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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-13049
CCA PRISON REALTY TRUST
(Exact name of Registrant as specified in its Organizational Documents)
MARYLAND 62-1689525
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 BURTON HILLS BLVD., SUITE 100, NASHVILLE, TENNESSEE 37215
(Address and Zip Code of Principal executive office)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (615) 263-0200
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of each class Name of each exchange on which registered
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Common Shares, $.01 par value New York Stock Exchange
8.0% Series A Cumulative Preferred New York Stock Exchange
Shares, $.01 par value
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 12 or 15(d) of the Securities Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Registrant's Common Shares held by
non-affiliates was approximately $875,156,144 based on the closing price of such
shares on the New York Stock Exchange on March 9, 1998.
The number of the Registrant's Common Shares outstanding on March 9,
1998 was 21,576,000.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this report incorporates by reference information from the
definitive Proxy Statement for the Annual Meeting of Shareholders, to be held in
May 1998, which will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A of the Securities Exchange Act of 1934 no later than
March 31, 1998.
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CCA PRISON REALTY TRUST
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
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Item No. Page
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PART I.
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1. Business ....................................................................................................... 1
2. Properties......................................................................................................16
3. Legal Proceedings...............................................................................................22
4. Submission of Matters to a Vote of Security Holders.............................................................22
PART II.
5. Market for Registrant's Common Equity and Related Shareholder Matters...........................................23
6. Selected Financial Data.........................................................................................25
7. Management's Discussion and Analysis of Financial Condition and Results of Operations...........................26
7A. Quantitative and Qualitative Disclosures about Market Risk......................................................28
8. Financial Statements and Supplementary Data.....................................................................28
9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure............................28
PART III.
10. Trustees and Executive Officers of the Registrant...............................................................28
11. Executive Compensation..........................................................................................28
12. Security Ownership of Certain Beneficial Owners and Management..................................................29
13. Certain Relationships and Related Transactions..................................................................29
PART IV.
14. Exhibits, Financial Statement Schedules and, Reports on Form 8-K................................................29
SIGNATURES
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CAUTIONARY STATEMENT FOR PURPOSES OF
THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
WHEN USED IN THIS ANNUAL REPORT ON FORM 10-K, THE WORDS "BELIEVES,"
"ANTICIPATES," "EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD LOOKING STATEMENTS. STATEMENTS LOOKING FORWARD IN TIME ARE INCLUDED IN
THIS ANNUAL REPORT ON FORM 10-K PURSUANT TO THE "SAFE HARBOR" PROVISION OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH STATEMENTS ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY, INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH IN "RISK FACTORS" AS
SET FORTH HEREIN AND IN THE COMPANY'S REGISTRATION STATEMENTS ON FORM S-11 (FILE
NOS. 333-25727 AND 333-43935) AND IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS." READERS ARE CAUTIONED NOT TO
PLACE UNDUE RELIANCE ON THESE FORWARD- LOOKING STATEMENTS, WHICH SPEAK ONLY AS
OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY REVISE
THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES OCCURRING
AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
PART I.
ITEM 1. BUSINESS.
(A) GENERAL DEVELOPMENT OF BUSINESS.
BACKGROUND AND FORMATION TRANSACTIONS.
CCA Prison Realty Trust, a Maryland real estate investment trust (the
"Company"), was formed on April 23, 1997 to acquire, develop, and lease private
and public correctional and detention facilities. The Company plans to qualify
as a real estate investment trust (a "REIT") under the Internal Revenue Code of
1986, as amended (the "Code"). The Company's principal executive offices are
located at 10 Burton Hills Boulevard, Suite 100, Nashville, Tennessee 37215.
On July 18, 1997, the Company commenced operations after completing an initial
public offering (the "Initial Offering") of 21,275,000 of its common shares,
$.01 par value per share (the "Common Shares") (including 2,775,000 shares
issued as a result of the exercise of an over-allotment option by the
underwriters) . The Common Shares were issued at an Initial Offering price of
$21.00 per share, generating gross proceeds to the Company of $446.8 million.
The aggregate proceeds to the Company, net of underwriters' discount and
offering costs, were approximately $412.1 million.
The following transactions occurred prior to or simultaneously with the
completion of the Initial Offering (collectively, the "Formation Transactions"):
- The Company acquired the following nine correctional and
detention facilities (the "Initial Facilities") from
Corrections Corporation of America, a Tennessee corporation,
and certain of its subsidiaries (collectively, "CCA") for an
aggregate purchase price of $308.1 million, payable in cash:
(i) Houston Processing Center, located in Houston, Texas;
(ii) Laredo Processing Center, located in Laredo, Texas;
(iii) Bridgeport Pre-Parole Transfer Facility, located in
Bridgeport, Texas;
(iv) Mineral Wells Pre-Parole Transfer Facility, located in
Mineral Wells, Texas;
(v) West Tennessee Detention Facility, located in Mason,
Tennessee;
(vi) Leavenworth Detention Center, located in Leavenworth,
Kansas;
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(vii) Eloy Detention Center, located in Eloy, Arizona;
(viii) Central Arizona Detention Center, located in Florence,
Arizona; and
(ix) T. Don Hutto Correctional Center, located in Taylor,
Texas.
- The Company entered into agreements with CCA to lease the
Initial Facilities back to CCA pursuant to long-term,
non-cancellable "triple net" leases (individually, a "Lease,"
collectively, the "Leases") which require CCA to pay all
operating expenses, taxes, insurance and other costs. The
Leases provide for initial, annual base rents which aggregate
$33.9 million, with annual escalations equal to the greater of
(i) 4% or (ii) the percentage which is 25% of the percentage
interest in the gross management revenues realized by CCA from
such leased property, exclusive of any increase attributable
to expansions in the size or number of beds in such property
(the "Base Rent Escalation"). The Leases have primary terms
ranging from 10-12 years which may be extended at the fair
market rental rates for three additional five-year periods
upon the mutual agreement of the Company and CCA.
- The Company entered into agreements with CCA (the "Option
Agreements") pursuant to which the Company was granted the
option to acquire and leaseback to CCA any or all of five
correctional and/or detention facilities from CCA at any time
during the three-year period following the acquisition of the
Initial Facilities for a purchase price generally equal to
CCA's costs of developing, constructing and equipping such
facilities, plus 5% of such costs, aggregating approximately
$215.9 million. The Option Agreements provide that if
acquired, such facilities would be leased to CCA on terms
substantially similar to those contained in the Leases.
In addition, the Company entered into an agreement with CCA
whereby CCA granted the Company an option to acquire (the
"Right to Purchase Agreement"), at fair market value, and
leaseback 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 date
CCA first receives inmates at such facility (the "Service
Commencement Date"). For facilities acquired during the first
five years of the Right to Purchase Agreement, the initial
annual rent for facilities leased back to CCA will be the
greater of (i) fair market rental rates as determined by the
Company and CCA, or (ii) 11% of the purchase price of such
facilities. For facilities acquired thereafter, the initial
annual rental rate on such facilities will be the fair market
rental rate as determined by the Company and CCA.
Additionally, CCA agreed to 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 such facility. Facilities available for purchase by
the Company through the Option Agreements and the Right to
Purchase Agreement are collectively referred to herein as the
"Option Facilities."
- Upon consummation of the Initial Offering, D. Robert Crants,
III and Michael W. Devlin each received 150,000 Common Shares
as a development fee and reimbursement for expenses incurred
in connection with the promotion and formation of the Company,
the consummation of the Initial Offering, and the closing of
the purchase of the Initial Facilities.
- Contemporaneously with the closing of the Initial Offering,
the Company entered into a $150.0 million bank credit facility
(the "Bank Credit Facility") with a group of banks led by
First Union National Bank of Tennessee. The Company has used
and intends to continue to use the Bank Credit Facility
principally to fund the acquisition of additional correctional
and detention facilities, including the Option Facilities, and
for working capital purposes. The Company's ability to borrow
under the Bank Credit Facility is subject to the Company's
ongoing compliance with a number of financial and other
covenants. Outstanding borrowings under the Bank Credit
Facility at December 31, 1997 totaled $32.0 million.
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SUBSEQUENT FACILITY PURCHASES.
During the period July 18, 1997 (the date the Company commenced operations) to
December 31, 1997, the Company increased its real estate investment holdings
from nine to twelve correctional and detention facilities. In July 1997, the
Company exercised its option to acquire from CCA the 2,016 bed Northeast Ohio
Correctional Center located in Youngstown, Ohio for a purchase price of $70.1
million. In October 1997, the Company exercised its option to acquire from CCA
the 910 bed Torrance County Detention Facility located in Estancia, New Mexico
for a purchase price of $38.5 million. In December 1997, the Company purchased
from CCA the Cimarron Correctional Facility located in Cushing, Oklahoma
pursuant to the Right to Purchase Agreement for a purchase price of $38.3
million. Each of the above-mentioned facilities have been leased back to CCA
pursuant to leases containing terms substantially similar to the Leases entered
into with regard to the Initial Facilities, with initial terms of 10 years each.
In January 1998, the Company also acquired from CCA the 960 bed Davis County
Correctional Center located in Holdenville, Oklahoma pursuant to the Right to
Purchase Agreement for a purchase price of $36.1 million. The Company has leased
this facility back to CCA for an initial term of 10 years under a lease also
containing terms substantially similar to the Leases.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
The Company currently is involved in only one industry segment, specifically,
the ownership of real estate. Accordingly, all of the financial statements
contained herein relate to this industry segment.
(C) NARRATIVE DESCRIPTION OF THE BUSINESS.
GENERAL.
The Company was formed to capitalize on the opportunities created by the growing
trend towards privatization in the corrections and detention industry, including
the increased demand for private correctional and detention facilities. The
principal business strategy of the Company is to own and develop correctional
and detention facilities that meet the Company's investment criteria, to acquire
such facilities from both private prison managers and government entities, to
expand the design capacity of the Company's existing facilities, and to lease
all such facilities under long-term leases. As of December 31, 1997, the Company
owned 12 facilities, with an aggregate design capacity of 10,573 beds, each of
which were acquired from CCA. In January 1998, the Company also acquired one
additional facility with a design capacity of 960 beds. The 12 correctional and
detention facilities owned by the Company at December 31, 1997 and the one
facility acquired by the Company in January 1998, are collectively referred to
herein as the "Facilities". The Company also has options to acquire up to nine
additional Option Facilities, with an aggregate design capacity of 9,752 beds
which are currently under construction or development by CCA. In addition, the
Company has 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 the transactions with CCA, the Company and CCA have several ongoing
relationships, some of which could give rise to conflicts of interest. The
Company is currently 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 leases all of the Facilities to CCA, which continues to manage the
Facilities (CCA, as the sole lessee of the Facilities, is sometimes referred to
herein as the "Lessee"). The Company believes that with respect to the
Facilities purchased and, if acquired, the Option Facilities, it has benefitted
and will continue to benefit from the continuity of management provided by CCA.
CCA is the largest developer and manager of privatized correctional and
detention facilities worldwide and has developed and operated the Facilities and
each of the completed Option Facilities since they were acquired or constructed
by CCA at various times from 1984 through 1997. The Company also is pursuing
opportunities to acquire correctional and detention facilities from and
leaseback such facilities to operators other than CCA. Likewise, subject to the
Option Agreements and the Right to Purchase Agreement, CCA may sell correctional
and detention facilities to and leaseback such facilities from owners other than
the Company.
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The Facilities are leased to CCA pursuant to the Leases, which are long-term,
non-cancellable "triple net" leases which require CCA to pay all operating
expenses, taxes, insurance and other costs. All of the Leases provide for base
rent with certain annual escalations and 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
Facilities generated annualized aggregate annual rent of approximately $54.0
million for the year ended December 31, 1997, which represented an 11% lease
rate based on their respective purchase prices. Although the Company has general
recourse to CCA under the Leases, CCA's obligations under the Leases are not
secured by any assets of CCA. CCA's obligations under the Leases are
cross-defaulted to each of the other Leases with respect to payment defaults and
certain other defaults. Each Lease (and any future lease with CCA) may be
terminated by the Company, at its option, at any time after the first five years
of the Lease, upon 18 months' written notice to CCA.
The Company has historically focused its investments on privately-managed
facilities which are owned and operated by CCA or its subsidiaries. However, the
Company is also pursuing other opportunities, including acquisitions and
leasebacks of, or financings for, facilities owned and operated by various
government entities and private operators other than CCA. The Company believes
it has significant access to potential development and acquisition opportunities
through its relationship with CCA and the experience and industry contacts of
its Board of Trustees and management, particularly those of J. Michael Quinlan,
the Company's Chief Executive Officer and former head of the Federal Bureau of
Prisons.
The Company intends to elect to be taxed as a REIT under the Code and as such,
generally will not be subject to federal income tax to the extent that it
distributes its earnings to its shareholders and maintains its qualification as
a REIT. 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). Accordingly, the Company
is precluded from operating correctional and detention facilities and, as a
consequence, intends to lease such properties pursuant to long-term
non-cancellable leases.
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 its shareholders. The Company seeks to
achieve these objectives through:
- The potential acquisition of the Option Facilities;
- The strategic expansion of its correctional and detention
facilities portfolio through (i) the selective acquisition of
correctional and detention facilities that demonstrate
potential for significant revenue and cash flow from both
private prison managers and government entities, and (ii) the
construction and/or development of new correctional and
detention facilities to be managed by either private prison
managers or government entities;
- The expansion of the design capacity of its existing
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;
- The provision of mortgages or other appropriate financing
vehicles to correctional and detention facility operators in
circumstances when ownership by the Company is not otherwise
attractive;
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- The monitoring of the operating performance of the facilities
in its portfolio to ensure that the lessees of such facilities
comply with their lease obligations; and
- The maintenance of a debt to total capitalization ratio (i.e.,
total debt of the Company as a percentage of shareholders'
equity plus total debt) of 50% or less.
GROWTH STRATEGY.
External Growth.
Acquisition Opportunities. In addition to the possible acquisitions 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
Company believes it has a competitive advantage in the acquisition of new
private correctional and detention facilities due to its relationship with CCA
and the Company's significant capital resources. A primary source of private
correctional and detention facilities to be 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 back to CCA. The Company
has an option to acquire and leaseback 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 also 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. Management of the Company
believes that there is a growing trend among government entities which contract
with private prison operators to consider private ownership of correctional and
detention facilities as well. In 1997, CCA invested approximately $300.0 million
in approximately 20 correctional facility projects and increased its beds under
contract from 41,135 to over 52,890. Moreover, as of December 31, 1997, CCA was
the largest private prison management company in the United States with an
estimated national market share in excess of 50%. Notwithstanding CCA's market
share and growth, less than 5% of all adult prison beds in the United States are
privately managed. Accordingly, management believes that as CCA and the private
prison management industry continue to grow, many opportunities will exist to
acquire additional private correctional and detention facilities from CCA as
well as from other private operators on attractive terms.
The Company also believes that attractive opportunities exist to acquire or
develop correctional and detention facilities from or on behalf of various
government entities. Historically, government entities have used various methods
of construction financing to develop new correctional and detention facilities,
including but not limited to the following: (i) one-time general revenue
appropriations by the government agency for the cost of the new facility; (ii)
general obligation bonds that are secured by either a limited or unlimited tax
levied by the issuing government entity; or (iii) lease revenue bonds secured by
an annual lease payment that is subject to annual or bi-annual legislative
appropriation of funds. Many jurisdictions are operating their correctional and
detention facilities at well above their rated capacities, and as a result are
under federal court orders 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 and detention 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 and detention facilities and
sale-leaseback transactions or other financing alternatives with respect to
existing correctional and detention facilities. Management believes that such
situations will enable the Company to acquire and develop correctional and
detention facilities from and on behalf of governments at all levels including
those which might not be the subject of a private management contract.
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In making its decision with respect to the Facilities and in evaluating the
future acquisition of any or all of the Option Facilities and other facilities,
the Company has considered and will continue to 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.
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 the expansion of existing
correctional and detention facilities, the Company believes that opportunities
exist for it to provide mortgage or other appropriate financing 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 and
detention 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.
Internal Growth.
Expansion Opportunities. The Company's growth objectives focus on the selective
expansion of its existing correctional and detention facilities to increase cash
flows and property values. In 1997, CCA expanded six of its domestic facilities
by an aggregate of 2,290 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
future tenants of the Company) will continue to attempt to achieve economies of
scale through expansions of existing facilities. The Company intends to actively
participate in any future expansion plans with respect to any of the Facilities
or the Option Facilities and intends to provide expansion space as needed to CCA
or any of the Company's future tenants.
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 of CCA. The minimum rent for the first year for each Facility under the
Leases is initially set at a fixed amount. Thereafter, the minimum rent will
escalate by the Base Rent Escalation. However, there can be no assurance that
such contractual escalations will be realized due to certain factors, including
changing circumstances and the possible renegotiation of the Leases.
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LEASES.
The Lease for each Facility includes the land, the buildings and structures and
other improvements thereon, easements, rights and similar appurtenances to such
land and improvements, and permanently affixed equipment, machinery, and other
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 the lessee's proprietary property (the "Leased Property"). Each
Facility is leased to CCA as the Lessee under a master lease (the "Master
Lease") with 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 the Lessee. Fair market rates for Extended
Terms will be determined mutually by the Company and the Lessee 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. Additionally, each
Lease may be terminated by the Company, at its option, at any time after the
first five years of the Lease, upon 18 months written notice to the Lessee.
