Trust
Page 4
Borrower shall have no obligation under this indemnity provision for liabilities
resulting from gross negligence or willful misconduct of any Indemnified Person.
The foregoing provisions of this paragraph shall be in addition to any right
that an Indemnified Person shall have at common law or otherwise. No Indemnified
Person shall be responsible or liable for consequential damages which may be
alleged as a result of this letter.
The provisions of the immediately preceding two paragraphs shall remain
in full force and effect regardless of whether definitive financing
documentation shall be executed and delivered and notwithstanding the
termination of this letter agreement or the commitment of FUCMC or First Union
hereunder.
Except as required by applicable law (including applicable securities
law), this letter and the contents hereof shall not be disclosed by the Borrower
or its representatives to any third party without the prior consent of FUCMC and
First Union, other than to their attorneys, financial advisors and accountants,
who are directly involved in the consideration of this matter. In the event that
the contents of this letter are disclosed in contravention of the preceding
sentence, the Borrower is hereby advised that such disclosure could have a
material adverse effect on the success and/or timely closing of the syndication.
The Borrower acknowledges and agrees that First Union may share with any of its
affiliates (including specifically FUCMC) any information relating to the
Facility, the Borrower.
This letter may be executed in counterparts which, taken together,
shall constitute an original. This letter, together with the Term Sheet and the
Fee Letter embodies the entire agreement and understanding between FUCMC, First
Union, and the Borrower with respect to the specific matters set forth above and
supersedes all prior agreements and understandings relating to the subject
matter hereof. No party has been authorized by FUCMC and First Union to make any
oral or written statements inconsistent with this letter.
THIS LETTER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NORTH CAROLINA WITHOUT REGARD TO THE
PRINCIPLES OF CONFLICTS OF LAW.
This letter may not be assigned by the Borrower without the prior
written consent of FUCMC and First Union.
If the Borrower is in agreement with the foregoing, please execute and
return the enclosed copy of this Commitment Letter and Fee Letter and payment in
immediately available funds of the upfront portion of the Arrangement Fee set
forth in the Fee Letter no later than the close of business on May 2, 1997. This
letter will become effective upon delivery to FUCMC by the Borrower of executed
counterparts of this Commitment Letter and the Fee Letter and payment of such
fee. This commitment shall terminate if not so accepted by you prior to that
time.
<PAGE> 5
CCA Prison Realty Trust
Page 5
Following acceptance by you, this commitment will terminate on August 31,
1997, unless the Facility is closed by such time.
[Signature Pages Follow]
<PAGE> 6
CCA Prison Realty Trust
Page 6
Very truly yours,
FIRST UNION NATIONAL BANK
OF TENNESSEE
By: /s/ Timothy B. Fouts
-----------------------------------
Title:
--------------------------------
Date: May 2, 1997
---------------------------------
FIRST UNION CAPITAL MARKETS CORP.
By: /s/ Ted Heldring
-----------------------------------
Title:
--------------------------------
Date: May 2, 1997
---------------------------------
[Additional Signature Page Follows]
<PAGE> 7
CCA Prison Realty Trust
Page 7
COMMITMENT ACCEPTED AND AGREED TO
THIS 2ND DAY OF MAY, 1997:
CCA PRISON REALTY TRUST
By: /s/ D. Robert Crants, III
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Name: D. Robert Crants, III
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Title: President
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CCA PRISON REALTY TRUST
SUMMARY OF TERMS AND CONDITIONS
MAY 2, 1997
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BORROWER: CCA Prison Realty Trust (the "Borrower"), a Maryland real
estate investment trust.
ADMINISTRATIVE
AGENT: First Union National Bank of Tennessee ("First Union" or the
"Administrative Agent").
ARRANGER: First Union Capital Markets Corp.
LENDERS: First Union and a group of lenders to be selected by First Union
and the Borrower (the "Lenders").
FACILITY: Revolving Credit Facility of up to $150,000,000 (the "Facility"),
with a portion of the Facility not to exceed $5,000,000 available
for swingline loans (the "Swingline Loans") from First Union on
same day notice. Any such Swingline Loans shall reduce the
available commitment under the Facility. Each of the Lenders
shall acquire an irrevocable and unconditional pro rata
participation in each such Swingline Loan.
ADMINISTRATIVE AGENT'S
COMMITMENT: $40,000,000.00
TERM OF
FACILITY: Three years from the date of Closing (the "Termination Date").
