<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 15, 1998
REGISTRATION NO. 333-65017
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT
NO. 3 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
PRISON REALTY CORPORATION
(SEE EXPLANATORY NOTE IMMEDIATELY FOLLOWING THIS FACING PAGE)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS ARTICLES OF INCORPORATION)
MARYLAND
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
6798
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
WILL SUCCEED TO 62-1689525
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
10 BURTON HILLS BOULEVARD
NASHVILLE, TENNESSEE 37215
(615) 263-0200
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES OF REGISTRANT)
DOCTOR R. CRANTS
CHIEF EXECUTIVE OFFICER
10 BURTON HILLS BOULEVARD
NASHVILLE, TENNESSEE 37215
(615) 263-0200
(NAME AND ADDRESS OF AGENT FOR SERVICE FOR REGISTRANT)
---------------------
COPIES TO:
ELIZABETH E. MOORE, ESQ.
STOKES & BARTHOLOMEW, P.A.
SUNTRUST CENTER
NASHVILLE, TENNESSEE 37219
(615) 259-1450/FAX (615) 259-1470
F. MITCHELL WALKER, JR., ESQ.
BASS, BERRY & SIMS PLC
FIRST AMERICAN CENTER
NASHVILLE, TENNESSEE 37238
(615) 742-6200/FAX (615) 742-6298
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement and the
effectiveness of the Merger described in the Prospectus included herewith.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE.
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EXPLANATORY NOTE
This Registration Statement on Form S-4 (the "Registration Statement")
relates to a business combination to be effected pursuant to an Amended and
Restated Agreement and Plan of Merger dated as of September 29, 1998, by and
among Corrections Corporation of America, CCA Prison Realty Trust and Prison
Realty Corporation (the "Merger Agreement"). This Merger Agreement provides for
a business combination in which Corrections Corporation of America and CCA
Prison Realty Trust will each merge into Prison Realty Corporation, a newly
formed Maryland corporation. This Registration Statement constitutes the
Registration Statement of Prison Realty Corporation.
<PAGE> 3
CCA PRISON REALTY TRUST CORRECTIONS CORPORATION OF AMERICA
(PRISON REALTY TRUST LOGO) (CCA/CORRECTIONS CORPORATION OF AMERICA LOGO)
MERGER PROPOSED -- YOUR VOTE IS VERY IMPORTANT
The Board of Trustees of CCA Prison Realty Trust ("Prison Realty") and the Board
of Directors of Corrections Corporation of America ("CCA") have approved a
combination of the two companies which will be accomplished by merging both
Prison Realty and CCA into a newly formed Maryland corporation, Prison Realty
Corporation ("New Prison Realty"). New Prison Realty intends to operate so as to
qualify as a real estate investment trust, or REIT, for federal income tax
purposes and will be the largest REIT focusing on the ownership of correctional
and detention facilities. Following the merger transactions, New Prison Realty
is expected to deliver a unique combination of dividends and growth to
stockholders while benefitting from the corporate tax advantages of operating as
a REIT.
THE MATERIAL RISKS ASSOCIATED WITH THE MERGER TRANSACTIONS ARE DISCUSSED UNDER
THE HEADING "MATERIAL RISK FACTORS" BEGINNING ON PAGE 22 OF THE ATTACHED JOINT
PROXY STATEMENT-PROSPECTUS.
As consideration for the merger, CCA shareholders will obtain the right to
receive 0.875 share of New Prison Realty common stock in exchange for each share
of CCA common stock they own. Holders of Prison Realty common shares will
receive 1.0 share of New Prison Realty common stock in exchange for each Prison
Realty common share they own. Holders of Prison Realty Series A Preferred Shares
will receive 1.0 share of New Prison Realty Series A Preferred Stock in exchange
for each Prison Realty Series A Preferred Share they own. The merger will be
tax-free to both Prison Realty shareholders and CCA shareholders.
After completion of the merger transactions, current CCA shareholders will own
approximately 80%, and current Prison Realty shareholders will own approximately
20%, of the shares of New Prison Realty common stock then outstanding. The
market value of the shares of New Prison Realty common stock to be issued to
shareholders of CCA as consideration for the merger, based on the closing price
of Prison Realty's common shares on October 14, 1998, is approximately $1.4
billion. Based on this price, the market value of the shares of New Prison
Realty common stock to be issued as consideration for the merger to the common
shareholders of Prison Realty is approximately $419.7 million. The exchange
ratio is fixed and will not be changed prior to the merger transactions.
The merger transactions cannot be completed unless you and the other
shareholders approve them.
WHETHER OR NOT YOU PLAN TO ATTEND THE PRISON REALTY SPECIAL MEETING OR THE CCA
SPECIAL MEETING, PLEASE COMPLETE, SIGN, DATE AND MAIL THE ENCLOSED PROXY CARD.
IF YOU SIGN, DATE AND MAIL YOUR PROXY CARD WITHOUT INDICATING HOW YOU WANT TO
VOTE, YOUR PROXY WILL BE COUNTED AS A VOTE IN FAVOR OF THE MERGER TRANSACTIONS.
IF YOU FAIL TO EXECUTE AND RETURN YOUR PROXY CARD OR TO VOTE IN PERSON AT YOUR
SPECIAL MEETING, OR IF YOU ABSTAIN, THE EFFECT WILL BE A VOTE AGAINST THE MERGER
TRANSACTIONS.
Additional information regarding the special meetings is as follows:
FOR CCA SHAREHOLDERS:
Tuesday, December 1, 1998
10:00 a.m., local time
Loews Vanderbilt Plaza Hotel
2100 West End Avenue
Nashville, Tennessee
Record Date: Wednesday, October 14, 1998
FOR PRISON REALTY SHAREHOLDERS:
Thursday, December 3, 1998
10:00 a.m., local time
Loews Vanderbilt Plaza Hotel
2100 West End Avenue
Nashville, Tennessee
Record Date: Wednesday, October 14, 1998
The attached Joint Proxy Statement-Prospectus provides additional information
about the merger transactions. Please read this entire document carefully. Pages
162 and 163 of the Joint Proxy Statement-Prospectus explain how you may obtain
information about CCA and Prison Realty from documents that previously have been
filed with the Securities and Exchange Commission.
We strongly support the merger transactions between CCA and Prison Realty and
join with the other members of our Boards of Directors and Trustees in
enthusiastically recommending that you vote in favor of the merger transactions.
<TABLE>
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/s/ J. Michael Quinlan /s/ Doctor R. Crants
- ------------------------------------------------------ ------------------------------------------------------
J. Michael Quinlan Doctor R. Crants
Chief Executive Officer Chairman, Chief Executive Officer and President
CCA Prison Realty Trust Corrections Corporation of America
</TABLE>
THE SECURITIES TO BE ISSUED IN CONNECTION WITH THE MERGER TRANSACTIONS HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR BY ANY
STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
JOINT PROXY STATEMENT-PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE> 4
CORRECTIONS CORPORATION OF AMERICA
10 Burton Hills Boulevard
Nashville, Tennessee 37215
NOTICE OF A SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON TUESDAY, DECEMBER 1, 1998
Notice is hereby given that a special meeting of the shareholders of
Corrections Corporation of America, a Tennessee corporation ("CCA"), will be
held at 10:00 a.m., local time, on Tuesday, December 1, 1998, at the Loews
Vanderbilt Plaza Hotel, 2100 West End Avenue, Nashville, Tennessee, for the
following purposes:
(1) To consider and act upon a proposal to approve the merger
transactions between CCA and CCA Prison Realty Trust, a Maryland real
estate investment trust ("Prison Realty"), in which CCA will be merged into
a newly formed Maryland corporation, Prison Realty Corporation, with Prison
Realty Corporation as the surviving company, and then Prison Realty will be
merged into Prison Realty Corporation, with Prison Realty Corporation as
the surviving company ("New Prison Realty"), and the transactions related
thereto. As part of the merger, each outstanding share of CCA common stock
will be converted into the right to receive 0.875 share of common stock of
New Prison Realty. In addition, Prison Realty common shareholders will
receive 1.0 share of common stock of New Prison Realty for each outstanding
Prison Realty common share held by them, and Prison Realty Series A
Preferred shareholders will receive 1.0 share of Series A Preferred Stock
of New Prison Realty for each outstanding Prison Realty Series A Preferred
Share held by them. Immediately prior to the merger, CCA's non-real estate
assets will be transferred to certain affiliated management companies.
(2) To consider and act upon such other business as may properly come
before the special meeting and any adjournment thereof, in the event the
special meeting is postponed or adjourned for any reason.
CCA has fixed the close of business on Wednesday, October 14, 1998, as the
record date for determination of shareholders entitled to notice of and to vote
at the special meeting and at any adjournment thereof, in the event the special
meeting is adjourned or postponed for any reason. Only shareholders of record of
the common stock of CCA at the close of business on that date will be entitled
to notice of and to vote at the special meeting and at any adjournment thereof,
in the event the special meeting is adjourned or postponed for any reason.
The Board of Directors of CCA recommends that you vote "FOR" the merger
transactions.
Your vote is important. Approval of the merger transactions requires the
affirmative vote of a majority of the outstanding shares of CCA common stock
entitled to vote at the special meeting. If you fail to return a properly
executed proxy or to vote in person at the special meeting, or if you abstain,
the effect will be a vote against the merger transactions.
Your attention is directed to the Joint Proxy Statement-Prospectus
accompanying this Notice of Special Meeting for more complete information
regarding the matters to be presented and acted upon at the special meeting.
By Order of the Board of Directors,
/s/ Darrell K. Massengale
Darrell K. Massengale, Secretary
October 15, 1998
Nashville, Tennessee
<PAGE> 5
CCA PRISON REALTY TRUST
10 Burton Hills Boulevard, Suite 100
Nashville, Tennessee 37215
NOTICE OF A SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON THURSDAY, DECEMBER 3, 1998
Notice is hereby given that a special meeting of the shareholders of CCA
Prison Realty Trust, a Maryland real estate investment trust ("Prison Realty"),
will be held at 10:00 a.m., local time, on Thursday, December 3, 1998, at the
Loews Vanderbilt Plaza Hotel, 2100 West End Avenue, Nashville, Tennessee, for
the following purposes:
(1) To consider and act upon a proposal to approve the merger
transactions between Prison Realty and Corrections Corporation of America,
a Tennessee corporation ("CCA"), in which CCA will be merged into a newly
formed Maryland corporation, Prison Realty Corporation, with Prison Realty
Corporation as the surviving company, and then Prison Realty will be merged
into Prison Realty Corporation, with Prison Realty Corporation as the
surviving company ("New Prison Realty"), and the transactions related
thereto. As part of the merger, each outstanding share of CCA common stock
will be converted into the right to receive 0.875 share of common stock of
New Prison Realty. In addition, Prison Realty common shareholders will
receive 1.0 share of common stock of New Prison Realty for each outstanding
Prison Realty common share held by them, and Prison Realty Series A
Preferred shareholders will receive 1.0 share of Series A Preferred Stock
of New Prison Realty for each outstanding Prison Realty Series A Preferred
Share held by them.
(2) To consider and act upon such other business as may properly come
before the special meeting and any adjournment thereof, in the event the
special meeting is adjourned or postponed for any reason.
Prison Realty has set the close of business on Wednesday, October 14, 1998,
as the record date for determination of shareholders entitled to notice of and
to vote at the special meeting and at any adjournment thereof, in the event the
special meeting is adjourned or postponed for any reason. Only shareholders of
record of Prison Realty's common shares at the close of business on that date
will be entitled to vote at the special meeting and at any adjournment thereof,
in the event the special meeting is adjourned or postponed for any reason.
The Board of Trustees of Prison Realty recommends that you vote "FOR" the
merger transactions.
Your vote is important. Approval of the merger transactions requires the
affirmative vote of two-thirds of the outstanding common shares of Prison Realty
entitled to vote at the special meeting. If you fail to return a properly
executed proxy or to vote in person at the special meeting, or if you abstain,
the effect will be a vote against the merger transactions.
Your attention is directed to the Joint Proxy Statement-Prospectus
accompanying this Notice of Special Meeting for more complete information
regarding the matters to be presented and acted upon at the special meeting.
By Order of the Board of Trustees,
/s/ Vida H. Carroll
Vida H. Carroll, Secretary
October 15, 1998
Nashville, Tennessee
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED OCTOBER 15, 1998
CCA PRISON REALTY TRUST CORRECTIONS CORPORATION OF AMERICA
This Joint Proxy Statement-Prospectus is furnished in connection with the
solicitation of proxies by the Board of Directors of Corrections Corporation of
America, a Tennessee corporation ("CCA"), and the Board of Trustees of CCA
Prison Realty Trust, a Maryland real estate investment trust ("Prison Realty"),
for use in connection with a special meeting of the shareholders of CCA and a
special meeting of the shareholders of Prison Realty, or any adjournments
thereof, in the event either of the special meetings is adjourned or postponed
for any reason. The CCA special shareholders' meeting will be held on Tuesday,
December 1, 1998 and the Prison Realty special shareholders' meeting will be
held on Thursday, December 3, 1998. At the special meetings, the common
shareholders of CCA and Prison Realty will consider and vote upon a proposal to
approve the merger transactions described herein in which CCA and Prison Realty
will be merged into a newly formed Maryland corporation, Prison Realty
Corporation ("New Prison Realty"), and the related transactions. Like Prison
Realty, New Prison Realty intends to operate so as to qualify as a real estate
investment trust for federal income tax purposes. As a result of the merger: (i)
each of the then outstanding shares of common stock of CCA will be converted
into the right to receive 0.875 share of New Prison Realty common stock; (ii)
each of the then outstanding common shares of Prison Realty will be converted
into 1.0 share of New Prison Realty common stock; and (iii) each of the then
outstanding Series A Preferred Shares of Prison Realty will be converted into
1.0 share of New Prison Realty Series A Preferred Stock.
The common shareholders of CCA and the common shareholders of Prison Realty also
will consider and vote upon such other business as may properly come before the
respective special meetings or any adjournments thereof, in the event either of
the special meetings is adjourned or postponed for any reason.
This Joint Proxy Statement-Prospectus also constitutes a prospectus of New
Prison Realty for the issuance of approximately 96,421,000 shares of New Prison
Realty common stock and 4,300,000 shares of New Prison Realty Series A Preferred
Stock to be issued in connection with the merger transactions.
THIS JOINT PROXY STATEMENT-PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE AT
NO CHARGE UPON REQUEST BY MAIL FROM CCA OR PRISON REALTY OR UPON REQUEST FROM
THE SECURITIES AND EXCHANGE COMMISSION AT THEIR PRESCRIBED RATES OR THROUGH THE
SECURITIES AND EXCHANGE COMMISSION'S INTERNET SITE ON THE WORLD WIDE WEB AT
WWW.SEC.GOV. SEE "WHERE YOU CAN FIND MORE INFORMATION" AT PAGE 162. IN ORDER TO
ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUESTS FOR ADDITIONAL INFORMATION
FROM CCA SHOULD BE MADE BY NOVEMBER 23, 1998 AND ANY REQUESTS FOR ADDITIONAL
INFORMATION FROM PRISON REALTY SHOULD BE MADE BY NOVEMBER 25, 1998.
------------------------
Joint Proxy Statement-Prospectus dated October 15, 1998, and first mailed to
shareholders of CCA on October 19, 1998 and shareholders of Prison Realty on
October 19, 1998.
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
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QUESTIONS AND ANSWERS ABOUT THE CCA
PRISON REALTY TRUST/CORRECTIONS
CORPORATION OF AMERICA MERGER........ 1
SUMMARY................................ 4
The Parties.......................... 4
CCA Prison Realty Trust.............. 4
Corrections Corporation of America... 4
The Transaction...................... 4
Management, Operation and Structure
of New Prison Realty After the
Merger............................ 5
Management of New Prison Realty... 5
Ownership and Operation of
Correctional and Detention
Facilities...................... 5
Ownership of and Relationship with
Operating Company and the
Service Companies............... 5
Structure of New Prison Realty
After the Merger................ 6
The Prison Realty Board's
Recommendation to Shareholders.... 6
Fairness Opinion of Prison
Realty's Financial Adviser...... 6
The CCA Board's Recommendation to
Shareholders...................... 7
Fairness Opinion of CCA's
Financial Adviser............... 7
Potential Benefits and Detriments of
the Proposed Merger............... 7
Potential Benefits of the
Merger.......................... 7
Potential Detriments of the
Merger.......................... 8
Summary Material Risk Factors........ 8
The CCA Special Meeting.............. 8
Matters to be Considered.......... 8
Record Date; Voting Power......... 8
CCA Shareholder Vote Required..... 8
Share Ownership of CCA Management
and Certain CCA Shareholders.... 8
The Prison Realty Special Meeting.... 9
Matters to be Considered.......... 9
Record Date; Voting Power......... 9
Prison Realty Shareholder Vote
Required........................ 9
Share Ownership of Prison Realty
Management...................... 9
The Merger........................... 9
Merger Transactions............... 9
Relationship Between Prison Realty
and CCA Prior to the Merger..... 9
What Current CCA Shareholders Will
Receive in the Merger........... 10
Comparison of Rights of Shareholders
of CCA and Stockholders of New
Prison Realty..................... 10
Effective Time of the CCA Merger and
the Prison Realty Merger.......... 10
What Current Prison Realty
Shareholders Will Receive in the
Merger............................ 10
Comparison of Rights of Shareholders
of Prison Realty and Stockholders
of New Prison Realty.............. 10
Ownership of New Prison Realty After
the Merger........................ 11
Conditions to the Merger............. 11
Termination of the Merger
Agreement......................... 11
Termination Fees and Expenses........ 11
Regulatory Approvals................. 11
Accounting Treatment................. 12
Material Federal Income Tax
Consequences...................... 12
Benefits of Merger to Affiliates of
CCA and Prison Realty............. 12
Potential Conflicts of Interest...... 13
Cash Distribution to New Prison Realty
Stockholders......................... 13
New Prison Realty's Distribution Policy
After the Merger..................... 14
Comparative Per Share Market Price
Information.......................... 14
Listing of Shares of New Prison Realty
Common Stock and Series A Preferred
Stock................................ 14
Recent Developments.................... 14
Bank Financings...................... 14
Securities Financings................ 15
Cautionary Statement Concerning
Forward-Looking Information.......... 15
Selected Unaudited Pro Forma Combined
Financial Information................ 16
New Prison Realty Selected Pro Forma
Combined Financial Information.... 17
Prison Realty Selected Historical
Consolidated Financial
Information....................... 18
CCA Selected Historical Consolidated
Financial Information............. 20
Comparative Per Share Market Price And
Distribution/Dividend Information.... 21
Prison Realty........................ 21
CCA.................................. 21
</TABLE>
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<TABLE>
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MATERIAL RISK FACTORS.................. 22
Interests of Affiliates and
Shareholders in the Merger and
Potential Conflicts of Interest
Following the Merger.............. 22
Risks Associated with the Merger..... 24
Risks of Leverage and Floating
Rate Debt....................... 24
Fixed Exchange Ratio Despite
Potential Change in Relative
Stock Prices.................... 24
Dilution to Prison Realty
Shareholders in their Ownership
of New Prison Realty as a Result
of the Merger................... 26
Differences in Shareholders'
Rights.......................... 26
Substantial Expenses Related to
the Merger; Termination Fee; No
Solicitation.................... 26
Contingent Nature of Financial
Adviser Fees.................... 27
New Prison Realty Will be Dependent
on Operating Company, as Primary
Lessee of New Prison Realty's
Facilities, for Its Revenues and
Ability to Make Distributions to
its Stockholders.................. 27
New Prison Realty Will be Dependent
on Outside Financing to Support
Its Growth; Dilutive Effect of
Such Financing and Potential
Reduction of Earnings and Profits
Distribution...................... 27
Ownership of Shares of the Capital
Stock of New Prison Realty
Involves Tax Related Risks........ 28
Dependence on Qualification as a
REIT............................ 28
Adverse Effects of REIT Minimum
Distribution Requirements....... 29
Tax Legislation................... 29
Requirement to Distribute
Accumulated Earnings and
Profits......................... 30
Shares of New Prison Realty Common
Stock Must be Held for a Period of
Time After the Merger to Receive
the Earnings and Profits
Distribution...................... 30
Ownership of Shares of the Capital
Stock of New Prison Realty
Involves Risks Inherent in the
Corrections and Detention
Industry.......................... 30
General........................... 30
Short-Term Nature of Government
Contracts....................... 30
Dependence on Government
Appropriations.................. 31
Dependence on Government Agencies
for Inmates..................... 31
Dependence on Ability to Develop
New Prisons and Contracts;
Opposition of Organized Labor... 31
Options to Purchase............... 31
Legal Proceedings................. 32
Ownership of Shares of the Capital
Stock of New Prison Realty
Involves Risks Inherent in the
Investment in Real Estate
Properties........................ 32
General........................... 32
Environmental Matters............. 32
Uninsured Loss.................... 32
New Prison Realty Will be Dependent
on Certain Individuals for Its
Management........................ 33
New Prison Realty Will Lack Control
Over Day-to-Day Operations and
Management of Its Facilities...... 33
New Prison Realty Imposes Limits on
the Ownership of Its Capital Stock
to Maintain Qualification as a
REIT.............................. 34
Certain Provisions of New Prison
Realty's Governing Documents May
Limit Changes in Control of New
Prison Realty..................... 34
New Prison Realty's Board of
Directors May Change the Company's
Investment and Financing Policies
Without Vote of New Prison
Realty's Stockholders............. 35
Year 2000 Compliance Issues May Have
an Effect on New Prison Realty.... 35
Generally......................... 35
Impact on CCA..................... 35
Impact on Prison Realty........... 36
A Fluctuation in Market Interest
Rates May Affect the Price of
Shares of New Prison Realty Common
Stock............................. 37
Factors to be Considered by ERISA
Plan Fiduciaries.................. 37
THE SPECIAL MEETINGS................... 38
CCA Special Meeting.................. 38
Date, Place and Time.............. 38
Matters to be Considered at the
CCA Special Meeting............. 38
Record Date; Quorum............... 38
Required Vote..................... 38
Voting of Proxies................. 39
Revocability of Proxy............. 39
Solicitation of Proxies........... 39
Recommendation of the CCA Board... 40
Prison Realty Special Meeting........ 40
Date, Place and Time.............. 40
Matters to be Considered at the
Prison Realty Special Meeting... 40
Record Date; Quorum............... 40
Required Vote..................... 40
</TABLE>
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<TABLE>
<S> <C>
Voting of Proxies................. 41
Revocability of Proxy............. 41
Solicitation of Proxies........... 41
Recommendation of the Prison
Realty Board.................... 42
THE MERGER............................. 43
General.............................. 43
Effective Time....................... 43
Terms of the Merger.................. 43
Background of the Merger............. 43
General........................... 43
Formation of Prison Realty........ 44
Change in Market Conditions....... 44
The Proposed Merger............... 45
Prison Realty's Reasons for the
Merger; Recommendation of the
Prison Realty Board............... 48
CCA's Reasons for the Merger;
Recommendation of the CCA Board... 51
Opinion of Prison Realty's Financial
Adviser........................... 54
Opinion of CCA's Financial Adviser... 60
Interests of Certain Persons in the
Merger............................ 66
Relationship with Sodexho......... 66
Relationship with Baron........... 66
Employment Agreements............. 67
Treatment of CCA and Prison Realty
Options......................... 67
Treatment of CCA Deferred Stock
Agreements...................... 67
Ownership of Operating Company.... 68
Ownership of the Service
Companies....................... 68
General Conflicts of Interest..... 68
Certain Other Relationships....... 69
Certain Regulatory Matters........... 69
Accounting Treatment................. 69
No Appraisal Rights.................. 69
Stock Exchange Listing of New Prison
Realty Common Stock and New Prison
Realty Series A Preferred Stock... 70
Delisting and Deregistration of the
CCA Common Stock.................. 70
Federal Securities Laws Consequences;
Resale Restrictions............... 70
Distributions........................ 70
Pending Litigation Regarding the
Merger............................ 71
Prison Realty Financings............. 72
New Prison Realty Financings......... 72
THE MERGER AGREEMENT................... 73
General.............................. 73
Conversion of Securities............. 73
Exchange of Certificates; Procedures
for Exchange...................... 73
Fractional Shares.................... 74
Warrants to Purchase CCA Common
Stock............................. 74
Notes Convertible into CCA Common
Stock............................. 74
Representations and Warranties....... 74
Conduct of Business Pending the
Merger; Covenants of CCA.......... 75
Conduct of Business Pending the
Merger; Covenants of Prison
Realty............................ 77
Conditions to the Merger............. 78
No Solicitation...................... 80
Access to Information................ 81
Reasonable Best Efforts.............. 81
Termination.......................... 82
Fees and Expenses.................... 83
Amendment and Waiver................. 83
Benefit Plans; Stock Plans........... 84
MANAGEMENT AND OPERATIONS OF NEW PRISON
REALTY AFTER THE MERGER.............. 85
General.............................. 85
Tax Status........................... 85
Ownership of Operating Company and
Service Companies................. 85
Merger-Related Transactions.......... 85
Ownership Structure.................. 88
Operating Company.................... 88
General........................... 88
Management........................ 90
Leases............................ 90
Right to Purchase Agreement....... 91
Trade Name Use Agreement.......... 91
Services Agreement................ 92
Tenant Incentive Agreement........ 92
Service Company A.................... 92
Service Company B.................... 93
Administrative Services Agreements
and Trade Name Use Agreements..... 94
Benefit Plans........................ 95
Leases with Operating Company........ 95
Use of the Facilities............. 95
Amounts Payable Under the
Operating Company Leases; Net
Provisions...................... 95
Maintenance, Modification and
Capital Additions............... 96
Environmental Matters............. 96
Assignment and Subletting......... 96
</TABLE>
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<TABLE>
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Damage to, or Condemnation of, an
Operating Company Leased
Property........................ 97
Indemnification Generally......... 97
Events of Default................. 97
Appraisal of Properties; Fairness of
Operating Company Lease
Payments.......................... 98
Information About the Policies and
Objectives of New Prison Realty... 98
Growth Policies and Objectives.... 99
Investment Policies and
Objectives...................... 99
Financing Policies and
Objectives...................... 100
Working Capital Reserves Policies
and Objectives.................. 100
Other Policies and Objectives..... 100
CONFLICTS OF INTEREST.................. 101
Relationships Which May Give Rise to
Conflicts of Interest............. 101
Situations in Which Conflicts of
Interest May Arise................ 102
Financial Terms of Leases, Trade
Name Use Agreement, Services
Agreement and Tenant Incentive
Agreement....................... 102
Valuation of the Facilities....... 102
Potential for Future Conflicts.... 102
Policies and Procedures for
Addressing Conflicts............ 103
MATERIAL FEDERAL INCOME TAX
CONSEQUENCES......................... 104
Tax Consequences of the Merger....... 104
Tax Consequences to Shareholders
of CCA.......................... 104
Tax Consequences to Shareholders
of Prison Realty................ 104
Tax Consequences of Transfers to
Operating Company and Service
Companies......................... 105
Qualification and Operation of New
Prison Realty as a REIT........... 106
General........................... 106
Opinion of Counsel................ 106
Taxation of New Prison Realty..... 106
Organizational Requirements....... 107
General......................... 107
Qualified REIT Subsidiaries..... 107
Income Tests...................... 108
General......................... 108
Rents from Real Property........ 108
Mortgage Interest............... 110
Other Sources of Income......... 111
Potential Reallocation of
Income....................... 111
Asset Tests....................... 111
Annual Distribution
Requirements.................... 112
Non-REIT Earnings and Profits..... 113
Failure to Qualify................ 113
Taxation of U.S. Stockholders..... 113
Distributions Generally......... 113
Capital Gain Dividends.......... 114
Passive Activity and Loss;
Investment Interest
Limitations.................. 114
Dispositions of New Prison
Realty Capital Stock......... 114
Treatment of Tax-exempt U.S.