Use of the Facilities. Each Lease permits the Lessee to operate the Leased
Property solely as a correctional or detention facility. The Lessee 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, the Lessee will pay annual base rent (the "Annual Base Rent"),
which will be payable in monthly installments. The Annual Base Rent for each
Leased Property will be increased each year by the Base Rent Escalation.
Each Lease of a Leased Property is what is commonly known as a triple net lease
or absolute net lease, under which the Lessee is to pay the 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.
Lessees Right of First Refusal. Pursuant to the Master Lease, the Lessee has 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 the Lessee (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 the Lessee 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 the lessee and on terms and
conditions substantially consistent with those offered to the Lessee.
Maintenance, Modification and Capital Additions. Under each Lease, the Lessee
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.
The Lessee, at its sole cost and expense, may make alterations, additions,
changes and/or improvements to each Leased Property with the prior written
consent of the Company, provided that the value and primary intended use of such
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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 the lessee on any Leased Property, will
remain the property of the Lessee until the expiration or earlier termination of
the Lease.
Each Lease provides that, at the request of the Lessee, 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 the Lessee and financed by third parties
with the prior written consent of the Company. In the case of a Capital Addition
not undertaken or financed by the Company, the Company will have an option to
acquire and leaseback to the Lessee 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 the Lessee's actual cost and expense to acquire, develop, design,
construct and equip such Capital Addition ( "CCA's Cost") plus 5% of the
lessee's Cost.
Environmental Matters. Each Lease for CCA makes various representations and
warranties relating to environmental matters with respect to each Leased
Property. Each Lease also requires the Lessee to indemnify and hold harmless the
Company and any holder of a mortgage, deed or trust or other security agreement
on a Leased Property (a "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 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 the Lessee 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 the Lessee may not, without
the prior written consent of the Company, assign, sublease, mortgage, pledge,
hypothecate, encumber or otherwise transfer any Lease or any interest therein
with respect to 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 (as hereinafter defined), of the Lessee as if such Change of Control
were an assignment of the Lease. A "Change of Control" of the Lessee means, for
purposes of the Leases, the sale by the Lessee of a controlling interest in the
Lessee, or the sale or other transfer of all or substantially all of the assets
of the Lessee. A Change of Control also means any transaction pursuant to which
the Lessee is merged with or consolidated into another entity, and the Lessee is
not the surviving entity. The Leases further provide that no assignment will in
any way impair the continuing primary liability of the Lessee under the Leases.
Damage to, or Condemnation of, a Leased Property. In the event of any damage or
destruction to any Facility, the Lessee has the obligation fully to repair or
restore the same at the Lessee'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 the Lessee
has fully complied with the insurance obligations with respect to such Facility
(including maintaining insurance against loss of rents), the Lessee 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 the Lessee's failure to maintain the particular
Leased Property, the Lease will terminate as to the portion of the Leased
8
<PAGE> 11
Property taken, and in the event of a partial taking, the Lessee is obligated to
repair the portion not taken, if the same does not render the Leased Property
unsuitable for the Lessee'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 the Lessee 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, the Lessee 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 the Lessee of the Leased
Property; (iii) any impositions (which are the obligations of the Lessee 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 person's civil or legal rights; (v) any failure on the part of
the Lessee 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 the Lessee under any Lease. Under each Lease, the Company indemnifies, and is
obligated to save harmless, the Lessee from and against all liabilities, costs
and expenses (including reasonable attorneys' fees) imposed upon or asserted
against the Lessee 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 the Lessee fails to perform any
covenant and does not diligently undertake to cure the same after 30 days'
notice from the Company; if the interest of the Lessee 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 the Lessee is incorrect. An "Event of
Default" will be deemed to have occurred under the Master Lease and all of the
Leases, if the Lessee fails to pay any rent within 15 days after notice of
non-payment from Company; if any bankruptcy proceedings are instituted by or
against the Lessee and, if against the Lessee, they are not dismissed within 90
days; if any material part of the property of the Lessee is levied upon or
attached in any proceeding; if the Lessee defaults in any payment of any
obligations for borrowed money having a principal balance of $25.0 million or
more in the aggregate and such default is not discharged within 90 days; or if
the Lessee is the subject of a non-appealable final judgment in an amount
greater than $10.0 million, which is not covered by insurance or discharged by
the Lessee within a specified period of time.
In the event of any Event of Default referable to a specific Leased Property,
the Company may evict the Lessee from such Leased Property and either terminate
the Lease or re-let the Leased Property. In either event, the Lessee 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 the Lessee 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 the
Lessee'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 are 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 between the Lessee and the Company
prohibits or otherwise restricts the Company's ability to lease properties to
parties other than the Lessee.
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<PAGE> 12
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 nor any of its
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 nor any of its affiliates are 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 an environmental investigation. No assurance can be given that such
investigation revealed 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
Leases provide that the lessee will indemnify the Company for certain potential
environmental liabilities at the Facilities.
Americans with Disabilities Act. The Facilities and the Option Facilities are
subject to the Americans with Disabilities Act of 1990, as amended (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, the lessee 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.
INSURANCE.
Each Lease provides that the lessee will maintain insurance on each Leased
Property under the lessee'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 the lessee's insurance coverage and provide input with respect thereto.
EMPLOYEES.
At December 31, 1997, the Company employed eight full-time and four part-time
employees.
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 proceedings, 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 based
on personal injury and property damage at the Facilities and require CCA to
maintain insurance for such purposes.
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<PAGE> 13
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.
TAX STATUS.
The Company will elect to be taxed as a REIT under the Code commencing with its
taxable year ending December 31, 1997. If the Company qualifies for taxation as
a REIT, the Company (subject to certain exceptions) will not be subject to
federal income taxation at the corporate level on its taxable income that is
distributed to the shareholders of the Company. A REIT is subject to a number of
organizational and operational requirements, including a requirement that it
currently distribute at least 95% of its annual taxable income and that not more
than 50% in value of the Company's 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. Two sets of constructive ownership
rules (one to determine whether a REIT is closely held and one to determine
whether 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 Company's Declaration of Trust, as amended and restated (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 the preferred
shares, $0.01 par value per share, of the Company (the "Preferred Shares"),
including the Company's recently issued 8% Series A Preferred Shares (the
"Series A Preferred Shares") (such ownership limit being referred to as the
"Ownership Limit"). The constructive ownership rules in the Code are complex and
may cause 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. Direct or constructive ownership of Company 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 defined
the Company's Declaration of Trust) for the benefit of one or more charitable
organizations, so as to maintain qualification as a REIT.
Failure to qualify as a REIT would render the Company subject to tax on its
taxable income at regular corporate rates, and distributions to its shareholders
in any such year would not be deductible by the Company. Although the Company
has not requested a ruling from the Internal Revenue Service (the "IRS") as to
its REIT status, the Company has received the opinion of its legal counsel that
the Company has operated in a manner that qualifies it for taxation as a REIT,
which opinion is based on certain assumptions and representations of the Company
and which is not binding on the IRS or any court. Even if the Company qualifies
as a REIT, the Company may be subject to certain federal, state, and local taxes
on its income and property. The Company has adopted the calendar year as its
taxable year.
RISK FACTORS.
The Company is subject to certain risks and uncertainties that could cause
actual results to differ materially from those indicated in the certain forward
looking statements contained herein and elsewhere. The following risk factors
identifies, among others, those risks as identified by the Company.
CORRECTIONS 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.
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<PAGE> 14
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 between a private
manager and 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. Accordingly, if a
private prison manager's contract to operate a facility is terminated, such
event may adversely affect the ability of the contracting private prison manager
(including CCA) to make its lease payments to the Company.
Dependence on Government Appropriations. A private prison manager's cash flow is
subject to the receipt of sufficient funding of 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 and therefore its ability to make lease payments to the
Company. Further, it is part of the Company's business strategy 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 their 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 and therefore its ability to make lease
payments to the Company.
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.
Options to Purchase. When the Company buys a facility from CCA which is the
subject of a prison management contract between CCA and a government entity or
buys a facility from or develops a facility for a government entity, the
government entity may approve the management relationship on the condition that
the government entity receive an option to purchase the facility for some period
of time at a price that reflects fair market value. The Company expects that if
it purchases a property subject to such an option or is required to grant such
an option, the purchase price paid by the Company for such facility will be
subject to downward adjustment for a 12-month period from the date of purchase
in the event such option is exercised during that period and the fair market
purchase price paid by such government entity is less than the purchase price
paid by the Company. Further, if the option is exercised, there exists the risk
that the Company will be unable to invest the proceeds in one or more properties
that yield as much revenue as the property reacquired by the government entity.
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 related to 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 from, or 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.
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<PAGE> 15
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.
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
Facilities, and, if acquired, the Option Facilities, and yields from investments
in such properties may be affected by many factors beyond the Company's control,
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; however,
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 complying with 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 do not reveal 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.
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 obtained new title insurance policies for each of the
Facilities in connection with the Formation Transactions. 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 FINANCING FOR GROWTH AND ADVERSE CONSEQUENCES OF DEBT FINANCING ON
ABILITY TO MAKE DISTRIBUTIONS.
The Company is pursuing a growth strategy which includes acquiring and
developing 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
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<PAGE> 16
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. 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 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.
The Company is authorized to raise additional funds for its future operations
through debt financing. As a result of incurring debt, the Company is 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. The
Company has mortgaged its properties to secure payment of indebtedness, and if
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.
THE DEPENDENCE ON CCA, AS THE SOLE LESSEE OF THE FACILITIES, FOR THE COMPANY'S
REVENUES AND ABILITY TO MAKE DISTRIBUTIONS TO ITS SHAREHOLDERS.
CCA is currently the sole lessee of all the Facilities and, if acquired, the
Option Facilities. The Company's revenues, and its ability to make distributions
to its shareholders, currently 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. While
the Company plans to generate revenues through the acquisition from, and the
leasing of correctional and detention facilities directly to, government
entities or other private prison operators, no such agreements have been reached
and there can be no assurance that the Company will ever be successful in
reaching such an agreement with a government entity or a private operator other
than CCA.
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 ability
to pay distributions to its shareholders.
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 Facilities,
and, if acquired, the Option Facilities. CCA controls the operations of the
Facilities under the Leases, each of which 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
does 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
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<PAGE> 17
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.
VOLATILITY OF MARKET PRICE.
From time to time, there may be significant volatility in the market price for
the Company's Common Shares. The Company believes that the current market price
of the Common Shares reflects expectations that the Company will be able to
continue to acquire and develop new facilities at a significant rate and lease
them to private prison operators. If the Company is unable to acquire or develop
facilities at a pace that reflects the expectations of the market, investors
could sell Common or Series A Preferred Shares at or after the time that it
becomes apparent that such expectations may not be realized, resulting in a
decrease in the market price of the Common Shares. In addition to the operating
results of the Company, changes in earnings estimated by analysts, changes in
general conditions in the economy or the financial markets or other developments
affecting the Company or the private corrections industry could cause the market
price of the Common Shares to fluctuate substantially. In recent years, the
stock market has experienced extreme price and volume fluctuations. This
volatility has had a significant effect on the market prices of securities
issued by many companies for reasons unrelated to their operations performance.
(D) FOREIGN OPERATIONS.
The Company does not currently engage in any foreign operations or derive
revenues from foreign sources. The Company may be, however, pursuing
opportunities which may result in the Company engaging in foreign operations or
deriving revenues from foreign sources in the future.
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<PAGE> 18
ITEM 2. PROPERTIES.
GENERAL.
As of December 31, 1997, the Company owned 12 Facilities with an aggregate
design capacity of 10,573 beds. On January 5, 1998, the Company acquired the
Davis Correctional Facility in Holdenville, Oklahoma from CCA pursuant to the
Right to Purchase Agreement. The Company also has rights under the Option
Agreements and Right to Purchase Agreement to purchase any or all of the nine
Option Facilities. In addition, pursuant to the Right to Purchase Agreement, the
Company has 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. Certain
information with respect to the Facilities and the Option Facilities is set
forth in the following tables and accompanying descriptions. The following
tables set forth certain information with respect to the Facilities and Option
Facilities as of March 9, 1998.
THE FACILITIES.
The Company owns the following thirteen facilities:
<TABLE>
<CAPTION>
INITIAL
AMOUNT RENT LEASE
DESIGN MONTH MONTH TYPE OF CONTRACTING (IN TERM
FACILITY AND LOCATION CAPACITY(1) OPENED ACQUIRED FACILITY(2) ENTITIES MILLIONS)(3) (YEARS)
- --------------------- ----------- -------- -------- -------------- ---------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Houston Processing Center 411 April July Medium Security INS(4) $1.5 12
Houston, Texas 1984 1997
Laredo Processing Center 258 March July Medium Security INS and 1.2 12
Laredo, Texas 1985 1997 BOP(5)
Bridgeport Pre-Parole 200 November July Minimum Security State of Texas 0.4 12
Transfer Facility 1987 1997 Pre-Parole Transfer
Bridgeport, Texas Facility
Mineral Wells Pre-Parole 1,119 July July Minimum Security State of Texas 3.0 12
Transfer Facility 1989 1997 Pre-Parole Transfer
Mineral Wells, Texas Facility
West Tennessee Detention 600 September July Multi-Security INS, USMS(6), 3.7 10
Facility 1990 1997 Detention Center BOP
Mason, Tennessee and State of
Montana
Leavenworth Detention 327 June July Maximum Security USMS 3.3 10
Center 1992 1997 Detention Center
Leavenworth, Kansas
Eloy Detention Center 1,500 July July Medium Security INS and BOP 6.0 12
Eloy, Arizona 1994 1997 Detention Center
Central Arizona Detention 1,792 October July Multi-Security USMS, States 12.3 10
Center 1994 1997 Detention Center of
Florence, Arizona Oregon,
Alaska,
Montana and
New Mexico
and the U.S.
Virgin Islands
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
INITIAL
AMOUNT RENT LEASE
DESIGN MONTH MONTH TYPE OF CONTRACTING (IN TERM
FACILITY AND LOCATION CAPACITY(1) OPENED ACQUIRED FACILITY(2) ENTITIES MILLIONS)(3) (YEARS)
- --------------------- ----------- ------- -------- -------------- ---------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
T. Don Hutto Correctional 480 January July Medium Security Williamson $2.5 12
Center 1997 1997 Correctional Facility County,
Taylor, Texas Texas and
States of
Texas and
Wyoming
Northeast Ohio Correctional 2,016 June July Medium Security District of 7.7 10
Center 1997 1997 Correctional Facility Columbia
Youngstown, Ohio
Torrance County Detention 910 December October Multi-Security USMS, BOP, 4.2 10
Center 1990 1997 Detention Facility State of
Estancia, New Mexico New Mexico
and Torrance
County, NM
Cimarron Correctional 960 May Dec. Medium Security State of 4.2 10
Facility 1997 1997 Correctional Facility Oklahoma
Cushing, Oklahoma
Davis Correctional Facility 960 April January Medium Security State of 4.0 10
Holdenville, Oklahoma (7) 1996 1998 Correctional Facility Oklahoma
</TABLE>
- --------------
(1) Design capacity measures the number of beds, and accordingly, the number of
inmates each facility is designed to accommodate. Management believes
design capacity is an appropriate measure for evaluating prison operations,
because the revenues generated by each facility are based on a per diem or
monthly rate per inmate housed at the facility paid by the corresponding
contracting government entities. The ability of CCA or another private
prison manager to satisfy its financial obligations under its leases with
the Company is based in part on the revenues generated by the facilities,
which in turn depends on the design capacity of each facility. The
historical inmate occupancy level of each of the Facilities is presented in
this Annual Report under the heading "Properties-Description of the
Facilities-Historical Occupancy of the Facilities".
(2) Each facility is identified according to the level(s) of security
maintained and the type(s) of inmates held. Minimum security facilities are
facilities having open-housing within an appropriately 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 U.S. 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. Immigration and Naturalization Service (the "INS")
(5) Federal Bureau of Prisons (the "BOP")
(6) U.S. Marshals Service (the "USMS")
(7) Purchased on January 5, 1998. This facility was purchased pursuant to the
Right to Purchase Agreement.
The Facilities were purchased from CCA for an aggregate purchase price of
approximately $491.2 million in cash. Throughout the terms of the 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.
17
<PAGE> 20
THE OPTION FACILITIES.