EXTENSION: At each of the first two anniversaries of the Closing, the Facility
may be extended by one year beyond the then existing
Termination Date at the sole discretion of each Lender; provided
that no extension shall occur for any Lender unless Lenders
holding at least 80% of the commitments as of the date the
extension is requested have consented to such extension. Written
notification of the Borrower's election to extend must be received
by the Administrative Agent at least sixty (60) but no more than
ninety (90) days prior to the applicable anniversary date. The
Administrative Agent shall notify the Borrower in writing of the
acceptance or rejection of such extension no later than thirty (30)
days after receipt of Borrower's election. If any Lender fails to
consent to such extension, the Borrower shall
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have the option ofobtaining a replacement Lender or continuing the
Facility with a reduced aggregate commitment.
PURPOSE: To fund the acquisition of public and private sector completed
correctional facilities, the further construction and development of
owned correctional facilities, working capital and general
corporate purposes.
SECURITY: The security for the Facility shall consist of a perfected first
priority (except as otherwise permitted herein) security interest in
all assets of the Borrower, including mortgages on all real
property and an assignment of all leases. Upon receipt by the
Borrower of a rating of at least BBB-/Baa3 by either Moody's
Investor Service or Standard & Poors' Rating Service (an
"Investment Grade Rating"), all collateral of the Lenders,
including mortgages and collateral assignments of leases, will be
released. Release of the Lenders' security interest shall also be
permitted with respect to (i) the sale of any correctional facility
to Corrections Corporation of America pursuant to the Right to
Purchase Agreement or any other permitted sale or (ii) the
refinancing of any correctional facility, if in any such case at least
75% of the initial purchase price plus all related capital additions
for such facility are received by the Borrower; provided further
that the aggregate proceeds (net of closing costs) from said sale
or refinancing indebtedness is applied to repay outstandings under
the Facility.
INTEREST RATE
OPTIONS: The Borrower's option of:
(1) Base Rate: The Base Rate plus the Applicable Base Rate
Margin, as set forth in the pricing grid attached hereto as
Exhibit I. Loans bearing interest at the Base Rate shall be
for a minimum amount of $1,000,000 and $100,000 increments
in excess thereof.
The Base Rate means the greater of (i) the Agent's Prime Rate
or (ii) the overnight federal funds rate plus 0.50%.
The rate announced publicly by Administrative Agent as
its Prime Rate is an index or base rate and shall not
necessarily be its lowest or best rate charged to its
customers or other banks.
Swingline Loans shall be maintained solely at the
Base Rate and may be borrowed in minimum increments of $100,000.
(2) LIBOR Rate: LIBOR plus the Applicable LIBOR Margin as
set forth in the pricing grid attached hereto as Exhibit I.
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Loans bearing interest at the LIBOR Rate may be requested on three
business days prior written notice and shall be for a
minimum amount of $5,000,000 and $1,000,000
increments in excess thereof.
LIBOR shall mean reserve adjusted LIBOR as set forth
on Telerate Page 3750 or as determined by the
Administrative Agent if such information is not
available. The LIBOR Rate Option is available for
Interest Periods of 1, 2, 3, or 6 months. No more
than six (6) Interest Periods may be in effect at
any time. The LIBOR Rate shall be adjusted for FDIC
and regulatory reserve requirements.
Rate changes involving an increase or decrease in the
Applicable Margin will be effected five (5) business
days after a change in the Senior Debt Rating.
LIBOR Rate interest and all fees shall be calculated on
a 360-day basis, while Base Rate interest shall be
calculated on a 365-day basis.
INTEREST
PAYMENTS: Interest on Base Rate loans will be due and payable quarterly in
arrears. Interest on LIBOR Rate loans will be due and payable
at the earlier of the end of each applicable interest period or
quarterly.
DEFAULT
RATE: Upon the occurrence and during the continuance of an Event of
Default, (i) the Borrower shall no longer have the option to
request LIBOR Rate loans, (ii) all amounts due and payable with
respect to LIBOR Rate loans shall bear interest at a rate per
annum two percent (2%) in excess of the rate then applicable to
LIBOR Rate loans until the expiration of the then applicable
Interest Period and thereafter at a rate equal to two percent (2%)
in excess of the rate then applicable to Base Rate loans and (iii)
all amounts due and payable with respect to Base Rate loans shall
bear interest at a rate per annum equal to two percent (2%) in
excess of the rate then applicable to Base Rate loans.
INCREASED COSTS/
CHANGE OF
CIRCUMSTANCES: Provisions customary in facilities of this type protecting the Lenders
in the event of unavailability of funding, illegality, capital
adequacy requirements, increased costs, withholding taxes and funding losses.
COMMITMENT
FEES: Twenty-five basis points per annum on the unused portion of the
Facility, payable quarterly in arrears to each Lender based upon
its commitment percentage.