Stockholders................. 114
Special Tax Consequences for
Foreign Stockholders............ 115
Information Reporting Requirements
and Backup Withholding Tax...... 116
State and Local Tax
Consequences.................... 117
Possible Federal Tax
Developments.................... 117
General......................... 117
Proposed Tax Legislation........ 117
ERISA CONSIDERATIONS................... 118
INFORMATION ABOUT OUR COMPANIES........ 120
Information About Prison Realty...... 120
General........................... 120
Recent Acquisition of Assets...... 120
Certain Information Incorporated
by Reference.................... 121
Information about CCA................ 121
General........................... 121
Recent Acquisition of Assets...... 122
Relationship and Related
Transactions with Sodexho....... 122
Certain Information Incorporated
by Reference.................... 123
NEW PRISON REALTY CAPITAL STOCK........ 124
General.............................. 124
Common Stock......................... 124
Preferred Stock...................... 124
Restrictions on Ownership of Capital
Stock............................. 124
COMPARISON OF RIGHTS OF SHAREHOLDERS OF
CCA AND STOCKHOLDERS OF NEW PRISON
REALTY............................... 127
Status as a REIT under the Code...... 127
Authorized Shares of Capital Stock... 127
Restrictions on Ownership and
Transfer of Capital Stock......... 127
Inspection of Books and Records...... 128
</TABLE>
iv
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<TABLE>
<S> <C>
Nominations and Proposals of
Stockholders...................... 128
Stockholders' Meetings............... 129
Action by Stockholders Without a
Meeting........................... 130
Separate Shareholder Voting Groups... 130
Number of Directors.................. 130
Classified Board..................... 130
Action by the Board.................. 131
Removal of Directors................. 131
Vacancies on the Board............... 131
Limitation of Liability.............. 131
Indemnification...................... 132
Amendments to the Charter............ 132
Amendments to the Bylaws............. 132
Distributions........................ 133
Dissolution.......................... 133
Dissenters' Rights................... 133
Anti-Takeover Statutes............... 134
Business Combinations............. 134
Other Constituencies.............. 135
Control Share Acquisitions........ 135
Greenmail......................... 136
Investor Protection............... 136
COMPARISON OF RIGHTS OF SHAREHOLDERS OF
PRISON REALTY AND STOCKHOLDERS OF NEW
PRISON REALTY........................ 138
Authorized Capital Shares and Shares
of Capital Stock.................. 138
Standard of Conduct For Trustees and
Directors......................... 138
Indemnification...................... 139
Number of Trustees or Directors...... 139
Removal of Trustees or Directors..... 139
Vacancies on the Board............... 139
Quorum And Voting of the Board....... 140
UNAUDITED PRO FORMA COMBINED FINANCIAL
STATEMENTS........................... 141
New Prison Realty Pro Forma Combined
Balance Sheet as of June 30,
1998.............................. 142
New Prison Realty Pro Forma Combined
Statement of Operations for the
Year Ended December 31, 1997...... 147
New Prison Realty Pro Forma Combined
Statement of Operations for the
Six Months Ended June 30, 1998.... 154
ADDITIONAL INFORMATION................. 161
Recent Developments.................. 161
Bank Financings................... 161
Securities Financings............. 161
Legal Opinions....................... 161
Experts.............................. 162
Shareholder Proposals................ 162
Prison Realty Shareholders........ 162
CCA Shareholders.................. 162
OTHER MATTERS.......................... 163
Where You Can Find More Information.. 163
INDEX TO FINANCIAL STATEMENTS.......... F-1
APPENDICES
Amended and Restated Agreement
and Plan of Merger dated as of
September 29, 1998......... Appendix A
Opinion of J.C. Bradford
& Co., L.L.C............... Appendix B
Opinion of Stephens Inc....... Appendix C
Additional Questions and Answers About the
Merger
for CCA Employees.......... Appendix D
</TABLE>
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<PAGE> 12
QUESTIONS AND ANSWERS ABOUT THE
CCA PRISON REALTY TRUST/
CORRECTIONS CORPORATION OF AMERICA MERGER
Q: WHY ARE THE TWO COMPANIES PROPOSING TO
MERGE?
A: CCA Prison Realty Trust ("Prison Realty") and Corrections Corporation of
America ("CCA") are proposing to combine to take advantage of the strengths
of both companies and to create the nation's leading company in the private
corrections industry. The surviving company, Prison Realty Corporation ("New
Prison Realty"), will create a unique investment opportunity for investors
of both companies by combining Prison Realty's cash distributions and tax
advantages with an increased growth rate through the leases and other
contractual arrangements to be entered into in connection with the merger
transactions.
Q: AS A PRISON REALTY SHAREHOLDER, HOW WILL THE
MERGER AFFECT ME?
A: Following the merger transactions, you will hold the same number of shares
of New Prison Realty common stock or New Prison Realty Series A Preferred
Stock as you held in Prison Realty immediately prior to the merger. After
the merger transactions, current shareholders of CCA will own approximately
80%, and you and the other current holders of Prison Realty common shares
will own approximately 20%, of the issued and outstanding shares of New
Prison Realty common stock, assuming all Prison Realty and CCA share options
are exercised.
Q: HOW WILL NEW PRISON REALTY DIFFER FROM PRISON REALTY?
A: After the merger, New Prison Realty will be the surviving company, and its
corporate characteristics will be substantially similar to those of Prison
Realty. Like Prison Realty, New Prison Realty will operate so as to qualify
as a real estate investment trust for federal income tax purposes. The New
Prison Realty board of directors and executive officers will be identical to
Prison Realty's, except that: (i) Doctor R. Crants, Chairman of both CCA and
Prison Realty and Chief Executive Officer and President of CCA, will become
Chief Executive Officer of New Prison Realty; (ii) J. Michael Quinlan,
currently the Chief Executive Officer of Prison Realty, will become
Vice-Chairman of the New Prison Realty Board of Directors; and (iii) Jean-
Pierre Cuny, currently a CCA director and an affiliate of Sodexho Alliance
S.A., CCA's largest beneficial shareholder, will become a member of the
Board of Directors of New Prison Realty. The rights of holders of shares of
New Prison Realty common stock and New Prison Realty Series A Preferred
Stock will be essentially identical to the rights of holders of current
Prison Realty common shares and Prison Realty Series A Preferred Shares,
except that New Prison Realty is a Maryland corporation, while Prison Realty
is currently a Maryland real estate investment trust.
Q: WHY ARE THE COMPANIES PROPOSING TO MERGE NOW, WHEN IN JULY OF 1997 CCA SOLD
NINE OF ITS PROPERTIES TO PRISON REALTY AND LEASED THEM BACK?
A: Prison Realty began operations in July 1997 to capitalize on the market for
REIT owned, government operated correctional facilities and to assist CCA in
meeting the capital needs of governments. In the months following the
formation of Prison Realty, senior management of both companies observed
that the potential government customers' interest in and demand for
financing available from Prison Realty was significantly larger than
initially anticipated. The Boards of both companies believe that the
proposed merger will allow the combined company (i) to take advantage of
increased government demand for private ownership of facilities that
governments continue to operate; (ii) to grow at a sustainable rate; and
(iii) to pay a significant dividend.
Q: AS A CCA SHAREHOLDER, WHAT WILL I RECEIVE IN
THE MERGER?
A: If the merger is completed, CCA shareholders will obtain the right to
receive 0.875 share of New Prison Realty common stock in exchange for each
share of CCA common stock they own.
Example:
If you currently own 1,000 shares of CCA common stock, then after the merger
you will
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<PAGE> 13
be entitled to receive 875 shares of New Prison Realty common stock.
Q: WHAT HAPPENS AS THE MARKET PRICE OF PRISON REALTY COMMON SHARES FLUCTUATES?
A: The estimated value of the shares of New Prison Realty common stock received
by shareholders of CCA is based on the market price of the common shares of
Prison Realty at the time of the merger. Since the market value of Prison
Realty common shares will fluctuate before the closing of the merger, the
value of the shares of New Prison Realty common stock the shareholders of
CCA will receive in the merger will fluctuate and accordingly, could
increase or decrease. The exchange ratio of 0.875 is fixed, however, and
will not be altered in response to fluctuations in the market price.
Example:
On October 14, 1998, the closing price of CCA common stock on the New York
Stock Exchange was $15.13. Applying the 0.875 exchange ratio, on that date,
each holder of CCA common stock would be entitled to receive shares of New
Prison Realty common stock with a market value of approximately $16.73 for
each share of CCA common stock they own, based on the market price of Prison
Realty common shares on that date. However, the market prices for CCA common
stock and Prison Realty common shares are likely to change between now and
the merger. You are urged to obtain current price quotes for CCA common
stock and Prison Realty common shares.
Q: WHEN DO YOU EXPECT THE MERGER TRANSACTIONS
TO BE COMPLETED?
A: It is expected that the merger transactions will be completed on or about
January 1, 1999.
Q: DO CCA OR PRISON REALTY SHAREHOLDERS HAVE
ANY APPRAISAL RIGHTS?
A: No. Neither CCA shareholders nor Prison Realty shareholders have appraisal
rights in connection with the merger transactions.
Q: WHAT DO I NEED TO DO NOW?
A: After making a decision about the merger transactions, you should mark on
your proxy card how you want to vote, and sign and mail the proxy card in
the enclosed return envelope as soon as possible so your shares may be
represented at your special shareholders' meeting.
Q: WHAT IF I DO NOT VOTE?
A: If you sign and send in your proxy, but do not mark how you want to vote,
your proxy will be counted as a vote in favor of the merger transactions. If
you do not vote or if you abstain, the effect will be a vote against the
merger transactions.
Q: CAN I CHANGE OR REVOKE MY PROXY?
A: You may attend your special meeting and vote your shares in person, rather
than signing and mailing your proxy card. In addition, you may revoke your
proxy up to and including the day of the special meeting by following the
directions on page 39 or page 41 of this Joint Proxy Statement-Prospectus
and you may either change your vote or attend the special meeting and vote
in person.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY
BROKER, WILL MY BROKER VOTE MY SHARES FOR ME?
A: Your broker will vote your shares only if you provide instructions on how to
vote. You should instruct your broker to vote your shares, following the
directions provided by your broker. If your broker does not receive
instructions from you, your shares will not be voted.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: After the merger transactions are completed, we will send CCA shareholders
written instructions for exchanging their stock certificates. Prison Realty
shareholders may keep their existing share certificates, which will
automatically represent shares in New Prison Realty.
Additional questions and answers relating to the effect of the merger
transactions on employees of CCA are included in Appendix D hereto.
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<PAGE> 14
WHO CAN HELP ANSWER YOUR QUESTIONS?
If you have more questions about the merger transactions, you should contact:
PRISON REALTY SHAREHOLDERS:
CCA Prison Realty Trust
10 Burton Hills Boulevard, Suite 100
Nashville, Tennessee 37215
Attention: Vida H. Carroll, Chief Financial Officer
Telephone Number: (615) 263-0200
CCA SHAREHOLDERS:
Corrections Corporation of America
10 Burton Hills Boulevard
Nashville, Tennessee 37215
Attention: Peggy Lawrence, Vice President, Investor Relations
Telephone Number: (615) 263-3000
If you are a shareholder and would like additional copies of this Joint Proxy
Statement-Prospectus, you should contact:
Corporate Investor Communications, Inc.
111 Commerce Road
Carlstadt, New Jersey 07072
Telephone Number: (201) 896-1900
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<PAGE> 15
SUMMARY
This summary highlights selected information from this Joint Proxy
Statement-Prospectus and may not contain all of the information that is
important to you. To understand the merger fully and for a more complete
description of the legal terms of the merger, you should read carefully this
entire document and the documents to which we have referred you. See "Other
Matters -- Where You Can Find More Information" on page 162. We have included
page references in parentheses to direct you to a more complete description of
the topics presented in this summary.
THE PARTIES
CCA Prison Realty Trust (Page 119)
10 Burton Hills Boulevard, Suite 100
Nashville, Tennessee 37215
(615) 263-0200
CCA Prison Realty Trust is a real estate investment trust organized under the
laws of the State of Maryland ("Prison Realty"). Prison Realty's primary
business objectives are to own and develop correctional and detention
facilities, acquire facilities from both private prison managers and government
entities, expand the design capacity of its existing facilities and lease its
facilities to facility managers pursuant to long-term leases. As of October 14,
1998, Prison Realty was the largest REIT focusing on the ownership of
correctional and detention facilities and owned 20 correctional and detention
facilities with a total design capacity of 16,030 beds, of which 17 facilities
are leased to Corrections Corporation of America, a Tennessee corporation
("CCA"). Prison Realty also has one correctional facility currently under
construction with a total design capacity of approximately 528 beds.
Prison Realty currently operates so as to qualify as a REIT for federal income
tax purposes.
Corrections Corporation of America (Page 120)
10 Burton Hills Boulevard
Nashville, Tennessee 37215
(615) 263-3000
CCA is the largest developer and manager of private correctional and detention
facilities worldwide. CCA manages facilities in 22 states, Washington, D.C.,
Puerto Rico, Australia and the United Kingdom. As of October 14, 1998, CCA had
contracts to manage 78 correctional and detention facilities with a total design
capacity of 64,956 beds, of which 65 facilities with a total design capacity of
47,142 beds were in operation. CCA is currently developing 13 facilities and
expanding nine facilities representing a total of 17,814 beds. The services
provided by CCA to government agencies include the integrated design,
construction and management of new correctional and detention facilities and the
redesign, renovation and management of older facilities. In addition, CCA owns
TransCor America, Inc., which provides inmate transportation services for
numerous government agencies.
THE TRANSACTION (PAGE 43)
CCA and Prison Realty are proposing a merger of the two companies, whereby each
of CCA and Prison Realty will merge with and into a newly formed Maryland
corporation, Prison Realty Corporation ("New Prison Realty"), with New Prison
Realty as the surviving company. New Prison Realty intends to operate so as to
qualify as a REIT for federal income tax purposes. In the merger, CCA
shareholders will receive 0.875 share of New Prison Realty common stock in
exchange for each outstanding share of CCA common stock they own. Prison Realty
shareholders will receive 1.0 share of common stock or Series A Preferred Stock
of New Prison Realty in exchange for each Prison Realty common share or Series A
Preferred Share they own. The exchange ratio will not be altered based on
fluctuations in the stock prices of either Prison Realty or CCA. After
completion of the merger, current CCA shareholders will own approximately 80%,
and current Prison Realty common shareholders will own approximately 20%, of the
shares of New Prison Realty common stock then outstanding, assuming all CCA and
Prison Realty share options are exercised. The market value of the shares of New
Prison Realty common stock to be issued as consideration for the merger, taking
into account the fixed exchange ratio and based on the closing price of Prison
Realty's common shares on October 14, 1998, is approximately $1.4 billion to
shareholders of CCA and approximately $419.7 million to common shareholders of
Prison Realty. Prison Realty previously paid $490.9 million for the 13
facilities it purchased from CCA. New Prison Realty will also assume
indebtedness of Prison Realty in the amount of $236.7 million at October 14,
1998 and preferred stock with a liquidation preference of $107.5 million.
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<PAGE> 16
The merger transactions will allow the respective shareholders of both companies
to benefit, to the extent consistent with the rules applicable to REITs, from
every type of private sector/public sector partnership with respect to
correctional and detention facilities: (i) facilities owned by New Prison Realty
and managed by government entities; (ii) facilities owned by New Prison Realty
and managed by private operators; and (iii) facilities owned by government
entities and managed by private operators. CCA and Prison Realty believe there
are possibilities for substantial growth in all of these areas.
MANAGEMENT, OPERATION AND STRUCTURE OF NEW PRISON REALTY AFTER THE MERGER (PAGE
84)
Management of New Prison Realty (Page 84)
Management of New Prison Realty after completion of the merger transactions will
be identical to the management of Prison Realty prior to the merger
transactions, with the exception that Doctor R. Crants, currently the Chief
Executive Officer and President of CCA and Chairman of the Prison Realty Board
of Trustees, is also the Chief Executive Officer of New Prison Realty and J.
Michael Quinlan, currently the Chief Executive Officer of Prison Realty, is the
Vice-Chairman of the New Prison Realty Board of Directors.
Ownership and Operation of Correctional and Detention Facilities (Pages 84
through 93)
After the completion of the merger transactions, New Prison Realty will continue
Prison Realty's objective of owning and developing correctional and detention
and related facilities that meet its investment criteria, acquiring such
facilities from both private operators and government entities, expanding the
design capacity of its existing facilities, and leasing all facilities under
long-term leases to qualified third-party operators. Following the merger
transactions, New Prison Realty intends to operate so as to qualify as a REIT
for federal income tax purposes. To qualify as a REIT, New Prison Realty's
income generally may not include income from the operation of facilities.
Therefore, after the merger transactions, New Prison Realty will not be able to
operate the correctional and detention facilities that are currently operated by
CCA, including those facilities acquired from CCA and Prison Realty in the
merger transactions. Accordingly, immediately prior to the merger transactions,
the non-real estate assets of CCA, including all management contracts, will be
transferred to a newly formed management company, Correctional Management
Services Corporation ("Operating Company"), and to two newly formed service
companies, Prison Management Services, Inc. ("Service Company A") and Juvenile
and Jail Facility Management Services, Inc. ("Service Company B") (Service
Company A and Service Company B are defined, collectively, as the "Service
Companies"). A substantial majority of the correctional and detention facilities
acquired by New Prison Realty in the merger will be leased to Operating Company.
Upon completion of the merger transactions, New Prison Realty will also enter
into a services agreement with Operating Company pursuant to which Operating
Company will perform services in connection with the construction and
development of additional facilities on behalf of New Prison Realty and a tenant
incentive agreement pursuant to which New Prison Realty will make certain
payments to Operating Company for its entering into new leases. Operating
Company will operate after the merger transactions under the name "Corrections
Corporation of America" pursuant to a trade name use agreement with New Prison
Realty. The Service Companies will operate after the merger transactions under
the name "Corrections Corporation of America" pursuant to separate trade name
use agreements with Operating Company. Additionally, Operating Company will
perform administrative services for the Service Companies under separate
administrative services agreements.
Ownership of and Relationship with Operating Company and the Service Companies
(Pages 84 through 97)
In consideration for CCA's transfer of a portion of its non-real estate assets
to Operating Company, New Prison Realty, as successor to CCA, will receive from
Operating Company: (i) 9.5% of the capital stock of Operating Company, which
will be non-voting common stock and will represent 9.5% of the economic value of
Operating Company, and (ii) a promissory note in the principal amount of $137.0
million. The remaining 90.5% of the capital stock of Operating Company, which
consists of voting common stock, will be owned as follows: (i) 30%, valued at
$15.0 million, will be owned by management employees of Operating Company other
than Doctor R. Crants, who is the Chief Executive Officer of both New Prison
Realty and
5
<PAGE> 17
Operating Company; (ii) 8%, valued at $4.0 million, will be owned by management
employees of New Prison Realty; (iii) 19.1%, valued at $9.5 million, will be
owned by the wardens of the facilities operated by, and other employees of,
Operating Company; (iv) 1.4%, valued at $700,000, will be owned by certain key
employees of Prison Realty; (v) 16%, valued at $8.0 million, will be owned by
Sodexho Alliance S.A., the largest beneficial shareholder of CCA; and (vi) 16%,
valued at $8.0 million, will be owned by a mutual fund managed by an affiliate
of Baron Capital Group, Inc., which, with its affiliates, is the largest
beneficial shareholder of Prison Realty.
In consideration for CCA's transfer of a portion of its non-real estate assets
to the Service Companies, New Prison Realty, as successor to CCA, will receive
all of the outstanding non-voting common stock of each of the Service Companies.
The non-voting common stock of the Service Companies will obligate each Service
Company to pay New Prison Realty 95% of its net income. The voting common stock
of each of the Service Companies will be owned by wardens of the facilities
operated by the Service Companies and by unaffiliated investors.
Structure of New Prison Realty After the Merger (Page 87)
After the completion of the merger and the transfer of the non-real estate
assets of CCA immediately prior thereto, the structure of New Prison Realty,
Operating Company, and the Service Companies will be as follows:
(CCA Organization chart)
THE PRISON REALTY BOARD'S RECOMMENDATION TO SHAREHOLDERS (PAGE 48)
The Prison Realty Board of Trustees believes that the merger is in the best
interests of the shareholders of Prison Realty and recommends that the Prison
Realty shareholders vote "FOR" approval of the merger and the related
transactions.
Fairness Opinion of Prison Realty's Financial Adviser (Page 54)
In deciding to approve the merger, Prison Realty's Board of Trustees considered
an opinion from its financial adviser, J.C. Bradford & Co., L.L.C., to the
effect that, as of April 18, 1998, the consideration to be paid by Prison Realty
pursuant to the merger is fair to Prison Realty and its shareholders from a
financial point of view. J.C. Bradford has confirmed its opinion by
6
<PAGE> 18
delivering an updated opinion to the Prison Realty Board of Trustees, dated as
of the date of this Joint Proxy Statement-Prospectus, to the effect that the
consideration to be paid by Prison Realty pursuant to the merger is fair to
Prison Realty and its shareholders from a financial point of view. This updated
opinion is attached as Appendix B to this Joint Proxy Statement-Prospectus.
HOLDERS OF PRISON REALTY COMMON SHARES ARE ENCOURAGED TO READ, AND SHOULD READ,
THE ENTIRE J.C. BRADFORD OPINION CAREFULLY.
In connection with delivering its opinion, J.C. Bradford performed a variety of
financial analyses. These analyses included: pro forma merger analysis,
discounted cash flow analysis for CCA and Prison Realty, comparable company
analysis for CCA and Prison Realty, historical price-earnings analysis for CCA,
comparable transaction analysis, historical price-funds from operations ratio
analysis for Prison Realty, exchange ratio analysis, premium analysis, stock
trading analysis and rate spread analysis. J.C. Bradford's opinion does not
constitute a recommendation as to how any Prison Realty shareholder should vote
at the Prison Realty special meeting.
In consideration for its services in delivering its fairness opinion, J.C.
Bradford will receive a fee from Prison Realty in the amount of $8.0 million,
$4.0 million of which is payable only upon completion of the merger.
THE CCA BOARD'S RECOMMENDATION TO SHAREHOLDERS (PAGE 51)
The CCA Board of Directors believes that the merger transactions are in the best
interests of the shareholders of CCA and recommends that the CCA shareholders
vote "FOR" approval of the merger and the related transactions.