As of March 9, 1998, the Company has an option to purchase any or all of the
following nine facilities currently owned or under construction or development
by CCA:
<TABLE>
<CAPTION>
Estimated
Estimated Initial
Anticipated Purchase Annual Option
Design Opening Price Rent Expiration
Facility and Location Capacity Date Type of Facility (in millions) (in millions) Date
- ------------------------ -------- ---- ---------------- ------------- ------------- ----
<S> <C> <C> <C> <C> <C> <C>
Huerfano County 752 November Medium Security $29.5 $3.2 July 2000
Correctional Center 1997 Correctional Facility
Walsenburg, Colorado
North Fork Correctional 1,440 March Medium Security 40.3 4.4 July 2000
Facility 1998 Correctional Facility
Sayre, Oklahoma
Whiteville Correctional 1,024 July Medium Security 42.0 4.6 July 2000
Center 1998 Correctional Facility
Whiteville, Tennessee
Kit Carson Correctional 768 November Medium Security 37.5 4.1 (1)
Center 1998 Correctional Facility
Burlington, Colorado
Diamondback 1,440 October Medium Security 41.0 4.5 (1)
Correctional Facility 1998 Correctional Facility
Watonga, Oklahoma
Wheeler County 500 January Medium Security 18.7 2.1 (1)
Correctional Facility 1999 Correctional Facility
Alamo, Georgia
Coffee County 500 January Medium Security 18.0 2.0 (1)
Correctional Facility 1999 Correctional Facility
Nicholls, Georgia
California City 2,304 July Medium Security 98.9 10.9 (1)
Correctional Facility 1999 Correctional Facility
California City,
California
Mendota Correctional 1,024 July Medium Security 64.5 7.1 (1)
Facility 1999 Correctional Facility
Mendota, California
</TABLE>
- ----------------
(1) The length of the Company's option with respect to these facilities is
three years from the Service Commencement Date with respect to such
facility.
The purchase price of each Option Facility subject to an Option Agreement will
be equal to CCA's approximate cost of developing, constructing and equipping
such facility, plus 5% of such costs. The purchase price for each Option
Facility subject to the Right to Purchase Agreement is fair market value.
Because each Option Facility subject to the Right to Purchase Agreement is
currently under development, construction or expansion by CCA, the cash
consideration to be paid by the Company for each such facility is also expected
to be CCA's approximate 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 prices
to be paid by the Company for the Option Facilities is expected to exceed their
historical costs. The initial annual rental rate for each Option Facility will
be the greater of (i) the fair market rental rate of the Option Facility, or
(ii) 11% of the purchase price.
The Company will lease to CCA the Option Facilities, if acquired, pursuant to
long-term, non-cancellable triple net leases on substantially the same terms and
conditions as the Leases for the Facilities, including the Base Rent Escalations
provisions included in the Leases. The Company does not intend to acquire an
Option Facility until it is fully
18
<PAGE> 21
constructed, is subject to an enforceable management contract between CCA and a
government entity, and has an occupancy rate acceptable to the Company.
DESCRIPTION OF THE FACILITIES.
The Facilities.
Set forth below are brief descriptions of each of the Facilities. Each of the
Facilities has been pledged to secure any borrowings under the Bank Credit
Facility. In addition, one of the Facilities is owned subject to, and the
Company expects to grant with respect to an additional Facility, an option to
purchase at fair market value in favor of the applicable correctional authority.
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.
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 owned 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 of land 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 1998.
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 1998. CCA is currently
expanding this facility to 1,800 beds.
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 owned by the Company include the Houston Processing Center
and the Laredo Processing Center.
THE HOUSTON PROCESSING CENTER is located on approximately six acres of land 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 1998. CCA has managed this facility since 1984 under similar contract
renewals.
THE LAREDO PROCESSING CENTER is located on approximately four acres of land 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 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 1998. CCA is currently under
negotiations with the INS and BOP 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 owned by the Company include the Central
Arizona Detention Center, the Eloy Detention Center, the Leavenworth Detention
Center, the Torrance County Detention Facility and the West Tennessee Detention
Facility.
THE CENTRAL ARIZONA DETENTION CENTER is located on two tracts of land 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, the States of Alaska, Montana, and New Mexico, and the U.S. Virgin
Islands and female prisoners for
19
<PAGE> 22
the State of Oregon. 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, the States of Alaska, New
Mexico and Oregon and the U.S. Virgin Islands expire at various times through
June 1999.
THE ELOY DETENTION CENTER is located on a 146 acre tract of land 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 the 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 the BOP 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 is in effect until 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 original management contract
with the USMS had been extended through December 1997. Subsequently CCA entered
into a contract with the USMS for a term through September 1998, and will be
entering into negotiations with the USMS regarding a new contract.
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 the 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 was expanded by 624 beds in
1997. The facility is seeking ACA accreditation. CCA's contract with Torrance
County, New Mexico, USMS, BOP and the State of New Mexico do not have specific
expiration dates.
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 Montana Department of Corrections
(the "MDC"). The facility received its ACA accreditation in August 1992. CCA's
current management contract with the MDC expires in September 1999. CCA's
current management contracts with the USMS, INS and BOP are set to expire in
August 1998.
Correctional Facilities. Correctional facilities are used to house inmates on a
permanent basis for the duration of their sentences. The correctional facilities
owned by the Company are the Cimarron Correctional Facility, the Northeast Ohio
Correctional Center, the T. Don Hutto Correctional Center, and the Davis
Correctional Center.
THE CIMARRON CORRECTIONAL FACILITY is located on approximately 71 acres of land
in Cushing, Oklahoma and has a design capacity of 960 beds. The 207,000 square
foot, medium security facility opened in May 1997. CCA is currently housing
inmates for the State of Oklahoma under a one-year contract with four one-year
renewal options. Pursuant to Oklahoma state law, in connection with the
execution of the current contract by CCA, the Company granted the Oklahoma
Department of Corrections (the "ODC") an option to purchase this facility at
fair market value. The purchase price paid by the Company for such facility is
subject to downward adjustment for a period of 12 months from the date of
purchase in the event such option is exercised during that period and the fair
market purchase price paid by the ODC is less than the purchase price paid by
the Company to CCA.
THE NORTHEAST OHIO CORRECTIONAL CENTER is located on approximately 72 acres of
land 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 was completed in July 1997, bringing the design capacity
to 2,016 beds. CCA is currently housing 1,725 inmates in the facility for the
District of Columbia under a one year contract with four one-year renewal
options. The facility will seek ACA accreditation.
THE T. DON HUTTO CORRECTIONAL CENTER is located on approximately 64 acres of
land in Taylor, Texas and has a design capacity of 480 beds. Opened in January
1997, the 136,000 square foot, medium security facility was developed, designed
and constructed by CCA. CCA anticipates the facility will seek ACA accreditation
within the next three years. The facility currently houses inmates for
Williamson County, Texas and the States of Texas and Wyoming under contracts
which expire at various times from the end of 1997 through January 2000.
20
<PAGE> 23
THE DAVIS CORRECTIONAL CENTER is located on approximately 75 acres of land in
Holdenville, Oklahoma and has a design capacity of 960 beds. The 190,000 square
foot, medium security facility opened in April 1996. The facility currently
houses inmates from the State of Oklahoma under a contract which expires in
2016. The ODC has an option to purchase this facility at fair market value. The
purchase price paid by the Company for such facility is subject to downward
adjustment for a period of 12 months from the date of purchase in the event such
option is exercised during that period and the fair market purchase price paid
by the ODC is less than the purchase price paid by the Company to CCA.
Historical Occupancy Rates of the Facilities. The following chart summarizes the
historical inmate occupancy rates for the Facilities for each of the five years
ended December 31, 1993-1997.
HISTORICAL INMATE OCCUPANCY OF FACILITIES
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Bridgeport 67.3% 94.2% 83.2% 98.4% 100.4%
Mineral Wells 99.6 93.9 83.0 96.9 101.7
Houston 105.3 111.6 75.5 59.8 102.2
Laredo 87.7 109.3 94.0 90.0 118.3
Central Arizona N/A 33.7 92.7 104.9 95.7
Eloy N/A 47.8 92.2 93.2 90.3
Leavenworth 90.6 82.9 94.2 88.4 93.8
West Tennessee 87.2 86.4 95.8 97.1 98.1
T. Don Hutto N/A N/A N/A N/A 87.5
Northeast Ohio N/A N/A N/A N/A 72.5
Torrance County 70.1 80.1 95.5 97.5 74.6
Cimarron N/A N/A N/A N/A 85.1
Davis N/A N/A N/A N/A 99.7
</TABLE>
The Option Facilities.
Set forth below are brief descriptions of each of the Option Facilities. Two of
the Option Facilities are subject to options to purchase at the lesser of fair
market value and depreciated book value in favor of the applicable correctional
authority.See "Risk Factors -- Corrections and Detention Industry Risks -
Options to Purchase."
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 287,000
square foot, medium security facility will have a design capacity of 1,440 beds.
The facility will seek ACA accreditation. CCA is currently under negotiation
with the State of Michigan with regard to beds in this facility. CCA also
anticipates housing inmates from the State of Oklahoma in this facility.
THE HUERFANO COUNTY CORRECTIONAL CENTER is located on two tracts of land
totaling 82 acres in Walsenburg, Colorado. The 207,000 square foot, medium
security facility has a design capacity of 752 beds and opened in November 1997.
The facility will seek ACA accreditation and houses inmates for the State of
Colorado.
THE WHITEVILLE CORRECTIONAL CENTER will be located in Whiteville, Tennessee and
will have a design capacity of 1,024 beds. The medium security facility is
scheduled to open in July 1998, and the facility will seek ACA accreditation.
CCA is currently negotiating with the State of Wisconsin with respect to the
housing of inmates in the facility.
THE KIT CARSON CORRECTIONAL CENTER is located on 105 acres in Burlington,
Colorado. The 222,000 square foot, medium security facility will have a design
capacity of 768 beds and is scheduled to open in November 1998. CCA anticipates
housing inmates from the State of Colorado in this facility.
THE DIAMONDBACK CORRECTIONAL FACILITY is located on 120 acres in Watonga,
Oklahoma. The 287,000 square foot, medium security facility will have a design
capacity of 1,440 beds and is scheduled to open in October 1998. CCA anticipates
housing inmates for the State of Colorado in this facility.
THE WHEELER COUNTY CORRECTIONAL FACILITY is located on 146 acres in Alamo,
Georgia. The 135,000 square foot, medium security facility will have an initial
design capacity of 500 beds and is scheduled to open in January 1999. CCA has a
contract with the State of Georgia for the housing of inmates in this facility
pursuant to which the Georgia Department of Corrections (the "GDOC") may require
CCA to increase the design capacity of the facility to up to 1,000 beds. Upon
completion of this facility, GDOC will have the right to purchase this facility
from the owner at any time during the term of the management contract between
CCA and the GDOC, at the lesser of fair market value and the depreciated book
value. The Company expects that the purchase price paid by the Company for this
facility will be
21
<PAGE> 24
subject to downward adjustment for a period of 12 months in the event such
option is exercised after such facility is acquired by the Company and the
purchase price paid by the GDOC is less than the purchase price paid by the
Company to CCA.
THE COFFEE COUNTY CORRECTIONAL FACILITY is located on 97 acres in Nicholls,
Georgia. The 135,000 square foot, medium security facility will have an initial
design capacity of 500 beds and is scheduled to open in January 1999. CCA has a
contract with the State of Georgia for the housing of inmates in this facility
pursuant to which the GDOC may require CCA to increase the design capacity of
the facility to up to 1,000 beds. Upon completion of this facility, GDOC will
have the right to purchase this facility at any time during the term of the
management contract between CCA and the GDOC, at the lesser of fair market value
and the depreciated book value. The Company expects that the purchase price paid
by the Company for this facility will be subject to downward adjustment for a
period of 12 months in the event such option is exercised after such facility is
acquired by the Company and the purchase price paid by the GDOC is less than the
purchase price paid by the Company to CCA.
THE CALIFORNIA CITY CORRECTIONAL FACILITY will be located on 320 acres in
California City, California. The 489,000 square foot, medium security facility
will have a design capacity of 2,034 beds and is scheduled to open in July 1999.
CCA anticipates housing inmates for the State of California in this facility.
THE MENDOTA CORRECTIONAL FACILITY will be located on 247 acres in Mendota,
California. The 261,000 square foot, medium security facility will have a design
capacity of 1,024 beds and is scheduled to open in July 1999. CCA anticipates
housing Federal inmates in this facility.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not presently subject to any material litigation nor, to the
Company's knowledge, is any litigation threatened against the Company, other
than routine litigation arising in the ordinary course of business, some of
which is expected to be covered by liability insurance and all of which
collectively is not expected to have a material adverse effect on the
consolidated financial statements of the Company. See "Risk Factors -
Corrections and Detention Industry Risks - Legal Proceedings."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS.
No matters were submitted to a vote of shareholders during the fourth quarter of
the year ended December 31, 1997.
22
<PAGE> 25
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
MARKET PRICE OF AND DISTRIBUTIONS ON COMMON SHARES.
The Company's Common Shares began trading on the New York Stock Exchange
("NYSE") on July 15, 1997, under the symbol "PZN". On March 9, 1998, the last
reported sale price per share of Common Shares was $42.88 and there were 77
registered holders and approximately 6,706 beneficial holders, respectively, of
the Company's Common Shares. The following table sets forth the quarterly high
and low closing sale prices per share of Common Shares reported on the NYSE and
the cash distributions declared per share by the Company with respect to each
such period.
<TABLE>
<CAPTION>
1997 Distribution Period Price Range Cash Distribution
------------------- Declared and Paid
High Low Per Common Share
---- --- ----------------
<S> <C> <C> <C>
Third Quarter (from July 15, 1997 $37.75 $28.83 $0.346(1)
through September 30, 1997)
Fourth Quarter $44.63 $33.00 $0.425(2)
</TABLE>
- ------------------
(1) Represents a pro rata distribution of the Company's initial quarterly
distribution of $0.425 per share based on a partial calendar quarter
beginning on July 18, 1997, the closing date of the Initial Offering.
(2) The Company paid a distribution of $0.425 per share relating to the
fourth quarter of 1997 that was paid on January 15, 1998 to
shareholders of record on December 31, 1997.
The Company has paid and intends to continue to pay regular quarterly
distributions on its Common Shares. The Company will also pay regularly
quarterly dividends on the Company's Series A Preferred Shares pursuant to the
terms of such shares, with the first such payment being made on April 15, 1998
for the initial partial quarterly period ending March 31, 1998. Future
distributions by the Company on the Common Shares will be at the discretion of
the Board of Trustees and will depend on the Company's financial condition, its
capital requirements, the annual distribution requirements under the REIT
provisions of the Code and such other factors as the Board of Trustees deems
relevant, and there can be no assurance that any such distributions will be made
by the Company. Under the Bank Credit Facility, the Company may make
distributions on its capital shares (including distributions on the Common
Shares and the dividends on the Series A Preferred Shares discussed herein) only
if the Company is not in default under the Bank Credit Facility.
In order to maintain its qualification as a REIT, the Company must make annual
distributions to its shareholders of at least 95% of its taxable income
(excluding net capital gains). Under certain circumstances, the Company may be
required to make distributions in excess of available cash in order to meet such
distribution requirements. In such event, the Company would seek to borrow the
amount to obtain the cash necessary to make distributions to retain its
qualification as a REIT for federal income tax purposes.
RECENT SALES OF UNREGISTERED SECURITIES AND USE OF PROCEEDS FROM REGISTERED
SECURITIES.
Sale of Unregistered Securities
The Company was formed as a Maryland real estate investment trust in April 1997,
with one shareholder being issued 1,000 Common Shares in consideration of
$1,000.
On July 18, 1997, upon consummation of the Company's Initial Offering, D. Robert
Crants, III and Michael W. Devlin each received 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 Company's Initial Offering and the closing of the purchase of nine
facilities from CCA. The reimbursed costs include certain costs related to
property due diligence, employee compensation, travel and overhead. The Company
received no cash proceeds from the issuance of these 300,000 shares.
All of the Common Shares issued by the Company discussed herein were issued
pursuant to an exemption from the registration requirements of the Securities
Act contained in Section 4(2) of the Securities Act of 1933, as amended.
23
<PAGE> 26
Common Shares
On July 18, 1997, pursuant to the Company's Registration Statement on Form S-11
(File No. 333-25725) declared effective by the U.S. Securities and Exchange
Commission (the "Commission") on July 10, 1997, the Company completed an initial
offering of 21,275,000 of its Common Shares (the "Initial Offering") (including
2,775,000 Common Shares issued as a result of the exercise of an over-allotment
option by the underwriters). The gross proceeds to the Company from the sale of
the Common Shares was approximately $446.8 million, generating net proceeds to
the Company of $412.1 million after deduction of the underwriting discount and
offering expenses. The Company used $308.1 million of the net proceeds to
purchase the nine Initial Facilities simultaneously with the completion of the
Initial Offering. The balance of the net proceeds along with working capital and
borrowings under the Bank Credit Facility were subsequently used to purchase two
of the Option Facilities (the Northeast Ohio Correctional Center and the
Torrance County Detention Facility) and for general corporate purposes. The
Initial Offering was underwritten by a syndicate of underwriters lead managed by
J.C. Bradford & Co., A.G. Edwards & Sons, Inc., Legg Mason Wood Walker
Incorporated, Lehman Brothers, PaineWebber Incorporated, and Stephens Inc.