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PREPAYMENTS: Base Rate Loans may be prepaid at any time. LIBOR Rate loans
may be prepaid at the end of the applicable Interest Period
without penalty. Upon any partial release of collateral to secure
refinancing indebtedness as described above, all sale and loan
proceeds (net of closing costs) received by the Borrower shall be
applied to prepay the outstandings under the Facility. Prepayment
of the LIBOR Rate loans prior to the end of the applicable
Interest Period (whether through a voluntary or mandatory
prepayment) is subject to payment of any funding losses.
OPTIONAL
REDUCTIONS: The Borrower may voluntarily reduce the Facility at any time without
penalty; provided, that prepayment of any LIBOR Rate loans in
connection with such reduction prior to the end of the applicable
Interest Period is subject to payment of any funding losses. Such
reductions shall be permanent.
CONDITIONS
PRECEDENT TO
CLOSING: Customary for facilities of this nature, including but not limited
to, satisfactory completion of the Offering referred to in the
Commitment Letter and receipt by the Borrower of not less than
$250,000,000 net proceeds therefrom; the acquisition of at least
eight correctional facilities from CCA with an option to purchase
at least five additional correctional facilities; no material change
to terms of sale leaseback transactions outlined in the Form S-11
as filed with the Securities and Exchange Commission on April
24, 1997 and the Lenders shall be satisfied with such terms; all
initial leases shall be satisfactory in form and substance to the
Lenders; purchase by Doctor R. Crants of no less than $7.5
million and no more than $10.0 million of equity securities issued
as part of such Offering; credit documentation for the Facility
satisfactory to the Administrative Agent and the Lenders; all
governmental, shareholder, corporate and third party consents
shall have been obtained; no material pending or threatened
litigation, bankruptcy or other proceeding; satisfactory review of
all corporate documentation and other legal due diligence;
payment of all fees and expenses due to the Administrative Agent,
Administrative Agent's counsel and the Lenders; and other
conditions precedent deemed reasonably necessary by the
Administrative Agent, the Administrative Agent's counsel and the
Lenders in the context of the proposed transaction.
CONDITIONS
PRECEDENT TO
FUNDING: No draws shall be permitted to fund the acquisition of any
correctional facility unless (a) the Administrative Agent on behalf
of the Lenders has a first priority (except as otherwise permitted
herein) perfected security interest in, or other security
arrangement satisfactory to the Administrative Agent with respect
to, such property and assets and all applicable affirmative
covenants have been complied with, (b) no Default or Event of
Default shall exist
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under the Facility and (c) delivery of a compliance certificate
executed by the Chief Financial Officer or other executive officer
of the Borrower. In addition, no greater than the following amounts
may be outstanding at any time during the term of the Facility for
the corresponding purpose: (a) $5 million for working capital and
general corporate purposes, (b) $50 million for further development
of existing correctional facilities as long as the corresponding lease
is in place, and if in place with a private sector counterparty, with
an underlying incarceration agreement as well (or if such lease in place
but no underlying incarceration agreement exists, such use shall not
exceed $25 million), (c) $40 million for the construction of no
more than two new correctional facilities at any one time, as long
as the corresponding lease is in place with a public sector
counterparty rated at least A-/A3 by Standard & Poor's Rating
Service or Moody's Investors Service and (d) $30 million to
finance the acquisition of completed correctional facilities where
such property remains subject to a first priority lien in favor of
another secured party, as long as the Administrative Agent on
behalf of the Lenders receives a perfected second priority lien on
such property.
REPRESENTATIONS
AND WARRANTIES: Customary for facilities of this nature, including but not limited
to, valid existence and qualification as a real estate investment
trust under applicable law; corporate and governmental
authorization; enforceability; financial information; no material
adverse changes; compliance with laws and agreements (including
environmental laws); compliance with ERISA; no material
litigation; payment of taxes; full disclosure; and any additional
representations and warranties deemed reasonably necessary by
the Administrative Agent, the Administrative Agent's counsel and
the Lenders in the context of the proposed transaction.