Fairness Opinion of CCA's Financial
Adviser (Page 60)
In deciding to approve the merger, CCA's Board of Directors considered an
opinion from its financial adviser, Stephens Inc., to the effect that, as of
April 17, 1998, the exchange ratio set for the merger is fair to CCA and its
shareholders from a financial point of view. Stephens has confirmed its opinion
by delivering an updated opinion to the CCA Board of Directors, dated as of the
date of this Joint Proxy Statement-Prospectus, to the effect that the exchange
ratio set for the merger is fair to CCA and its shareholders from a financial
point of view. This updated opinion is attached as Appendix C to this Joint
Proxy Statement-Prospectus. HOLDERS OF CCA COMMON STOCK ARE ENCOURAGED TO READ,
AND SHOULD READ, THE ENTIRE STEPHENS OPINION CAREFULLY.
In connection with delivering its opinion, Stephens performed a variety of
financial analyses. These analyses included: historical stock price analysis,
selected private correctional companies analysis, selected triple-net lease REIT
analysis, relative public company analyses, selected comparable transaction
analysis, discounted cash flow analysis, and merger consequences analysis.
Stephens' opinion does not constitute a recommendation as to how any CCA
shareholder should vote at the CCA special meeting.
For its services in delivering its fairness opinion, Stephens will receive a fee
from CCA in the amount of $7.0 million, $3.5 million of which is payable only
upon completion of the merger.
POTENTIAL BENEFITS AND DETRIMENTS OF THE PROPOSED MERGER (PAGES 48 THROUGH 54)
The reasons for the proposed merger are described in more detail in the section
of this Joint Proxy Statement-Prospectus entitled "The Merger." The following is
a summary of some of the potential benefits and detriments of the proposed
merger.
Potential Benefits of the Merger (Pages 48 through 54)
- - The shareholders of both companies will have the opportunity to participate in
a company with significant growth prospects which, as a REIT, will not have to
pay corporate income taxes and will pay a substantial dividend.
- - The shareholders of both companies will have the opportunity to participate in
a market that both companies believe has significant potential: the ownership
of correctional and detention facilities which continue to be operated by
government entities.
- - The increased capital resources created by combining the companies will allow
New Prison Realty to increase the number of correctional and detention
facilities owned.
- - The increased lease payments for facilities currently owned by Prison Realty,
the distributions made by the Service Companies and the fees paid for use of
the name "Corrections Corporation of America" will provide significant
additional income to New Prison Realty.
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<PAGE> 19
Potential Detriments of the Merger (Pages 48 through 54)
- - CCA's shareholders will own shares in a Maryland corporation which will
operate as a REIT. Under applicable law, a REIT must pay out its net earnings
as opposed to reinvesting them in its business.
- - After the completion of the merger, New Prison Realty will own only (i) real
estate, including its private correctional and detention facilities, and (ii)
interests in the companies which will continue to manage the correctional and
detention facilities formerly managed by CCA.
- - After completion of the merger, the assets of New Prison Realty, like those of
Prison Realty currently, must consist primarily of interests in real property.
- - Several current employees, shareholders and affiliates of both CCA and Prison
Realty will have ownership interests in Operating Company and the Service
Companies, which will manage the correctional and detention facilities
currently managed by CCA. Other shareholders of CCA and Prison Realty will not
have the opportunity to participate in the ownership of the management
companies except through New Prison Realty's ownership interest in them.
SUMMARY MATERIAL RISK FACTORS (PAGE 22)
This Joint Proxy Statement-Prospectus includes, or incorporates by reference,
information describing material risks related to the operations and strategies
of Prison Realty and CCA generally and the merger transactions and their effect
on New Prison Realty specifically, including:
- - The merger consideration to be received by CCA shareholders and Prison Realty
shareholders is fixed and will not change despite any fluctuation in the stock
price of shares of CCA or Prison Realty prior to the merger.
- - As a result of the merger, Prison Realty shareholders will incur dilution in
their ownership interest in New Prison Realty.
- - Several current employees, shareholders and affiliates of both CCA and Prison
Realty have interests in the merger different from the interests of CCA
shareholders or Prison Realty shareholders.
- - Conflicts of interest will exist following the merger.
- - New Prison Realty will rely on Operating Company as the primary lessee of New
Prison Realty's facilities.
- - There are risks related to New Prison Realty's qualification as a REIT.
- - There are risks inherent in the ownership of real estate and the corrections
and detention industry.
- - As a REIT, New Prison Realty will have no control over the day-to-day
operations of facilities it owns.
THE CCA SPECIAL MEETING (PAGE 38)
Matters to be Considered (Page 38)
The special meeting of the holders of shares of CCA common stock will be held at
10:00 a.m., local time, on Tuesday, December 1, 1998. At the CCA special
meeting, CCA shareholders will be asked to approve the merger and the related
transactions. The CCA special meeting will be held at Loews Vanderbilt Plaza,
2100 West End Avenue, Nashville, Tennessee.
Record Date; Voting Power (Page 38)
You are entitled to vote at the CCA special meeting if you owned shares of CCA
common stock as of the close of business on Wednesday, October 14, 1998, the
record date.
On the record date, there were 83,840,275 shares of CCA common stock entitled to
vote at the CCA special meeting. CCA shareholders will have one vote at the CCA
special meeting for each share of CCA common stock owned on October 14, 1998.
CCA Shareholder Vote Required (Page 38)
The affirmative vote of the holders of a majority of the issued and outstanding
shares of common stock of CCA entitled to vote at the CCA special meeting is
required to approve the merger and the related transactions. Your failure to
vote either in person or by proxy will have the effect of a vote against the
merger and the related transactions.
Share Ownership of CCA Management and Certain CCA Shareholders (Pages 38 and 65)
On October 14, 1998, the record date, CCA directors, executive officers and
their affiliates and Sodexho owned and were entitled to vote approximately
9,168,682 shares of CCA common stock, or approximately 10.9% of the shares of
CCA common stock outstanding on such date.
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The directors and executive officers of CCA have indicated that they intend to
vote, and Sodexho has agreed to vote, the shares of CCA common stock owned by
them "FOR" approval of the merger and the related transactions.
THE PRISON REALTY SPECIAL MEETING (PAGE 40)
Matters to be Considered (Page 40)
The special meeting of the holders of Prison Realty shares will be held at 10:00
a.m., local time, on Thursday, December 3, 1998. At the Prison Realty special
meeting, Prison Realty shareholders will be asked to approve the merger. The
Prison Realty special meeting will be held at the Loews Vanderbilt Plaza, 2100
West End Avenue, Nashville, Tennessee.
Record Date; Voting Power (Page 40)
You are entitled to vote at the Prison Realty special meeting if you owned
common shares of Prison Realty as of the close of business on Wednesday, October
14, 1998, the record date. Holders of Prison Realty Series A Preferred Shares
are generally not entitled to any voting rights, including voting rights with
respect to the merger.
On the record date, there were 21,945,569 common shares of Prison Realty
entitled to vote at the Prison Realty special meeting. Prison Realty
shareholders will have one vote at the Prison Realty special meeting for each
Prison Realty common share owned on October 14, 1998.
Prison Realty Shareholder Vote Required (Page 40)
The affirmative vote of the holders of two-thirds of the issued and outstanding
common shares of Prison Realty entitled to vote at the Prison Realty special
meeting is required to approve the merger. Your failure to vote either in person
or by proxy will have the effect of a vote against the merger.
Share Ownership of Prison Realty Management (Page 41)
On October 14, the record date, Prison Realty trustees, executive officers and
their affiliates, owned and were entitled to vote approximately 950,738 Prison
Realty common shares, or approximately 4.3% of the common shares of Prison
Realty issued and outstanding on the record date.
The trustees and executive officers of Prison Realty have indicated that they
intend to vote the common shares of Prison Realty owned by them "FOR" approval
of the merger.
THE MERGER (PAGE 43)
The merger agreement is attached as Appendix A to this Joint Proxy
Statement-Prospectus. We encourage you to read the merger agreement as it is the
legal document that governs the merger.
Merger Transactions (Page 43)
Under the terms of the merger agreement, CCA will merge with and into New Prison
Realty at an exchange ratio of 0.875. Immediately thereafter, Prison Realty will
merge with and into New Prison Realty at an exchange ratio of 1.0. Immediately
prior to the merger of CCA into New Prison Realty, CCA will sell and transfer
all of its non-real estate assets, including all of its management contracts, to
Operating Company and the Service Companies in exchange for non-voting
securities of each and a promissory note from Operating Company.
Relationship Between Prison Realty and CCA Prior to the Merger (Pages 43 and
119)
CCA was organized in 1983 as a service company to engage primarily in the
business of managing and operating correctional and detention facilities. Since
that time, CCA's government customers have shifted from their original focus of
quality operations and cost savings to also requiring the operator to provide
capital for prison construction. In 1997, after reviewing several financing
alternatives available to CCA, the CCA Board of Directors determined that the
most cost-effective way to continue to meet the growing capital needs of its
government customers was to sell and then lease back a portion of its facilities
under long-term leases. Accordingly, CCA assisted in the creation of Prison
Realty.
In connection with the commencement of operations of Prison Realty in July 1997,
CCA sold nine correctional and detention facilities to Prison Realty for a total
purchase price of $308.1 million. Simultaneously with the sale of these
facilities, Prison Realty leased the facilities back to CCA pursuant to
long-term leases. In addition, the companies entered into agreements whereby
Prison Realty was given the option to purchase five facilities under
construction by CCA and the right to buy any future facility developed or
constructed by CCA. As of the date of this Joint Proxy
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Statement-Prospectus, Prison Realty has purchased a total of 13 facilities from
CCA for an aggregate purchase price of $490.9 million, and each of these
facilities is leased back to CCA.
In April 1998, CCA acquired all of the issued and outstanding capital stock of
eight subsidiaries of U.S. Corrections Corporation, a privately held private
prison operator and manager, whose assets consisted of operations and management
contracts, or the rights to obtain the same, for eight correctional and
detention facilities. Immediately thereafter, U.S. Corrections Corporation was
merged with and into a wholly-owned subsidiary of Prison Realty in a cash
merger. By virtue of the U.S. Corrections Corporation merger, Prison Realty
acquired four correctional and detention facilities in Kentucky, one in Ohio,
and two facilities in North Carolina, one of which is presently under
construction. Prison Realty leases the four Kentucky facilities, which have an
aggregate design capacity of 1,863 beds, to CCA and leases the completed North
Carolina facility, which has a design capacity of 528 beds and is operated by
CCA, to the State of North Carolina. Prison Realty expects to lease the North
Carolina facility presently under construction to the State of North Carolina
upon its completion. It is anticipated that the facility under construction will
also be operated by CCA.
What Current CCA Shareholders Will Receive in the Merger (Page 43)
If the merger is completed, CCA shareholders will have the right to receive
0.875 share of New Prison Realty common stock for each share of CCA common stock
they own. New Prison Realty will not issue fractional shares after the merger.
Instead, CCA shareholders will receive a cash payment for their fractional
shares.
CCA shareholders should not send in their stock certificates for exchange until
instructed to do so.
Comparison of Rights of Shareholders of CCA and Stockholders of New Prison
Realty (Page 126)
Following the merger, the shareholders of CCA, whose rights as shareholders are
currently governed by Tennessee law and the charter and bylaws of CCA, will
become stockholders of New Prison Realty, and their rights as stockholders will
be governed by Maryland law and the charter and bylaws of New Prison Realty,
which are substantially similar to the current Prison Realty declaration of
trust and bylaws. Therefore, their rights as New Prison Realty stockholders will
differ from their rights as CCA shareholders. These differences include, but are
not limited to:
- - New Prison Realty stockholders will be subject to limitations on ownership of
shares of New Prison Realty common and preferred stock. CCA has no such
limitations.
- - New Prison Realty will require stockholders to provide advance notice of
stockholder proposals and director nominations. CCA shareholders are subject
to no such requirement.
- - New Prison Realty will have a classified Board of Directors with three
classes. CCA's Board of Directors is not classified.
- - Any amendment to New Prison Realty's charter will require two-thirds approval
of its stockholders. Amendments to CCA's charter require only majority
approval of its shareholders.
- - In accordance with Maryland law, New Prison Realty will elect not to be
governed by certain Maryland laws concerning corporate takeovers and the
voting rights of certain large stockholders. CCA is governed by similar
provisions of Tennessee law.
Effective Time of the CCA Merger and the Prison Realty Merger (Page 43)
CCA expects that the effective date of the merger of CCA into New Prison Realty
will be December 31, 1998 and Prison Realty expects that the effective date of
the merger of Prison Realty into New Prison Realty will be January 1, 1999.
What Current Prison Realty Shareholders Will Receive in the Merger (Page 43)
If the merger is completed, Prison Realty shareholders will own 1.0 share of New
Prison Realty common stock for each Prison Realty common share they own or 1.0
share of New Prison Realty Series A Preferred Stock for each Prison Realty
Series A Preferred Share they own.
Prison Realty shareholders should not send in their share certificates in
connection with the merger.
Comparison of Rights of Shareholders of Prison Realty and Stockholders of New
Prison Realty (Page 137)
Following the merger, the shareholders of Prison Realty, whose rights as
shareholders are currently
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governed by Maryland real estate investment trust law and the declaration of
trust and bylaws of Prison Realty, will become stockholders of New Prison Realty
and their rights as stockholders will be governed by Maryland corporate law and
the charter and bylaws of New Prison Realty. The New Prison Realty charter and
bylaws are substantially similar to the current Prison Realty declaration of
trust and bylaws. Therefore, the rights of holders of shares of New Prison
Realty common stock and New Prison Realty Series A Preferred Stock will be
essentially identical to the rights of current holders of Prison Realty common
shares and Prison Realty Series A Preferred Shares, except that New Prison
Realty is a Maryland corporation, while Prison Realty is a Maryland real estate
investment trust.
Ownership of New Prison Realty After the Merger (Page 26)
Following the merger, current CCA shareholders will own approximately 80%, and
current Prison Realty shareholders will own approximately 20%, of all of the
outstanding common stock of New Prison Realty, assuming all Prison Realty and
CCA share options are exercised. This information is based on the number of
common shares of Prison Realty and shares of CCA common stock and stock options
outstanding on October 14, 1998.
Conditions to the Merger (Page 77)
The merger will be completed if certain conditions, including the following, are
met:
(1) the approval of the merger of CCA into New Prison Realty by the CCA
shareholders;
(2) the approval of the merger of Prison Realty into New Prison Realty by the
Prison Realty shareholders;
(3) the receipt of an opinion from CCA's tax adviser that the merger of CCA into
New Prison Realty will qualify as a tax-free reorganization;
(4) the receipt of an opinion from Prison Realty's tax adviser that the merger
of Prison Realty into New Prison Realty will qualify as a tax-free
reorganization;
(5) the receipt of an opinion from Prison Realty's tax adviser that New Prison
Realty will qualify as a REIT following the merger;
(6) the absence of legal restraints or prohibitions that prevent the completion
of the merger;
(7) the receipt of certain consents, approvals, authorizations, qualifications
and orders of government entities and other third parties as are necessary
for the merger transactions;
(8) the transfer of non-real estate assets by CCA to Operating Company and to
the Service Companies prior to the merger of CCA into New Prison Realty; and
(9) receipt of financing for New Prison Realty.
All conditions, except for the material conditions contained in (1) and (2)
above, may be waived by the company entitled to assert the condition. Prison
Realty has waived the requirement in (7) above with respect to consents of
government entities as to the assignment of the management contracts of CCA. If
material conditions to the merger are waived by either party after the date of
this Joint Proxy Statement-Prospectus, or any supplement thereto, the companies
expect to resolicit shareholder approval of the merger.
Termination of the Merger Agreement (Page 81)
The Board of Directors of CCA and the Board of Trustees of Prison Realty may
jointly agree in writing to terminate the merger agreement without completing
the merger. The merger agreement may also be terminated in certain other
circumstances, including the failure of the parties to complete the merger by
March 31, 1999, the failure of either company's shareholders to approve the
merger, a court order prohibiting the merger, changes in circumstances that
significantly affect the parties' ability to complete the merger, such as the
receipt by CCA of a superior takeover proposal by another company, or other
circumstances.
Termination Fees and Expenses (Page 82)
CCA must reimburse Prison Realty up to $7.0 million of out-of-pocket fees and
expenses reasonably incurred in connection with the merger agreement, if the
merger agreement is terminated because CCA receives a superior takeover proposal
from another company and CCA accepts such proposal by executing an acquisition
agreement or the CCA Board of Directors withdraws or modifies its recommendation
in favor of the merger.
Regulatory Approvals (Page 68)
Prison Realty and CCA do not believe that any governmental filings in the United
States, including without limitation any filings under the Hart-Scott-
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Rodino Antitrust Improvements Act of 1976, as amended, or any other federal or
state statute or regulation, other than the articles of merger to be filed with
the appropriate government entities of the States of Tennessee and Maryland, are
required with respect to the merger.
Accounting Treatment (Page 68)
The merger is expected to be accounted for as a common control transfer from CCA
to New Prison Realty at historical cost and the purchase of Prison Realty by New
Prison Realty. CCA will be treated as the acquiring company, and Prison Realty
will be treated as the acquired company for financial reporting purposes.
Accordingly, the historical book basis of the assets, liabilities and
shareholders' equity of CCA will become the carrying value of the assets,
liabilities and shareholders' equity of New Prison Realty, and the assets and
liabilities of Prison Realty will be recorded on the books of New Prison Realty
at their fair value.
The purchase method of accounting prescribes that the acquiring company allocate
the cost of an acquired company, including the expenses of the acquisition, to
the assets acquired and liabilities assumed as of the date of the acquisition
based upon their fair values.
No Appraisal Rights (Page 68)
Neither the holders of shares of common stock of CCA nor the holders of the
common shares of Prison Realty are entitled to appraisal rights in connection
with the merger.
Material Federal Income Tax Consequences (Page 103)
CCA and Prison Realty have structured the merger so that CCA, Prison Realty and
their shareholders will not recognize gain or loss for federal income tax
purposes as a result of the merger, except for gain or loss attributable to cash
received for fractional shares. Bass, Berry & Sims PLC, tax counsel to CCA, will
deliver an opinion to CCA dated the closing date that CCA and its shareholders
will not recognize gain or loss for federal income tax purposes as a result of
the merger and Stokes & Bartholomew, P.A., tax counsel to Prison Realty, will
deliver an opinion to Prison Realty dated the closing date that Prison Realty
and its shareholders will not recognize gain or loss for federal income tax
purposes as a result of the merger. Receipt of each tax opinion is a condition
to the merger.
CCA and Prison Realty have also structured the merger and the post-combination
operations of New Prison Realty so that upon and after the completion of the
merger, New Prison Realty will qualify as a REIT under the Internal Revenue Code
of 1986, as amended. Stokes & Bartholomew, P.A., tax counsel to Prison Realty,
will render an opinion to Prison Realty and New Prison Realty that, commencing
with New Prison Realty's taxable year ending December 31, 1999, New Prison
Realty will be organized in conformity with the requirements for qualification
as a REIT and that its proposed method of operation will enable it to meet the
requirements for qualification and taxation as a REIT. Receipt of this opinion
is a condition to the merger.
Tax matters are very complicated and the tax consequences of the merger to you
will depend on the facts of your own situation. You should consult your tax
advisers for a full understanding of the tax consequences of the merger to you.
Benefits of Merger to Affiliates of CCA and Prison Realty (Pages 22 and 65)
If the merger is completed, some officers and directors of CCA and some officers
and trustees of Prison Realty will receive substantial benefits that
shareholders of CCA and Prison Realty will not receive. Sodexho, CCA's largest
shareholder, and a mutual fund managed by an affiliate of Baron, which, with its
affiliates, is Prison Realty's largest shareholder, will also receive certain
benefits.
- - At the time of the merger, Sodexho will purchase a 16% interest in Operating
Company for $8.0 million in cash and will designate a representative to the
New Prison Realty Board of Directors and to the board of directors of
Operating Company.
- - At the time of the merger, a mutual fund managed by an affiliate of Baron will
purchase a 16% interest in Operating Company for $8.0 million in cash and will
designate a representative to the board of directors of Operating Company.
- - Doctor R. Crants, currently the Chief Executive Officer and President of CCA
and Chairman of the Prison Realty Board of Trustees is also Chief Executive
Officer of New Prison Realty and, will, at the time of the merger, enter into
an
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employment agreement with New Prison Realty. Doctor R. Crants is also
currently Chief Executive Officer of Operating Company and will, at the time
of the merger, receive an employment agreement with Operating Company.
- - Some CCA and Prison Realty officers, other than Doctor R. Crants, will be
holders of 38.0% of the stock of Operating Company. The shares were obtained
by the individuals in September 1998 for nominal consideration. Based on the
value of the cash investment of Sodexho and the mutual fund managed by an
affiliate of Baron in Operating Company, 38.0% of Operating Company's stock
will have a value of $19.0 million upon completion of the merger. Operating
Company will manage certain correctional and detention facilities that CCA
managed prior to the merger.
- - Each of the directors of CCA are or will become directors of either Operating
Company or one of the Service Companies, but will not be shareholders of
either. They will be paid directors' fees for their services.
In making your decision on the merger, you should consider these benefits.
Potential Conflicts of Interest (Pages 22 and 100)
After the merger, several current officers, directors, trustees or shareholders
of Prison Realty or CCA may have conflicts of interest in connection with the
operation of New Prison Realty, Operating Company and the Service Companies.
These conflicts impose a risk that these persons will favor their own interests
over the interests of New Prison Realty in the merger or after the merger, in
connection with the operations of New Prison Realty and Operating Company and
the ongoing relationship between these companies. Doctor R. Crants, Michael
Quinlan, D. Robert Crants, III, and Michael W. Devlin, who are trustees and
officers of Prison Realty and will be directors and officers of New Prison
Realty, have employment or ownership interests in Operating Company which may
create a conflict. In addition, Sodexho and a mutual fund managed by the Baron
affiliate will each own an interest in Operating Company and New Prison Realty
after the merger.
It is anticipated that New Prison Realty will address conflicts by adopting
policies and procedures, including requiring Doctor R. Crants to abstain from
making management decisions in his capacity as an officer or director of New
Prison Realty and Operating Company, respectively, with respect to matters that
present a conflict of interest between the companies, and to abstain from voting
as a director of either company with respect to matters that present a conflict
of interest between the companies. An independent committee of New Prison Realty
directors who are not employees of New Prison Realty or affiliated with
Operating Company is expected to approve actions of the New Prison Realty Board
of Directors concerning agreements or transactions with Operating Company. In
addition, the independent committee of the New Prison Realty Board will address
other conflicts under New Prison Realty's business conduct policy. The current
members of the independent committee are Richard W. Cardin, Monroe J. Carell,
Jr., John W. Eakin, Jr., Ted Feldman, Jackson W. Moore, and Joseph V. Russell.
CASH DISTRIBUTION TO NEW PRISON REALTY STOCKHOLDERS (PAGE 69)
After the merger, New Prison Realty will succeed to CCA's accumulated earnings
and profits. As a REIT, New Prison Realty cannot complete any taxable year as a
REIT with accumulated earnings and profits from a taxable corporation.
Accordingly, to preserve its REIT status, after the merger New Prison Realty
will make a distribution of CCA's accumulated earnings and profits to all New
Prison Realty common stockholders, including those holding New Prison Realty
common stock received as a result of the merger.
Although New Prison Realty will succeed to CCA's accumulated earnings and
profits, New Prison Realty will not receive a corresponding amount of cash from
CCA, as accumulated earnings and profits is an accounting determination which
represents CCA's cumulative profitability, and is not a measure of the actual
availability of funds. Because New Prison Realty will be required to borrow
funds or raise equity capital to make the earnings and profits distribution, it
is anticipated that the earnings and profits distribution will be made to
holders of shares of New Prison Realty common stock who own shares on a record
date to be established in the fourth quarter of 1999. New Prison Realty
stockholders who, prior to the record date of the earnings and profits
distribution, dispose of their shares of New Prison Realty
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common stock will not receive the earnings and profits distribution.
The amount of the earnings and profits distribution cannot be determined until
after the merger. The per share amount of the earnings and profits distribution
will depend upon the final determination of CCA's accumulated earnings and
profits, the number of shares of New Prison Realty common stock outstanding as
of the earnings and profits distribution record date, and the cash settlement of
CCA stock options and other compensation expenses in connection with the merger.
Currently, the earnings and profits distribution is expected to be made during
the fourth quarter of 1999 and to exceed $2.00 per share of New Prison Realty
common stock.
NEW PRISON REALTY'S DISTRIBUTION POLICY AFTER THE MERGER (PAGE 69)
As part of Prison Realty's distribution policy, Prison Realty's Board of
Trustees evaluates Prison Realty's quarterly distributions based on expected
calendar year operations. The anticipated 1998 distributions to be paid by
Prison Realty are expected to total $1.81 per common share. New Prison Realty
will continue to utilize Prison Realty's distribution policy. New Prison Realty
expects that its annualized regular distribution rate for the calendar year
1999, without giving effect to the earnings and profits distribution, will be
within a range of 80% to 85% of its funds from operations per share. As a REIT,
New Prison Realty will be obligated to distribute 95% of its current taxable
earnings to its shareholders on an annual basis. The payment of distributions in
the future will depend on tax law requirements, New Prison Realty's financial
condition and earnings, business conditions and other factors.
If the merger is completed when expected, CCA shareholders and Prison Realty
shareholders will receive cash distributions from New Prison Realty beginning
with its regular distribution for the first quarter of 1999. The distribution
for the first quarter is presently expected to be paid in April 1999.