Subsequent Offering of Series A Preferred Shares
On January 30, 1998, pursuant to the Company's Registration Statement on Form
S-11 (File No. 333-43935) declared effective by the Commission on January 26,
1998, the Company completed an offering of 4,300,000 shares of 8.0% Series A
Cumulative Preferred Shares, $0.01 par value per share (the "Series A Preferred
Shares") (including 300,000 Series A Shares issued as a result of the exercise
of an over-allotment option by the underwriters), at a price of $25.00 per
share. The Series A Preferred Shares are redeemable at any time on or after
January 30, 2003, at $25 per share, plus dividends accrued and unpaid to the
redemption date. The Series A Preferred Shares have no stated maturity, sinking
fund provision or mandatory redemption and are not convertible into any other
securities of the Company. Dividends on the Series A Preferred Shares are
cumulative from the date of original issue of such shares and are payable
quarterly in arrears on the fifteenth day of January, April, July and October of
each year, to shareholders of record on the last day of March, June, September
and December of each year, respectively, at a fixed annual rate of 8.0%. The
shares are listed on the NYSE under the symbol "PNZ Pr A." The offering of the
Series A Preferred Shares was underwritten by a syndicate of underwriters lead
managed by J.C. Bradford & Co., NationsBanc Montgomery Securities LLC,
PaineWebber Incorporated, Stephens Inc. and Wheat First Butcher Singer.
The gross proceeds from the sale of the Series A Preferred Shares were
approximately $107.5 million, generating net proceeds to the Company of
approximately $103.5 million after deduction of the underwriting discount and
estimated offering expenses. The Company used approximately $72.7 million of the
net proceeds to repay outstanding indebtedness under the Bank Credit Facility.
The balance will be used to make future acquisitions of correctional and
detention facilities and for general corporate purposes.
24
<PAGE> 27
ITEM 6. SELECTED FINANCIAL DATA.
The selected historical consolidated financial information set forth below as of
December 31, 1997 and for the period from July 18, 1997 to December 31, 1997 has
been derived from the Company's audited consolidated financial statements as of
December 31, 1997 and for the period from July 18, 1997 to December 31, 1997.
All information contained in the following table should be read in conjunction
with the consolidated financial statements and related notes of the Company
included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
PERIOD FROM JULY 18, 1997
TO DECEMBER 31, 1997
-------------------------
<S> <C>
OPERATING DATA:
Revenues:
Rental $19,980
Interest 600
-------
20,580
-------
Costs and Expenses:
Depreciation 5,088
Interest 184
General and administrative 981
-------
6,253
-------
Net income $14,327
=======
Net income per share:
Basic $ 0.66
Diluted $ 0.65
Weighted average number of shares outstanding, basic 21,576
Weighted average number of shares outstanding, diluted 22,007
Other Data:
Funds from Operations(1) $19,415
Net cash provided by operating activities 19,835
Distributions on Common Shares 16,635
Distributions per Common Share $ 0.77
AS OF DECEMBER 31, 1997
-----------------------
BALANCE SHEET DATA:
Net real estate properties $453,272
Total assets 454,438
Line of credit 32,000
Total shareholders' equity 412,749
</TABLE>
(1) Management believes Funds from Operations (as hereinafter defined) 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 defined by the Board of
Governors of NAREIT (as hereinafter defined) as 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 and, accordingly, may
not be comparable to other REITs' Funds from Operations calculated under a
differing methodology. Funds from Operations should be examined in
conjunction with net income as presented.
<TABLE>
<CAPTION>
PERIOD FROM JULY 18, 1997
TO DECEMBER 31, 1997
--------------------
<S> <C>
Calculation of Funds from Operations:
Net income $14,327
Plus: Real estate depreciation 5,088
-------
Funds from Operations $19,415
=======
</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.
25
<PAGE> 28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW.
The Company was formed on April 23, 1997, as a Maryland real estate investment
trust to capitalize on the opportunities created by the increased demand for
private correctional and detention facilities. The Company intends to qualify as
a REIT for federal income tax purposes commencing with its taxable year ending
December 31, 1997.
On July 18, 1997, the Company commenced operations after completing an initial
public offering of 21,275,000 common shares (including 2,775,000 shares issued
as a result of the exercise of an over-allotment option by the underwriters)
(the "Initial Offering"). The 21,275,000 common shares were issued at the
Initial Offering price of $21.00, generating gross proceeds of $446.8 million.
The aggregate proceeds to the Company, net of the underwriters' discount and
offering costs, were approximately $412.1 million.
The principal business strategy of the Company is 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 to qualified
third-party operators, including affiliates of the sellers. The Company's
initial investments were privately-managed facilities that were owned and
operated by CCA. However, the Company is pursuing other opportunities, including
acquisitions and leasebacks of, or financings for, correctional facilities owned
and operated by various government entities and private operators other than
CCA. Substantially all of the Company's revenues are derived from: (i) rents
received under triple net leases of correctional and detention facilities; and
(ii) interest earned from the temporary investment of funds in short-term
investments.
The Company, together with its wholly-owned management subsidiary, Prison Realty
Management, Inc., a Tennessee corporation, incurs 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
is self-administered and managed by its executive officers and staff, and does
not engage a separate advisor or pay an advisory fee for administrative or
investment services, although the Company does engage legal, accounting, tax and
financial advisors from time to time. The primary non-cash expense of the
Company is depreciation of its correctional and detention facilities.
The Company 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.
The Company has made distributions 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.
RESULTS OF OPERATIONS.
For the period from July 18, 1997 to December 31, 1997 (the "Initial Period"),
rental revenues of $20.0 million were generated from the immediate leaseback of
12 correctional and detention facilities purchased during the Initial Period.
Nine facilities were purchased on July 18, 1997, and generated $15.4 million in
lease revenues, while three correctional and detention facilities individually
purchased throughout the Initial Period generated $4.6 million.
Interest income of $0.6 million was earned during the Initial Period through
investment of the Initial Offering proceeds prior to purchase of the real estate
properties and the investment of cash provided by operations. Interest rates
generally ranged from 5.5% to 5.7%.
Depreciation of real estate properties totaled $5.1 million for the Initial
Period and was calculated from the purchase closing date to period end, as all
assets were considered immediately in use.
General and administrative expenses incurred for the Initial Period were
approximately $981,000, or 4.9% of lease revenues and consisted primarily of
management salaries and benefits, legal and other administrative costs. Interest
expense (including amortization of loan costs) incurred for the Initial Period
was $184,000 based on borrowings under the Bank Credit Facility.
LIQUIDITY AND CAPITAL RESOURCES.
Upon completion of the Initial Offering, the Company received approximately
$412.1 million in net proceeds. The Company used these funds and borrowings
under the Bank Credit Facility to purchase 12 correctional and detention
facilities at an aggregate cost of $455.4 million. Initially, cash on hand was
invested by the Company in
26
<PAGE> 29
interest-bearing accounts and other short-term, interest-bearing securities that
are consistent with the Company's election to seek qualification for taxation as
a REIT. After the Company began utilizing the Bank Credit Facility, cash
available was utilized to reduce outstanding borrowings. Outstanding borrowings
under the Bank Credit Facility at December 31, 1997 totaled $32.0 million.
The Company expects to meet its short-term liquidity requirements generally
through its initial working capital and net cash provided by operations. The
Company believes that its net cash provided by operations will be sufficient to
allow the Company to make distributions necessary to enable the Company to
maintain qualification as a REIT. All facilities owned by the Company will be
leased to third parties under triple net leases, which require the lessee to pay
substantially all expenses associated with the operation of such facilities. As
a result of these arrangements, the Company does not believe it will be
responsible for any significant expenses in connection with the facilities
during the terms of the Leases. The Company anticipates entering into similar
leases with respect to all properties acquired in the future.
On December 2, 1997, the Board of Trustees declared a distribution of $0.425 per
share for the quarter ended December 31, 1997. Such distribution was paid on
January 15, 1998 to shareholders of record on December 31, 1997. The Company
paid a pro rata distribution of $0.346 per share for the period from July 18,
1997 through September 30, 1997 on October 15, 1997 based on the anticipated
initial regular per share quarterly distribution rate of $0.425. The
distributions to the Company's shareholders are in accordance with the Code's
requirements for qualification as a REIT.
The Company closed on the $150.0 million Bank Credit Facility contemporaneously
with the closing of the Initial Offering. The Bank Credit Facility is a
three-year, revolving, secured acquisition credit facility that expires in July
2000. As of December 31, 1997, the outstanding balance under the Bank Credit
Facility was $32.0 million, with an effective interest rate of approximately
7.44%, determined by adding 1.50% to the LIBOR rate for the interest period
selected by the Company. The Company may specify LIBOR rate loans of one, two,
three, or six month maturities. The Company may also borrow up to $5.0 million
at the prime rate for working capital purposes and repay such loans at any time.
A commitment fee of 0.25% per annum accrues on the amount of the unused
available credit commitment. Any borrowings under the Bank Credit Facility are
secured by the pledge of each of the Facilities. The Company is subject to
ongoing compliance with a number of financial and other covenants under the Bank
Credit Facility, with which the Company is and has been in compliance.
On January 30, 1998, the Company netted approximately $103.5 million through its
offering of 4,300,000 8.0% Series A Cumulative Preferred Shares, $0.01 par value
per share, at a price of $25 per share. The Company used approximately $72.7
million of the preferred share offering proceeds to repay outstanding
indebtedness under the Bank Credit Facility. The Company borrowed $40.7 million
subsequent to December 31, 1997 to fund the January 5, 1998 acquisition of the
Davis Correctional Facility and for working capital purposes. Remaining proceeds
of the preferred share offering will be used to finance the acquisition of
additional facilities, including certain of the Option Facilities.
The Company has no commitments with respect to other capital expenditures.
However, the Company has options with varying terms to purchase any or all of
the nine Option Facilities from CCA for CCA's costs of developing, constructing
and equipping the facilities, plus 5% of such costs, aggregating approximately
$390.0 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 expects to meet its long-term liquidity requirements for the funding
of real estate property development and acquisitions by borrowing under the Bank
Credit Facility and by issuing in public or private transactions, equity or debt
securities. The Company anticipates that as a result of its initially low debt
to total capitalization ratio and its intention to maintain a debt to total
capitalization ratio 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 facilities, the acquisition of
additional properties, or as necessary, to meet certain distribution
requirements imposed on REITs under the Code.
YEAR 2000 COMPLIANCE.
While the Company has completed an assessment of its computer systems and
software applications and believes that both are "Year 2000" compliant, there
can be no assurance that coding errors or other defects will not be discovered
in the future. In addition, the Company has not initiated formal communications
with its lessee or with any of the entities which contract with its lessee to
determine the extent to which the Company is vulnerable to those third parties'
failure to remediate their own Year 2000 issues. The Company expects to address
this issue with these parties in 1998, which is prior to any anticipated impact
from the issue. Any Year 2000 compliance problem
27
<PAGE> 30
of the Company, its lessee or other third parties could result in a material
adverse effect on the Company's business, prospects, results of operations and
financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by Regulation S-X are
included in this report on Form 10-K commencing on page F-2 as indicated below.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants...........................F-2
Consolidated Balance Sheet as of December 31, 1997.................F-3
Consolidated Statement of Income for the period from
July 18, 1997 to December 31, 1997...............................F-4
Consolidated Statement of Shareholders' Equity for the
period from July 18, 1997 to December 31, 1997...................F-5
Consolidated Statement of Cash Flows for the period
From July 18, 1997 to December 31, 1997..........................F-6
Notes to the Consolidated Financial Statements.....................F-7
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND,
FINANCIAL DISCLOSURE.
There have been no disagreements with the Company's accountants on any matter of
accounting principles and practices or financial statement disclosures. Arthur
Andersen LLP was selected by the Company's Board of Trustees to serve as the
Company's independent public accountant for the Initial Offering and for the
partial year ended December 31, 1997.
PART III.
Certain information required by this Part III is omitted from this report in
that the Company will file a definitive proxy statement within 120 days after
the end of its fiscal year pursuant to Regulation 14A of its Annual Meeting of
Shareholders to be held in May 1998 (the "Proxy Statement") and the information
included in the Proxy Statement is incorporated in this Annual Report on Form
10-K by reference to the Proxy Statement.
ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS OF THE COMPANY.
The information responsive to this Item is contained in the sections entitled
"Proposals for Shareholder Action Proposal 1 - Election of Trustees" included in
the Company's Proxy Statement, which information is incorporated herein by this
reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information responsive to this Item is contained in the sections entitled
"Executive Compensation," included in the Company's Proxy Statement, other than
the Compensation Committee Report and Performance Graph required by Items 402(k)
and (l) of Regulation S-K, which information is incorporated herein by this
reference.
28
<PAGE> 31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information responsive to this Item is contained in the section entitled
"Principal Shareholders and Security Ownership of Management" included in the
Company's Proxy Statement, which information is incorporated herein by this
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information responsive to this Item is contained in the section entitled
"Certain Relationships and Related Transactions" included in the Company's Proxy
Statement, which information is incorporated herein by this reference.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Report:
(1) Financial Statements.
The Financial Statements as set forth under Item 8 of
this report on Form 10-K have been filed herewith,
beginning on Page F-1 of this report.
(2) Financial Statement Schedules.
The financial statement schedule entitled "Schedule
III-Real Estate and Accumulated Depreciation as of
December 31, 1997" is included herein as Exhibit S-1
to the Financial Statements.* All other schedules for
which provision is made in Regulation S-X are either
not required to be included herein under the related
instructions or are inapplicable or the related
information is included in the footnotes to the
applicable financial statements and, therefore, have
been omitted.
(3) The Exhibits are listed in the Index of Exhibits
Required by Item 601 of Regulation S-K included
herewith.
(b) No reports on Form 8-K were filed during the last quarter of the
period covered by this Report.
(c) Certain Exhibits. See Item 14(a)(3) above.
(d) Certain Financial Statements. See Item 14(a) (1) and (2)
above.
* The financial statement schedule required to be filed hereunder has
been omitted pursuant to a request for confidential treatment under
Rule 24b-2 of the General Rules and Regulations promulgated under the
Securities Exchange Act of 1934, as amended, and has been filed
separately with the Commission.
29
<PAGE> 32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, hereunto duly authorized on March 16, 1998.
CCA PRISON REALTY TRUST
By: /s/ D. Robert Crants, III
---------------------------------------
D. Robert Crants, III, President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints D. Robert Crants, III and Vida H. Carroll, and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to the Annual
Report on Form 10-K of CCA Prison Realty Trust for the fiscal year ended
December 31, 1997, and to file the same with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission
and the New York Stock Exchange, granting unto said 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 in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or either 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 Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Doctor R. Crants
- -----------------------------------
Doctor R. Crants Chairman of the Board of Trustees March 16, 1998
and Trustee
/s/ J. Michael Quinlan
- -----------------------------------
J. Michael Quinlan Chief Executive Officer March 16, 1998
and Trustee
/s/ D. Robert Crants, III
- -----------------------------------
D. Robert Crants, III President and Trustee March 16, 1998
/s/ Michael W. Devlin
- -----------------------------------
Michael W. Devlin Chief Operating Officer March 16, 1998
and Trustee
</TABLE>
30
<PAGE> 33
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Vida H. Carroll
- -----------------------------------
Vida H. Carroll Chief Financial Officer March 16, 1998
(Principal Financial and
Accounting Officer)
/s/ C. Ray Bell
- -----------------------------------
C. Ray Bell Trustee March 16, 1998
/s/ Richard W. Cardin
- -----------------------------------
Richard W. Cardin Trustee March 16, 1998
/s/ Monroe J. Carell, Jr.
- -----------------------------------
Monroe J. Carell, Jr. Trustee March 16, 1998
/s/ John W. Eakin, Jr.
- -----------------------------------
John W. Eakin, Jr. Trustee March 16, 1998
/s/ Ted Feldman
- -----------------------------------
Ted Feldman Trustee March 16, 1998
/s/ Jackson W. Moore
- -----------------------------------
Jackson W. Moore Trustee March 16, 1998
/s/ Rusty L. Moore
- -----------------------------------
Rusty L. Moore Trustee March 16, 1998
/s/ Joseph V. Russell
- -----------------------------------
Joseph V. Russell Trustee March 16, 1998
/s/ Charles W. Thomas, Ph.D.
- -----------------------------------
Charles W. Thomas, Ph.D. Trustee March 16, 1998
</TABLE>
31
<PAGE> 34
CCA PRISON REALTY TRUST
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants F-2
Consolidated Balance Sheet as of December 31, 1997 F-3
Consolidated Statement of Income for the period from
July 18, 1997 to December 31, 1997 F-4
Consolidated Statement of Shareholders' Equity for the
period from July 18, 1997 to December 31, 1997 F-5
Consolidated Statement of Cash Flows for the period
from July 18, 1997 to December 31, 1997 F-6
Notes to the Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE> 35
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CCA Prison Realty Trust:
We have audited the accompanying consolidated balance sheet of CCA
Prison Realty Trust (a Maryland real estate investment trust) and subsidiary as
of December 31, 1997, and the related consolidated statements of income,
shareholders' equity and cash flows for the period from July 18, 1997 to
December 31, 1997. 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 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 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CCA Prison
Realty Trust and subsidiary as of December 31, 1997, and the results of its
operations and its cash flows for the period from July 18, 1997 to December 31,
1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
NASHVILLE, TENNESSEE
JANUARY 9, 1998
F-2
<PAGE> 36
CCA PRISON REALTY TRUST
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<S> <C>
ASSETS
Real Estate Properties, at Cost
Correctional and Detention Facilities $ 458,360
Less - Accumulated Depreciation (5,088)
---------
Net Real Estate Properties 453,272
Cash and Cash Equivalents 756
Other Assets 410
=========
Total Assets $ 454,438
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Distributions Payable $ 9,170
Line of Credit 32,000
Accounts Payable and Accrued Expenses 519
---------
Total Liabilities 41,689
---------
Commitments and Contingencies
Shareholders' Equity
Preferred Shares, $.01 par value; 10,000,000 shares
authorized; none outstanding --
Common Shares, $.01 par value; 90,000,000 shares
authorized; 21,576,000 shares issued and outstanding 216
Capital in Excess of Par Value 414,841
Accumulated Distributions in Excess of Net Income (2,308)
---------
Total Shareholders' Equity 412,749
=========
Total Liabilities and Shareholders' Equity $ 454,438
=========
</TABLE>
The accompanying Notes to Consolidated Financial
Statements are an integral part of this statement.