AFFIRMATIVE
COVENANTS: Customary for facilities of this nature, including but not limited to,
receipt of financial information (including, without limitation,
projections prepared by the Borrower, said projections to be
delivered on an annual basis and at such other times that the
Administrative Agent shall reasonably request); notification of
litigation, investigations and other adverse changes; notification
of defaults under incarceration agreements; payment of obligations;
conduct of business; maintenance of status as a qualified real estate
investment trust under applicable law; maintenance of property and insurance;
maintenance of records and accounts; inspection of property and books and
records; compliance with laws (including environmental laws); payment of taxes;
ERISA; performance of obligations; all correctional facilities currently owned or
subsequently acquired, if leased to a private sector counterparty, shall have an
underlying incarceration agreement prior to their respective dates of acquisition; all
leases will be triple net, non-cancelable and not contingent on the maintenance of
incarceration agreements; all leases shall have minimum initial lease terms of 10 years
(provided that leases with public sector counterparties may have such shorter terms
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and be subject to such appropriations limitations as are satisfactory to the
Required Lenders); all new leases shall be satisfactory in form and substance to the
Administrative Agent; the lessee(s) will remain responsible for all prison operations
and liabilities; business of the Borrower shall be limited solely to the ownership of
correctional facilities which will be managed by their respective lessee(s) (or
agents in the event the lessee is a public sector counterparty); not less than 90% of
all lease revenues shall be derived from leases where CCA or a counterparty rated at
least A-/A3 by Standard & Poor's Rating Service or Moody's Investors Service is the
lessee, provided the remaining 10% of all lease revenues shall be derived from leases
with counterparties whose senior unsecured non-credit enhanced long term debt is rated
Investment Grade or with any other counterparty satisfactory to the
Administrative Agent; quarterly delivery of leases then in effect and financial
statements of each lessee; within 18 months after the Closing, 50% of all funded debt
shall be hedged by the Borrower at rates and other terms and conditions satisfactory to
the Administrative Agent; and any additional affirmative covenants deemed reasonably
necessary by the Administrative Agent, the Administrative Agent's counsel and the
Lenders in the context of the proposed transaction.
FINANCIAL
COVENANTS: The credit documentation will include, without limitation, the
following covenants with respect to the Borrower on a
consolidated basis:
1. Liabilities/Capitalization. The ratio of Total Liabilities to
Capitalization shall not equal or exceed .45 to 1.0 as of
any fiscal quarter end.
"Total Liabilities" means all Liabilities of the
Borrower determined in accordance with GAAP,
including all contingent obligations.
"Total Capitalization" means Total Liabilities plus Net
Worth of the Borrower.
2. Debt/Cash Flow. The ratio of (a) Total Funded Debt less
Excess Cash to (b) Cash Flow shall not exceed 12.0 to
1.0 as of any fiscal quarter end.
"Total Funded Debt" means all indebtedness for
borrowed money, capital leases, deferred purchase
price of property or services (other than trade
accounts payable), and all contingent obligations.
"Excess Cash" means cash and cash equivalents as set
forth on a consolidated balance sheet at any fiscal
quarter end in excess of $5,000,000.
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"Cash Flow" means Funds From Operations less
Required Dividends less Maintenance Capital
Expenditures, all for such fiscal quarter end, times
four. For purpose of determining pro forma
compliance for the financing of acquisitions
of correctional facilities and for the purpose of
determining compliance for the quarter in which any
such acquisition occurs, the projected first year
cash flow of the property to be acquired shall be
included in such calculation.
"Required Dividends" means any dividends required to
be distributed by the Borrower to maintain its
status as a qualified real estate investment trust.
"Funds From Operations" is defined as net income plus
depreciation and amortization minus interest
income and any extraordinary gains.
3. Dividends/FFO. The ratio of Dividends to Funds From
Operations for any period of four consecutive fiscal
quarters ending on any date set forth below (provided
that this ratio shall be determined on an annualized
basis for each fiscal quarter end through March
1998), shall not exceed the corresponding ratio set
forth below:
Date Ratio
---- -----
Closing Date through
9/30/97 1.0 to 1.0
12/31/97 through
12/31/98 .95 to 1.0
3/31/99 and
thereafter .90 to 1.0
4. Coverage Ratio: The ratio of (a) Funds From Operations
plus Interest Expense less Maintenance Capital
Expenditures to (b) Interest Expense plus
Preferred Stock Dividends, in each case for any period
of four consecutive fiscal quarters, shall be equal to
or greater than 3.0 to 1.0 as of such fiscal quarter
end (provided that this ratio shall be determined
on an annualized basis for each fiscal quarter end
through March 1998).
5. Minimum Net Worth. The Borrower will maintain as of
each fiscal quarter end a Minimum Net Worth of no less
than the sum of (a) 95% of the net proceeds of the
Offering plus (b) $3,000,000 (representing the accounting
treatment of the initial equity interests of Bob Crants and
Mike Devlin) plus (c) 75% of Net Income less (d) Dividends
plus (e) 100% of any net proceeds received on the issuance of, or
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any debt satisfied on the conversion into,
any capital stock during such fiscal quarter.