COMPARATIVE PER SHARE MARKET PRICE INFORMATION (PAGE 21)
CCA common stock is listed on the New York Stock Exchange under the symbol "CCA"
and Prison Realty common shares are listed on the New York Stock Exchange under
the symbol "PZN." Prison Realty Series A Preferred Shares are listed on the New
York Stock Exchange under the symbol "PZN PrA." On April 17, 1998, the last full
trading day prior to the public announcement of the proposed merger, CCA common
stock closed at $33.50 per share and Prison Realty common shares closed at
$40.13 per share. On October 14, 1998, CCA common stock closed at $15.13 per
share and Prison Realty common shares closed at $19.13 per share.
LISTING OF SHARES OF NEW PRISON REALTY COMMON STOCK AND SERIES A PREFERRED STOCK
(PAGE 68)
New Prison Realty will apply to list the shares of New Prison Realty common
stock and New Prison Realty Series A Preferred Stock to be issued in the merger
on the New York Stock Exchange. CCA and Prison Realty will use their best
efforts to cause these shares to be approved for supplemental listing on the New
York Stock Exchange as the successor to Prison Realty, subject to official
notice of issuance, prior to the effective time of the merger.
RECENT DEVELOPMENTS (PAGE 160)
Bank Financings (Page 160)
On June 24, 1998, CCA obtained an increase in the credit available under its
revolving credit facility with a group of banks arranged by First Union National
Bank, NationsBank, N.A., and Canadian Imperial Bank of Commerce from $170.0
million to $350.0 million. Proceeds from the credit facility are being used for
working capital, project development and general corporate purposes. The
increased credit facility will mature on the earlier of the completion of the
merger or September 6, 1999.
On July 31, 1998, Prison Realty obtained an increase in the credit available
under its revolving credit facility with a group of banks arranged by First
Union National Bank, NationsBank, N.A., and Canadian Imperial Bank of Commerce
from $225.0 million to $300.0 million. Proceeds from the credit facility are
being used for the acquisition of correctional and detention facilities, working
capital and general corporate purposes. The increased credit facility will
mature on the earlier of the completion of the merger or July 18, 2000.
New Prison Realty expects to obtain a commitment from NationsBank N.A. and
Canadian Imperial Bank of Commerce for a $750.0 million credit facility upon
completion of the merger. Each of the Service Companies expects to receive a
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commitment from NationsBank N.A. for a $20.0 million credit facility upon
completion of the merger. Operating Company has engaged NationsBanc Montgomery
Securities LLC to assist in the procurement of a $60.0 million credit facility
for Operating Company upon completion of the merger, of which NationsBank N.A.
is expected to commit for $20.0 million. It is expected that the commitment
letters will be subject to customary conditions, including the absence of
material adverse changes with respect to the companies, as well as the condition
that each aspect of the financing plan described herein be consummated.
Securities Financings (Page 160)
On September 16, 1998, Prison Realty filed a Registration Statement on Form S-3
to register an aggregate of $500.0 million in value of its common shares,
preferred shares, and common share rights and warrants for sale to the public.
Proceeds from sales under the Prison Realty Registration Statement on Form S-3
will be used for the general corporate purposes of Prison Realty. As of October
14, 1998, Prison Realty has issued and sold 362,731 common shares under the
Prison Realty Registration Statement on Form S-3. From the effective date of the
Registration Statement on Form S-3, October 14, 1998, until completion of the
merger, Prison Realty will not issue a number of common shares or securities
convertible into Prison Realty common shares which would cause former Prison
Realty shareholders to own more than 50% of the shares of the common stock of
New Prison Realty.
It is expected that, upon completion of the merger, New Prison Realty will file
a Registration Statement on Form S-3 to register up to $1.0 billion in value of
its common stock, preferred stock, common stock rights or warrants and debt
securities.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
This Joint Proxy Statement-Prospectus contains certain forward-looking
statements about the financial condition, results of operations and business of
each of Prison Realty and CCA and about New Prison Realty following the
completion of the merger. These statements concern the growth and revenue
enhancements and other advantages expected to be obtained from the merger, the
anticipated impact of the merger on financial performance of New Prison Realty
and earnings estimates for New Prison Realty. These statements appear in several
sections of this Joint Proxy Statement-Prospectus, including "Summary," "The
Merger -- Prison Realty's Reasons for the Merger; Recommendation of the Prison
Realty Board," "The Merger -- CCA's Reasons for the Merger; Recommendation of
the CCA Board," "The Merger -- Opinion of Prison Realty's Financial Adviser,"
and "The Merger -- Opinion of CCA's Financial Adviser." Also, when any of the
words "believes," "expects," "anticipates," "intends," "estimates," "plans," or
similar terms or expressions are used in this Joint Proxy Statement-Prospectus,
forward-looking statements are being made. In addition, forward-looking
statements may be included in various other documents issued in the future and
in various oral statements by representatives of Prison Realty and CCA to
securities analysts and potential investors from time to time.
Forward-looking statements are not guarantees of future performance. They are
subject to risks, uncertainties and assumptions. The future results and
shareholder values of Prison Realty and CCA, and of New Prison Realty, may
differ materially from those expressed in these forward-looking statements. The
information contained or incorporated by reference in this Joint Proxy
Statement-Prospectus, including, without limitation, the information set forth
in "Material Risk Factors," identifies important factors that could cause such
differences. Many of the factors that could influence or determine actual
results are unpredictable and not within the control of New Prison Realty,
Prison Realty or CCA. In addition, New Prison Realty, Prison Realty and CCA do
not intend to, nor are they obligated to, update these forward-looking
statements after they distribute this Joint Proxy Statement-Prospectus, even if
new information, future events or other circumstances have made them incorrect
or misleading as of any future date. For all of these statements, Prison Realty
and CCA claim the protection of the "safe harbor" for forward-looking statements
provided in the Private Securities Litigation Reform Act of 1995, as set forth
in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended.
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SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
On September 29, 1998, CCA, Prison Realty and New Prison Realty entered into the
Amended and Restated Agreement and Plan of Merger, which amends and restates the
Agreement and Plan of Merger between CCA and Prison Realty dated April 18, 1998,
pursuant to which (i) CCA will merge with and into New Prison Realty on December
31, 1998, with New Prison Realty being the surviving company, and (ii) Prison
Realty will merge with and into New Prison Realty on January 1, 1999, with New
Prison Realty being the surviving company. Additionally, on April 17, 1998,
Prison Realty acquired all of the issued and outstanding capital stock and
derivative securities of U.S. Corrections Corporation for a cash payment to U.S.
Corrections Corporation's shareholders of $157.0 million plus the assumption of
certain liabilities.
The merger will be accounted for as a common control transfer from CCA to New
Prison Realty at historical cost and the purchase of Prison Realty by New Prison
Realty. As such, CCA will be treated as the acquiring company and Prison Realty
will be treated as the acquired company for financial reporting purposes. The
general provisions of the purchase method of accounting prescribe that: (1)
Prison Realty's assets and liabilities be recorded at fair market value, as
required by Accounting Principles Board Opinion No. 16; (2) CCA's assets and
liabilities be carried forward at historical cost; (3) CCA's historical
financial statements be presented as the continuing accounting entity's; and (4)
the equity section of the balance sheet and earnings per share be retroactively
restated to reflect the effect of the exchange ratio established in the merger
agreement. The Unaudited Pro Forma Combined Financial Statements included
elsewhere herein have been adjusted to reflect the above provisions.
The purchase method of accounting prescribes that the assets and liabilities
owned by Prison Realty be adjusted to estimated fair market value. The fair
market value of the assets and liabilities of Prison Realty has been determined
based upon preliminary estimates and is subject to change as additional
information is obtained. Management does not anticipate that the preliminary
allocation of purchase costs based upon the estimated fair market value of the
assets and liabilities of Prison Realty will materially change; however, the
allocation of purchase costs is subject to final determination based upon
estimates and other evaluations of fair market value as of the close of the
transactions. Therefore, the allocations reflected in the following selected
unaudited pro forma combined financial information may differ from the amounts
ultimately determined.
The following selected unaudited pro forma combined financial information is
derived from and should be read in conjunction with the Unaudited Pro Forma
Combined Financial Statements included elsewhere in this Joint Proxy
Statement-Prospectus. The following financial data represents the unaudited pro
forma financial results for New Prison Realty, the continuing registrant, as of
and for the six months ended June 30, 1998 and the year ended December 31, 1997,
respectively. The pro forma operating data is presented as if the merger had
occurred as of the beginning of the period indicated and therefore incorporates
certain assumptions that are included in the Notes to Pro Forma Combined
Statement of Operations included elsewhere herein. The pro forma balance sheet
data is presented as if the merger had occurred on June 30, 1998 and therefore
incorporates certain assumptions that are included in the Notes to Pro Forma
Combined Balance Sheet included elsewhere herein. The pro forma information does
not purport to represent what New Prison Realty's financial position or results
of operations actually would have been had the merger, in fact, occurred on such
date or at the beginning of the period indicated, or to project New Prison
Realty's financial position or results of operations at any future date or for
any future period.
16
<PAGE> 28
PRISON REALTY CORPORATION
(NEW PRISON REALTY)
SELECTED PRO FORMA COMBINED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, SIX MONTH
1997 TO PERIOD ENDED
DECEMBER 31, 1997 JUNE 30, 1998
----------------- --------------
<S> <C> <C>
OPERATING DATA:
Revenues:
Rental................................................. $ 82,028 $68,382
Expenses:
Depreciation and amortization.......................... 24,867 17,835
General and administrative............................. 2,981 2,010
-------- -------
27,848 19,845
-------- -------
Operating income.......................................... 54,180 48,537
Equity in earnings of subsidiaries........................ 13,252 14,268
Licensing fees............................................ 2,051 1,697
Interest income........................................... 14,119 2,610
-------- -------
Net income................................................ 83,602 67,112
Dividends to Preferred Stockholders....................... -- 3,569
-------- -------
Net Income available for shares of Common Stock........... $ 83,602 $63,543
======== =======
Net income available per share of Common Stock:
Basic.................................................. $ 0.94 $ 0.69
======== =======
Diluted................................................ $ 0.83 $ 0.63
======== =======
Weighted average number of shares outstanding, basic...... 89,144 91,510
======== =======
Weighted average number of shares outstanding, diluted.... 100,966 101,024
======== =======
</TABLE>
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1998
--------------
<S> <C>
BALANCE SHEET DATA:
Net real estate, net of accumulated depreciation.......... 1,444,854
Total assets.............................................. 1,979,287
Line of credit and current portion of long-term debt...... 220,841
Long-term debt, net of current portion.................... 265,659
Total liabilities, excluding deferred gain................ 931,234
Total stockholders' equity................................ 929,394
</TABLE>
17
<PAGE> 29
PRISON REALTY SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth certain selected consolidated historical
financial information concerning Prison Realty and its subsidiaries for the six
months ended June 30, 1998 and for the period from July 18, 1997 to December 31,
1997. The selected historical financial information as of and for the six months
ended June 30, 1998 has been derived from Prison Realty's unaudited condensed
consolidated financial statements included in Prison Realty's Quarterly Report
on Form 10-Q which is incorporated by reference in this Joint Proxy
Statement-Prospectus. The selected historical financial information as of and
for the period ended December 31, 1997 has been derived from Prison Realty's
audited consolidated financial statements included in Prison Realty's Annual
Report on Form 10-K/A which is incorporated by reference in this Joint Proxy
Statement-Prospectus. All information contained in the following table should be
read in conjunction with the consolidated financial statements and related notes
of Prison Realty referred to above. See "Other Matters -- Where You Can Find
More Information".
<TABLE>
<CAPTION>
PERIOD FROM JULY 18, 1997 SIX MONTH PERIOD
TO DECEMBER 31, 1997 ENDED JUNE 30, 1998
------------------------- --------------------
<S> <C> <C>
OPERATING DATA:
Revenues:
Rental............................................ $19,980 $30,073
Interest.......................................... 600 617
------- -------
20,580 30,690
------- -------
Expenses:
Depreciation...................................... 5,088 8,593
Interest.......................................... 184 2,928
General and administrative........................ 981 1,010
------- -------
6,253 12,531
------- -------
Net income.......................................... 14,327 18,159
Dividends to Preferred Shareholders................. -- (3,569)
------- -------
Net income available for Common Shares.............. $14,327 $14,590
======= =======
Net income available per Common Share:
Basic............................................. $ 0.66 $ 0.68
Diluted........................................... $ 0.65 $ 0.66
Weighted average number of shares outstanding,
basic............................................. 21,576 21,576
Weighted average number of shares outstanding,
diluted........................................... 22,007 22,053
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF JUNE 30, 1998
----------------------- -------------------
<S> <C> <C>
BALANCE SHEET DATA:
Net real estate properties........................ $453,272 $743,016
Total assets...................................... 454,438 750,193
Line of credit.................................... 32,000 215,000
Total shareholders' equity........................ 412,749 512,053
</TABLE>
18
<PAGE> 30
<TABLE>
<CAPTION>
PERIOD FROM JULY 18, 1997 SIX MONTH PERIOD ENDED
TO DECEMBER 31, 1997 JUNE 30, 1998
------------------------- ----------------------
<S> <C> <C>
OTHER DATA:
Funds from Operations(1)........................ $ 19,415 $ 23,183
Net cash provided by operating activities....... 19,835 36,315
Net cash used in investing activities........... (455,360) (298,338)
Net cash provided by financing activities....... 436,281 266,296
Distributions on Common Shares.................. 16,635 18,340
Distributions per Common Share.................. 0.77 0.85
Ratio of Earnings to Fixed Charges(2)........... 78.9 6.8
</TABLE>
- ---------------
(1) Prison Realty management believes Funds from Operations is helpful to
investors as a measure of the performance of an equity REIT because, along
with cash flows from operating activities, financing activities and
investing activities, it provides investors with an understanding of the
ability of Prison Realty to incur and service debt and make capital
expenditures. Funds from Operations should be examined in conjunction with
net income as presented.
<TABLE>
<CAPTION>
PERIOD FROM JULY 18, 1997 SIX MONTH PERIOD ENDED
TO DECEMBER 31, 1997 JUNE 30, 1998
------------------------- ----------------------
<S> <C> <C>
Calculation of Funds from Operations:
Net income.................................. $14,327 $14,590
Plus: Real estate depreciation.............. 5,088 8,593
------- -------
Funds from Operations....................... $19,415 $23,183
======= =======
</TABLE>
Funds from Operations should not be considered as an alternative to net
income (determined in accordance with GAAP) as an indication of Prison
Realty's financial performance or to cash flows from operating activities
(determined in accordance with GAAP) as a measure of Prison Realty's
liquidity, nor is it indicative of funds available to fund Prison Realty's
cash needs, including its ability to make distributions. Funds from
Operations as presented herein may not be comparable to other similarly
titled measures of other REITs.
(2) The ratio of earnings to fixed charges was computed by dividing earnings by
fixed charges. Fixed charges consist of interest expense and amortization of
loan origination fees. Earnings consist of net income (loss) before income
taxes and extraordinary items, plus fixed charges.
19
<PAGE> 31
CCA SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth certain selected consolidated historical
financial information concerning CCA and its subsidiaries for the six months
ended June 30, 1998 and 1997 and for each of the five years ended December 31,
1997. The selected historical financial information as of and for the six months
ended June 30, 1998 and 1997 has been derived from CCA's unaudited condensed
consolidated financial statements included in CCA's Quarterly Report on Form
10-Q which is incorporated by reference in this Joint Proxy
Statement-Prospectus. The selected historical financial information for each of
the five years ended December 31, 1997 has been derived from CCA's audited
consolidated financial statements included in CCA's Annual Report on Form 10-K/A
which is incorporated by reference in this Joint Proxy Statement-Prospectus. All
information contained in the following table should be read in conjunction with
the consolidated financial statements and related notes of CCA referred to
above. See "Other Matters -- Where You Can Find More Information."
<TABLE>
<CAPTION>
SIX MONTH PERIOD
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues $132,534 $152,375 $207,241 $292,513 $462,249 $198,862 $305,369
-------- -------- -------- -------- -------- -------- --------
Expenses:
Operating 107,837 123,273 153,692 211,208 330,470 140,992 214,342
Lease 742 741 5,904 2,786 18,684 2,296 24,936
General and administrative 7,332 8,939 13,506 12,607 16,025 7,272 10,463
Depreciation and amortization 5,759 5,753 6,524 11,339 14,093 7,930 7,287
-------- -------- -------- -------- -------- -------- --------
121,670 138,706 179,626 237,940 379,272 158,490 257,028
-------- -------- -------- -------- -------- -------- --------
Operating income 10,864 13,669 27,615 54,573 82,977 40,372 48,341
Interest expense (income), net 4,424 3,439 3,952 4,224 (4,119) 1,352 (5,211)
-------- -------- -------- -------- -------- -------- --------
Income before income taxes 6,440 10,230 23,663 50,349 87,096 39,020 53,552
Provision for income taxes 832 2,312 9,330 19,469 33,141 15,413 14,021
-------- -------- -------- -------- -------- -------- --------
Net income 5,608 7,918 14,333 30,880 53,955 23,607 39,531
Preferred stock dividends 425 204 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income allocable to common
stockholders $ 5,183 $ 7,714 $ 14,333 $ 30,880 $ 53,955 $ 23,607 $ 39,531
======== ======== ======== ======== ======== ======== ========
Net income per share:
Basic $ .10 $ .14 $ .23 $ .43 $ .70 $ .31 $ .49
Diluted $ .10 $ .12 $ .18 $ .36 $ .61 $ .27 $ .44
Weighted average shares
outstanding:
Basic 50,185 54,500 62,257 71,763 77,221 75,917 79,924
Diluted 52,155 62,384 81,595 87,040 90,239 89,937 90,252
BALANCE SHEET (END OF PERIOD):
Total assets $109,285 $141,792 $213,478 $468,888 $697,940 $665,881 $895,601
Long-term debt, less current
portion 50,558 47,984 74,865 117,535 127,075 231,886 265,659
Total liabilities excluding
deferred gain 75,103 80,035 116,774 187,136 214,112 353,956 377,767
Stockholders' equity 34,182 61,757 96,704 281,752 348,076 311,925 387,152
</TABLE>
20
<PAGE> 32
COMPARATIVE PER SHARE MARKET PRICE AND
DISTRIBUTION/DIVIDEND INFORMATION
PRISON REALTY
Prison Realty's common shares and Series A Preferred Shares are listed on the
New York Stock Exchange ("NYSE") under the symbols "PZN" and "PZN PrA",
respectively. New Prison Realty will apply to list the shares of New Prison
Realty common stock and New Prison Realty Series A Preferred Stock to be issued
in the merger on the NYSE. CCA and Prison Realty will use their best efforts to
cause these shares to be approved for supplemental listing on the NYSE as the
successor to Prison Realty, subject to official notice of issuance, prior to the
effective time of the merger. The following table sets forth, for the fiscal
quarters indicated (i) the range of high and low closing prices of Prison
Realty's common shares on the NYSE, and (ii) the amount of cash distribution
paid or expected to be paid per share:
<TABLE>
<CAPTION>
PER SHARE CASH
PRISON REALTY DISTRIBUTION
CLOSING PRICES PAID OR
--------------- EXPECTED TO BE
HIGH LOW PAID
------ ------ --------------
<S> <C> <C> <C>
FISCAL YEAR 1997
Third Quarter (July 15, 1997 through September 30,
1997)............................................. $37.75 $28.83 $0.346
Fourth Quarter....................................... 44.63 33.00 0.425
FISCAL YEAR 1998
First Quarter........................................ 44.38 39.00 0.425
Second Quarter....................................... 41.38 26.63 0.425
Third Quarter........................................ 30.25 18.00 0.480
Fourth Quarter (through October 14, 1998)............ 19.13 16.00 0.480(expected)
</TABLE>
CCA
CCA common stock is listed on the NYSE under the symbol "CCA." The following
table sets forth, for the fiscal quarters indicated (i) the range of high and
low closing prices of the CCA's common stock on the NYSE, and (ii) the amount of
cash dividends paid or to be paid per share:
<TABLE>
<CAPTION>
CCA
CLOSING PRICES PER SHARE CASH
--------------- DIVIDEND PAID
HIGH LOW OR TO BE PAID
------ ------ --------------
<S> <C> <C> <C>
FISCAL YEAR 1996
First Quarter.......................................... $28.50 $17.38 $0
Second Quarter......................................... 42.44 26.81 0
Third Quarter.......................................... 35.50 27.25 0
Fourth Quarter......................................... 31.75 23.13 0
FISCAL YEAR 1997
First Quarter.......................................... 33.50 24.25 0
Second Quarter......................................... 40.88 23.50 0
Third Quarter.......................................... 44.88 37.00 0
Fourth Quarter......................................... 44.56 29.69 0
FISCAL YEAR 1998
First Quarter.......................................... 41.00 32.50 0
Second Quarter......................................... 35.06 20.88 0
Third Quarter.......................................... 24.69 13.56 0
Fourth Quarter (through October 14, 1998).............. 15.12 11.14 0
</TABLE>
In October 1995, CCA authorized a 2-for-1 stock split on the CCA common stock
effective October 31, 1995. The stock split was paid in the form of a one-share
dividend for every share of CCA common stock held by shareholders of record on
October 16, 1995. In June 1996, CCA authorized a 2-for-1 stock split on the CCA
common stock effective July 2, 1996. The stock split was paid in the form of a
one-share dividend for every share of CCA common stock held by shareholders of
record on June 19, 1996. All references herein to the CCA common stock are on a
post-split basis.
21
<PAGE> 33
MATERIAL RISK FACTORS
In addition to the other information contained or incorporated by reference
in this Joint Proxy Statement-Prospectus, you should consider the following
material risk factors before you decide whether you wish to approve the merger
transactions described herein, in which CCA will be merged into a newly formed
Maryland corporation, Prison Realty Corporation ("New Prison Realty"), with New
Prison Realty as the surviving company (the "CCA Merger"), and then Prison
Realty will be merged into New Prison Realty, with New Prison Realty as the
surviving company (the "Prison Realty Merger" and, together with the CCA Merger,
the "Merger"), pursuant to an Amended and Restated Agreement and Plan of Merger,
dated as of September 29, 1998 between CCA, Prison Realty and New Prison Realty,
which amends and restates the Agreement and Plan of Merger between CCA and
Prison Realty dated April 18, 1998 (the "Merger Agreement"). Pursuant to the
Merger Agreement, in the Merger (i) holders of CCA common stock, $1.00 par value
per share (the "CCA Common Stock"), will obtain the right to receive 0.875 share
of New Prison Realty common stock, $0.01 par value per share (the "New Prison
Realty Common Stock"), for each share of CCA Common Stock they hold (the "CCA
Merger Consideration"); (ii) holders of common shares of Prison Realty, $0.01
par value per share (the "Prison Realty Common Shares"), will receive 1.0 share
of New Prison Realty Common Stock for each Prison Realty Common Share they hold
(the "Prison Realty Common Share Merger Consideration"); and (iii) holders of
the 8.0% Series A Cumulative Preferred Shares of Prison Realty, $0.01 par value
per share (the " Prison Realty Series A Preferred Shares" and together with the
Prison Realty Common Shares, the "Prison Realty Capital Shares"), will receive
1.0 share of New Prison Realty 8.0% Series A Cumulative Preferred Stock, $0.01
par value per share (the "New Prison Realty Series A Preferred Stock" and
together with the New Prison Realty Common Stock, the "New Prison Realty Capital
Stock"), for each Prison Realty Series A Preferred Share they hold (the "Prison
Realty Series A Preferred Share Merger Consideration" and together with the
Prison Realty Common Share Merger Consideration and the CCA Merger
Consideration, the "Merger Consideration").
INTERESTS OF AFFILIATES AND SHAREHOLDERS IN THE MERGER AND POTENTIAL CONFLICTS
OF INTEREST FOLLOWING THE MERGER
Shareholders of CCA and Prison Realty should be aware that several
shareholders of CCA and Prison Realty and several members of CCA's and Prison
Realty's management, and CCA's and Prison Realty's Board have interests in, and
will receive benefits as a consequence of, the Merger, that are separate from
the interests of, and benefits to, shareholders of CCA and/or Prison Realty
generally. These benefits are summarized below. If the Merger is completed, some
officers and directors of CCA and some officers and trustees of Prison Realty
will receive benefits that most shareholders of CCA and Prison Realty will not
receive.
- At the time of the Merger, Sodexho Alliance S.A. ("Sodexho"), CCA's
largest beneficial shareholder, will purchase a 16% interest in
Operating Company for $8.0 million in cash and designate a
representative to the board of directors of New Prison Realty (the
"New Prison Realty Board") and a representative to the board of
directors of Operating Company.
- At the time of the Merger, a mutual fund (the "Baron Mutual Fund")
managed by an affiliate of Baron Capital Group, Inc. ("Baron"), will
purchase a 16% interest in Operating Company for $8.0 million in cash
and designate a representative to the board of directors of Operating
Company. Baron together with its affiliates, is the largest beneficial
holder of Prison Realty Common Shares.
- Doctor R. Crants, currently the Chief Executive Officer and President
of CCA and Chairman of the Prison Realty Board of Trustees (the
"Prison Realty Board"), is also the Chief Executive Officer of New
Prison Realty and will, at the time of the Merger, enter into an
employment agreement with New Prison Realty. Doctor R. Crants is also
currently Chief Executive Officer of Operating Company and will, at
the time of the Merger, receive an employment agreement with Operating
Company.