F-3
<PAGE> 37
CCA PRISON REALTY TRUST
CONSOLIDATED STATEMENT OF INCOME
PERIOD FROM JULY 18, 1997 TO DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<S> <C>
Revenues
Rental $19,980
Interest 600
-------
20,580
-------
Expenses
Depreciation 5,088
Interest 184
General and Administrative 981
-------
6,253
-------
Net Income $14,327
=======
Net Income Per Share
Basic $ 0.66
=======
Diluted $ 0.65
=======
Weighted Average Number of Shares Outstanding, Basic 21,576
=======
Weighted Average Number of Shares Outstanding, Diluted 22,007
=======
</TABLE>
The accompanying Notes to Consolidated Financial
Statements are an integral part of this statement.
F-4
<PAGE> 38
CCA PRISON REALTY TRUST
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
PERIOD FROM JULY 18, 1997 TO DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated
Common Shares Capital in Distributions
-------------------- Excess of in Excess of
Shares Amount Par Value Net Income Total
--------- ------ --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Initial Capital Contribution 1 $ -- $ 1 $ -- $ 1
Shares Issued, net offering costs
of $3,445 21,575 216 414,840 -- 415,056
Net Income -- -- -- 14,327 14,327
Distributions to Shareholders -- -- -- (16,635) (16,635)
--------- ----- --------- --------- ---------
Balance, December 31, 1997 21,576 $ 216 $ 414,841 $ (2,308) $ 412,749
========= ===== ========= ========= =========
</TABLE>
The accompanying Notes to Consolidated Financial
Statements are an integral part of this statement.
F-5
<PAGE> 39
CCA PRISON REALTY TRUST
CONSOLIDATED STATEMENT OF CASH FLOWS
PERIOD FROM JULY 18, 1997 TO DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<S> <C>
Cash Flows from Operating Activities
Net Income $ 14,327
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:
Depreciation of Real Estate Properties 5,088
Changes in Assets and Liabilities:
Other Assets (99)
Accounts Payable and Accrued Expenses 519
---------
Net Cash Provided by Operating Activities 19,835
---------
Cash Flows from Investing Activities
Acquisition of Real Estate Properties (455,360)
---------
Net Cash Used In Investing Activities (455,360)
Cash Flows from Financing Activities
Initial Capital Contribution 1
Proceeds from Initial Public Offering, net of Offering Costs of $3,445 412,056
Borrowings under Line of Credit 32,600
Repayments under Line of Credit (600)
Distributions paid on Common Shares (7,465)
Loan Origination Costs (311)
---------
Net Cash Provided by Financing Activities 436,281
Net Increase in Cash and Cash Equivalents 756
Cash and Cash Equivalents, Beginning of Period --
---------
Cash and Cash Equivalents, End of Period $ 756
=========
Supplemental Disclosure of Noncash Transactions:
Increase in Distributions Payable $ 9,170
Reduction in Shareholders' Equity through
Distributions to Shareholders (9,170)
Increase in Real Estate Properties due to Development Fee
Paid in Shares (3,000)
Increase in Shareholders' Equity through issuance
of Development Fee Shares 3,000
---------
$ --
=========
Supplemental Disclosure of Cash Flow Information:
Cash paid for Interest $ --
Cash paid for Income Taxes --
---------
$ --
=========
</TABLE>
The accompanying Notes to Consolidated Financial
Statements are an integral part of this statement.
F-6
<PAGE> 40
CCA PRISON REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND OPERATIONS
CCA Prison Realty Trust (the "Company"), a Maryland real estate
investment trust, was formed April 23, 1997 to acquire, develop, and lease
private and public correctional and detention facilities. The Company plans to
elect to qualify as a real estate investment trust ("REIT") under the Internal
Revenue Code of 1986, as amended (the "Code").
On July 18, 1997, the Company commenced operations after completing an
initial public offering of 21,275,000 common shares (including 2,775,000 shares
issued as a result of the exercise of an over-allotment option by the
underwriters) (the "Initial Offering"). The 21,275,000 common shares were issued
at the Initial Offering price of $21.00, generating gross proceeds of
$446,775,000. The aggregate proceeds to the Company, net of the underwriters'
discount and offering costs, were approximately $412,056,000. D. Robert Crants,
III and Michael W. Devlin each received 150,000 Common Shares as a development
fee and reimbursement for expenses incurred in connection with the promotion and
formation of the Company.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements of the Company include all the
accounts of the Company and its wholly owned management subsidiary, Prison
Realty Management, Inc. (a Tennessee corporation). All significant intercompany
balances and transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all short-term, highly-liquid investments that
are readily convertible to cash and have an original maturity of three months or
less at the time of purchase to be cash equivalents.
Real Estate Properties
Real estate properties are recorded at cost. Acquisition costs and
transaction fees directly related to each property are capitalized as a cost of
the respective property. The cost of real estate properties acquired is
allocated between land and land improvements, building and improvements, and
machinery and equipment based upon estimated market values at the time of
acquisition. Depreciation is provided for on a straight-line basis over an
estimated useful life of 40 years for building and improvements and seven years
for machinery and equipment.
Federal Income Taxes
The Company plans to elect to qualify as a REIT under the Code,
commencing with its taxable period ending December 31, 1997. As a result, the
Company will generally not be subject to federal income tax on its taxable
income at corporate rates to the extent it distributes annually at least 95% of
its taxable income to its shareholders and complies with certain other
requirements. Accordingly, no provision has been made for federal income taxes
in the accompanying consolidated financial statements.
Leases and Rental Income
All leases are accounted for as operating leases. Under this method,
lease payments are recognized as revenue as earned.
F-7
<PAGE> 41
Use of Estimates in the Preparation of Financial Statements
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.
Fair Value of Financial Instruments
To meet the reporting requirements of Statement of Financial Accounting
Standards No. ("SFAS") 107, "Disclosures About Fair Value of Financial
Instruments," the Company calculates the fair value of financial instruments at
quoted market prices. At December 31, 1997, there were no material differences
in the book values of the Company's financial instruments and their related fair
values.
New Accounting Pronouncement
SFAS 130, "Reporting Comprehensive Income" has been issued effective
for fiscal years beginning after December 15, 1997 and requires restatement of
earlier financial statements for comparative purposes. SFAS 130 requires that
changes in the amounts of certain items, including gains and losses on certain
securities, be shown in the financial statements. The Company does not
anticipate the adoption of SFAS 130 to have a material effect on the Company's
financial statements.
3. REAL ESTATE PROPERTIES
As of December 31, 1997, the Company had investments in 12 leased
correctional and detention facilities. Cost components of these real estate
properties are as follows (in thousands):
<TABLE>
<S> <C>
Land and land improvements $ 6,321
Building and improvements 439,664
Machinery and equipment 12,375
---------
458,360
Less accumulated depreciation (5,088)
---------
$ 453,272
=========
</TABLE>
4. DISTRIBUTIONS PAID AND PAYABLE TO SHAREHOLDERS
On December 2, 1997, the Board of Trustees declared a distribution of
$0.425 per share for the quarter ended December 31, 1997, to shareholders of
record on December 31, 1997. The distribution is scheduled to be paid on January
15, 1998. The Company paid a pro rata distribution of $0.346 per share for the
period from July 18, 1997 through September 30, 1997 on October 15, 1997 based
on the anticipated initial regular per share quarterly distribution rate of
$0.425. Distributions for the year ended December 31, 1997 may be characterized
for tax purposes as follows:
<TABLE>
<CAPTION>
Declaration Record Payment Distribution Ordinary To be Reported as
Date Date Date Per Share Taxable Income 1998 Distribution
----------- -------- ------- ----------- -------------- ------------------
<S> <C> <C> <C> <C> <C>
9/3/97 9/30/97 10/15/97 $0.346 100.0% 0.0%
12/2/97 12/31/97 1/15/98 $0.425 74.8% 25.2%
</TABLE>
5. BANK CREDIT FACILITY
The Company has a $150 million, three-year, revolving, secured
acquisition credit facility that expires in July 2000. The bank credit facility
is from several major U.S. and non-U.S. banks. As of December 31, 1997, the
outstanding balance on the credit facility was $32 million, with an effective
interest rate of approximately 7.44%, determined by adding 1.50% to the LIBOR
rate for the interest period selected by the Company. The Company may specify
LIBOR rate loans of one, two, three, or six month maturities. The Company may
also borrow up to $5.0 million at the prime rate for working capital purposes
and repay such loans at any time. The Bank Credit Facility is secured by all
assets of the Company. A commitment fee of 0.25% per annum accrues on the amount
of the unused available credit commitment. The Company is
F-8
<PAGE> 42
subject to ongoing compliance with a number of financial and other covenants
under the Bank Credit Facility, all of which the Company is in compliance.
6. EMPLOYEE BENEFIT PLAN
On September 3, 1997, the Board of Trustees adopted the CCA Prison
Realty Trust Employee Savings and Stock Ownership Plan (the "ESOP") whereby
eligible employees may defer certain percentages of their pretax compensation,
subject to federal limitations, for the purchase of Company common shares at
current market prices. Benefits are paid on death, retirement or termination.
The Company may make contributions to the ESOP, subject to approval by the Plan
Administrator. Company contributions may be in the form of "matching"
contributions determined as a percentage of the employee's deferral amount or
"basic" contributions which would be set as a percentage of all participants'
compensation, subject to limitations of the Code. Company contributions made on
behalf of employees will vest ratably over five years. Expense accrued by the
Company for matching and basic contributions at December 31, 1997 totaled
approximately $22,000.
7. SHARE OPTION AND INCENTIVE PLANS
The Company has established share option and incentive plans for the
purpose of attracting and retaining qualified executive officers and key
employees, as well as non-employee trustees. In conjunction with the Initial
Offering, the Company granted options to officers, employees and trustees.
Options granted under the Company's plans are granted with exercise prices equal
to the market value at the date of grant. The term of such options is ten years
from the date of grant. In general, one-fourth of the options granted to
executive officers and employees vest immediately, with the remaining options
becoming exercisable ratably on the first, second, and third anniversary of the
dates of grant. Options granted to non-employee trustees vest at the date of
grant. Shares remaining for issuance under the share incentive and non-employee
trustees plans total 466,000 and 105,000, respectively.
A summary of the Company's share option activity, and related
information for the period from July 18, 1997 to December 31, 1997 follows:
<TABLE>
<CAPTION>
Weighted
Options Average
(000s) Exercise Price
----- ---------------
<S> <C> <C>
Granted at Initial Offering 1,075 $21.00
Granted during period 103 37.81
Exercised -- --
Forfeited -- --
----- ------
Outstanding at end of period 1,178 $22.47
===== ======
Exercisable at end of period 328 $22.30
===== ======
</TABLE>
A summary of the Company's outstanding and exercisable options and
related information at December 31, 1997 follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- ------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
PRICES (000S) LIFE PRICE (000S) PRICE
-------- ------- ---------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
$21.00 1,075 9.54 $21.00 303 $21.00
$37.81 103 9.92 37.81 25 37.81
----- ------ ------ ----- ------
1,178 9.57 $22.47 328 $22.30
===== ====== ====== ===== ======
</TABLE>
The Company applies APB Opinion 25 and related Interpretations in
accounting for its plans. In accordance with APB Opinion 25, during the period
from July 18, 1997 to December 31, 1997, the Company recognized no compensation
expense related to the grant of share awards. In October 1995, the FASB issued
SFAS 123, "Accounting for Stock-Based Compensation." SFAS 123 established new
financial accounting and reporting standards for stock-based compensation plans.
The Company has adopted the disclosure-only provisions of SFAS 123. However, had
compensation cost for the Company's
F-9
<PAGE> 43
share-based compensation plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of FASB
Statement 123, the Company's net income and earnings per share for the period
from July 18, 1997 to December 31, 1997, would have been reduced to the
following pro forma amounts (in thousands except per share amounts):
<TABLE>
<S> <C>
Net Income $13,960
Basic Net Income per Share $ 0.65
Diluted Net Income Per Share $ 0.63
</TABLE>
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 used: dividend yield of 7.57%, expected volatility of 40.0%,
risk-free interest rate of US zero coupon bonds with time to maturity
approximately equal to the options average time to exercise of 6.22%, and
expected lives of ten years for each option.
8. NET INCOME PER SHARE
SFAS 128, "Earnings per Share," 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 has adopted 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 for
the Company was computed by dividing net income by the weighted average number
of common shares outstanding during the period or 21,576,000 shares. Diluted
earnings per share was computed by dividing net income by the weighted average
number of common shares after considering the additional dilution related to the
Company's outstanding share options, or additional shares of 431,000, after
assuming a buyback of shares under the treasury method.
9. RELATIONSHIP WITH CORRECTIONS CORPORATION OF AMERICA
On July 18, 1997, the following transactions with Corrections
Corporation of America and certain of its subsidiaries (collectively, "CCA")
occurred simultaneously with the completion of the Initial Offering:
- - The Company acquired the following nine correctional and detention
facilities (the "Initial Facilities") from CCA for an aggregate purchase
price of $308.1 million:
(i) Houston Processing Center, located in Houston, Texas;
(ii) Laredo Processing Center, located in Laredo, Texas;
(iii) Bridgeport Pre-Parole Transfer Facility, located in
Bridgeport, Texas;
(iv) Mineral Wells Pre-Parole Transfer Facility, located in
Mineral Wells, Texas;
(v) West Tennessee Detention Facility, located in Mason,
Tennessee;
(vi) Leavenworth Detention Center, located in Leavenworth,
Kansas;
(vii) Eloy Detention Center, located in Eloy, Arizona;
(viii) Central Arizona Detention Center, located in Florence,
Arizona; and
(ix) T. Don Hutto Correctional Center, located in Taylor,
Texas.
The Company purchased a 100% interest in the real property and all
tangible personal property associated with each of the Initial Facilities
from CCA. The real and personal property associated with each of the
Initial Facilities was used by CCA in the ownership and operation of
correctional and detention facilities. The Company will continue to use the
property in the same manner by leasing each of the Initial Facilities back
to CCA who will use the property in the operation of correctional and
detention facilities.
- - The Company entered into agreements with CCA to lease the Initial
Facilities back 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 provide for initial,
annual base rents which aggregate $33.9 million, with 4% annual
escalations, and have primary terms ranging from 10-12 years which may be
extended at the fair market rates for three additional five-year periods
upon the mutual agreement of the Company and 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. In addition, the
Leases provide CCA with 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.
F-10
<PAGE> 44
- - The Company entered into option agreements with CCA (the "Option
Agreements") pursuant to which the Company was granted the option to
acquire and leaseback to CCA any or all of five option facilities (the
"Initial Option Facilities") from CCA at any time during the three-year
period following the acquisition of the Initial Facilities for CCA's costs
of developing, constructing and equipping such facilities, plus 5% of such
costs, aggregating approximately $219.6 million. In addition, CCA granted
the Company 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 date CCA
first receives inmates at such facility.
Subsequent to the Initial Offering, through December 31, 1997, the Company
individually acquired the following three correctional and detention facilities
from CCA and immediately entered into 10 year lease agreements with CCA which
will continue to operate each of the facilities:
(i) Northeast Ohio Correctional Center, located in
Youngstown, Ohio (one of the five Initial Option
Facilities) for $70.1 million;
(ii) Torrance County Detention Facility, located in
Estancia, New Mexico (one of the five Initial Option
Facilities) for $38.5 million; and
(iii) Cimarron Correctional Facility, located in Cushing,
Oklahoma for $38.3 million.
The terms of the leases for the above facilities are substantially
similar to the Leases with respect to the Initial Facilities and will provide
for aggregate first year base rentals of approximately $16.0 million. The
acquisitions were funded with remaining proceeds of the Initial Offering,
borrowings under the Bank Credit Facility, and cash generated from operations.
The Chairman of the Board of Trustees of the Company is also the
Chairman of the Board of Directors, President and Chief Executive Officer of
CCA.
Leasing Activities
All of the Company's 12 correctional and detention facilities are
currently leased to CCA under non-cancelable leases with terms of 10 and 12
years, which expire on various dates through 2009. Future minimum lease payments
to be received by the Company as of December 31, 1997 are as follows (in
thousands):
<TABLE>
<S> <C>
Years Ending December 31:
1998 $ 50,792
1999 52,824
2000 54,937
2001 57,166
2002 59,370
Thereafter 363,457
--------
$638,546
========
</TABLE>
10. EVENT SUBSEQUENT TO DECEMBER 31, 1997
On January 5, 1998, the Company purchased the Davis Correctional
Facility, located in Holdenville, Oklahoma, from CCA for $36.1 million. CCA will
continue to operate the medium-security correctional facility under the terms of
a 10 year operating lease, with terms substantially similar to those of the
Leases. Annual first year rent for the facility is expected to be approximately
$4.0 million. The Company used proceeds from the Bank Credit Facility to fund
the purchase.