ADDITIONAL FINANCIAL
COVENANTS
1. Additional Secured Debt. Upon the incurrence of any
secured indebtedness while the Facility remains
secured, the Borrower shall also not permit as of any
fiscal quarter end the ratio of (a) Facility
Outstandings on such quarter end to (b) Revolver
Secured Cash Flow for such quarter times four, to
exceed 3.25 to 1.0.
"Revolver Secured Cash Flow" shall mean Net
Operating Income less Maintenance Capital
Expenditures, in each case with respect to properties
on which there is a perfected first priority
perfected security interest in favor of the
Administrative Agent for the benefit of the Lenders.
"Net Operating Income" shall mean Funds From
Operations plus Interest Expense.
2. Investment Grade Rating. Upon the receipt of an
Investment Grade Rating from either Standard & Poors'
Rating Service or Moody's Investor Service, the
Borrower shall not permit as of each fiscal quarter end:
(a) the ratio of (a) Total Unsecured Debt to (b)
Unleveraged Cash Flow for such quarter times
four, to exceed 3.25 to 1.0.
"Total Unsecured Debt" means the aggregate
principal amount of Total Funded Debt of the Borrower
which is not secured by a lien on any assets thereof.
"Unleveraged Cash Flow" shall mean Net Operating
Income less Maintenance Capital Expenditures, in each
case with respect to properties which are not subject to
any lien.
(b) the ratio of Total Secured Debt to Combined
Fixed Asset Book Value to exceed .25 to 1.0.
"Total Secured Debt" means the aggregate principal
amount of Total Funded Debt of the Borrower which is
secured by a perfected lien on any assets thereof.
NEGATIVE
COVENANTS: Customary for facilities of this nature, including but not
limited to, restrictions and limitations on: indebtedness;
liens (including the capital stock and other ownership
interests); contingent obligations; changes in business;
mergers; sales of assets (provided that asset sales in the
ordinary course of business not to exceed 20% of the net
book value of fixed assets during the term of the Facility
shall be permitted);
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acquisitions (maximum limit of 35% of the net book value
of fixed assets determined immediately prior to consummation
of such acquisition for any single correctional facility and
related assets shall be permitted); restricted payments
(including dividends and other distributions); loans and
investments; prohibition on creation or acquisition of subsidiaries;
transactions with affiliates; optional prepayments of and material
amendments to indebtedness; restrictive agreements; changes in
fiscal year or accounting method; prohibition on amending leases
in any way which could reasonably be expected to be adverse to the
Borrower (as determined by the Administrative Agent) without prior
consent of the Administrative Agent; and other negative covenants
deemed reasonably necessary by the Administrative Agent,
Administrative Agent's counsel and the Lenders in the context
of the proposed transaction.
EVENTS OF
DEFAULT: Customary for facilities of this nature, including but not
limited to, failure to pay any interest, principal or fees
under the Facility when due; failure to perform any
covenant or agreement; invalidity of any loan documents;
inaccurate or false representations or warranties; cross
default (including any default under any correctional
facility lease or any material default under any other lease
or material agreement, in each case as determined by the
Administrative Agent); insolvency or bankruptcy; ERISA;
judgment defaults; change in control; changes in senior
management; and any other events of default deemed
reasonably necessary by the Administrative Agent,
Administrative Agent's counsel and the Lenders in the
context of the proposed transaction.
ASSIGNMENTS &
PARTICIPATION: Each Lender will be permitted to make assignments in
minimum amounts of $10,000,000 to eligible assignees,
with the prior consent of Administrative Agent, and (as
long as no default or event of default exists) the
Borrower, each of said consents not to be unreasonably
withheld. Participations shall be permitted in minimum
amounts of $5,000,000 without the consent of the
Borrower. The assigning Lender shall pay an assignment
fee of $2,500 to the Administrative Agent in connection
with any such assignment.
REQUIRED
LENDERS: 66-2/3%
GOVERNING LAW/
JURISDICTION: North Carolina law (without reference to choice of law
provisions) shall govern. Waiver of jury trial, submission
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to jurisdiction and mandatory arbitration in
Charlotte, North Carolina.
COUNSEL TO
ARRANGER AND
ADMINISTRATIVE
AGENT: Kennedy Covington Lobdell & Hickman, L.L.P.
MISCELLANEOUS: This summary of terms and conditions does not purport
to summarize all the conditions, covenants,
representations, warranties and other provisions which
would be contained in definitive credit
documentation for the Facility contemplated hereby.