- Certain CCA and Prison Realty officers, other than Doctor R. Crants,
will be employees of, and holders of 38% of the stock of, Operating
Company. See "The Merger -- Interests of Certain
22
<PAGE> 34
Persons in the Merger -- Ownership of Operating Company" and
"Management and Operations of New Prison Realty After the
Merger -- Operating Company." The shares were obtained by the
individuals in September 1998 for nominal consideration. Based on the
value of the cash investment of Sodexho and the Baron Mutual Fund in
Operating Company, 38% of Operating Company's stock will have a value
of $19.0 million upon completion of the Merger. Operating Company will
manage certain prison facilities that CCA managed prior to the Merger.
- Certain directors of CCA will become directors of either Operating
Company or one of the Service Companies, but will not be shareholders.
They will be paid directors' fees for their services. See "Management
and Operations of New Prison Realty After the Merger -- Operating
Company," "Management and Operations of New Prison Realty After the
Merger -- Service Company A," and "Management and Operations of New
Prison Realty After the Merger -- Service Company B."
In addition to the benefits described above, after the Merger is completed,
there will be conflicts of interest in connection with the operation of New
Prison Realty, Operating Company and the Service Companies. As a result of the
Merger and the formation of Operating Company, including the transfer of non-
real estate assets by CCA to Operating Company, CCA shareholders will own stock
of New Prison Realty, which will own facilities and a 9.5% interest in Operating
Company, but will no longer manage facilities. Because Sodexho, the Baron Mutual
Fund and certain CCA and Prison Realty executive officers, other than Doctor R.
Crants, will become shareholders of Operating Company, these persons and
entities will potentially benefit to a greater extent from the management
operations that were formerly conducted by CCA whereas other former CCA
shareholders will only benefit through New Prison Realty's minority ownership
interest in Operating Company.
These conflicts impose a risk that these persons will favor their own
interests over the interests of New Prison Realty after the Merger in connection
with the operations of New Prison Realty and Operating Company and their ongoing
relationship. However, because CCA and New Prison Realty's officers or directors
that become affiliates of Operating Company are, or will be after the Merger,
owners of shares of New Prison Realty Common Stock, or shares of New Prison
Realty Series A Preferred Stock or options to purchase shares of New Prison
Realty Common Stock, they will also have an economic interest in the continued
financial success of New Prison Realty. In addition, New Prison Realty will
adopt policies and procedures to address conflicts of interest, including
requiring Doctor R. Crants to abstain from making management decisions in his
capacity as an officer of New Prison Realty and Operating Company with regard to
matters that present a conflict of interest between the companies, and to
abstain from voting as a director of either company with respect to matters that
present a conflict of interest between the companies. An independent committee
consisting of New Prison Realty directors who are not employees of New Prison
Realty or affiliated with Operating Company (the "Independent Committee") will
approve actions of the New Prison Realty Board concerning agreements or
transactions with Operating Company. The current members of the Independent
Committee are Richard W. Cardin, Monroe J. Carell, Jr., John W. Eakin, Jr., Ted
Feldman, Jackson W. Moore and Joseph V. Russell. See "The Merger -- Interests of
Certain Persons in the Merger," "Management and Operations of New Prison Realty
After the Merger" and "Conflicts of Interest -- Situations in Which Conflicts of
Interest May Arise."
In addition, the following conflicts existed when the formation of
Operating Company was planned, including: (i) the consideration for the sale of
certain non-real estate assets of CCA to Operating Company and the determination
of the principal amount of and the payment terms of the note from Operating
Company to CCA; (ii) the amount of the fee payable to New Prison Realty under,
and the terms of, a Trade Name Use Agreement (as hereinafter defined) whereby
New Prison Realty will grant Operating Company the right to use the name
"Corrections Corporation of America"; (iii) the amount of the fee payable to
Operating Company under, and the terms of, a Services Agreement and a Tenant
Incentive Agreement (both as hereinafter defined) whereby New Prison Realty will
pay to Operating Company certain fees in connection with the development of
future facilities and provide a tenant incentive payment in connection with the
leasing of future facilities; (iv) the terms of the leases between New Prison
Realty and Operating Company; and (v) the terms of the Right to Purchase
Agreement (as hereinafter defined). See "Management and
23
<PAGE> 35
Operations of New Prison Realty After the Merger -- Merger-Related
Transactions." The payments and other terms of all of such transactions were
determined by Prison Realty and CCA in consultation with their advisers in a
manner to reflect the fair market value of the assets involved. Both Prison
Realty and CCA also considered the rules applicable to REITs in establishing
these financial terms. There were, however, no arm's-length negotiations between
the parties regarding these financial terms. See "Conflicts of Interest --
Situations in Which Conflicts of Interest May Arise -- Financial Terms of
Leases, Trade Name Use Agreement, Services Agreement and Tenant Incentive
Agreement." Accordingly, there exists the risk that New Prison Realty or
Operating Company could have obtained more favorable terms if they had been
negotiating on their own behalf with an unaffiliated third party. The Prison
Realty Board and the CCA Board of Directors ("CCA Board") believe, however, that
the terms of these transactions are fair to all involved parties.
RISKS ASSOCIATED WITH THE MERGER
RISKS OF LEVERAGE AND FLOATING RATE DEBT. New Prison Realty expects to
obtain a commitment for a $750.0 million revolving credit facility (the "New
Prison Realty Credit Facility") upon completion of the Merger. CCA and Prison
Realty expect that, at that time, New Prison Realty will have approximately
$650.0 million of pro forma combined total indebtedness under the New Prison
Realty Credit Facility, as compared to the current total indebtedness of Prison
Realty, without giving effect to the Merger, of approximately $236.7 million
under its existing $300.0 million credit facility (the "Prison Realty Credit
Facility") and the current total indebtedness of CCA, without giving effect to
the Merger, of approximately $349.5 million (including $117.5 million committed
pursuant to letters of credit) under its existing $350.0 million credit facility
(the "CCA Credit Facility"). See "Additional Information -- Recent
Developments -- Bank Financings." It is anticipated that the New Prison Realty
Credit Facility will bear interest at a floating rate calculated from the then
current LIBOR rate. Consequently, the incurrence of the additional indebtedness
in connection with the Merger and the payment of the Earnings and Profits
Distribution (as hereinafter defined), and the potential issuance of additional
debt securities, may result in increased interest expense for New Prison Realty
as compared to Prison Realty or CCA, when considered individually, and may
increase New Prison Realty's exposure to the risks associated with debt
financing. New Prison Realty's increased leverage may have important
consequences, including the following: (i) the ability of New Prison Realty to
obtain additional financing for acquisitions, working capital, capital
expenditures or other purposes, if necessary, may be impaired or such financing
may not be on terms favorable to New Prison Realty; (ii) a substantial decrease
in operating cash flow or an increase in expenses of New Prison Realty could
make it difficult for New Prison Realty to meet its debt service requirements
and force it to modify its operations; (iii) New Prison Realty's higher level of
debt and resulting interest expense could make it difficult for New Prison
Realty to make distributions to stockholders; (iv) New Prison Realty's higher
level of debt and resulting interest expense may place it at a competitive
disadvantage with respect to certain competitors with lower amounts of
indebtedness; and (v) New Prison Realty's greater leverage may make it more
vulnerable to a downturn in its business or the economy generally. Moreover, the
floating interest rates on these debt obligations could result in higher
interest rates, thereby increasing New Prison Realty's interest expense on its
floating rate debt and reducing funds available for distribution to New Prison
Realty's stockholders. Finally, it is expected that the Prison Realty Credit
Facility will contain a cross-default clause tied to the default of any other
Debt (as will be defined in the New Prison Realty Credit Facility) incurred by
New Prison Realty. If this provision is included in the New Prison Realty Credit
Facility, any indebtedness incurred by New Prison Realty under the New Prison
Realty Credit Facility may become immediately due and payable if New Prison
Realty suffers a technical or any other default on any Debt. Upon completion of
the Merger, New Prison Realty expects to have no Debt other than the New Prison
Realty Credit Facility.
FIXED EXCHANGE RATIO DESPITE POTENTIAL CHANGE IN RELATIVE STOCK
PRICES. Upon completion of the Merger, each share of CCA Common Stock will be
converted into the right to receive 0.875 share of New Prison Realty Common
Stock; each Prison Realty Common Share will be converted into 1.0 share of New
Prison Realty Common Stock; and each Prison Realty Series A Preferred Share will
be converted into 1.0 share of New Prison Realty Series A Preferred Stock
(collectively, the "Exchange Ratio"). The Exchange Ratio will not be adjusted
even if there is an increase or decrease in the price of either CCA Common Stock
or
24
<PAGE> 36
Prison Realty Capital Shares. The prices of CCA Common Stock and Prison Realty
Capital Shares when the Merger occurs may vary from their prices at the date of
this Joint Proxy Statement-Prospectus and the date of the special meetings of
shareholders (individually, a "Special Meeting," and collectively, the "Special
Meetings"). For example, during the 12 month period ending on October 14, 1998
(the most recent practicable date prior to the first mailing of this Joint Proxy
Statement-Prospectus), the closing price of Prison Realty Common Shares varied
from a low of $16.00 to a high of $44.63 and ended that period at $19.13, and
the closing price of CCA Common Stock varied from a low of $11.44 to a high of
$44.00 and ended that period at $15.13. Such variations may be the result of
changes in the business or operations of Prison Realty or CCA or the prospects
of their businesses, separately or combined; changes in market assessments of
Prison Realty's or CCA's business, operations, or prospects; or market
assessments of the likelihood that the Merger will be completed; the tax effects
of the Merger, and the timing thereof; the general market and economic
conditions; and other factors.
Because the Exchange Ratio for the Prison Realty Common Shares is 1.0, the
value of the shares of New Prison Realty Common Stock that the holders of CCA
Common Stock will have the right to receive will be based on the market price of
the Prison Realty Common Shares at the time of the Merger. Since the market
price of Prison Realty Common Shares will fluctuate, at the time of the Special
Meetings, the holders of shares of CCA Common Stock will not know the exact
value of the New Prison Realty Common Stock they will have the right to receive
when the Merger is completed.
The following table sets forth the dollar value of the New Prison Realty
Common Stock to be issued per share of CCA Common Stock based on the assumed
market price of Prison Realty Common Shares on the date of completion of the
Merger. On April 17, 1998, the last full trading day prior to the announcement
of the Merger, the closing price per share of CCA Common Stock was $33.50 and
the closing price per Prison Realty Common Share was $40.13 per share. On
October 14, 1998, the closing sale price per Prison Realty Common Share was
$19.13. Both CCA and Prison Realty shareholders are urged to obtain current
market quotations for CCA Common Stock and Prison Realty Capital Shares.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF NEW DOLLAR VALUE OF THE NEW
PRISON REALTY COMMON STOCK PRISON REALTY COMMON
TO BE ISSUED FOR EACH SHARE OF STOCK TO BE ISSUED PER SHARE
CCA COMMON STOCK IN THE OF CCA COMMON STOCK IN
PRICE PER PRISON REALTY COMMON SHARE MERGER THE MERGER
- ------------------------------------ ------------------------------ ----------------------------
<S> <C> <C>
$40.00......................................... 0.875 $35.00
39.00......................................... 0.875 34.13
38.00......................................... 0.875 33.25
37.00......................................... 0.875 32.38
36.00......................................... 0.875 31.50
35.00......................................... 0.875 30.63
34.00......................................... 0.875 29.75
33.00......................................... 0.875 28.88
32.00......................................... 0.875 28.00
31.00......................................... 0.875 27.13
30.00......................................... 0.875 26.25
29.00......................................... 0.875 25.38
28.00......................................... 0.875 24.50
27.00......................................... 0.875 23.63
26.00......................................... 0.875 22.75
25.00......................................... 0.875 21.88
24.00......................................... 0.875 21.00
23.00......................................... 0.875 20.13
22.00......................................... 0.875 19.25
21.00......................................... 0.875 18.38
20.00......................................... 0.875 17.50
19.00......................................... 0.875 16.63
18.00......................................... 0.875 15.75
17.00......................................... 0.875 14.88
16.00......................................... 0.875 14.00
</TABLE>
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<PAGE> 37
DILUTION TO PRISON REALTY SHAREHOLDERS IN THEIR OWNERSHIP OF NEW PRISON
REALTY AS A RESULT OF THE MERGER. Upon completion of the Merger, the former
holders of CCA Common Stock will own approximately 80% of the outstanding shares
of New Prison Realty Common Stock and the former holders of Prison Realty Common
Shares will own approximately 20% of the outstanding shares of New Prison Realty
Common Stock, assuming all Prison Realty and CCA stock options are exercised.
Accordingly, holders of Prison Realty Common Shares will incur substantial
dilution in their ownership interest of New Prison Realty as a result of the
Merger.
DIFFERENCES IN SHAREHOLDERS' RIGHTS. Prison Realty is organized under and
New Prison Realty will be incorporated under the laws of the State of Maryland,
and CCA is incorporated under the laws of the State of Tennessee. If the Merger
is completed, the holders of the CCA Common Stock, whose rights as shareholders
are currently governed by the Tennessee Business Corporation Act (the "TBCA"),
the charter of CCA (the "CCA Charter") and the bylaws of CCA (the "CCA Bylaws"),
and the holders of the Prison Realty Common Shares and Prison Realty Series A
Preferred Shares, whose rights as shareholders are currently governed by the
Maryland General Corporation Law (the "MGCL"), Title 8 of the Corporations and
Associations Article of the Annotated Code of Maryland (the "MRL"), the Amended
and Restated Declaration of Trust of Prison Realty, including Articles
Supplementary (the "Prison Realty Declaration of Trust"), and the bylaws of
Prison Realty, as amended (the "Prison Realty Bylaws"), will, at the Effective
Time (as hereinafter defined), become holders of shares of New Prison Realty
Common Stock and New Prison Realty Series A Preferred Stock. Their rights as
such will be governed by the MGCL, and the charter of New Prison Realty (the
"New Prison Realty Charter") and the bylaws of New Prison Realty (the "New
Prison Realty Bylaws"), both of which will be substantially similar to the
current Prison Realty Declaration of Trust and the Prison Realty Bylaws,
respectively.
CCA and Prison Realty shareholders should be aware that certain provisions
of the New Prison Realty Charter, the New Prison Realty Bylaws and the MGCL
could have a potential anti-takeover effect. The following provisions of these
governing documents and state laws could have the effect of making it more
difficult for a third party to acquire control of New Prison Realty, including
certain acquisitions that stockholders may deem to be in their best interests:
- The New Prison Realty Charter and the New Prison Realty Bylaws provide
for a classified Board of Directors divided into three nearly equal classes. The
CCA Board is not classified.
- In order to preserve New Prison Realty's REIT qualification, among other
things, the New Prison Realty Charter prohibits direct or constructive ownership
by any person of more than 9.8% of the shares of New Prison Realty Common Stock
or of more than 9.8% of the shares of New Prison Realty Preferred Stock
(including the New Prison Realty Series A Preferred Stock). CCA has no such
limitations on the ownership of any of its capital stock.
- The New Prison Realty Bylaws require advance notice of stockholder
proposals and director nominations. The CCA Bylaws do not contain these
requirements.
- In accordance with the MGCL, New Prison Realty has elected not to be
covered by certain provisions of the MGCL concerning corporate takeovers and the
voting rights of certain large stockholders. CCA is governed by certain similar
provisions of the TBCA.
For a more complete discussion of the rights of CCA and Prison Realty
shareholders upon the completion of the Merger, see "Comparison of Rights of
Shareholders of CCA and Stockholders of New Prison Realty" and "Comparison of
Rights of Shareholders of Prison Realty and Stockholders of New Prison Realty."
For a more complete discussion of how the provisions of the New Prison Realty
Charter, the New Prison Realty Bylaws, and the MGCL may limit a change in
control of New Prison Realty, see " -- Certain Provisions of New Prison Realty's
Governing Documents May Limit Changes in Control of New Prison Realty,"
"Comparison of Rights of Shareholders of CCA and Stockholders of New Prison
Realty," and "Comparison of Rights of Shareholders of Prison Realty and
Stockholders of New Prison Realty."
SUBSTANTIAL EXPENSES RELATED TO THE MERGER; TERMINATION FEE; NO
SOLICITATION. Prison Realty and CCA have incurred substantial expenses in
connection with the Merger described in this Joint Proxy Statement-
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<PAGE> 38
Prospectus, which will not be recoverable if the Merger is not completed. In
addition, the Merger Agreement provides for a termination fee of $7.0 million
payable by CCA in the event the Merger Agreement is terminated for certain
reasons or if certain events occur under the Merger Agreement. For a more
complete description of the circumstances under which a termination fee may be
payable by CCA to Prison Realty, see "The Merger Agreement -- Termination" and
"The Merger Agreement -- Fees and Expenses." Prison Realty has no potential
liability for a termination fee payable to CCA under the Merger Agreement.
CCA has also agreed in the Merger Agreement that (i) neither it nor any of
its subsidiaries, nor any of its officers, directors, employees or other agents,
will, directly or indirectly, solicit, initiate, encourage or facilitate the
submission of any Takeover Proposal (as defined in the Merger Agreement) from a
third party or (ii) enter into or participate in any discussion or negotiations
regarding, or furnish to any person any information with respect to, any
Takeover Proposal. Although the Merger Agreement does not prohibit CCA from
responding to any bona fide Takeover Proposal, until the Merger Agreement is
otherwise terminated, CCA is prohibited from seeking other potential acquirers,
which could have the effect of making it more difficult for a third party to
acquire control of CCA, including certain acquisitions that shareholders may
deem to be in their best interests if the Merger is not completed. For a more
complete description of the non-solicitation provisions of the Merger Agreement,
see "The Merger Agreement -- No Solicitation."
CONTINGENT NATURE OF FINANCIAL ADVISER FEES. J.C. Bradford & Co., L.L.C.
("J.C. Bradford") and Stephens Inc. ("Stephens") were retained by the Prison
Realty Board and the CCA Board, respectively, to assist each board in evaluating
the proposed Merger and to render an opinion as to the fairness of the Merger
Consideration from a financial point of view. As consideration for these
services, Prison Realty has agreed to pay J.C. Bradford a fee of $8.0 million
and CCA has agreed to pay Stephens a fee of $7.0 million. Fifty percent of each
of these fees is payable only if the Merger is completed. Moreover, Prison
Realty and CCA have further agreed to indemnify J.C. Bradford and Stephens,
respectively, and certain related persons against certain liabilities in
connection with their respective engagements, including certain liabilities
under the federal securities laws. Shareholders should take these arrangements
into consideration when evaluating the opinions of these financial advisers. For
a more complete discussion of these arrangements and of the opinions of the
financial advisers, see "The Merger -- Opinion of Prison Realty's Financial
Adviser" and "The Merger -- Opinion of CCA's Financial Adviser."
NEW PRISON REALTY WILL BE DEPENDENT ON OPERATING COMPANY, AS PRIMARY LESSEE OF
NEW PRISON REALTY'S FACILITIES, FOR ITS REVENUES AND ABILITY TO MAKE
DISTRIBUTIONS TO ITS STOCKHOLDERS
Immediately following completion of the Merger, Operating Company will be
the lessee of a substantial majority of New Prison Realty's facilities.
Therefore, New Prison Realty will be dependent for its revenues upon Operating
Company's ability to make the lease payments required under the leases for such
facilities. Operating Company, however, will not have the capital resources or
cash flow available to it that CCA had prior to the Merger. Operating Company's
revenues for the six month period ended June 30, 1998 would have been an
estimated $167.8 million as compared to CCA's actual revenues of $305.4 million
for the same period. This decreased revenue, and the resulting decrease in cash
flow, combined with Operating Company's limited capacity to borrow under any
credit facility it may obtain as discussed herein, may adversely affect
Operating Company's ability to make the required lease payments. Moreover,
Operating Company's obligation to make lease payments is not secured by any of
the assets of Operating Company, although the obligations under the leases will
be cross-defaulted so that New Prison Realty could terminate all the leases if
Operating Company fails to make required lease payments. If this were to happen,
however, New Prison Realty will be required to find other suitable lessees or
risk losing its ability to elect or maintain REIT status, as applicable.
NEW PRISON REALTY WILL BE DEPENDENT ON OUTSIDE FINANCING TO SUPPORT ITS GROWTH;
DILUTIVE EFFECT OF SUCH FINANCING AND POTENTIAL REDUCTION OF EARNINGS AND
PROFITS DISTRIBUTION
As of October 14, 1998, CCA had outstanding indebtedness of approximately
$349.5 million (including $117.5 million committed pursuant to letters of
credit) under its $350.0 million bank credit facility and Prison Realty had
outstanding indebtedness of approximately $236.7 million under its $300.0
million bank credit facility. Upon completion of the Merger, Prison Realty and
CCA expect that New Prison Realty will have pro
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<PAGE> 39
forma combined total indebtedness of $650.0 million under a $750.0 million
credit facility. The agreements governing Prison Realty's existing bank credit
facility contain various restrictive covenants, including, among others,
provisions generally restricting Prison Realty from incurring additional
indebtedness in excess of $1.0 million, engaging in transactions with
shareholders and affiliates, incurring certain liens, liquidating or disposing
of all or substantially all of its assets or declaring or paying dividends, or
having its subsidiaries do the same, except under certain specified
circumstances. In addition, these agreements require Prison Realty to maintain
certain specified financial ratios. If similar restrictions apply to any future
credit facilities or financings obtained by New Prison Realty, they may restrict
New Prison Realty's ability to obtain additional debt capital or limit its
ability to engage in certain transactions. In addition, any breach of these
limitations could result in the acceleration of most of New Prison Realty's
outstanding indebtedness. New Prison Realty may not be able to refinance or
repay this indebtedness in full under such circumstances.
New Prison Realty intends to continue the growth strategy implemented by
Prison Realty, which includes acquiring, developing and expanding correctional
and detention facilities as well as other properties. New Prison Realty expects
that it generally will not be able to fund its growth from cash from its
operating activities because New Prison Realty will be required to distribute to
its stockholders at least 95% of its taxable income each year to qualify as a
REIT. Consequently, New Prison Realty will be required to rely primarily upon
the availability of debt or equity capital to fund acquisitions and
improvements. There can be no assurance that New Prison Realty will continue to
have access to the capital or debt markets to fund future growth at an
acceptable cost. In addition, the Prison Realty Board has adopted a policy of
limiting indebtedness to not more than 50% of Prison Realty's total
capitalization, which could also limit Prison Realty's ability to incur
additional indebtedness to fund its continued growth. At present, it is expected
that New Prison Realty will enact an identical policy. See "Management and
Operations of New Prison Realty After the Merger -- Information About the
Policies and Objectives of New Prison Realty -- Financing Policies and
Objectives."
To assist in the financing of its growth, on September 16, 1998, Prison
Realty filed a Registration Statement on Form S-3 (the "Prison Realty
Registration Statement on Form S-3") with the Commission to register an
aggregate of $500.0 million in value of the Prison Realty Common Shares,
preferred shares and common share rights or warrants. The sale and issuance of
any Prison Realty Common Shares or the issuance of any Prison Realty Common
Shares upon the conversion of any securities sold under the Prison Realty
Registration Statement on Form S-3 will have the effect of diluting the
ownership interest of holders of Prison Realty Common Shares in Prison Realty
and, therefore in New Prison Realty, if the Merger is completed. As of the date
of this Joint Proxy Statement-Prospectus, Prison Realty has issued 362,731
Prison Realty Common Shares under the Prison Realty Registration Statement on
Form S-3.
To assist in the financing of its growth, upon completion of the Merger, it
is expected that New Prison Realty will file a Registration Statement on Form
S-3 (the "New Prison Realty Registration Statement on Form S-3") with the
Commission to register up to $1.0 billion in value of the New Prison Realty
Common Stock, preferred stock, common stock rights or warrants and debt
securities. The sale and issuance of any shares of New Prison Realty Common
Stock under the New Prison Realty Registration Statement on Form S-3 or the
issuance of any shares of New Prison Realty Common Stock upon the conversion of
any securities sold under the New Prison Realty Registration Statement on Form
S-3 will have the effect of diluting the ownership interest of New Prison Realty
shareholders in New Prison Realty. In addition, the anticipated amount of the
Earnings and Profits Distribution per share may be reduced by the issuance of
additional shares of common stock by Prison Realty prior to the Merger and by
New Prison Realty after the Merger.
OWNERSHIP OF SHARES OF THE CAPITAL STOCK OF NEW PRISON REALTY INVOLVES TAX
RELATED RISKS
DEPENDENCE ON QUALIFICATION AS A REIT. New Prison Realty intends to
operate so as to qualify as a REIT for federal income tax purposes. However, no
assurance can be made that New Prison Realty will qualify as a REIT.
Qualification as a REIT involves the application of highly technical and complex
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), for
which there are only limited judicial or administrative interpretations. Upon
completion of the Merger, application of these provisions to New Prison Realty
will be even more difficult because of certain aspects of New Prison Realty's
organizational structure
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<PAGE> 40
after the Merger, including its ownership of non-voting common stock of
Operating Company, its ownership interest in, and receipt of dividends from, the
Service Companies, its receipt of license fees relating to use of the CCA name,
and its distribution of earnings and profits accumulated by CCA prior to the
Merger. See "Management and Operations of New Prison Realty After the Merger."