F-11
<PAGE> 45
To CCA Prison Realty Trust:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of CCA Prison Realty Trust as of December 31,
1997 and for the period from July 18, 1997 to December 31, 1997 included in this
Annual Report on Form 10-K and have issued our report thereon dated January 9,
1998. Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The financial statement schedule listed
in the accompanying index is the responsibility of the Company's management and
is presented for purposes of complying with the Securities and Exchange
Commission's rules and regulations under the Securities and Exchange Act of
1934 and is not otherwise a required part of the basic financial statements.
The financial statement schedule has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion,
fairly states, in all material respects, the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
March 12, 1998
S-1
<PAGE> 46
INDEX OF EXHIBITS
Exhibits marked with an * are filed herewith. Other exhibits have
previously been filed with the Commission and are incorporated herein by
reference.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
2 Agreement of Sale and Purchase between CCA Prison Realty Trust, a Maryland real
estate investment trust (the "Company"), and Corrections Corporation of America, a
Tennessee corporation ("CCA") (previously filed as Exhibit 2 to the Company's
Registration Statement on Form S-11 (Commission File No. 333-25727) Amendment
No. 4 (Filed July 9, 1997) and incorporated herein by reference).
3(a) Amended and Restated Declaration of Trust of the Company
(previously filed as -- Exhibit 3.1 to the Company's Registration
Statement on Form S-11 (Commission File No. 333-25727) Amendment
No. 1 (Filed June 16, 1997) and incorporated herein by reference).
*3(b) Articles Supplementary to the Company's Declaration of Trust.
3(c) Amended and Restated Bylaws of the Company (previously filed as Exhibit 3.2 to the
Company's Registration Statement on Form S-11 (Commission File No.
333-25727) Amendment No. 1 (Filed June 16, 1997) and incorporated
herein by reference).
4(a) Provisions defining the rights of shareholders are found in
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(a), (b) and (c) herein).
4(b) Specimen of certificate representing the Company's Common shares
(previously filed -- as Exhibit 3.3 to the Company's Registration
Statement on Form S-11 (Commission File Number 333-25727)
Amendment No. 333-25727 (Filed June 16, 1997) and incorporated
herein by reference).
4(c) Specimen of certificate representing the Company's Series A
Preferred shares -- (previously filed as Exhibit 4.1 to the
Company's Registration Statement on Form S-11 (Commission File
Number 43935) (filed January 27, 1998) and incorporated herein by
reference.
10(a) Option Agreement between the Company and CCA with respect to the Northeast Ohio
Correctional Center (previously filed as Exhibit 10.1(a) to the Company's Registration
Statement on Form S-11 (Commission File No. 333-25727) Amendment No. 4 (Filed
July 9, 1997) and incorporated herein by reference).
10(b) Option Agreement between the Company and CCA with respect to the Torrance
County Detention Facility (previously filed as Exhibit 10.1(b) to the Company's
Registration Statement on Form S-11 (Commission File No. 333-25727) Amendment
No. 4 (Filed July 9, 1997) and incorporated herein by reference).
10(c) Option Agreement between the Company and CCA with respect to the Southern
Colorado Correctional Facility (previously filed as Exhibit 10.1(c) to the Company's
Registration Statement on Form S-11 (Commission File No. 333-25727) Amendment
No. 4 (Filed July 9, 1997) and incorporated herein by reference).
</TABLE>
<PAGE> 47
<TABLE>
<CAPTION>
<S> <C>
10(d) Option Agreement between the Company and CCA with respect to the North Fork
Correctional Facility (previously filed as Exhibit 10.1(d) to the Company's Registration
Statement on Form S-11 (Commission File No. 333-25727) Amendment No. 4 (Filed
July 9, 1997) and incorporated herein by reference).
10(e) Option Agreement between the Company and CCA with respect to the Whiteville
Correctional Center (previously filed as Exhibit 10.1(e) to the Company's Registration
Statement on Form S-11 (Commission File No. 333-25727) Amendment No. 4 (Filed
July 9, 1997) and incorporated herein by reference).
10(f) Master Agreement to Lease between the Company and CCA (previously filed as
Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q (filed on August 25,
1997) and incorporated herein by reference).
10(g) Lease Agreement between the Company and CCA with respect to the Houston
Processing Center (previously filed as Exhibit 10.7 to the Company's Quarterly Report
on Form 10-Q (filed on August 25, 1997) and incorporated herein by reference).
10(h) Lease Agreement between the Company and CCA with respect to the Laredo
Processing Center (previously filed as Exhibit 10.8 to the Company's Quarterly Report
on Form 10-Q (filed on August 25, 1997) and incorporated herein by reference).
10(i) Lease Agreement between the Company and CCA with respect to the Bridgeport
Pre-Parole Transfer Facility (previously filed as Exhibit 10.9 to the Company's
Quarterly Report on Form 10-Q (filed on August 25, 1997) and incorporated herein by
reference).
10(j) Lease Agreement between the Company and CCA with respect to the Mineral Wells
Pre-Parole Transfer Facility (previously filed as Exhibit 10.10 to the Company's
Quarterly Report on Form 10-Q (filed on August 25, 1997) and incorporated herein by
reference).
10(k) Lease Agreement between the Company and CCA with respect to the West Tennessee
Detention Facility (previously filed as Exhibit 10.11 to the Company's Quarterly
Report on Form 10-Q (filed on August 25, 1997) and incorporated herein by
reference).
10(l) Lease Agreement between the Company and CCA with respect to the Leavenworth
Detention Center (previously filed as Exhibit 10.12 to the Company's Quarterly Report
on Form 10-Q (filed on August 25, 1997) and incorporated herein by reference).
10(m) Lease Agreement between the Company and CCA with respect to the Eloy Detention
Center (previously filed as Exhibit 10.13 to the Company's Quarterly Report on
Form 10-Q (filed on August 25, 1997) and incorporated herein by reference).
10(n) Lease Agreement between the Company and CCA with respect to the Central Arizona
Detention Center (previously filed as Exhibit 10.14 to the Company's Quarterly Report
on Form 10-Q (filed on August 25, 1997) and incorporated herein by reference).
10(o) Lease Agreement between the Company and CCA with respect to the T. Don Hutto
Correctional Center (previously filed as Exhibit 10.15 to the Company's Quarterly
Report on Form 10-Q (filed on August 25, 1997) and incorporated herein by
reference).
</TABLE>
<PAGE> 48
<TABLE>
<CAPTION>
<S> <C>
10(p) Right to Purchase Agreement between the Company and CCA (previously filed as
Exhibit 10.4 to the Company's Registration Statement on Form S-11 (Commission File
No. 333-25727) Amendment No. 4 (Filed July 9, 1997) and incorporated herein by
reference).
10(q) Trade Name Use Agreement between the Company and CCA (previously filed as
Exhibit 10.17 to the Company's Quarterly Report on Form 10-Q (filed on August 25,
1997) and incorporated herein by reference).
10(r) Lease Agreement between the Company and CCA with respect to the Northeast Ohio
Correctional Facility (previously filed as Exhibit 10.5 to the Company's Current Report
on Form 8-K (filed August 4, 1997) and incorporated herein by reference).
10(s) Credit Agreement, by and among the Company, various lenders, First Union National
Bank of Tennessee, as administrative agent, and Southtrust Bank, National Association,
as co-agent (previously filed as Exhibit 10.19 to the Company's Quarterly Report on
Form 10-Q (filed on August 25, 1997) and incorporated herein by reference).
10(t) Security Agreement entered into by the Company in favor of First Union National
Bank of Tennessee (previously filed as Exhibit 10.20 to the Company's Quarterly
Report on Form 10-Q (filed on August 25, 1997) and incorporated herein by
reference).
10(u) Officer and Trustee Indemnification Agreement between the Company and its trustees
and officers (previously filed as Exhibit 10.21 to the Company's Quarterly Report on
Form 10-Q (filed on August 25, 1997) and incorporated herein by reference).
10(v) Employment Agreement between J. Michael Quinlan and the Company (previously
filed as Exhibit 10.22 to the Company's Quarterly Report on Form 10-Q (filed on
August 25, 1997) and incorporated herein by reference).
10(w) Employment Agreement between D. Robert Crants, III and the Company (previously
filed as Exhibit 10.23 to the Company's Quarterly Report on Form 10-Q (filed on
August 25, 1997) and incorporated herein by reference).
10(x) Employment Agreement between Michael W. Devlin and the Company (previously
filed as Exhibit 10.24 to the Company's Quarterly Report on Form 10-Q (filed on
August 25, 1997) and incorporated herein by reference).
10(y) The Company's 1997 Employee Share Incentive Option Plan (previously filed as
Exhibit 10.25 to the Company's Quarterly Report on Form 10-Q (filed on August 25,
1997) and incorporated herein by reference).
10(z) The Company's Non-Employee Trustees' Share Option Plan, as amended (previously
filed as Exhibit 10.26 to the Company's Quarterly Report on Form 10-Q (filed on
August 25, 1997) and incorporated herein by reference).
10(aa) Lease Agreement between the Company and CCA with respect to the Torrance County
Detention Facility (previously filed as Exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q (Filed on November 13, 1997) and incorporated herein by reference).
10(bb) CCA Prison Realty Trust Employee Savings and Stock Ownership Plan (previously
filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q (Filed on
November 13, 1997) and incorporated herein by reference).
</TABLE>
<PAGE> 49
<TABLE>
<CAPTION>
<S> <C>
10(cc) Lease Agreement between the Company and CCA with respect to the Cimarron
Correctional Facility (previously filed as Exhibit 10.29 to the Company's Registration
Statement (Commission File Number 333-43935) (Filed January 9, 1998) and
incorporated herein by reference).
10(dd) Lease Agreement between the Company and CCA with respect to the Davis
Correctional Facility (previously filed as Exhibit 10.30 to the Company's Registration
Statement (Commission File Number 333-43935) (Filed January 9, 1998) and
incorporated herein by reference).
*10(ee) Exercise Agreement, dated as of December 11, 1997, by and between the Company
and CCA with respect to the Cimarron Correction Facility
*10(ff) Exercise Agreement, dated as of January 5, 1998, by and between the Company and
CCA with respect to the Davis Correctional Facility
10(gg) The Company's Non-Employee Trustees' Compensation Plan (Filed as Appendix A to
the Company's definitive Proxy Statement relating to the 1998 Annual Meeting of
Shareholders which will be filed within 120 days after the end of the Company's fiscal
year pursuant to Regulation 14A and incorporated herein by reference).
*10(hh) REIT Management Agreement, dated as of July 21, 1997, by and between the
Company and Prison Realty Management, Inc.
12 Statements re: computation of ratios (previously filed as Exhibit 12 to the Company's
Registration Statement on Form S-11 (Commission File Number 333-43935) (Filed
January 21, 1998) and incorporated herein by reference).
21 The Company has one wholly-owned subsidiary, Prison Realty Management, Inc., a
Tennessee corporation.
*23 Consent of Arthur Andersen LLP
24 Powers of Attorney (included on signature pages hereto).
</TABLE>
<PAGE> 1
EXHIBIT 3(b)
ARTICLES SUPPLEMENTARY
CCA PRISON REALTY TRUST
8% SERIES A CUMULATIVE PREFERRED SHARES
(PAR VALUE $.01 PER SHARE)
CCA Prison Realty Trust, a Maryland real estate investment trust (the
"Company"), hereby certifies to the State Department of Assessments and Taxation
of the State of Maryland that:
FIRST: Pursuant to authority granted to and vested in the Board of
Trustees of the Company (the "Board of Trustees") in accordance with Article
Third, Section 5 of the Declaration of Trust of the Company, as amended and
restated, including these Articles Supplementary (the "Declaration of Trust"),
the Board of Trustees adopted resolutions reclassifying 4,600,000 shares (the
"Shares") of Preferred Shares, as defined in the Declaration of Trust) as a
separate class of shares, 8% Series A Cumulative Preferred Shares, $.01 par
value per share (the "Series A Preferred Shares"), with the preferences,
conversions and other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications, and terms and conditions of
redemption set forth below. Upon any restatement of the Declaration of Trust,
the immediately following Article SECOND hereof shall become Section 5(A) of the
Declaration of Trust.
SECOND: 8% Series A Cumulative Preferred Shares. The terms of Series A
Preferred Shares, including the preferences, conversions or other rights, voting
powers, restrictions, limitations as to dividends and other distributions,
qualifications, or terms or conditions of redemption, as set by the Board of
Trustees are as follows:
SECTION 1. Designation and Amount; Fractional Shares; Par Value. There
shall be a class of Preferred Shares of the Company designated as "8% Series A
Cumulative Preferred Shares" and the number of shares constituting such series
shall be 4,600,000. The Series A Preferred Shares is issuable solely in whole
shares and shall entitle the holder thereof to exercise the voting rights, to
participate in the distributions and dividends and to have the same benefits as
all other holders of Series A Preferred Shares as set forth herein and in the
Declaration of Trust. The par value of each Series A Preferred Share shall be
$0.01.
SECTION 2. Maturity. The Series A Preferred Shares have no stated
maturity and will not be subject to any sinking fund or mandatory redemption.
SECTION 3. Rank. The Series A Preferred Shares will, with respect to
dividend rights and rights upon liquidation, dissolution or winding-up of the
Company, rank (i) senior to all classes or series of common shares, $0.01 par
value per share, of the Company (the "Common Shares"), and to all equity
securities ranking junior to the Series A Preferred Shares; (ii) on a parity
with all equity securities issued by the Company, the terms of which
specifically provide that such equity securities rank on a parity with the
Series A Preferred Shares with respect to dividend rights or rights upon
liquidation, dissolution or winding-up of the Company; and (iii) junior to all
existing and future
<PAGE> 2
indebtedness of the Company. The term "equity securities" does not include
convertible debt and securities which rank senior to the Series A Preferred
Shares prior to conversion.
SECTION 4. Dividends. Holders of the Series A Preferred Shares shall be
entitled to receive, when and as authorized and declared by the Board of
Trustees, out of funds legally available for the payment of dividends,
cumulative preferential cash dividends at the rate of eight percent (8%) per
annum of the Liquidation Preference, as hereinafter defined (which is equivalent
to a fixed annual rate of $2.00 per share). Such dividends shall be cumulative
from the date of original issuance and shall be payable quarterly in arrears on
the fifteenth day of January, April, July and October of each year (each, a
"Dividend Payment Date"), or, if not a business day, the next succeeding
business day. Dividends will accrue from the date of original issue to the first
Dividend Payment Date and thereafter from each Dividend Payment Date to the
subsequent Dividend Payment Date. It is expected that the first dividend will be
paid on April 15, 1998, and will be for less than a full quarter. Such dividend
and any dividend payable on the Series A Preferred Shares for any partial
dividend period will be computed on the basis of a 360-day year consisting of
twelve 30-day months. Dividends will be payable to holders of record as they
appear in the share records of the Company at the close of business on the
applicable record date, which shall be the last business day of March, June,
September and December, respectively or on such other date designated by the
Board of Trustees of the Company for the payment of dividends that is not more
than 30 nor less than 10 days prior to the applicable Dividend Payment Date
(each, a "Dividend Record Date"). The first Dividend Record Date for
determination of shareholders entitled to receive dividends on the Series A
Preferred Shares is expected to be March 31, 1998. The Series A Preferred Shares
will rank senior to the Company's Common Shares with respect to the payment of
dividends.
No dividends on Series A Preferred Shares shall be declared by the
Board of Trustees of the Company or paid or set apart for payment by the Company
at such time as the terms and provisions of any agreement to which the Company
is a party, including any agreement relating to its indebtedness, prohibits such
declaration, payment or setting apart for payment or provides that such
declaration, payment or setting apart for payment would constitute a breach
thereof or a default thereunder, or if such declaration or payment shall be
restricted or prohibited by law.
Notwithstanding the foregoing, dividends on the Series A Preferred
Shares will accrue whether or not the Company has earnings, whether or not there
are funds legally available for payment of such dividends and whether or not
such dividends are declared. The accrued but unpaid dividends on the Series A
Preferred Shares will not bear interest and holders of Series A Preferred Shares
will not be entitled to any distributions in excess of full cumulative
distributions described above.
Except as set forth in the next sentence, no dividends will be declared
or paid or set apart for payment on any capital shares of the Company or any
other series of Preferred Shares ranking, as to dividends, on a parity with or
junior to the Series A Preferred Shares (other than a distribution in shares of
the Company's Common Shares or in shares of any other class of shares ranking
junior to the Series A Preferred Shares as to dividends and upon liquidation)
for any period unless full
2
<PAGE> 3
cumulative dividends have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof is set apart for such
payment on the Series A Preferred Shares for all past dividend periods and the
then current dividend period. When dividends are not paid in full (or a sum
sufficient for such full payment is not so set apart) upon the Series A
Preferred Shares and the shares of any other series of Preferred Shares ranking
on a parity as to dividends with the Series A Preferred Shares, all dividends
declared upon the Series A Preferred Shares and any other series of Preferred
Shares ranking on a parity as to dividends with the Series A Preferred Shares
shall be declared pro rata so that the amount of dividends declared per share of
Series A Preferred Shares and such other series of Preferred Shares shall in all
cases bear to each other the same ratio that accrued and unpaid dividends per
share on the Series A Preferred Shares and such other series of Preferred Shares
(which shall not include any accrual in respect of unpaid dividends for prior
dividend periods if such Preferred Shares do not have a cumulative dividend)
bear to each other. No interest, or sum of money in lieu of interest, shall be
payable in respect of any dividend payment or payments on the Series A Preferred
Shares which may be in arrears.