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EXHIBIT I
Pricing Grid
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Tier Senior Debt Rating* Applicable Margin
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LIBOR Base Rate
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I >BBB +/Baa1 1.125% 0%
-
- ------------------------------------------------------------------------------------------------------
II >BBB/Baa2 1.250% 0%
-
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III >BBB-/Baa3 1.375% .125%
-
- ------------------------------------------------------------------------------------------------------
IV <BBB-/Baa3 1.750% .500%
======================================================================================================
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* The pricing levels shall be based upon the higher of the ratings
given by Standard & Poor's Rating Service and Moody's Investor Service to the
senior unsecured non-credit enhanced long-term debt of the Borrower in
accordance with the schedule set forth above ("Senior Debt Rating"). As long as
the Borrower leases all of its correctional facilities to Corrections
Corporation of America, the rating of the senior unsecured non-credit enhanced
long term debt of CCA may be substituted in lieu of such rating for the
Borrower.
Until the Borrower receives an Investment Grade Rating, the Applicable
Margin shall be 1.50% for LIBOR Rate Loans and .25% for Base Rate Loans.
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EXHIBIT 10.12
CCA PRISON REALTY TRUST
NON-EMPLOYEE TRUSTEES' SHARE OPTION PLAN
1. Purpose. The purpose of the CCA Prison Realty Trust
Non-Employee Trustees' Share Option Plan (the "Plan") is to advance the
interests of CCA Prison Realty Trust (the "Company") and its shareholders by
encouraging increased share ownership by members of the Board of Trustees (the
"Board") of the Company who are not employees of the Company, any subsidiary of
the Company, Corrections Corporation of America ("CCA"), or any subsidiary of
CCA to enhance long-term shareholder value through continuing ownership of the
Company's common shares.
2. Administration.
(a) The Plan shall be administered by the Compensation
Committee of the Board. The Compensation Committee shall have all the
powers vested in it by the terms of the Plan, which shall include the
authority (within the limitations described herein) to prescribe the
form of the agreements embodying awards of non- qualified options (the
"Options"). The Compensation Committee, subject to the provisions of
the Plan, shall grant Options under the Plan and shall have the power
to construe the Plan, to determine all questions arising hereunder,
and to adopt and amend such rules and regulations for the
administration of the Plan as it may deem desirable. Any decision of
the Compensation Committee in the administration of the Plan shall be
final and conclusive. The Compensation Committee may act only by a
majority of its members in office, except that the members of the
Compensation Committee may authorize any one or more of their members
or the Secretary or any other officer of the Company to execute and
deliver documents on behalf of the Compensation Committee.
(b) Each person who is or shall have been a member of the
Compensation Committee shall be indemnified and held harmless by the
Company against and from any and all loss, cost, liability, or expense
that may be imposed upon or reasonably incurred by him in connection
with or resulting from any claim, action, suit, or proceeding to which
he may be or become involved by reason of any action taken or failure
to act under the Plan and against and from any and all amounts paid by
him in settlement thereof (with the Company's written approval) or
paid by him in satisfaction of a judgment in any such action, suit, or
proceeding, except a judgment in favor of the Company based upon a
finding of his lack of good faith; subject, however, to the conditions
that upon the institution of any claim, action, suit, or proceeding
against him, he shall in writing give the Company an opportunity, at
its expense, to handle and defend the same before he undertakes to
handle and defend it on such person's own behalf. The foregoing right
of indemnification shall not be exclusive of any other right to which
such person may be entitled as a matter of law or otherwise, or any
power that the Company may have to indemnify him or hold him harmless.
Each member of the Compensation Committee and each officer and
employee of the Company shall be fully justified in relying or acting
in good faith upon any information furnished in connection with the
administration of the Plan by an appropriate person or persons other
than himself. In no event shall any person who is or shall have been
a member of the Compensation
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Committee or an officer or employee of the Company be held liable for
any determination made or other action taken or any omission to act in
reliance upon any such information as referred to in the preceding
sentence, or for any action (including the furnishing of information)
taken or any omission to act, when such determination, action, or
omission is made in good faith.
3. Participation. Each member of the Board of the Company who is
not an employee of the Company or, subsidiary of the Company, CCA or any
subsidiary of CCA (a "Non-Employee Trustee") shall receive Options in
accordance with Section 5 below. As used herein, the term "subsidiary" means
any corporation at least 40% of the outstanding voting stock of which is owned,
directly or indirectly, by the Company or CCA, as the case may be.
4. Awards Under the Plan.
(a) Type of Awards. Awards under the Plan shall include
only Options, which are rights to purchase common shares of the
Company having a par value of $.01 per share (the "Shares"). All
Options are subject to the terms, conditions, and restrictions
specified in Paragraph 5 below.
(b) Maximum Number of Shares That May Be Issued. No more
than 150,000 Shares, subject to adjustment as provided in Paragraph 6
below, may be issued under the Plan pursuant to the exercise of
Options.