Qualification as a REIT also involves the determination of various factual
matters and circumstances not entirely within New Prison Realty's control. See
"Material Federal Income Tax Consequences -- Qualification and Operation of New
Prison Realty as a REIT."
If New Prison Realty fails to qualify as a REIT, it will be subject to
federal income tax, including any applicable alternative minimum tax, on its
taxable income at corporate rates. In addition, unless entitled to relief under
certain statutory provisions, New Prison Realty also would be disqualified from
re-electing REIT status for the four taxable years following the year during
which qualification is lost. Failure to qualify as a REIT would reduce the net
earnings of New Prison Realty available for distribution to stockholders because
of the additional tax liability to New Prison Realty for the year or years
involved. To the extent that distributions to stockholders would have been made
in reliance upon New Prison Realty's qualifying as a REIT, New Prison Realty
might be required to borrow funds or to liquidate certain of its investments to
pay the applicable tax. New Prison Realty expects that the failure to qualify as
a REIT would also constitute a default under its future debt obligations.
ADVERSE EFFECTS OF REIT MINIMUM DISTRIBUTION REQUIREMENTS. In order to
qualify as a REIT, New Prison Realty will generally be required each year to
distribute to its stockholders at least 95% of its taxable income, excluding any
net capital gain. In addition, if New Prison Realty disposes of assets acquired
from CCA in the Merger during the ten-year period following the effective date
of its election of REIT status, New Prison Realty will be required to distribute
at least 95% of the amount of any "built-in gain" attributable to such assets
that New Prison Realty recognizes in the disposition, less the amount of any tax
paid with respect to such recognized built-in gain. For a further discussion of
this requirement, see "Material Federal Income Tax Consequences -- Qualification
and Operation of New Prison Realty as a REIT -- Annual Distribution
Requirements." As a REIT, New Prison Realty generally will be subject to a 4%
nondeductible excise tax on the amount, if any, by which certain distributions
paid by it with respect to any calendar year are less than the sum of: (i) 85%
of its ordinary income for that year; (ii) 95% of its capital gain net income
for that year; and (iii) 100% of its undistributed income from prior years.
Therefore, unless New Prison Realty's income increases each year, it will be
required eventually to distribute all of its income to avoid paying the excise
tax.
New Prison Realty intends to make distributions to its stockholders to
comply with the 95% distribution requirement and to avoid the nondeductible
excise tax. Differences in timing between the recognition of taxable income and
the receipt of cash available for distribution could require New Prison Realty
to borrow funds on a short-term basis to meet the 95% distribution requirement
and to avoid the nondeductible excise tax. If New Prison Realty must so borrow
short-term funds it will be further subject to the risks discussed above with
respect to leverage.
Distributions by New Prison Realty will be determined by the New Prison
Realty Board and depend on a number of factors, including the amount of cash
available for distribution, the financial condition of New Prison Realty, any
decision by the New Prison Realty Board to reinvest funds rather than to
distribute such funds, capital expenditures, the annual distribution
requirements under the REIT provisions of the Code, and such other factors as
the New Prison Realty Board deems relevant. For federal income tax purposes,
distributions paid to stockholders may consist of ordinary income, capital
gains, return of capital or a combination thereof.
TAX LEGISLATION. On February 2, 1998, President Clinton released his
budget proposal for fiscal year 1999 (the "Proposal"). Two provisions contained
in the Proposal affecting REITs potentially could affect New Prison Realty if
enacted as proposed. See "Material Federal Income Tax
Consequences -- Qualification and Operation of New Prison Realty as a
REIT -- Possible Federal Tax Developments." Neither of the two provisions was
included in the Internal Revenue Service Restructuring and Reform Act of 1998,
signed into law on July 22, 1998, or in the tax provisions of the Transportation
Equity Act for the 21st Century, signed into law on June 9, 1998. However,
legislation containing provisions similar to the Proposal could be introduced in
Congress at any time. Moveover, other legislation, as well as administrative
interpretations or court decisions,
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<PAGE> 41
could also change the tax laws with respect to REIT qualification and the
federal income tax consequences of such qualification. The adoption of any such
legislation, regulation, administrative interpretation or court decision could
have a material adverse effect on the results of operations, financial condition
and prospects of New Prison Realty.
REQUIREMENT TO DISTRIBUTE ACCUMULATED EARNINGS AND PROFITS. To qualify as
a REIT following the Merger, New Prison Realty will be required to distribute
and will so distribute the current and accumulated earnings and profits of CCA,
as determined for federal income tax purposes (the "Earnings and Profits
Distribution"). The Earnings and Profits Distribution will be taken into account
by New Prison Realty's taxable U.S. stockholders as ordinary income to the
extent it is made out of current or accumulated earnings and profits, and,
although the law is not entirely clear, may not be eligible for the "dividends
received" deduction generally available for corporations. For a further
discussion of that requirement, see "The Merger -- Distributions."
In rendering its opinion regarding REIT qualification, New Prison Realty's
tax adviser has relied upon the representations of New Prison Realty to the
effect that it will distribute on or before the end of its first taxable year as
a REIT all of CCA's accumulated earnings and profits. If the Internal Revenue
Service ("IRS") were to determine that CCA's actual earnings and profits
exceeded the amounts distributed or deemed distributed by New Prison Realty in
1999 following the Merger, New Prison Realty may be disqualified as a REIT.
SHARES OF NEW PRISON REALTY COMMON STOCK MUST BE HELD FOR A PERIOD OF TIME AFTER
THE MERGER TO RECEIVE THE EARNINGS AND PROFITS DISTRIBUTION
If the Merger is approved, shareholders of Prison Realty and CCA who
receive shares of New Prison Realty Common Stock in the Merger will need to hold
such shares until the record date for the Earnings and Profits Distribution in
order to receive the Earnings and Profits Distribution. Pursuant to the Code, if
the Merger is completed, New Prison Realty will have until December 31, 1999 to
make the Earnings and Profits Distribution and currently expects to make such
payment during the fourth quarter of 1999. During the period after the
completion of the Merger until the making of such Earnings and Profits
Distribution, the New Prison Realty Common Stock will be subject to market risks
and other risks inherent in holding equity securities, including the risk that
the market price of the New Prison Realty Common Stock may decline. In the event
that a CCA or Prison Realty shareholder disposes of any shares of New Prison
Realty Common Stock received in connection with the Merger prior to the record
date for the Earnings and Profits Distribution, however, he or she will not
receive the Earnings and Profits Distribution with respect to those shares. In
addition, the anticipated amount of the Earnings and Profits Distribution per
share may be reduced by the issuance of additional Prison Realty Common Shares
prior to the Merger and of shares of New Prison Realty Common Stock after the
Merger.
OWNERSHIP OF SHARES OF THE CAPITAL STOCK OF NEW PRISON REALTY INVOLVES RISKS
INHERENT IN THE CORRECTIONS AND DETENTION INDUSTRY
GENERAL. Upon completion of the Merger, New Prison Realty will own
correctional and detention facilities as well as interests in Operating Company
and the Service Companies, companies whose sole business it is to operate and
manage such types of facilities. Because under the Code New Prison Realty cannot
operate the facilities it owns, its revenues and therefore its ability to make
distributions will be dependent on its tenants' abilities to make rental
payments and upon the ability of Operating Company and each of Service Company A
and Service Company B to make payments, including dividends, and with respect to
Operating Company, the note and license payments, to New Prison Realty.
Accordingly, New Prison Realty will be subject to the following, which are the
primary operating risks generally inherent in the corrections and detention
industry.
SHORT-TERM NATURE OF GOVERNMENT CONTRACTS. Private prison managers
typically enter into facility management contracts with government entities on
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
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<PAGE> 42
will exercise a renewal option in the future. The contracting agency typically
may also terminate a facility contract at any time without cause by giving the
private prison manager written notice. Moreover, because of the short-term
nature of the management contracts, Prison Realty is waiving the condition in
the Merger Agreement that consents be obtained for the transfer of contracts in
connection with the Merger. Accordingly, there exists the risk that a
contracting agency may terminate a facility contract in response to the failure
of New Prison Realty to obtain its consent to the transfer of the contract.
There also exists the risk that a facility owned by New Prison Realty may not be
the subject of a contract between a private manager and a government entity
while it is leased to a private prison manager because New Prison Realty's
leases with its lessees generally extend for periods substantially longer than
the contracts with government entities. Accordingly, if a private prison
manager's contract with a government entity to operate a New Prison Realty
facility is terminated, or otherwise not renewed, such event may adversely
affect the ability of the contracting private prison manager to make the
required rental payments to New Prison Realty. There also exists the risk that
any of Operating Company or the Service Companies may not be able to maintain
certain of their respective management contracts, which may adversely affect
such entity's ability to make payments to New Prison Realty or affect the amount
of such payments.
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 rental payments to New Prison
Realty, whether in the form of lease payments or dividend or other payments.
Further, it is part of New Prison Realty'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 capacity. 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 payments of any kind
to New Prison Realty.
DEPENDENCE ON ABILITY TO DEVELOP NEW PRISONS AND CONTRACTS; OPPOSITION OF
ORGANIZED LABOR. 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 New Prison Realty, Operating
Company or the Service Companies and the private corrections industry in
general. In addition, organized labor unions in many states, including organized
labor unions consisting of state correctional and detention facility employees,
have increasingly opposed the awarding of contracts to CCA. Any of these
occurrences may make it more difficult for a private prison manager to renew or
maintain existing contracts or to obtain new contracts or sites on which to
operate new facilities or for New Prison Realty to develop or purchase
facilities and lease them to government or private entities, all of which would
have a material adverse effect on New Prison Realty's business.
OPTIONS TO PURCHASE. Four of the facilities to be owned by New Prison
Realty upon completion of the Merger are subject to an option to purchase the
facility held by a government agency. In addition, CCA expects that six of the
facilities currently under development will be subject to similar options. If
one of these options is exercised, there exists the risk that New Prison Realty
will not recoup its full investment from such property or that it will be
otherwise unable to invest the proceeds from the sale of the facility in one or
more properties that yield as much revenue as the property acquired by the
government entity.
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LEGAL PROCEEDINGS. New Prison Realty's ownership of correctional and
detention facilities and its ownership interest in companies which operate and
manage such 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 facility owned by New Prison Realty. In addition, as
an owner of real property, New Prison Realty may be subject to certain
proceedings relating to personal injuries of persons at such facilities. New
Prison Realty may be held responsible under state laws for claims based on
personal injury or property damage despite contractual provisions in its leases
with private prison managers providing for indemnity against such claims. See
"Management and Operations of New Prison Realty After the Merger -- Leases with
Operating Company." Moreover, such legal proceedings could have a material
adverse effect on Operating Company and the Service Companies which could affect
their ability to make lease payments or the other required payments to New
Prison Realty or the amounts of such payments.
OWNERSHIP OF SHARES OF THE CAPITAL STOCK OF NEW PRISON REALTY INVOLVES RISKS
INHERENT IN THE INVESTMENT IN REAL ESTATE PROPERTIES
GENERAL. Investments in correctional and detention facilities and any
additional properties in which New Prison Realty may invest in the future are
subject to risks typically associated with investments in real estate. Such
risks include the possibility that the correctional and detention facilities and
any additional investment 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
correctional and detention facilities, and yields from investments in such
properties, may be affected by many factors beyond New Prison Realty'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 New Prison Realty to vary its portfolio promptly in response to
changed conditions will be limited. There are no limitations on the percentage
of New Prison Realty's assets that may be invested in any one property or
venture; however, the New Prison Realty Board may establish limitations as it
deems appropriate from time to time. No limitations have been set on the number
of properties in which New Prison Realty 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 New Prison Realty's cash available for distribution. Phase I
environmental assessments have been obtained on all facilities currently owned
by Prison Realty, all of which will be owned by New Prison Realty. The purpose
of a Phase I environmental assessment is to identify potential environmental
contamination that is made apparent from historical reviews of such 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 New Prison Realty believes would have a material adverse
effect on New Prison Realty's business, assets, results of operations or
liquidity, nor is New Prison Realty 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 New Prison Realty is
unaware. In addition, environmental conditions on properties owned by New Prison
Realty may affect the operation or expansion of facilities located on the
properties.
UNINSURED LOSS. The leases to be entered into with Operating Company will
require Operating Company to maintain insurance with respect to each of the
facilities to be owned by New Prison Realty and leased to Operating Company. CCA
currently carries and it is expected that Operating Company will carry
comprehensive liability, fire, flood for certain facilities and extended
insurance coverage with respect to such
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properties with policy specifications and insurance limits customarily carried
for similar properties. There are, however, certain types of losses, such as
losses from earthquakes, which may be either uninsurable or for which it may not
be economically feasible to obtain insurance coverage, in light of the
substantial costs associated with such insurance. Prison Realty typically
obtains new title insurance policies for facilities when acquired and New Prison
Realty expects to obtain title insurance policies on all facilities acquired by
it in the future. There is no assurance, however, that the amount of title
insurance coverage for any of the facilities to be owned by New Prison Realty by
virtue of the Merger accurately reflects the current value of such facility or
that title losses would be completely covered by such insurance. Should an
uninsured loss occur, New Prison Realty could lose both its capital invested in,
and anticipated profits from, one or more of the facilities owned by New Prison
Realty. In the opinion of management of Prison Realty, its facilities are
adequately insured in accordance with industry standards.
NEW PRISON REALTY WILL BE DEPENDENT ON CERTAIN INDIVIDUALS FOR ITS MANAGEMENT
Doctor R. Crants, the current Chairman of Prison Realty and Chairman, Chief
Executive Officer and President of CCA, is also the Chief Executive Officer of
New Prison Realty. J. Michael Quinlan, the current Chief Executive Officer of
Prison Realty, is also Vice-Chairman of the New Prison Realty Board. The loss of
the services of either of these individuals could have a material adverse effect
on New Prison Realty as it would lose the benefit of their extensive knowledge
of, and experience in, the corrections industry. New Prison Realty will enter
into employment agreements with Doctor R. Crants and J. Michael Quinlan
simultaneously with the closing of the Merger. The employment agreements will be
on terms substantially similar to Prison Realty's existing employment agreements
with senior management, including an agreement with Mr. Quinlan. See "The
Merger -- Interests of Certain Persons in the Merger -- Employment Agreements."
Under applicable Tennessee law, which will govern the interpretation and
enforcement of the employment agreements with Doctor R. Crants and J. Michael
Quinlan, specific performance is not available as a remedy for violation of the
agreements. Moreover, New Prison Realty may not generally enforce the provisions
of the employment agreements, including noncompetition agreements, if the
provisions contained therein are deemed unreasonable, provided, however, that
courts might enjoin violations of covenants not to compete if the scope of the
employment is deemed to require special skills that could not be attained by
another employee of average competence.
NEW PRISON REALTY WILL LACK CONTROL OVER DAY-TO-DAY OPERATIONS AND MANAGEMENT OF
ITS FACILITIES
To qualify as a REIT for federal income tax purposes, New Prison Realty
will not be able to operate, or participate in decisions affecting the
operations of, its facilities or those government-owned facilities managed by
the Service Companies or Operating Company. Accordingly, New Prison Realty's
lessees will control the operations of its facilities pursuant to long-term
"triple-net" leases, most of which have initial terms of 12 years and three
renewal terms of five years each, exercisable upon the mutual agreement of the
lessee and New Prison Realty. See "Management and Operations of New Prison
Realty After the Merger -- Leases with Operating Company." During the terms of
the leases, New Prison Realty will not have the authority to require the lessee
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 New
Prison Realty believes a lessee is operating a facility inefficiently or in a
manner adverse to New Prison Realty's interests, New Prison Realty may not
require a lessee to change its method of operation. New Prison Realty is limited
to seeking redress only if the lessee violates the terms of a lease, in which
case New Prison Realty's primary remedy is to terminate the lease or, in certain
circumstances, all of the leases with that particular lessee, and seek to
recover damages from the lessee. If a lease is terminated, New Prison Realty
will be required to find another suitable lessee or risk losing its ability to
elect or maintain REIT status, as applicable. Moreover, the Service Companies
will control the operations of the facilities managed and operated by them and
Operating Company will control the operations of the government-owned facilities
operated by it. New Prison Realty will not have the authority to require any of
them to operate the facilities in a particular manner or to govern any
particular aspect of their operation. Accordingly, New Prison Realty will have
no control over the operations which will provide the revenues to
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the Service Companies or Operating Company and thus provide the basis for any
dividends or other payment to be made to New Prison Realty from the Service
Companies or Operating Company.
NEW PRISON REALTY IMPOSES LIMITS ON THE OWNERSHIP OF ITS CAPITAL STOCK TO
MAINTAIN QUALIFICATION AS A REIT.
For New Prison Realty to qualify as a REIT, not more than 50% in value of
its outstanding shares may be owned, directly or constructively, by five or
fewer individuals, as defined in the Code. In addition, rent from related party
tenants is not qualifying income for purposes of the gross income tests under
the Code. See "Material Federal Income Tax Consequences -- Qualification and
Operation of New Prison Realty as a REIT -- Income Tests." 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
New Prison Realty's REIT qualification, among other things, the New Prison
Realty Charter prohibits direct or constructive ownership by any person of more
than 9.8% of the shares of New Prison Realty Common Stock or more than 9.8% of
the shares of New Prison Realty preferred stock, (including the New Prison
Realty Series A Preferred Stock). This ownership limit is referred to herein as
the "Ownership Limit." The constructive ownership rules in the Code are complex
and may cause the New Prison Realty Common Stock or the New Prison Realty Series
A Preferred Stock owned, directly or constructively, by a group of related
individuals and/or entities to be deemed to be constructively owned by one
individual or entity. As a result, the acquisition of less than 9.8% of the
shares of New Prison Realty Common Stock or shares of New Prison Realty Series A
Preferred Stock or the acquisition of an interest in an entity which owns shares
of New Prison Realty Common Stock or shares of New Prison Realty Series A
Preferred Stock by an individual or entity could cause that individual or entity
or another individual or entity to own constructively in excess of 9.8% of the
shares of New Prison Realty Common Stock or shares of New Prison Realty Series A
Preferred Stock, and thus subject such shares of New Prison Realty Common Stock
or shares of New Prison Realty Series A Preferred Stock to the Ownership Limit.
Direct or constructive ownership of shares of New Prison Realty Common Stock or
shares of New Prison Realty Series A Preferred Stock 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 Stock-in-Trust (as hereinafter defined) for the
benefit of one or more charitable organizations. These provisions may inhibit
market activity and the resulting opportunity for stockholders to realize a
premium for shares of New Prison Realty Common Stock or shares of New Prison
Realty Series A Preferred Stock if a stockholder were attempting to assemble a
block of shares in excess of the Ownership Limit. These provisions could also
have the effect of making it more difficult for a third party to acquire control
of New Prison Realty, including certain acquisitions the stockholders may deem
to be in their best interests. See " -- Certain Provisions of New Prison
Realty's Governing Documents May Limit Changes in Control of New Prison Realty."
Also, there can be no assurance that such provisions will in fact enable New
Prison Realty to meet relevant REIT ownership requirements. See "New Prison
Realty Capital Stock -- Restrictions on Ownership of Capital Stock."
CERTAIN PROVISIONS OF NEW PRISON REALTY'S GOVERNING DOCUMENTS MAY LIMIT CHANGES
IN CONTROL OF NEW PRISON REALTY
Certain provisions of the New Prison Realty Charter and the New Prison
Realty Bylaws, including provisions imposing the Ownership Limit, authorizing
the issuance of New Prison Realty preferred stock and requiring staggered terms
for the New Prison Realty Board, and certain provisions of the MGCL regarding
business combinations and control share acquisitions could have the effect of
delaying, deferring or preventing a change in control of New Prison Realty or
the removal of existing management and, as a result, could prevent the
stockholders of New Prison Realty from being paid a premium for their shares of
New Prison Realty Capital Stock. The New Prison Realty Charter authorizes the
New Prison Realty Board to issue shares of New Prison Realty preferred stock in
one or more series, to establish the number of shares in each series and to fix
the designations, powers, preferences and rights of each series and the
qualifications, limitations or restrictions thereof, all without stockholder
approval. The authorization of shares of New Prison Realty preferred stock may
have an anti-takeover effect because it gives the New Prison Realty Board the
power to issue New Prison Realty preferred stock at its sole discretion on such
terms as it, in its sole discretion, deems
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proper, which may have a dilutive effect on or otherwise deter any potential
acquirer of New Prison Realty. The New Prison Realty Charter provides for three
classes of directors as nearly equal in size as is practicable, exclusive of
directors elected by holders of shares of the New Prison Realty Series A
Preferred Stock only when dividends payable on such shares are in arrears. Each
class of directors will hold office until the third annual meeting for selection
of directors following the election of such class. The New Prison Realty Charter
further provides that the New Prison Realty stockholders may, at any time,
remove any director, with or without cause, by an affirmative vote of a majority
of holders of shares entitled to vote in the election of directors. These
provisions may have an anti-takeover effect because a third party will be unable
to acquire immediate control of the New Prison Realty Board due to the existence
of the classified board and will further be unable to remove directors without
majority stockholder approval. See "Comparison of Rights of Shareholders of CCA
and Stockholders of New Prison Realty" and "Comparison of Rights of Shareholders
of Prison Realty and Stockholders of New Prison Realty."
NEW PRISON REALTY'S BOARD OF DIRECTORS MAY CHANGE THE COMPANY'S INVESTMENT AND
FINANCING POLICIES WITHOUT VOTE OF NEW PRISON REALTY'S STOCKHOLDERS
The New Prison Realty Board will determine New Prison Realty's investment
and financing policies with respect to certain activities, including its growth,
capitalization, distribution and operating policies, although it presently
intends to follow those policies currently set by Prison Realty. Although the
New Prison Realty Board has no present intention to revise Prison Realty's
existing policies, the New Prison Realty Board may do so at any time without a
vote of New Prison Realty's stockholders. Any such determination may have an
adverse effect on New Prison Realty's results of operations or its ability to
make or the amount of its distributions to stockholders.
YEAR 2000 COMPLIANCE ISSUES MAY HAVE AN EFFECT ON NEW PRISON REALTY
GENERALLY. The Year 2000 issue generally relates to computer programs that
were written using two digits rather than four to define the applicable year. In
those programs, the year 2000 may be incorrectly identified as the year 1900,
which can result in a system failure or miscalculations causing a disruption of
operations, including a temporary inability to process transactions, prepare
financial statements or engage in other normal business activities. The
following discussion identifies the actions taken by each of CCA and Prison
Realty to assess and address the Year 2000 issues facing the companies. As a
result of the Merger, any Year 2000 compliance issues and expenses of CCA or
Prison Realty will have an effect on New Prison Realty to the extent they are
not remediated or expended prior to completion of the Merger.
IMPACT ON CCA. CCA's Year 2000 compliance program is focused on addressing
Year 2000 readiness in the following areas: (i) CCA's information technology
hardware and software; (ii) material non-information technology systems; (iii)
Year 2000 compliance of third parties with which CCA has a material
relationship; (iv) systems used to track and report assets not owned by CCA
(e.g. inmate funds and personal effects); and (v) development of contingency
plans.
CCA has completed an initial assessment and remediation of its key
information technology systems including its client server and minicomputer
hardware and operating systems and critical financial and nonfinancial
applications. Remediation efforts as of the date hereof include upgrades of
CCA's minicomputer hardware and critical financial applications. Based on this
initial assessment and remediation efforts, CCA believes that these key
information technology systems are "Year 2000 compliant." However, there can be
no assurance that coding errors or other defects will not be discovered in the
future. CCA is in the process of evaluating the remaining noncritical
information technology systems for Year 2000 compliance.
CCA manages and operates facilities it owns, facilities it leases from
Prison Realty, and facilities owned by and leased from government entities. CCA
is currently evaluating whether the material non-information technology systems
such as security control equipment, fire suppression equipment and other
physical plant and equipment at both the facilities it owns and the facilities
it leases from Prison Realty are Year 2000 compliant. CCA will also request that
the owners of the government facilities it manages provide Year 2000
certification for material information technology and non-information technology
systems at those facilities.
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All CCA managed correctional facilities, as a part of general operating
policy, have existing contingency plans that are deployed in the event key
operational systems, such as security control equipment, fail (e.g. when a power
failure occurs). In addition, the correctional facilities' key security systems
are "fail secure" systems which automatically "lock down" and are then operated
manually should the related electronic components fail. Therefore, CCA
management believes no additional material risks associated with the physical
operation of its correctional facilities are created as a result of potential
Year 2000 issues.
CCA depends upon the proper functioning of third-party computer and
non-information technology systems. These third parties include government
agencies for which CCA provides services, commercial banks and other lenders,
construction contractors, architects and engineers, and vendors such as
providers of food supplies and services, inmate medical services,
telecommunications and utilities. CCA has initiated communications with third
parties with whom it has important financial or operational relationships to
determine the extent to which they are vulnerable to the Year 2000 issue. CCA
has not yet received sufficient information from all parties about their
remediation plans to predict the outcome of their efforts.
If third parties with whom CCA interacts have Year 2000 problems that are
not remedied, the following problems could result: (i) in the case of
construction contractors and architects and engineers, in the delayed
construction of correctional facilities; (ii) in the case of vendors, in
disruption of important services upon which CCA depends, such as medical
services, food services and supplies, telecommunications and electrical power;
(iii) in the case of government agencies, in delayed collection of accounts
receivable potentially resulting in liquidity stress; (iv) in the case of banks
and other lenders, in the disruption of capital flows potentially resulting in
liquidity stress.