Except as provided in the immediately preceding paragraph, unless full
cumulative dividends on the Series A Preferred Shares have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof is set apart for payment for all past dividend periods and the
then current dividend period, no dividends (other than in Common Shares or other
shares of the Company ranking junior to the Series A Preferred Shares as to
dividends and upon liquidation) shall be declared or paid or set aside for
payment nor shall any other distribution be declared or made upon the Common
Shares, or shares of the Company ranking junior to or on a parity with the
Series A Preferred Shares as to dividends or upon liquidation, nor shall any
Common Shares, or any other shares of the Company ranking junior to or on a
parity with the Series A Preferred Shares as to dividends or upon liquidation,
be redeemed, purchased or otherwise acquired for any consideration (or any
monies be paid to or made available for a sinking fund for the redemption of any
such shares) by the Company (except by conversion into or exchange for other
shares of the Company ranking junior to the Series A Preferred Shares as to
dividends and upon liquidation or redemption for the purpose of preserving the
Company's qualification as a REIT). Holders of Series A Preferred Shares shall
not be entitled to any dividend, whether payable in cash, property or shares, in
excess of full cumulative dividends on the Series A Preferred Shares as provided
above. Any dividend payment made on shares of the Series A Preferred Shares
shall first be credited against the earliest accrued but unpaid dividend due
with respect to such shares which remains payable.
SECTION 5. Liquidation Preference. Upon any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Company, the
holders of Series A Preferred Shares are entitled to be paid out of the assets
of the Company legally available for distribution to its shareholders, a
liquidation preference of $25 per share (the "Liquidation Preference"), plus an
amount equal to any accrued and unpaid dividends to the date of payment but
without interest, before any distribution of assets is made to holders of Common
Shares or any other class or series of shares of the Company that ranks junior
to the Series A Preferred Shares as to liquidation rights. In the event that,
upon any such voluntary or involuntary liquidation, dissolution or winding up,
the available assets of the Company are insufficient to pay the amount of the
liquidating distributions
3
<PAGE> 4
on all outstanding Series A Preferred Shares and the corresponding amounts
payable on all shares of other classes or series of Preferred Shares of the
Company ranking on a parity with the Series A Preferred Shares in the
distribution of assets, then the holders of shares of the Series A Preferred
Shares and all other such classes or Series A Preferred Shares shall share
ratably in any such distribution of assets in proportion to the full liquidating
distributions to which they would otherwise be respectively entitled.
Holders of Series A Preferred Shares will be entitled to written notice
of any such liquidation. After payment of the full amount of the liquidating
distributions to which they are entitled, the holders of Series A Preferred
Shares will have no right or claim to any of the remaining assets of the
Company. The consolidation or merger of the Company with or into any other
trust, corporation or entity or of any other corporation with or into the
Company, or the sale, lease or conveyance of all or substantially all of the
property or business of the Company, shall not be deemed to constitute a
liquidation, dissolution or winding up of the Company.
6. REDEMPTION. The Series A Preferred Shares are not redeemable prior
to January 30, 2003. However, in order to ensure that the Company will continue
to meet the share ownership requirements for qualification as a REIT for federal
income tax purposes, the Series A Preferred Shares will be subject to terms and
provisions of the Declaration of Trust, pursuant to which Series A Preferred
Shares owned by a shareholder in excess of the Ownership Limit will
automatically be held as Shares-in-Trust for the benefit of a Beneficiary named
by the Company. On and after January 30, 2003, the Company, at its option upon
not less than 30 nor more than 60 days' written notice, may redeem the Series A
Preferred Shares, in whole or in part, at any time or from time to time, for
cash at a redemption price of $25 per share, plus all accrued and unpaid
dividends thereon to the date fixed for redemption (except as provided below),
without interest. Holders of Series A Preferred Shares to be redeemed shall
surrender any certificates representing such Series A Preferred Shares at the
place designated in such notice and shall be entitled to the redemption price
and any accrued and unpaid dividends payable upon such redemption following such
surrender. If notice of redemption of any Series A Preferred Shares has been
given and if the funds necessary for such redemption have been set aside by the
Company in trust for the benefit of the holders of any Series A Preferred Shares
so called for redemption, then from and after the redemption date dividends will
cease to accrue on such Series A Preferred Shares, such Series A Preferred
Shares shall no longer be deemed outstanding and all rights of the holders of
such shares will terminate, except the right to receive the redemption price. If
less than all of the outstanding Series A Preferred Shares are to be redeemed,
the Series A Preferred Shares to be redeemed, shall be selected pro rata (as
nearly as may be practicable without creating fractional shares) or by any other
equitable method determined by the Company.
Unless full cumulative dividends on all Series A Preferred Shares shall
have been or contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof set apart for payment for all past dividend
periods and the then current dividend period, no Series A Preferred Shares shall
be redeemed unless all outstanding Series A Preferred Shares are simultaneously
redeemed and the Company shall not purchase or otherwise acquire directly or
4
<PAGE> 5
indirectly any Series A Preferred Shares (except by exchange for capital shares
of the Company ranking junior to the Series A Preferred Shares as to dividends
and upon liquidation); provided, however, that the foregoing shall not prevent
the transfer and holding by the Company of Shares-in-Trust in order to ensure
that the Company remains qualified as a REIT for federal income tax purposes or
the purchase or acquisition of Series A Preferred Shares pursuant to a purchase
or exchange offer made on the same terms to holders of all outstanding Series A
Preferred Shares. So long as no dividends are in arrears, the Company shall be
entitled at any time and from time to time to repurchase Series A Preferred
Shares in open-market transactions duly authorized by the Board of Trustees and
effected in compliance with applicable laws.
Notice of redemption will be given by publication in a newspaper of
general circulation in the City of New York, such publication to be made once a
week for two successive weeks commencing not less than 30 nor more than 60 days
prior to the redemption date. A similar notice will be mailed by the Company,
postage prepaid, not less than 30 nor more than 60 days prior to the redemption
date, addressed to the respective holders of record of the Series A Preferred
Shares to be redeemed at their respective addresses as they appear on the shares
transfer records of the Company. No failure to give such notice or any defect
thereto or in the mailing thereof shall affect the validity of the proceedings
for the redemption of any Series A Preferred Shares except as to the holder to
whom notice was defective or not given. Each notice shall state: (i) the
redemption date; (ii) the redemption price; (iii) the number of Series A
Preferred Shares to be redeemed; (iv) the place or places where the certificates
representing the Series A Preferred Shares are to be surrendered for payment of
the redemption price; and (v) that dividends on the shares to be redeemed will
cease to accrue on such redemption date. If less than all of the Series A
Preferred Shares held by any holder are to be redeemed, the notice mailed to
such holder shall also specify the number of Series A Preferred Shares held by
such holder to be redeemed.
Immediately prior to any redemption of Series A Preferred Shares, the
Company shall pay, in cash, any accumulated and unpaid dividends through the
redemption date. Except as provided above, the Company will make no payment or
allowance for unpaid dividends, whether or not in arrears, on Series A Preferred
Shares which are redeemed.
The Series A Preferred Shares have no stated maturity and will not be
subject to any sinking fund or mandatory redemption. However, in order to ensure
that the Company continues to meet the requirements for qualification as a REIT
for federal income tax purposes, Series A Preferred Shares owned by a
shareholder in excess of the Ownership Limit will automatically be held as
Shares-in-Trust for the benefit of a Beneficiary named by the Company. Such
Shares-in-Trust shall be redeemed in such proportion and in accordance with such
procedures as Series A Preferred Shares are being redeemed.
5
<PAGE> 6
SECTION 7. VOTING RIGHTS. Holders of the Series A Preferred Shares
will not have any voting rights, except as set forth below.
Whenever dividends on any Series A Preferred Shares shall be in arrears
for six or more quarterly periods (a "Preferred Dividend Default"), the holders
of such Series A Preferred Shares (voting together as a class with all other
series of Preferred Shares ranking on a parity with the Series A Preferred
Shares as to dividends or upon liquidation ("Parity Preferred") upon which like
voting rights have been conferred and are exercisable) will be entitled to vote
for the election of a total of two additional trustees of the Company (the
"Preferred Shares Trustees") at a special meeting called by the holders of
record of at least 20% of the Series A Preferred Shares and the holders of
record of at least 20% of shares of any series of Parity Preferred so in arrears
(unless such request is received less than 90 days before the date fixed for the
next annual or special meeting of the shareholders) or at the next annual
meeting of shareholders, and at such subsequent annual meeting until all
dividends accumulated on such Series A Preferred Shares for the past dividend
periods and the dividend for the then current dividend period shall have been
fully paid or declared and a sum sufficient for the payment thereof set aside
for payment. A quorum for any such meeting shall exist if at least a majority of
the outstanding Series A Preferred Shares and shares of Parity Preferred upon
which like voting rights have been conferred and are exercisable are represented
in person or by proxy at such meeting. Such Preferred Shares Trustees shall be
elected upon affirmative vote of a plurality of the Series A Preferred Shares
and such Parity Preferred present and voting in person or by proxy at a duly
called and held meeting at which a quorum is present. If and when all
accumulated dividends and the dividend for the then current dividend period on
the Series A Preferred Shares shall have been paid in full or set aside for
payment in full, the holders thereof shall be divested of the foregoing voting
rights (subject to revesting in the event of each and every Preferred Dividend
Default) and, if all accumulated dividends and the dividend for the then current
dividend period have been paid in full or set aside for payment in full on all
series of Parity Preferred upon which like voting rights have been conferred and
are exercisable, the term of office of each Preferred Shares Trustee so elected
shall immediately terminate. Any Preferred Shares Trustee may be removed at any
time with or without cause by, and shall not be removed otherwise than by the
vote of, the holders of record of a majority of the outstanding Series A
Preferred Shares and all series of Parity Preferred upon which like voting
rights have been conferred and are exercisable (voting together as a class). So
long as a Preferred Dividend Default shall continue, any vacancy in the office
of a Preferred Shares Trustee may be filled by written consent of the Preferred
Shares Trustees remaining in office, or if none remains in office, by a vote of
the holders of record of a majority of the outstanding Series A Preferred Shares
when they have the voting rights described above (voting together as a class
with all series of Parity Preferred upon which like voting rights have been
conferred and are exercisable). The Preferred Shares Trustees, shall each be
entitled to one vote per trustee on any matter.
So long as any Series A Preferred Shares remain outstanding, the
Company will not, without the affirmative vote or consent of the holders of at
least two-thirds of the Series A Preferred Shares outstanding at the time, given
in person or by proxy, either in writing or at a meeting (voting separately as a
class), (a) authorize or create, or increase the authorized or issued amount of,
any
6
<PAGE> 7
class or series of shares ranking prior to the Series A Preferred Shares with
respect to payment of dividends or the distribution of assets upon liquidation,
dissolution or winding up or reclassify any authorized shares of the Company
into such shares, or create, authorize or issue any obligation or security
convertible into or evidencing the right to purchase any such shares; or (b)
amend, alter or repeal the provisions of the Declaration of Trust or the
Articles Supplementary, whether by merger, consolidation or otherwise (an
"Event"), so as to materially and adversely affect any right, preference,
privilege or voting power of the Series A Preferred Shares or the holders
thereof; provided, however, with respect to the occurrence of any Event set
forth in (b) above, so long as the Series A Preferred Shares remains outstanding
with the terms thereof materially unchanged, the occurrence of any such Event
shall not be deemed to materially and adversely affect such rights, preferences,
privileges or voting power of holders of the Series A Preferred Shares and
provided further that (i) any increase in the amount of the authorized Preferred
Shares or the creation or issuance of any other series of Preferred Shares, or
(ii) any increase in the amount of authorized shares of such series, in each
case ranking on a parity with or junior to the Series A Preferred Shares with
respect to payment of dividends or the distribution of assets upon liquidation,
dissolution or winding up, shall not be deemed to materially and adversely
affect such rights, preferences, privileges or voting powers.
The foregoing voting provisions will not apply if, at or prior to the
time when the act with respect to which such vote would otherwise be required
shall be effected, all outstanding Series A Preferred Shares shall have been
redeemed or called for redemption upon proper notice and sufficient funds shall
have been deposited in trust to effect such redemption.
8. CONVERSION. The Series A Preferred Shares are not convertible into
or exchangeable for any other property or securities of the Company, except that
the Series A Preferred Shares may be held as Shares-in-Trust, in accordance with
the Declaration of Trust.
IN WITNESS WHEREOF, the Company has caused these presents to be signed
in its name and on its behalf by its President on January 27, 1998.
CCA PRISON REALTY TRUST
/s/ D. Robert Crants, III (seal)
-------------------------------------
D. Robert Crants, III, President
Attest:
/s/ Vida H. Carroll
- ------------------------------
Vida H. Carroll, Secretary
7
<PAGE> 8
THE UNDERSIGNED, President of CCA Prison Realty Trust, a Maryland real
estate investment trust, who executed on behalf of the Company Articles
Supplementary of which this Certificate is made a part, hereby acknowledges the
foregoing Articles Supplementary to be the act of said real estate investment
trust and hereby certifies that, to the best of his knowledge, information, and
belief, the matters and facts set forth herein with respect to the authorization
and approval thereof are true in all material respects under the penalties of
perjury.
/s/ D. Robert Crants, III
-------------------------------------
D. Robert Crants, III
8
<PAGE> 1
EXHIBIT 10(ee)
EXERCISE AGREEMENT
THIS EXERCISE AGREEMENT is entered into effective as of December 11,
1997, by and between CCA PRISON REALTY TRUST, a Maryland real estate investment
trust (the "Company") and CORRECTIONS CORPORATION OF AMERICA, a Tennessee
corporation ("CCA").
R E C I T A L S:
WHEREAS, the Company and CCA entered into a Right to Purchase Agreement
dated as of July 7, 1997 whereby, among other things, CCA granted the Company an
option to acquire any Future Facility under terms and conditions set forth
therein (the "Right to Purchase Agreement"); and
WHEREAS, CCA owns a correctional or detention facility in Cushing,
Payne County, Oklahoma, as described on Exhibit A (the "Facility"); and
WHEREAS, the Company desires to exercise its option to acquire the
Facility; and
WHEREAS, the Right to Purchase Agreement provides that Future
Facilities will be acquired on terms and conditions generally consistent with
the terms and conditions of the Company's acquisition of certain other
facilities from CCA, one of which facilities was a certain facility in
Youngstown, Ohio, acquired by the Company pursuant to an Option Agreement dated
July 7, 1997 (the "Youngstown Option Agreement") which CCA and the Company have
agreed to partially incorporate by reference for the purpose of setting forth
certain of the terms and conditions of the Company's acquisition of the
Facility;
NOW, THEREFORE, for and in consideration of the premises, and other
good and valuable considerations, the receipt and sufficiency of which are
hereby acknowledged, the Company and CCA hereby agree as follows:
1. Exercise of Option. The Company hereby exercises its option to
acquire the Facility, pursuant to the terms of Paragraph 3 of the
Right to Purchase Agreement.
2. Terms. The purchase price for the Facility is $37,678,508.00.
Additionally, the Company shall reimburse CCA for certain costs
and expenses related to the Facility in the amount of
$618,217.00.
The Facility will be leased to CCA pursuant to the Master
Agreement to Lease between the Company and CCA, dated July 18,
1997 on the following terms:
Term - Ten (10) years with three (3) five (5) year renewals.
Rent - $4,212,640.00 per year, subject to adjustment to fair
market value for the first, second and third extended terms.
<PAGE> 2
3. Additional Terms. (i) The conveyance of the Facility shall not
include the rights of CCA under (a) the Monitor Agreement dated
August 29, 1995 with Norris & Associates or (b) the Marketing
Services Agreement dated August 29, 1995 with Capitol
Consultants. Additionally, the Company acknowledges that the
Cushing Municipal Authority ("Authority") shall be the sole
provider of the following utility services for the Facility:
electric, water, sewer and gas provided the amount charged by the
Authority for gas shall not exceed the best applicable rate
published by Arkansas Louisiana Gas Company for customers of
similar size and usage; and provided further the amount charged
by the Authority for electric, water and sewer services shall not
be greater than the rates charged by the Authority to other
commercial customers of similar size and usage. Further, it is
specifically acknowledged and agreed by the parties that CCA does
not own, and is not conveying to the Company, any rights to the
inmate pay telephone service agreements relating to the Facility,
or to any renewals or replacements thereof. The Company
acknowledges that the Authority and the vendor under the inmate
pay telephone service agreement with the Authority may have
access to the inmate pay telephone equipment in the Facility
during normal business hours upon reasonable notice to operate,
maintain and repair the equipment.
(ii) For convenience of reference, CCA and the Company agree
that the Company's acquisition of the Facility shall be
undertaken in accordance with the following provisions of the
Youngstown Option Agreement: Articles IV, V, VI, VII, VIII, IX,
X, XI and to the extent applicable, the definitions set forth in
Article I, all of which are incorporated herein by reference and
made a part hereof. The Effective Date of this Exercise Agreement
shall be the date first written above.