(c) Rights with Respect to Shares. A Non-Employee
Trustee to whom an Option is granted (and any person succeeding to
such a Non-Employee Trustee rights pursuant to the Plan) shall have no
rights as a shareholder with respect to any Shares issuable pursuant
to any such Option until the date of the issuance of a share
certificate to him for such Shares. Except as provided in Paragraph 6
below, no adjustment shall be made for dividends, distributions, or
other rights (whether ordinary or extraordinary, and whether in cash,
securities, or other property) for which the record date is prior to
the date such share certificate is issued.
5. Non-Qualified Options. All Options shall be options which are
not "incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"). Each Option shall be evidenced
by an agreement in such form as the Board shall prescribe from time to time in
accordance with the Plan and shall be subject to the following terms and
conditions:
(a) The option price per Share shall be 100% of the fair
market value per Share at grant. The fair market value per Share on
any given date, unless otherwise determined by the Compensation
Committee in good faith, shall be the reported closing price of a
Share on the New York Stock Exchange or, if no such sale of Shares is
reported on the New York Stock Exchange on such date, the fair market
value of the Share as determined by the Board
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in good faith. The options granted to Founding Trustees (as defined
below) upon effectiveness of the Registration Statement (as defined
below) will have an exercise price equal to the initial public
offering price.
(b) Each Non-Employee Trustee as of the date the initial
Registration Statement on Form S-11(the "Registration Statement") is
declared effective by the Securities and Exchange Commission relating
to the offering of 17,000,000 Shares will receive an Option to purchase
5,000 Shares on the date of the Registration Statement (each such
trustee, a "Founding Trustee"). Each Non-Employee Trustee who is not
a Founding Trustee (a "Non-Founding Trustee") will receive an Option
to purchase 5,000 Shares on the date the Non-Founding Trustee is first
elected or appointed to the Board of Trustees. In addition to the
foregoing, each Non-Employee Trustee will receive an Option to
purchase 5,000 Shares on each of the nine anniversary dates of the
adoption of the Plan.
(c) The term of each Option shall be fixed by the
Compensation Committee, but no Option shall be exercisable more than
ten years after the date the Option is granted.
(d) Options shall be exercisable at such time or times
and subject to such terms and conditions as shall be determined by the
Board at or after grant. If the Compensation Committee provides, in
its sole discretion, that any Option is exercisable only in
installments, the Compensation Committee may waive such installment
exercise provisions at any time at or after grant in whole or in part,
based on such factors as the Compensation Committee shall determine,
in its sole discretion.
(e) Subject to whatever installment exercise provisions
apply under subparagraph (d), Options may be exercised in whole or in
part at any time during the option period, by giving written notice of
exercise to the Company specifying the number of Shares to be
purchased. Such notice shall be accompanied by payment in full of the
purchase price either by check, note or such other instrument
as the Compensation Committee may accept. As determined by the
Compensation Committee in its sole discretion, at or after grant,
payment in full or in part may also be made in the form of a share
option or Shares already owned by the Non-Employee Trustee (based, in
each case, on the fair market value of the share option or the Shares
on the date the Option is exercised, as determined by the Compensation
Committee in accordance with subparagraph (a)). No Shares shall be
issued until full payment therefor has been made. Upon purchase of
Shares, an optionee shall make such representations, warranties and
covenants as the Compensation Committee may request.
(f) The Compensation Committee may, in its discretion,
authorize all or a portion of the Options to be granted to a
Non-Employee Trustee to be on terms which permit transfer by such
optionee to (i) the spouse, children or grandchildren of the
Non-Employee Trustee ("Immediate Family Members"), (ii) a trust or
trusts for the exclusive benefit of such Immediate Family Members,
(iii) a partnership in which such Immediate Family Members are the
only partners, or (iv) certain affiliates of the Non-Employee Trustee,
as determined
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by the Compensation Committee, provided that (x) there may be no
consideration for any such transfer, (y) the share option agreement
pursuant to which such Options are granted must be approved by the
Compensation Committee, and must expressly provide for transferability
in a manner consistent with this Section, and (z) subsequent transfers
of transferred Options shall be prohibited except those in accordance
with this subparagraph (f). Following transfer, any such Options
shall continue to be subject to the same terms and conditions as were
applicable immediately prior to transfer, provided that for purposes
of this Plan or the option agreement executed pursuant hereto, the
term "optionee" or "Non-Employee Trustee" shall be deemed to refer to
the transferee.