CCA is also evaluating Year 2000 compliance of other software applications
used to track and report assets that are not the property of CCA. This includes
applications used to track and report inmate funds and the inmates' personal
effects.
CCA is currently developing a contingency plan that is expected to address
financial and operational problems that might arise on and around January 1,
2000. This contingency plan would include establishing additional sources of
liquidity that could be drawn upon in the event of systems disruption and
identifying alternative vendors and back-up processes that do not rely on
computers, whenever possible. CCA management expects to have the contingency
plan completed by mid-year 1999.
CCA has incurred and expects to continue to incur expenses allocable to
internal staff, as well as costs for outside consultants, computer systems'
remediation and replacement and non-information technology systems' remediation
and replacement (including validation) in order to achieve Year 2000 compliance.
CCA currently estimates that these costs will total approximately $4.0 million.
Of this total it is estimated that $2.5 million will be for the repair of
software problems and $1.5 million will be for the replacement of problem
systems and equipment. As of August 31, 1998, CCA has incurred $500,000 in Year
2000 program costs. These costs are expensed as incurred. Management of CCA
believes there will be no material impact on CCA's financial condition or
results of operations resulting from other information technology projects being
delayed due to Year 2000 efforts.
The costs of CCA's Year 2000 compliance program and the date on which CCA
plans to complete it are based on current estimates, which reflect numerous
assumptions about future events, including the continued availability of certain
resources, the timing and effectiveness of third-party remediation plans and
other factors. CCA can give no assurance that these estimates will be achieved,
and actual results could differ materially from CCA's plans. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct relevant computer source codes and embedded technology, the results
of internal and external testing and the timeliness and effectiveness of
remediation efforts of third parties.
IMPACT ON PRISON REALTY. Prison Realty has reviewed its computer systems
and software applications and believes that both are Year 2000 compliant.
However, there can be no assurance that coding errors or other defects will not
be discovered in the future. Because CCA manages 18 of Prison Realty's 20
completed facilities, Prison Realty may be vulnerable to CCA's failure to remedy
its Year 2000 issues. Management of
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Prison Realty is currently reviewing CCA's Year 2000 compliance program and upon
completion of such review will determine the extent to which it will be
vulnerable to CCA's failure to remedy its Year 2000 problems and the potential
effect of any such failures.
A FLUCTUATION IN MARKET INTEREST RATES MAY AFFECT THE PRICE OF SHARES OF NEW
PRISON REALTY COMMON STOCK
One of the factors that may affect the price of shares of New Prison Realty
Common Stock is the amount of its distributions to stockholders in comparison to
yields on other financial instruments. An increase in the market interest rate
would provide higher yields on other financial instruments, which could
adversely affect the price of shares of New Prison Realty Common Stock.
FACTORS TO BE CONSIDERED BY ERISA PLAN FIDUCIARIES
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
is a broad statutory framework that governs most non-governmental employee
benefit plans in the United States. Fiduciaries of pension, profit-sharing or
other employee benefit plans subject to ERISA ("ERISA Plans"), in consultation
with their advisers, should carefully consider the impact of ERISA and the
regulations of the Department of Labor (the "DOL") thereunder on such ERISA
Plan's decision whether to approve the Merger. In particular, a fiduciary of an
ERISA Plan should consider whether its decisions with respect to these matters
would satisfy the requirements set forth in Part 4 of subtitle B of Title I of
ERISA, including (a) the diversification and prudence requirements of ERISA, (b)
the requirement that the decisions be in the best interests of the participants
and beneficiaries of the ERISA Plan, and (c) the requirement that the decisions
be authorized under the appropriate governing instruments and investment
policies of the ERISA Plan.
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THE SPECIAL MEETINGS
This Joint Proxy Statement-Prospectus is being sent to you in connection
with the solicitation of proxies (i) from the holders of CCA Common Stock by the
CCA Board for use at the CCA Special Meeting, and (ii) from the holders of
Prison Realty Common Shares by the Prison Realty Board for use at the Prison
Realty Special Meeting. This Joint Proxy Statement-Prospectus and the
accompanying forms of proxy are being mailed to the shareholders of CCA on or
about October 19, 1998 and to the shareholders of Prison Realty on or about
October 19, 1998.
CCA SPECIAL MEETING
Date, Place and Time
The CCA Special Meeting will be held at Loews Vanderbilt Plaza, 2100 West
End Avenue, Nashville, Tennessee on Tuesday December 1, 1998 at 10:00 a.m.,
local time.
Matters to be Considered at the CCA Special Meeting
At the CCA Special Meeting, CCA shareholders will be asked, in accordance
with the requirements of the TBCA, to consider and vote upon a proposal to
approve the Merger and the Merger Agreement, in which CCA will merge with New
Prison Realty and Prison Realty will merge with New Prison Realty, and the
related transactions as described herein, and to consider and act upon such
other business as may properly come before the CCA Special Meeting or any
subsequent meeting if the CCA Special Meeting is adjourned or postponed for any
reason. As part of the Merger, each outstanding share of CCA Common Stock will
be converted into the right to receive 0.875 share of New Prison Realty Common
Stock. Also as part of the Merger, CCA's non-real estate assets, which include
all of its management contracts, will be transferred to Operating Company and
the Service Companies immediately prior to the Merger. These steps, as they
refer to CCA, are collectively referred to as the "Merger." The CCA shareholders
must approve the Merger before the Merger can be completed. The CCA shareholders
may also be asked to vote upon a proposal to adjourn or postpone the CCA Special
Meeting, which adjournment or postponement could be used for the purpose, among
others, of allowing additional time for the solicitation of proxies in favor of
approval of the Merger and the Merger Agreement.
Record Date; Quorum
The CCA Board has set the close of business on Wednesday, October 14, 1998
as the record date (the "CCA Record Date") for the CCA Special Meeting. Only
holders of record of CCA Common Stock as of the CCA Record Date will be entitled
to notice of and to vote at the CCA Special Meeting. As of the CCA Record Date,
there were issued and outstanding 83,840,275 shares of CCA Common Stock, which
were held by approximately 1,289 holders of record and approximately 2,200
registered holders.
The presence, in person or by proxy, of the holders of a majority of the
outstanding CCA Common Stock entitled to vote at the CCA Special Meeting is
necessary to constitute a quorum.
Required Vote
Holders of CCA Common Stock on the CCA Record Date are entitled to one vote
per share of CCA Common Stock on the proposal to approve the Merger and the
Merger Agreement.
Under the TBCA, the approval of the Merger and the Merger Agreement will
require the affirmative vote of the holders of a majority of the outstanding
shares of CCA Common Stock entitled to vote thereon, at the close of business on
the CCA Record Date, provided a quorum is present at such meeting.
As of the CCA Record Date, directors and executive officers of CCA and
their affiliates beneficially owned and were entitled to vote approximately
5,278,682 shares of CCA Common Stock, which represented approximately 6.3% of
the shares of CCA Common Stock outstanding on the CCA Record Date. Each director
and executive officer has indicated his or her present intention to vote, or
cause to be voted, the shares of CCA Common Stock so owned by him or her for
approval of the Merger and the Merger Agreement. As of
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the CCA Record Date, trustees and executive officers of Prison Realty, other
than Doctor R. Crants, beneficially owned less than approximately 1.1% of the
outstanding shares of CCA Common Stock. The vote of the aforementioned shares in
favor of the Merger and the Merger Agreement, together with the vote of shares
of CCA Common Stock held and agreed to be voted by Sodexho in favor of the
Merger and the Merger Agreement, will result in an affirmative vote of
approximately 12.0% of the CCA Common Stock entitled to vote at the CCA Special
Meeting.
Voting of Proxies
All shares of CCA Common Stock represented at the CCA Special Meeting by
properly executed proxies received prior to or at the CCA Special Meeting,
unless such proxies previously have been revoked, will be voted at the CCA
Special Meeting as marked by the holder. Proxies which are received and are
properly executed by the holder but do not contain voting instructions will be
voted FOR approval of the Merger and the Merger Agreement.
CCA shareholders will not be entitled to present any matter for
consideration at the CCA Special Meeting, and no business is to be acted upon at
the CCA Special Meeting other than as set forth in the Notice of Special Meeting
of Shareholders accompanying this Joint Proxy Statement-Prospectus.
Each share of CCA Common Stock represented at the CCA Special Meeting by a
properly executed, dated and returned proxy will be treated as present at the
CCA Special Meeting for purposes of determining a quorum, without regard to
whether the proxy is marked as casting a vote or abstaining. Only shares voted
affirmatively in favor of approval of the Merger and Merger Agreement, either by
proxies marked as casting a vote FOR approval of the Merger and Merger Agreement
or by properly executed proxies for which no vote is indicated, will be counted
as favorable votes. Because only the approval of the Merger and Merger Agreement
will be voted upon at the CCA Special Meeting, CCA does not expect to receive
any "broker nonvotes." A "broker nonvote" occurs when a broker or other nominee
holds the shares of a beneficial owner which are represented at a meeting of
shareholders, but such broker or nominee is not empowered to vote such shares on
a particular proposal. If any broker nonvotes are received, they will have the
same effect as votes against approval of the Merger and Merger Agreement because
they are not votes in favor of the proposals.
The persons named as proxies by a CCA shareholder may propose and vote for
one or more adjournments of the CCA Special Meeting to permit further
solicitations of proxies in favor of approval of the Merger and Merger
Agreement; however, no proxy that was voted against the approval of the Merger
and Merger Agreement will be voted in favor of any such adjournment.
Revocability of Proxy
Even if you submit a vote by proxy on the applicable enclosed form, you may
still vote in person. A CCA shareholder may revoke a proxy at any time prior to
its exercise by (i) submitting a signed written revocation to the Secretary of
CCA, at 10 Burton Hills Boulevard, Nashville, Tennessee 37215, (ii) submitting a
signed proxy bearing a later date, or (iii) appearing at the CCA Special Meeting
and voting in person at such meeting. No special form of revocation is required
if you intend to vote in person at the CCA Special Meeting. However, attendance
at the CCA Special Meeting will not, in and of itself, constitute revocation of
a proxy.
Solicitation of Proxies
CCA will pay the costs of soliciting proxies from its shareholders,
including the costs of preparing, filing, printing and distributing this Joint
Proxy Statement-Prospectus and any other solicitation materials that are used.
In addition to solicitation by mail, the directors, officers and employees of
CCA may solicit proxies from CCA shareholders by telephone or telegram or by
other means of communication. Such directors, officers and employees will not be
additionally compensated but may be reimbursed for their reasonable
out-of-pocket expenses in connection with such solicitation. Arrangements will
also be made with brokerage houses and other custodians, nominees and
fiduciaries for the forwarding of solicitation material to the beneficial owners
of stock held of record by such persons, and CCA will reimburse such custodians,
nominees and fiduciaries for their reasonable out-of-pocket expenses in
connection therewith.
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In addition, CCA has retained Corporate Investor Communications, Inc. to
assist in the solicitation of proxies by CCA for a fee currently not expected to
exceed more than $7,500 plus reasonable out-of-pocket costs and expenses. Any
questions or requests regarding proxies or related materials may be directed to
Corporate Investor Communications, Inc., 111 Commerce Road, Carlstadt, New
Jersey 07072, Telephone: (201) 896-1900.
Recommendation of the CCA Board
THE CCA BOARD, BY THE UNANIMOUS VOTE OF ALL DIRECTORS PARTICIPATING IN THE
DECISION, HAS APPROVED THE MERGER, THE MERGER AGREEMENT AND THE RELATED
TRANSACTIONS. THE CCA BOARD BELIEVES THAT THE MERGER, THE MERGER AGREEMENT AND
THE RELATED TRANSACTIONS ARE FAIR TO AND IN THE BEST INTERESTS OF CCA AND ITS
SHAREHOLDERS AND RECOMMENDS THAT THE CCA SHAREHOLDERS VOTE FOR APPROVAL OF THE
MERGER, THE MERGER AGREEMENT AND THE RELATED TRANSACTIONS.
PRISON REALTY SPECIAL MEETING
Date, Place and Time
The Prison Realty Special Meeting will be held at Loews Vanderbilt Plaza,
2100 West End Avenue, Nashville, Tennessee on Thursday, December 3, 1998 at
10:00 a.m., local time.
Matters to be Considered at the Prison Realty Special Meeting
At the Prison Realty Special Meeting, the holders of Prison Realty Common
Shares will be asked, in accordance with the MRL, to consider and vote upon a
proposal to approve the Merger and the Merger Agreement, in which Prison Realty
and CCA will merge with New Prison Realty, and to consider and act upon such
other business as may properly come before the Prison Realty Special Meeting or
any adjournment thereof if the Prison Realty Special Meeting is adjourned or
postponed for any reason. Prison Realty may not complete the Merger unless the
holders of Prison Realty Common Shares approve the Merger. The holders of Prison
Realty Common Shares may also be asked to vote upon a proposal to adjourn or
postpone the Prison Realty Special Meeting, which adjournment or postponement
could be used for the purpose, among others, of allowing additional time for the
solicitation of additional votes to approve the Merger.
Record Date; Quorum
The Prison Realty Board has set the close of business on Wednesday, October
14, 1998 as the record date (the "Prison Realty Record Date") for the Prison
Realty Special Meeting. Only holders of record of Prison Realty Common Shares as
of the Prison Realty Record Date will be entitled to vote at the Prison Realty
Special Meeting. As of the Prison Realty Record Date, there were issued and
outstanding 21,945,569 Prison Realty Common Shares, which were held by
approximately 130 holders of record and approximately 6,300 registered holders.
Prison Realty also has 4,300,000 Prison Realty Series A Preferred Shares issued
and outstanding. The holders of the Prison Realty Series A Preferred Shares do
not have any voting rights with respect to the matters to be voted upon at the
Prison Realty Special Meeting.
At the Prison Realty Special Meeting, the presence in person or by proxy of
Prison Realty shareholders entitled to cast a majority of all votes entitled to
be cast at such meeting is necessary to constitute a quorum.
Required Vote
Holders of Prison Realty Common Shares as of the Prison Realty Record Date
are entitled to one vote per Prison Realty Common Share on each matter to be
considered at the Prison Realty Special Meeting.
Under the MRL, the approval of the Merger will require the affirmative vote
of the holders of two-thirds of all the outstanding Prison Realty Common Shares
at the close of business on the Prison Realty Record Date, provided a quorum is
present at such meeting.
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As of the Prison Realty Record Date, trustees and executive officers of
Prison Realty and their affiliates beneficially owned and were entitled to vote
approximately 950,738 Prison Realty Common Shares, which represented 4.3% of the
Prison Realty Common Shares outstanding on the Prison Realty Record Date. Each
trustee and executive officer has indicated his or her present intention to
vote, or cause to be voted, the Prison Realty Common Shares so owned by him or
her for approval of the Merger and the Merger Agreement. As of the Prison Realty
Record Date, directors and executive officers of CCA, other than Doctor R.
Crants, beneficially owned less than approximately 0.5% of the outstanding
Prison Realty Common Shares. The vote of the aforementioned shares in favor of
the Merger and the Merger Agreement, will result in the affirmative vote of
approximately 4.6% of the Prison Realty Common Shares entitled to vote at the
Prison Realty Special Meeting.
Voting of Proxies
All Prison Realty Common Shares represented at the Prison Realty Special
Meeting by properly executed proxies received prior to or at the Prison Realty
Special Meeting, unless such proxies previously have been revoked, will be voted
at the Prison Realty Special Meeting as marked by the holder. Proxies which are
received and are properly executed by the holder but do not contain voting
instructions will be voted FOR approval of the Merger and the Merger Agreement.
Prison Realty shareholders will not be entitled to present any matter for
consideration at the Prison Realty Special Meeting, and no business is to be
acted upon at the Prison Realty Special Meeting other than as set forth in the
Notice of Special Meeting of Shareholders accompanying this Joint Proxy
Statement-Prospectus.
Each Prison Realty Common Share represented at the Prison Realty Special
Meeting by a properly executed, dated and returned proxy will be treated as
present at the Prison Realty Special Meeting for purposes of determining a
quorum, without regard to whether the proxy is marked as casting a vote or
abstaining. Only shares affirmatively voted in favor of approval of the Merger
and the Merger Agreement, either by proxies marked as casting a vote FOR
approval of the Merger and the Merger Agreement or by properly executed proxies
for which no vote is indicated, will be counted as favorable votes. Because only
the approval of the Merger and the Merger Agreement will be voted upon at the
Prison Realty Special Meeting, Prison Realty does not expect to receive any
"broker nonvotes." A "broker nonvote" occurs when a broker or other nominee
holds the shares of a beneficial owner which are represented at a meeting of
shareholders, but such broker or nominee may not vote such shares on a
particular proposal. If broker nonvotes are received, they will have the same
effect as votes against approval of the Merger and Merger Agreement because they
are not votes in favor of the proposals.
The persons named as proxies by a Prison Realty shareholder may propose and
vote for one or more adjournments of the Prison Realty Special Meeting to permit
further solicitations of proxies in favor of approval of the Merger and the
Merger Agreement; however, no proxy that was voted against the approval of the
Merger and the Merger Agreement will be voted in favor of any such adjournment.
Revocability of Proxy
Even if you submit a vote by proxy on the applicable enclosed form, you may
still vote in person. A Prison Realty shareholder may revoke a proxy at any time
prior to its exercise by (i) submitting a signed written revocation to the
Secretary of Prison Realty, at 10 Burton Hills Boulevard, Suite 100, Nashville,
Tennessee 37215; (ii) submitting a signed proxy bearing a later date; or (iii)
appearing at the Prison Realty Special Meeting and voting in person. No special
form of revocation is required if you intend to vote in person at the Prison
Realty Special Meeting. However, attendance at the Prison Realty Special Meeting
will not, in and of itself, constitute revocation of a proxy.
Solicitation of Proxies
Prison Realty will pay the costs of soliciting proxies from its
shareholders, including the costs of preparing, filing, printing and
distributing this Joint Proxy Statement-Prospectus and any other solicitation
materials that are used. In addition to solicitation by mail, the trustees,
officers and employees of Prison Realty
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may solicit proxies from Prison Realty shareholders by telephone or telegram or
by other means of communication. Such trustees, officers and employees will not
be additionally compensated but may be reimbursed for their reasonable
out-of-pocket expenses in connection with such solicitation. Arrangements will
also be made with brokerage houses and other custodians, nominees and
fiduciaries for the forwarding of solicitation material to the beneficial owners
of stock held of record by such persons, and Prison Realty will reimburse such
custodians, nominees and fiduciaries for their reasonable out-of-pocket expenses
in connection therewith.
In addition, Prison Realty has retained Corporate Investor Communications,
Inc. to assist in the solicitation of proxies by Prison Realty for a fee
currently expected not to exceed more than $7,500 plus reasonable out-of-pocket
costs and expenses. Any questions or requests regarding proxies or related
materials may be directed to Corporate Investor Communications, Inc., 111
Commerce Road, Carlstadt, New Jersey 07072, Telephone: (201) 896-1900.
Recommendation of the Prison Realty Board
THE PRISON REALTY BOARD, BY THE UNANIMOUS VOTE OF ALL TRUSTEES
PARTICIPATING IN THE DECISION, HAS APPROVED THE MERGER, THE MERGER AGREEMENT AND
THE RELATED TRANSACTIONS. THE PRISON REALTY BOARD BELIEVES THAT THE MERGER, THE
MERGER AGREEMENT AND THE RELATED TRANSACTIONS ARE FAIR TO AND IN THE BEST
INTERESTS OF PRISON REALTY AND ITS SHAREHOLDERS AND RECOMMENDS THAT THE PRISON
REALTY SHAREHOLDERS VOTE FOR APPROVAL OF THE MERGER, THE MERGER AGREEMENT AND
THE RELATED TRANSACTIONS.
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THE MERGER
GENERAL
This section of the Joint Proxy Statement-Prospectus, as well as the
section entitled "The Merger Agreement," describes certain aspects of the Merger
and the related transactions. To the extent that it relates to the Merger
Agreement the following description does not purport to be complete and is
qualified in its entirety by reference to the Merger Agreement, a copy of which
is attached to this Joint Proxy Statement-Prospectus as Appendix A and is
incorporated herein by reference. All shareholders are urged to read the Merger
Agreement in its entirety.
EFFECTIVE TIME
If the CCA Merger and related transactions are approved by the vote of the
shareholders of CCA and the other conditions to the CCA Merger are satisfied or
waived, if permissible, the CCA Merger will be completed and effected on
December 31, 1998 at the time of day specified in the Articles of Merger (as
herein defined) filed with and accepted for record by the Secretary of State of
the State of Tennessee and the State Department of Assessments and Taxation of
the State of Maryland (the "CCA Effective Time").
If the Prison Realty Merger and related transactions are approved by the
vote of the shareholders of Prison Realty and the other conditions to the Prison
Realty Merger are satisfied or waived, if permissible, the Prison Realty Merger
will be completed and effected on January 1, 1999 at the time of day specified
in the Articles of Merger filed with and accepted for record by the State
Department of Assessments and Taxation of the State of Maryland (the "Prison
Realty Effective Time") (The CCA Effective Time and the Prison Realty Effective
Time are referred to collectively as the "Effective Time").
TERMS OF THE MERGER
The Merger Agreement provides for a business combination between Prison
Realty and CCA in which CCA will be merged with and into New Prison Realty, with
New Prison Realty as the surviving company, and then Prison Realty will be
merged with and into New Prison Realty, with New Prison Realty as the surviving
company. At the CCA Effective Time, each share of CCA Common Stock outstanding,
other than shares of CCA Common Stock held in CCA's treasury, will be converted
into the right to receive 0.875 share of New Prison Realty Common Stock. No
fractional shares of New Prison Realty Common Stock will be issued and cash will
be paid in lieu of any such fractional shares.
At the Prison Realty Effective Time, each Prison Realty Common Share, other
than Prison Realty Common Shares in Prison Realty's treasury, will be converted
into 1.0 share of New Prison Realty Common Stock, and each Prison Realty Series
A Preferred Share will be converted into 1.0 share of New Prison Realty Series A
Preferred Stock.
The Exchange Ratio will not be changed based on fluctuations in the
relative stock prices of either Prison Realty or CCA. Because the boards of each
of CCA and Prison Realty viewed the proposed Merger as a strategic combination
that would combine the strengths of both companies and deliver a unique
combination of dividends and growth to shareholders of the surviving company,
both the CCA Board and the Prison Realty Board concluded that establishing a
fixed exchange ratio to assure that each group of shareholders would receive a
specified percentage of the outstanding shares of New Prison Realty Common Stock
was the best method for establishing the terms of the Merger Agreement.
BACKGROUND OF THE MERGER
General
It is the view of the CCA Board and the Prison Realty Board that the
formation of Prison Realty in April 1997 and the proposed merger of CCA and
Prison Realty with and into New Prison Realty are distinct reactions of both
companies to the changing needs of government agencies with respect to the
ownership and operation of correctional and detention facilities. Both boards
are of the opinion that such events resulted primarily from the reaction of each
company to the changing budgetary and capital needs of their existing and
potential government customers. Set forth below are the background and business
reasons for the formation of
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Prison Realty as well as the events leading to the decision to merge CCA and
Prison Realty with and into New Prison Realty.
Formation of Prison Realty
CCA was organized in 1983 as a service company to engage primarily in the
business of managing and operating correctional and detention facilities. For
the first ten years of CCA's operations, governments which contracted with CCA
expressed little interest in having CCA provide the capital for prison
development and focused primarily on the cost savings generated through CCA's
operation of facilities. Beginning in 1994, however, governments considering
privatization of correctional facilities were also under pressure to fund other
higher priority infrastructure needs such as public education and
transportation. As a result, CCA's management noticed a shift in the demands of
government entities as these entities began to award business to private prison
operators in part based on their ability to provide capital for prison
construction as well as for their ability to provide cost savings and quality in
operations. In response to this change in customer needs, CCA, as the industry
leader, began to determine the most cost-effective methods of providing capital
to governments while continuing to provide quality facility operations. Using
various financing techniques, including debt financings and private and public
equity offerings, CCA increased its investments in facilities owned by it from
approximately $62.0 million in 1993 to approximately $289.0 million in 1996.
In the second quarter of 1997, after reviewing several financing
alternatives available to CCA, including the expense and dilutive impact of an
additional public equity offering, and the limitations of funds available
through debt financing, the CCA Board determined that the most cost-effective
way to continue to meet the accelerating capital needs of its customers was to
sell and then lease back certain of its facilities under long-term leases.
Accordingly, in July 1997 CCA assisted in the creation and initial public
offering of Prison Realty, an independent real estate investment trust formed to
develop and acquire correctional and detention facilities. In connection with
the formation of Prison Realty, CCA received approximately $308.1 million in
cash as consideration for the sale of nine of its facilities to Prison Realty.
The historical cost of such facilities was approximately $175.2 million. By
granting Prison Realty the option to purchase additional facilities, the CCA
Board believed it was creating a cost-effective source of capital to be used to
expand its marketing opportunities.
By comparison, the Prison Realty Board did not form Prison Realty solely to
assist CCA in meeting its capital needs. Rather, the benefits of Prison Realty's
formation to its shareholders also included: (i) the ability to participate in
the ownership of privately operated correctional and detention facilities; (ii)
the creation of an entity which, through its distributions to shareholders, is
able to reduce or avoid the incurrence of federal income tax, allowing the
shareholders to participate in real estate investments without the "double
taxation" of income that generally results from an investment in a regular
corporation; and (iii) most importantly, the potential to expand Prison Realty's
acquisition and development opportunities to Prison Realty owned/government
operated correctional and detention facilities.