2
<PAGE> 3
IN WITNESS WHEREOF, the Company and CCA have executed this Exercise
Agreement as of the day and date first set forth above.
CCA PRISON REALTY TRUST, a Maryland real
estate investment trust
By: /S/ Doctor R. Crants
---------------------------------
Title: President
---------------------------------
CORRECTIONS CORPORATION OF AMERICA,
a Tennessee corporation
By: Darrell K. Massengale
---------------------------------
Title: Vice President, Finance
---------------------------------
3
<PAGE> 4
EXHIBIT A
A tract, piece or parcel of land in the Southwest Quarter (SW/4) of
Section Sixteen (16), Township Seventeen (17) North, Range Five (5) East of the
Indian Meridian, Payne County, State of Oklahoma, more particularly described as
follows: Beginning at a 40D nail for the SW corner of said SW/4; thence N
89(degree)17'22" E, along the South line of said SW/4 a distance of 2595.89 feet
to a 1/2 inch iron pin at the SE corner of said SW/4; thence N 01(degree)23'02"
W a distance of 986.67 feet to a 1/2 inch iron pin at the NE corner of the S1/2
of the NE/4, SE/4, SW/4; thence S 89(degree)25'49" W a distance of 646.01 feet
to a 1/2 inch iron pin at the NW corner of S/2, NE/4, SE/4, SW/4; thence N
01(degree)12'40" W a distance of 329.41 feet to a 1/2 inch iron pin at the NE
corner of the W/2, SE/4, SW/4; thence S 89(degree)28'39" W a distance of 645.02
feet to a 1/2 inch iron pin at the NE corner of the SW/4, SW/4; thence S
81(degree)44'00" W a distance of 1301.39 feet to a 40D nail on the West line of
said SW/4; thence S 00(degree)41'45" E, along the West line of said SW/4 a
distance of 1148.57 feet to the point or place of beginning, a tract to contain
70.926 acres more or less.
4
<PAGE> 1
Exhibit 10(ff)
EXERCISE AGREEMENT
(Holdenville)
THIS EXERCISE AGREEMENT is entered into effective as of January 5,
1998, by and between CCA PRISON REALTY TRUST, a Maryland real estate investment
trust (the "Company") and CORRECTIONS CORPORATION OF AMERICA, a Tennessee
corporation ("CCA").
R E C I T A L S:
WHEREAS, the Company and CCA entered into a Right to Purchase Agreement
dated as of July 7, 1997 whereby, among other things, CCA granted the Company an
option to acquire any Future Facility under terms and conditions set forth
therein (the "Right to Purchase Agreement"); and
WHEREAS, CCA owns a correctional facility in Holdenville, Hughes
County, Oklahoma, on real estate described on Exhibit A, attached hereto (the
"Facility"); and
WHEREAS, the Company desires to exercise its option to acquire the
Facility; and
WHEREAS, the Right to Purchase Agreement provides that Future
Facilities will be acquired on terms and conditions generally consistent with
the terms and conditions of the Company's acquisition of certain other
facilities from CCA, one of which facilities was a certain facility in
Youngstown, Ohio, acquired by the Company pursuant to an Option Agreement dated
July 7, 1997 (the "Youngstown Option Agreement") which CCA and the Company have
agreed to partially incorporate by reference for the purpose of setting forth
certain of the terms and conditions of the Company's acquisition of the
Facility;
NOW, THEREFORE, for and in consideration of the premises, and other
good and valuable considerations, the receipt and sufficiency of which are
hereby acknowledged, the Company and CCA hereby agree as follows:
1. Exercise of Option. The Company hereby exercises its option to
acquire the Facility, pursuant to the terms of Paragraph 3 of the
Right to Purchase Agreement. The Facility will be transferred
subject to that certain Lease and Operation Agreement between the
Holdenville Industrial Authority (the "Authority") and the
Oklahoma Department of Corrections, dated as of July 1, 1996 (the
"L & O Agreement").
2. Terms. The purchase price for the Facility is $36,132,118.00:
The Facility will be leased to CCA pursuant to the Master
Agreement to Lease between the Company and CCA, dated July 18,
1997 on the following terms:
Term - Ten (10) years with three (3) five (5) year renewals
Rent - $3,974.533.00 per year, subject to adjustment
to fair market value for the first, second and third
extended terms.
The lease will be subject to the L & O Agreement.
<PAGE> 2
3. Additional Terms. (i) The conveyance of the Facility shall not
include the rights of CCA under (a) the Monitor Agreement dated
August 29, 1995 with Norris & Associates or (b) the Marketing
Services Agreement dated August 29, 1995 with Capitol
Consultants. Further, it is specifically acknowledged and agreed
by the parties that CCA does not own, and is not conveying to the
Company, any rights to the inmate pay telephone service
agreements relating to the Facility, or to any renewals or
replacements thereof. The Company acknowledges that the Authority
and the vendor under the inmate pay telephone service agreement
with the Authority may have access to the inmate pay telephone
equipment in the Facility during normal business hours upon
reasonable notice to operate, maintain and repair the equipment.
(ii) For convenience of reference, CCA and the Company agree
that the Company's acquisition of the Facility shall be
undertaken in accordance with the following provisions of the
Youngstown Option Agreement: Articles IV, V, VI, VII, VIII, IX,
X, XI and to the extent applicable, the definitions set forth in
Article I, all of which are incorporated herein by reference and
made a part hereof. The Effective Date of this Exercise Agreement
shall be the date first written above.
2
<PAGE> 3
IN WITNESS WHEREOF, the Company and CCA have executed this Exercise
Agreement as of the day and date first set forth above.
CCA PRISON REALTY TRUST, a Maryland real
estate investment trust
By: /S/ Doctor R. Crants
---------------------------------
Title: President
---------------------------------
CORRECTIONS CORPORATION OF AMERICA,
a Tennessee corporation
By: /S/ Darrell K. Massengale
---------------------------------
Title: Vice President, Finance
---------------------------------
3
<PAGE> 4
EXHIBIT A
A tract of land lying in the Southeast Quarter (SE/4) of Section 10,
Township 7 North, Range 8 East, Indian Meridian, Hughes County, Oklahoma,
further described as a point of beginning at a point along the South line of
said SE/4, S 89(degree)20'02" W, 469.25 feet from the Southeast corner of said
SE/4; thence along the South line of said SE/4, S 89(degree)20'02" W, 1030.75
feet; thence N 00(degree)57'37" W, 2323.20 feet and parallel to the East line of
said SE/4; thence N 89(degree)20'02" E, 1500.00 feet and parallel to the South
line of said SE/4; thence along said East line of the SE/4 S 00(degree)57'37" E,
1859.20 feet; thence S 89(degree)20'02" W, 469.25 feet; thence S
00(degree)57'37" E, 464.00 feet to the Point of Beginning, containing 75 acres,
more or less.
4
<PAGE> 1
Exhibit 10(hh)
REIT MANAGEMENT AGREEMENT
THIS REIT MANAGEMENT AGREEMENT (the "Agreement") is made and entered
into as of the 21st day of July, 1997, by and between CCA Prison Realty Trust, a
Maryland real estate investment trust (the "Company"), and Prison Realty
Management, Inc., a Tennessee corporation (the "REIT Manager").
RECITALS:
A. The Company is a real estate investment trust duly organized and
validly existing under the laws of the State of Maryland. It is intended to
qualify as a real estate investment trust under Sections 856, et seq., of the
Internal Revenue Code of 1986, as amended (the "Code").
B. The REIT Manager is a corporation duly organized and validly
existing under the laws of the State of Tennessee. It is a wholly owned
subsidiary of the Company and a "qualified REIT subsidiary" under Section 856(i)
of the Code.
C. The Company and the REIT Manager desire that the REIT Manager
undertake the duties and responsibilities hereinafter set forth, on behalf of
and subject to the supervision of the Board of Trustees of the Company
(the "Board").
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the Company and the REIT Manager agree as follows:
1. Duties of REIT Manager.
(a) General. The REIT Manager shall perform each of the duties
set forth in this Agreement and shall have the authority to take all actions and
to execute all documents and instruments that it deems necessary or advisable in
connection with the management of the Company and the fulfillment of its duties
as set forth herein, subject in each matter to the supervision of the Board and
the investment policies of the Company, and, as appropriate, to the prior
approval of the Board.
(b) Services. Subject to supervision by the Board, the REIT Manager
will provide acquisition, development and disposition services, including the
following:
(i) Investigation and selection of possible acquisitions and
developments, property analysis, market and economic surveys, on-site physical
inspections, review and projection of income and operating expenses and, when
desired, supervising and negotiating the arrangement of financing;
(ii) Conducting negotiations with real estate brokers, owners of
property and their agents, investment bankers and owners of privately and
publicly held real estate companies.
<PAGE> 2
(iii) Engaging and supervising on behalf of the Company,
independent contractors which provide real estate brokerage, investment banking
and leasing services, mortgage brokerage and other financial services and such
other services as may be required relating to the properties of the Company (the
"Company Properties"); provided, however, that the REIT Manager shall not share
in any brokerage, investment banking or similar fees paid to any person engaged
by the REIT Manager to perform such services for the Company; and
(iv) Negotiating on behalf of the Company for the sale,
exchange or other disposition of any Company Properties.
(c) General Administrative Duties. The REIT Manager shall perform,
or supervise the performance of, the necessary administrative functions in the
day-to-day management of the Company and its operations, including, without
limitation, internal and external financial reporting, property accounting,
shareholder relations, supervision of stock registrar and transfer services and
other necessary services, all in a manner consistent with the Company's current
practice, subject to changes approved by the Board.
(d) Real Estate Investment Advice. The REIT Manager shall advise the
Company with respect to policy decisions to be made by the Board, shall
investigate and evaluate investment opportunities consistent with the real
estate investment policies and the objectives of the Company and recommend them
to the Board, and shall provide research, economic and statistical data in
connection with the Company's real estate investments and policies.
(e) Short-Term Investments. The REIT Manager may invest and reinvest
any monies and securities of the Company in short-term investments pending
investment in Company Properties. Unless a specific new policy is developed by
the REIT Manager and approved by the Board, the REIT Manager may invest and
reinvest any monies and securities of the Company, pending investment in Company
Properties, in accordance with current practice and policies developed by the
REIT Manager and approved by the Company.
(f) Agency. The REIT Manager shall act as agent of the Company in
making, acquiring, financing and disposing of investments, disbursing and
collecting the Company's funds, paying the debts and fulfilling the obligations
of the Company, supervising the performance of the managers of the Company
Properties and handling, prosecuting and settling any claims or against the
Company, the Board, holders of the Company's securities or the Company's
representatives or properties.
(g) Office and Personnel. The REIT Manager shall maintain on behalf
of the Company such office space, equipment and personnel, including officers
and employees of the REIT Manager of its Affiliates, as it deems necessary or
advisable in connection with the management and operations of the Company and
the fulfillment of the REIT Manager's duties as set forth herein.
(h) Bank Accounts. The REIT Manager may establish one or more bank
accounts in the name of the Company or its own name and may deposit into and
disburse from such
<PAGE> 3
accounts any monies on behalf of the Company, and the REIT Manager shall as
requested by the Board render appropriate accountings to the Board of such
deposits and disbursements.
(i) Books And Records. The REIT Manager shall maintain all
accounting and reporting systems, books and records of the Company, including
books of account and records relating to services performed by the REIT Manager,
in form and quality at least equivalent to the Company's current practice, and
shall make such books and records accessible for inspection by the Board at any
time during ordinary business hours.
(j) Reports, Etc. The REIT Manager shall prepare, or cause to be
prepared, all reports of the Company required under the Securities Exchange Act
of 1934, as amended, and other communications to the holders of the Company's
securities, including, without limitation, proxy solicitation materials, and all
tax, returns and any other reports or other materials to be filed with any
governmental body or agency, and shall prepare, or cause to be prepared, all
materials and data necessary to complete such reports and other materials
including, without limitation, an annual audit of the Company's books of
account.
(k) Financing And Securities Issuances. The REIT Manager shall
provide services to the Company in connection with negotiations by the Company
with investment banking firms, securities brokers or dealers and other
institutions or investors in connection with the sale of securities of the
Company and the securing of loans for the Company, provided, however, that the
REIT Manager shall not share in any fees paid by the Company to third parties
for such services.
(l) Additional Services. The REIT Manager shall perform such
additional services as from time to time may be requested by the Board and
agreed to by the REIT Manager, provided, however, that nothing herein shall
require the REIT Manager to agree to any such request or to perform any
additional services to which it has not previously agreed.
(m) Reit Qualifications. In the performance of its duties and
responsibilities hereunder, the REIT Manager shall refrain from any action (i)
which, in its judgment or in the judgment of the Board, would adversely affect
the qualification of the Company as a real estate investment trust under the
Code, (ii) which would violate any law, rule or regulation of any governmental
body or agency having jurisdiction over the Company or its securities, the
violation of which could have a material adverse effect on the Company or (iii)
which would otherwise not be permitted by the Declaration of Trust of the
Company (the "Declaration of Trust").
<PAGE> 4
2. Compensation.
(a) Management Fee. The Company shall pay to the REIT Manager no
later then the tenth (10th) day following the first (1st) day of each calendar
quarter, a management fee equal to the sum of the following plus three percent
(3%): (i) estimated salaries and wages paid to be paid to each of the REIT
Manager's employees for the calendar quarter ; (ii) estimated expenses of the
Company related to office rent, depreciation and amortization, and all other
expenses reasonably related to the operation of the REIT Manager in performing
services for the Company. If the actual salaries and wages and expenses for the
calendar quarter differ from the estimated payment previously made to the REIT
Manager, there shall be a corresponding adjustment made to the management fee
payable for the next quarter following the quarter in which the amount of the
adjustment is determined.
(b) Payment for Additional Services. If the Board shall request the
REIT Manager to render services to the Company other than those required to be
rendered by the REIT Manager hereunder, such additional services, if performed,
shall be compensated separately on terms to be agreed upon from time to time
between the REIT Manager and the Company.
(c) Reimbursable Expenses. If the REIT Manager pays on behalf of the
Company interest expense, regulatory filing fees, legal and accounting fees or
other similar expenses, it shall be entitled to reimbursement by the Company
therefor.
3. Termination; Term.
(a) Termination. Notwithstanding any other provision to the
contrary, this Agreement may be terminated with or without cause by either party
upon 30 days' written notice to the other. In the event of termination of this
Agreement, the REIT Manager will cooperate with the Company and take all
reasonable steps requested to assist the Board in making an orderly transition
of the REIT management function.
(b) Term. This Agreement shall continue in force for an initial term
beginning on the date hereof and ending on December 31, 2002, and shall be
renewable upon agreement of the Company and the REIT Manager annually
thereafter.
4. Miscellaneous Provisions.
(a) Entire Agreement. This Agreement constitutes te entire agreement
between the parties with respect to the subject matter hereof. Any modification
or amendment of this Agreement shall be in writing executed by each of the
parties.
(b) Assignment. This Agreement may not be assigned by either party
except with the written consent of the other.
(c) Severability. If any term or provision of this Agreement or the
application thereof to any person or circumstance shall, to any extent, be
invalid or unenforceable, the remainder
<PAGE> 5
of this Agreement, or the application of that term or provision to persons or
circumstance other than those as to which is held invalid or unenforceable,
shall not be affected thereby, and each term provision of this Agreement shall
be valid and be enforced to the fullest extent permitted by law.
(d) Notices. Any notices and other communications to be given by any
party hereunder shall be in writing delivered at the address of the respective
party set forth on the signature page hereof, or at such other address as a
party shall have specified to the other party in writing as the address for
notices hereunder. Any such notice or other communication shall be deemed to
have been given when personally delivered or one business day after being
forwarded by overnight courier or five days after being sent by registered or
certified United States mail, postage prepaid.
(e) Headings. The section headings used herein have been inserted
for convenience of reference only and shall not be considered in interpreting
this Agreement.
(f) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Tennessee, without giving
effect to the principles of conflict of laws thereof.
(g) Declaration of Trust to Govern. To the extent that any
provision in this Agreement is inconsistent with or contradicts a provision in
the Declaration of Trust, as the same may be amended and supplemented from time
to time, the Declaration of Trust shall govern and such provision of this
Agreement shall be deemed to have been reformed to be consistent with the
Declaration of Trust.
(h) Counterparts. This Agreement may be executed in any number
of counterparts and by each of the parties hereto on separate counterparts; all
such counterparts shall together constitute but one and the same instrument.
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<PAGE> 6
IN WITNESS WHEREOF, the Company and the REIT Manager have executed this
Agreement as of the day and year first above written.
COMPANY:
CCA PRISON REALTY TRUST
By: /s/ D. Robert Crants, III
-----------------------------------
Its: President
-----------------------------------
REIT MANAGER:
PRISON REALTY MANAGEMENT, INC.
By: /s/ Vida H. Carroll
-----------------------------------
Its: Secretary
-----------------------------------
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Annual Report on Form 10-K of CCA Prison Realty Trust,
into the Company's previously filed Registration Statement File Numbers
333-31743 and 333-31711.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
March 12, 1998