6. Capital Adjustments. In the event of any merger,
reorganization, consolidation, recapitalization, share dividend, share split or
other change in corporate structure affecting the Shares, an adjustment shall
be made in the aggregate number of Shares reserved for issuance under the Plan
and in the number and price of Shares subject to outstanding Options granted
under the Plan, as may be determined to be appropriate by the Compensation
Committee, in its sole discretion, provided that the number of Shares subject
to an Option shall always be a whole number.
7. Authority to Issue Shares. The Company, during the term of
the Options granted hereunder, will at all times reserve and keep available,
and will seek to obtain from any regulatory body having jurisdiction, any
requisite authority in order to issue and sell such number of Shares as shall
be sufficient to satisfy the requirements of the Options granted under the
Plan. If in the opinion of its counsel the issuance or sale of any Shares
hereunder shall not be lawful for any reason, including the inability of the
Company to obtain from any regulatory body having jurisdiction,
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authority deemed by such counsel to be necessary to such issuance or sale, the
Company shall not be obligated to issue or sell any such Shares.
8. Ownership Limitation. All Options shall be subject to the
ownership limitations set forth in the Declaration of Trust of the Company.
Without limiting the generality of the foregoing, any Option which causes a
Non-Employee Trustee, or any constructive or beneficial owner of Shares
subject to such Option (as determined under Sections 318 and 544, respectively,
of the Code), to own or be deemed to own Shares in excess of such ownership
limitations shall be void ab initio.
9. Miscellaneous Provisions.
(a) No Non-Employee Trustee or other person shall have
any claim or right to be granted an Option under the Plan. Neither
the Plan nor any action taken hereunder shall be construed as giving a
Non-Employee Trustee any right to be retained in the service of the
Company.
(b) Except as provided in Section 5 (f), an optionee's
rights and interests under the Plan may not be assigned or transferred
in whole or in part either directly or by operation of law or
otherwise (except in the event of a optionee's death, by will or the
laws of descent and distribution), including, but not by way of
limitation, execution, levy, garnishment, attachment, pledge,
bankruptcy, or in any manner, and no such right or interest of any
participant in the Plan shall be subject to any obligation or
liability of such participant.
(c) No Shares shall be issued hereunder unless counsel
for the Company shall be satisfied that such issuance will be in
compliance with applicable federal, state, and other securities laws.
(d) The expenses of administration of the Plan shall be
borne by the Company.
(e) The Plan shall be unfunded. The Company shall not be
required to establish any special or separate fund or to make any
other segregation of assets to ensure the issuance of Shares upon
exercise of any Option under the Plan and issuance of Shares upon
exercise of Options shall be subordinate to the claims of the
Company's general creditors.
(f) By accepting any Option or other benefit under the
Plan, each optionee and each person claiming under or through an
optionee shall be conclusively deemed to have indicated his or her
acceptance and ratification of, and consent to, any action taken under
the Plan by the Company or the Compensation Committee.
(g) The appropriate officers of the Company shall cause
to be filed any reports, returns, or other information regarding
Options hereunder or any Shares issued pursuant hereto as may be
required by the Securities Exchange Act of 1934, as amended, the
Securities Act of 1933, as amended, or any other applicable statute,
rule, or regulation
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(excluding reports pursuant to Section 16 of the Securities Exchange
Act of 1934, which shall be the sole responsibility of a Non-Employee
Trustee who exercises an Option).
10. Amendment. The Plan may be amended at any time and from time
to time by the Board as the Board shall deem advisable. No amendment of the
Plan shall materially and adversely affect any right of any optionee with
respect to any Option theretofore granted without such optionee's written
consent.
11. Effective Date. This Plan shall be effective on Monday,
April 21, 1997.
12. Termination. This Plan shall terminate upon the earlier of
the following dates or events to occur:
(a) the adoption of a resolution of the Board terminating
the Plan; or
(b) December 31, 2007.
No termination of the Plan shall materially and adversely affect any
of the rights or obligations of any person, without his consent, under any
Option theretofore granted under the Plan.
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Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated February 18, 1997, relating to the consolidated financial statements of
Corrections Corporation of America and Subsidiaries as of December 31, 1996 and
1995 and for each of the three years ending December 31, 1996 and to all
references to our firm included in this First Amendment.
/s/ ARTHUR ANDERSEN LLP
----------------------
ARTHUR ANDERSEN LLP
Nashville, Tennessee
June 12, 1997
<PAGE> 1
Exhibit 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated April 23, 1997, relating to the balance sheet of CCA Prison Realty Trust
as of April 23, 1997 and to all references to our firm included in this
First Amendment to its registration statement.
/s/ ARTHUR ANDERSEN LLP
----------------------
ARTHUR ANDERSEN LLP
Nashville, Tennessee
June 12, 1997