Change in Market Conditions
In the months following Prison Realty's initial public offering, senior
management of both CCA and Prison Realty began to observe certain previously
unforeseen trends. First, while marketing Prison Realty's financing
capabilities, senior management of Prison Realty recognized that potential
government customers' interest in and demand for financing available from Prison
Realty was significantly larger than initially anticipated. Prison Realty's
senior management also realized that the capital available to Prison Realty
through various financing techniques would likely not accommodate the financing
opportunities presented by both CCA and the various governments contacted by
Prison Realty. Because Prison Realty determined that the potential market for
REIT owned/government operated facilities is substantially larger and
potentially more accessible than the market for REIT owned/privately operated
facilities, Prison Realty shifted its focus to Prison Realty owned/government
operated opportunities. Prison Realty has continued this focus throughout 1998
and since January of 1998 has not exercised its option to acquire any of the CCA
facilities for which it has an option to purchase.
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Also during this period, senior management of both companies observed that
notwithstanding the distinct business objectives of and market opportunities
available to each company, CCA and Prison Realty were becoming competitors in
certain circumstances. Senior management of CCA realized that Prison Realty
provides CCA's prospective customers with a "design, build and finance only"
alternative to CCA's business of designing, building, financing and operating
correctional facilities. In addition, senior management of Prison Realty
recognized that it was becoming reliant on CCA to demonstrate expertise and
experience in correctional facility design and construction. Management of both
companies concluded that the two companies could not continue to depend upon one
another on the one hand and compete with one another on the other.
During this period, certain events also led senior management of CCA to
begin analyzing strategies to enhance long-term value for CCA shareholders. In
the opinion of CCA's senior management, the price of CCA Common Stock reflected
a high price/earnings multiple, based primarily on the historical and
anticipated growth rate of CCA. Although CCA's senior management continued to
believe that CCA would capture a majority of new business awarded to private
management in the United States, it believed that opportunities for dramatically
increasing the percentage of prison beds under private management would be
difficult. In the fourth quarter of 1997 and the first quarter of 1998, CCA's
senior management noticed that many governments, particularly state and local
governments, were beginning to operate at surpluses and that the amounts of such
surpluses were increasing. CCA's senior management recognized that governments
operating with a surplus rather than a deficit may be less concerned with
cost-saving services and that such trends might adversely affect CCA's growth
rate. CCA's senior management also observed that such surpluses typically had
little to no effect on a government's capital budget and would likely not impact
the business opportunities of Prison Realty. In addition, CCA's senior
management recognized the potential adverse impact of the recent decision of
certain organized labor groups to oppose privatization and the aggressive
attempts of such groups to curtail CCA's growth. Moreover, under what it termed
"the law of large numbers," CCA's senior management became concerned that
because it had experienced a compounded annual growth rate in earnings per share
of approximately 70% over the past five years, given CCA's current base of beds
under management and the emerging industry trends, CCA would have difficulty
contracting for the management of enough beds to maintain its historical
compounded annual growth rate. During this time, the market for Prison Realty
Common Shares continued to be strong following the success of Prison Realty's
initial public offering in the summer of 1997. CCA's senior management believed
that the market's receptivity to Prison Realty reflected the unusual intrinsic
value of the assets owned by Prison Realty as well as its prospects for future
growth, both through the ownership of facilities managed by CCA and the
potential for ownership of facilities which continue to be operated by
government entities.
With all of these factors in mind, senior management of CCA began
considering alternative strategies for enhancing long-term shareholder value.
Senior management of CCA considered possibilities of growth through the
acquisition of competing companies in the corrections and detention industry,
which would increase the number of beds under management, as well as a possible
strategic combination with Prison Realty. With respect to the alternative of
acquiring competing companies in the corrections and detention industry, CCA's
senior management began considering an acquisition of the business conducted by
U.S. Corrections Corporation, a privately-held Kentucky corporation and operator
and second largest private owner of correctional and detention facilities
("USCC"). Ultimately, Prison Realty acquired only the real estate owned by USCC
and CCA acquired the management operations of USCC. Prison Realty agreed to
lease the properties it purchased from USCC to CCA, with the exception of
certain properties which would be leased to government entities. After
completion of the USCC acquisition, senior management of CCA did not view future
acquisitions as a significant growth opportunity because of the relatively small
number of competing companies, especially those which owned their own
facilities.
The Proposed Merger
Given the relative difficulty of attempting to increase shareholder value
through the acquisition of competing companies and in light of the changing
government customer needs described above, during the fourth quarter of 1997,
Doctor R. Crants, in his capacity as Chairman and Chief Executive Officer of
CCA,
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met with senior management of Prison Realty to discuss a possible strategic
combination between the companies. They discussed the potential benefits of such
a combination to both companies and their shareholders. After that meeting,
senior managers of each company requested that the companies' legal, tax and
accounting advisers determine if it was possible that such a combination could
be accomplished given the businesses conducted by both companies and the rules
and regulations governing the structure and operation of a REIT. These
preliminary studies continued through the first quarter of 1998, as management
of each company met with their professional advisers to discuss potential
structures for the combination. In analyzing the proposed combination of a REIT
and an operating company, a variety of structures were considered including,
among others: (i) the acquisition by Prison Realty of an existing "paired-share"
REIT; (ii) the merger of the companies and simultaneous spin-off of an operating
company to the public shareholders to form a "paper-clipped" REIT; (iii) the
merger of the companies and simultaneous conversion of Prison Realty to a
mortgage REIT; and (iv) the merger of the companies and simultaneous conversion
of Prison Realty to a publicly traded limited liability company. Management of
each company attempted to determine the economic impact of the various proposed
structures. In addition, during that time, management of each company and the
respective professional advisers were evaluating proposed tax legislation which
could have potentially affected the surviving company if such a combination were
to be effected. See "Material Federal Income Tax Consequences -- Qualification
and Operation of New Prison Realty as a REIT -- Possible Federal Tax
Developments -- Proposed Tax Legislation." Among the reasons for management of
each company recommending the proposed structure over the alternatives
considered were: the expense associated with acquiring a "paired-share" REIT as
well as the uncertain legislative status of such entities; the ability to
eliminate conflicts of interests between two groups of public shareholders
through the proposed combination as opposed to other structures; and the
straightforward nature of ownership in a REIT as opposed to other forms of
investment required in the alternative structures.
In March 1998, during these preliminary discussions between senior
management of CCA and Prison Realty and their advisers, CCA management
determined to consult with the CCA Board regarding CCA's strategic alternatives.
At a special meeting of the CCA Board held on Wednesday, March 11, 1998, CCA
management discussed with the CCA Board the strategic future of CCA, including
management's concerns about factors affecting CCA's stock price in recent
quarters, particularly CCA's results of operations and the prospects for its
growth rate and the market reaction to any shortfall in meeting earnings
expectations. CCA management then briefed the CCA Board on the preliminary
discussions between representatives of CCA and Prison Realty regarding a
proposed combination. At the meeting, the CCA Board discussed its fiduciary
duties in evaluating any proposed combination, discussed issues regarding the
timing of any transaction and the implications of various regulatory issues and
approvals that would be required to complete the transaction. The CCA Board also
discussed proposed federal legislation affecting real estate investment trusts
and investments in service companies. The meeting ended with a determination
that the CCA Board would continue to deliberate over the matter and would
reconvene on Monday, March 30, 1998 to discuss the merits of the transaction in
more detail. CCA then retained Stephens, as financial adviser, and Bass, Berry &
Sims PLC, as special counsel, to advise the CCA Board in connection with its
deliberations. In accordance with CCA's policy on transactions involving Prison
Realty, Doctor R. Crants would abstain from voting on any such transaction.
On Thursday, March 19, 1998, at a special meeting of the Prison Realty
Board, Prison Realty management briefed the Prison Realty Board on the
preliminary discussions between representatives of Prison Realty and CCA
regarding a potential combination. Prison Realty management, along with Prison
Realty's legal counsel, Stokes & Bartholomew, P.A., explained the proposed
structure of the surviving company, given the regulations governing a REIT's
ability to operate properties. The Prison Realty Board further discussed other
transactions that had occurred in other industries, and reviewed perceived
advantages of such a transaction. Prison Realty management presented the Prison
Realty Board with projected income statements and selected data for Prison
Realty both with and without the completion of the proposed transaction. Prison
Realty management summarized that the preliminary analysis indicated that the
transaction would be accretive to Prison Realty's funds from operations in the
first year. The Prison Realty Board then discussed the proposed structure of
Operating Company and the Service Companies and the proposed ownership in each.
Finally, the Prison Realty Board discussed its fiduciary duties in evaluating
any proposed merger, the timing of
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the proposed merger and the effect of proposed federal legislation regarding
REITs and investments in service companies. The Prison Realty Board then
scheduled a meeting for Thursday, March 26, 1998, to further discuss and
deliberate over the proposed combination. Prison Realty then retained J.C.
Bradford as financial adviser to the Prison Realty Board in connection with its
deliberations. In accordance with Prison Realty's policy on transactions
involving CCA, Doctor R. Crants would abstain from voting on any such
transaction.
At the meeting of the Prison Realty Board on March 26, 1998, the Prison
Realty Board further discussed the proposed combination with its professional
advisers. The Prison Realty Board studied projected income statements and
financial models contemplating completion of the proposed transaction as well as
various materials diagramming and outlining the proposed structure of the
transaction, including Prison Realty's ownership in the Service Companies and
the creation of Operating Company to manage the prisons owned by Prison Realty.
A general discussion then ensued on the legal and business reasons for the steps
of the transaction. During the discussion, Prison Realty's Board members asked
questions of Prison Realty's professional advisers regarding the proposed
transaction.
During this period from the initial meeting of the CCA Board until March
30, representatives of management of both companies, as well as their legal and
financial advisers and independent accountants, met on a regular basis to
discuss various aspects of the proposed transaction. During this period, counsel
to CCA provided a draft merger agreement to counsel for Prison Realty, and the
representatives of management of each company as well as the financial advisers
discussed a range of exchange ratios which would be fair to the shareholders of
each company.
The CCA Board met again on Monday, March 30, 1998 and further discussed the
proposed transaction. The CCA Board discussed the strategic advantages for the
surviving company as well as recent market forces that affected the long-term
prospects for CCA. The CCA Board observed that following completion of the
merger, the surviving company would be able to benefit, to the extent consistent
with the rules applicable to REITs, from the ownership and operation of prison
facilities through the ownership by the surviving company of the interests in
the Service Companies and through the leases and other contractual arrangements
to be entered into with Operating Company. The CCA Board also acknowledged that
the opportunity to participate in the market for ownership of correctional
facilities operated by government entities would provide a significant growth
opportunity to the surviving company. The CCA Board also noted the proposed
merger would enable the surviving company to achieve a greater return on its
capital by giving it access to increased margins through its interest in the
Service Companies and its contractual arrangements with Operating Company. The
CCA Board further discussed the transaction with its legal, accounting and
financial advisers. The CCA Board studied projected income statements and
financial models contemplating completion of the proposed transaction as well as
various materials outlining the proposed structure of the transaction, including
Prison Realty's ownership in the Service Companies and the creation of Operating
Company to manage the prisons owned by Prison Realty. At the conclusion of this
meeting, following discussions among the CCA Board, senior management and their
financial and legal advisers, CCA indicated that it would be willing to consider
a transaction in which CCA shareholders received 0.9 Prison Realty Common Share
for each share of CCA Common Stock owned.
The Prison Realty Board met again on Tuesday, April 7, 1998, at which time
the Prison Realty Board reviewed a memorandum summarizing the terms and
conditions of the draft merger agreement. Senior management of Prison Realty
presented the Prison Realty Board with the most recent financial models for the
surviving company's operations reflecting the current status of negotiations
regarding the transaction as well as the surviving company's operations.
Representatives of J.C. Bradford attended the meeting and reviewed its progress
and timetable for completing its analysis of the transaction. The Prison Realty
Board then discussed favorable and unfavorable aspects of the Merger, the status
of the CCA Board's discussions with Sodexho, the largest shareholder and
strategic partner of CCA, and the proposed legislation affecting REITs.
Similarly, at a CCA board meeting held on Thursday, April 9, 1998, the CCA
Board reviewed a memorandum summarizing the terms and conditions of the draft
merger agreement as well as the current draft of the Merger Agreement.
Representatives of Stephens attended the meeting and reviewed its progress and
timetable for completing its analysis of the transaction. Senior management of
CCA presented the most
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recent financial models for the surviving company's operations reflecting the
current status of negotiations regarding the transaction as well as the
structure of the surviving company's operations. At this meeting, the CCA Board
also discussed the need to address certain issues relating to the ownership of
Sodexho in CCA and ultimately the surviving company. Counsel to CCA reported on
the status of discussions with counsel for Prison Realty and counsel for Sodexho
regarding the framework for structuring the relationship with Sodexho. Because
of the ongoing nature of these discussions, it was determined that Jean-Pierre
Cuny, Sodexho's representative on the CCA Board, would abstain from voting on
the proposed transaction. See " -- Interests of Certain Persons in the Merger."
During this period in 1998 from the beginning of April through the dates of
these board meetings, representatives of both companies as well as their
financial advisers continued to discuss the range of acceptable exchange ratios.
Stephens advised CCA that it believed that the then proposed exchange ratio of
0.9 Prison Realty Common Share for each share of CCA Common Stock was within the
range of fairness. Also during this period, J.C. Bradford indicated that it did
not believe that the 0.9 exchange ratio was in the range of fairness for Prison
Realty shareholders and expressed their view that an exchange ratio of 0.85
Prison Realty Common Share for each outstanding share of CCA Common Stock may be
within the range of fairness. After extensive discussions among representatives
of each company and their financial advisers, representatives of each company
indicated that they would be willing to consider an exchange ratio of 0.875
Prison Realty Common Share for each outstanding share of CCA Common Stock.
On Friday, April 17, 1998, the CCA Board met to consider the Merger
Agreement and the transactions contemplated thereby. Doctor R. Crants and
Darrell K. Massengale, representing members of CCA's senior management, and
Stephens made presentations to the CCA Board and discussed with the CCA Board
their views and analyses of various aspects of the proposed merger. Stephens
delivered its oral opinion, which was subsequently confirmed in writing, based
on the matters presented to the CCA Board and as set forth in its opinion, as of
the date of the opinion, that the Exchange Ratio set for the Merger was fair,
from a financial point of view, to CCA and its shareholders. After a full
discussion, the CCA Board, by the unanimous vote of those directors
participating in the decision, approved the Merger Agreement and resolved to
recommend it to the CCA shareholders.
On Saturday, April 18, 1998, the Prison Realty Board met to consider the
Merger Agreement and the transactions contemplated thereby. J.C. Bradford
delivered its oral opinion and written opinion to the Prison Realty Board that,
based on the matters presented to the Prison Realty Board and as set forth in
its opinion, as of the date of the opinion, the Merger Consideration to be paid
by Prison Realty was fair, from a financial point of view, to Prison Realty and
its shareholders. After a full discussion, the Prison Realty Board, by the
unanimous vote of those trustees participating in the decision, approved the
Merger Agreement and the transactions contemplated thereby and resolved to
recommend it to the Prison Realty shareholders.
The Merger Agreement was executed on Saturday, April 18, 1998 and the
Merger was publicly announced on Monday, April 20, 1998. In September 1998, the
CCA Board and the Prison Realty Board approved the Amended and Restated
Agreement and Plan of Merger. The purpose of the formation of New Prison Realty
and the merger of each of CCA and Prison Realty into New Prison Realty is to
ensure that the Merger could be accomplished in accordance with corporate laws
applicable to trusts and corporations and to ensure that the Merger could be
accomplished as a tax-free reorganization. The market value of the shares of New
Prison Realty Common Stock to be issued to CCA shareholders as consideration for
the Merger, taking into account the Exchange Ratio and based on the closing
price of Prison Realty's Common Shares on October 14, 1998, is approximately
$1.4 billion.
PRISON REALTY'S REASONS FOR THE MERGER; RECOMMENDATION OF THE PRISON REALTY
BOARD
The Prison Realty Board, by unanimous vote of all trustees participating in
the decision, has (i) adopted the Merger Agreement and the related transactions;
(ii) determined that the terms of the Merger and the Merger Agreement, including
the Merger Consideration, and the related transactions are fair to and in the
best interests of Prison Realty and its shareholders; and (iii) resolved to
recommend to Prison Realty's shareholders that they vote to approve the Merger,
the Merger Agreement and the related transactions. Two members of the Prison
Realty Board, Doctor R. Crants and Charles W. Thomas, did not participate in the
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decision. In accordance with Prison Realty's policy on transactions involving
Prison Realty and CCA, Doctor R. Crants did not participate because he acts as a
trustee or director and officer of both companies. Charles W. Thomas did not
participate because he has performed and is currently performing consulting
services in connection with the Merger. See "-- Interests of Certain Persons in
the Merger". The Prison Realty Board believes that by combining Prison Realty's
strength as an owner and developer of prison facilities, to the extent
consistent with rules applicable to REITs, with CCA's strengths as a private
prison management company, the transaction will create significant growth
opportunities for the surviving company.
In reaching its decision to adopt the Merger Agreement and to recommend to
Prison Realty's shareholders that they vote to approve the Merger, the Merger
Agreement and the related transactions, the Prison Realty Board consulted with
Prison Realty's management, as well as Prison Realty's outside legal counsel,
accountants and its financial adviser, J.C. Bradford, and considered a number of
factors, including, without limitation, the following:
(i) Prison Realty's Business. The Prison Realty Board reviewed with
senior management Prison Realty's leading position as an owner of private
prison facilities and its potential for growth through the acquisition or
development of correctional facilities and the leasing of those facilities
to third parties. The Prison Realty Board reviewed the facilities currently
being developed by CCA and scheduled to be acquired by Prison Realty over
the next eighteen months. In addition, the Prison Realty Board evaluated
the current status of negotiations between Prison Realty and various
government entities with regard to the acquisition or development of prison
facilities to be operated by those government entities and the length of
time involved in finalizing those negotiations. The Prison Realty Board
believed that Prison Realty's anticipated long-term growth rate of 15% was
significantly higher than the average growth rate of the REIT industry as a
whole, and an increase in Prison Realty's growth rate would have a
favorable effect on the price to funds from operations multiple for the
Prison Realty Common Shares.
(ii) CCA's Business. The Prison Realty Board considered certain
information concerning CCA. Such information included CCA's operating
performance, particularly its operating margins, and CCA's leading position
as a manager of private prisons. The Prison Realty Board particularly noted
CCA's historical and anticipated growth rate. Although the Prison Realty
Board determined that, due to several factors, CCA would likely not be able
to maintain its historical compounded annual growth rate of 70%, in the
Prison Realty Board's opinion, CCA, due to, among other things, its leading
market position in a growth industry, would be able to maintain a
compounded annual growth rate substantially in excess of Prison Realty's
growth rate. The Prison Realty Board determined that the structure of the
surviving company would enable it to capture a significant amount of CCA's
growth rate through its ownership interest in and contractual agreements
with Operating Company and the Service Companies to the extent permissible
under the REIT rules.
(iii) Opinion of J.C. Bradford. The presentation of J.C. Bradford,
including the assumptions and methodologies on which its analysis was
based, made to the Prison Realty Board and the opinion of J.C. Bradford to
the Prison Realty Board to the effect that, as of the date of such opinion,
the Merger Consideration to be paid by Prison Realty is fair to Prison
Realty and its shareholders from a financial point of view. See "-- Opinion
of Prison Realty's Financial Adviser."
(iv) Strategic Merits of the Merger. The Prison Realty Board
considered that by entering into the transaction, Prison Realty could seek
to capitalize on certain strategic elements that would not be available if
it did not merge with CCA. These elements included, among others:
(a) The Prison Realty Board's belief that the opportunity to
participate in the earnings from management and operation of
correctional and detention facilities would provide a significant growth
opportunity to Prison Realty by giving it access to the growing private
prison management industry, by increasing its marketing access to
government entities and by supplementing and complementing its growth in
ownership of facilities. The Prison Realty Board believes the ability to
benefit from management of facilities which it does not own,
particularly those managed by private operators such as CCA and
government entities, provides an additional vehicle for growth for the
shareholders of the surviving company.
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(b) Due to the nature of the private prison management business,
CCA has historically achieved higher margins than Prison Realty is
currently able to achieve under the terms of its leases. The Prison
Realty Board believed that the Merger would allow the surviving company
to achieve a greater return on its capital by giving it access to
increased margins through the ability of the surviving company to (i)
own, to the extent consistent with the rules applicable to REITs, in the
form of nonvoting common stock, a significant economic ownership
interest in the Service Companies and (ii) to receive lease payments and
other payments from Operating Company, all of which manage and operate
correctional and detention facilities. In this regard, the Prison Realty
Board noted the greater return on invested capital that the surviving
company could earn following the Merger compared to Prison Realty's
current contractual arrangements with CCA. As a result, the Merger will
give the surviving company greater flexibility and facilitate its
ability to continue to grow.
(c) The Prison Realty Board's belief that the Prison Realty Common
Shares were thinly traded and that the increased market capitalization
that New Prison Realty will enjoy as a result of the Merger will lead to
greater liquidity for Prison Realty shareholders and increase access to
the surviving company's capital stock for all investors.
(d) The Prison Realty Board's belief that the larger asset base and
increased market capitalization of the surviving company following the
Merger, the increased shareholders' equity for the surviving company
resulting from the Merger and the establishment of the surviving
company's proposed credit facility would enable it to have access to
more capital at a comparable or lower cost and enhance the surviving
company's ability to obtain financing for its continued growth following
completion of the Merger.
(e) The Prison Realty Board's belief, based on projections prepared
by management of Prison Realty and CCA, that the Merger would be
accretive to the anticipated per share funds from operations of Prison
Realty compared to its anticipated results prior to the Merger.
(f) The fact that following completion of the Merger, shareholders
of Prison Realty would continue to own an equity interest in a company
which will operate as a REIT, so that the surviving company would not
pay any federal income tax at the entity level, assuming the rules
applicable to REITs are followed.
(g) The fact that following completion of the Merger, shareholders
of Prison Realty would continue to own shares of a company which intends
to make regular quarterly distributions, and which, as a result of the
Merger, will make the Earnings and Profits Distribution to its
shareholders. See " -- Distributions."
(v) Structure of Merger; Terms of Merger Agreement.
(a) The Prison Realty Board considered that the Exchange Ratio is a
fixed number and will not be adjusted in the event of any increases or
decreases in the price of CCA Common Stock or Prison Realty Common
Shares. The Prison Realty Board considered that the prices of CCA Common
Stock and Prison Realty Common Shares at the closing of the Merger may
vary from their respective prices at the date of this Joint Proxy
Statement-Prospectus and at the date of the Prison Realty Special
Meeting and the CCA Special Meeting. Such variations may be the result
of changes in the business or operations of Prison Realty or CCA or the
prospects of their businesses, separately or combined; changes in market
assessments of Prison Realty or CCA's business, operations, or
prospects; or market assessments of the likelihood that the Merger will
be completed; the tax effects of the Merger, and the timing thereof;
general market and economic conditions; and other factors.
(b) The terms and conditions of the Merger Agreement and related
documents, including the absence of any such term or condition that in
the view of the Prison Realty Board is unduly onerous or is likely to
prevent the completion of the Merger. See "The Merger Agreement."
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(vi) Negative Considerations. The Prison Realty Board considered all
material factors which may be characterized as negative considerations
including:
(a) The risk that the Merger would not be completed as a result of
the failure of the parties to satisfy or waive any of the conditions to
the closing contained in the Merger Agreement. See "The Merger
Agreement -- Conditions to the Merger."
(b) The risk that some shareholders of CCA would not want to own
shares of a dividend-paying REIT. The Prison Realty Board noted that the
historical and anticipated results of CCA and Prison Realty could
support a valuation of the surviving company that took into account both
the ability to pay dividends as well as growth prospects.
(c) The potentially substantial amount of management time and
effort that would be required to complete the Merger.
The foregoing discussion of the information and factors considered and
given weight by the Prison Realty Board is not intended to be exhaustive but
includes all material factors considered by the Prison Realty Board. In
addition, in reaching the determination to adopt the Merger Agreement and
recommend approval of the Merger and the related transactions given the wide
variety of factors considered in connection with its evaluation thereof, the
Prison Realty Board did not assign any relative or specific weights to the
foregoing factors, and individual trustees may have given different weights to
different factors. Moreover, the Prison Realty Board did not make any specific
determination as to whether some factors were more significant than others.
Rather, the Prison Realty Board concluded, after weighing the positive and
negative factors described above, that the Merger is the best strategic
alternative for Prison Realty at this time. The Prison Realty Board did not
attempt to analyze the fairness of the Merger Consideration in isolation from
the considerations as to the businesses of CCA and Prison Realty, the strategic
merits of the Merger or the other considerations referred to above. The Prison
Realty Board, however, did take into account, and placed reliance upon, the
analyses performed, and the opinion rendered, by J. C. Bradford regarding the
fairness, from a financial point of view, of the Merger Consideration. In making
its recommendation to approve the Merger, the Prison Realty Board also
considered the conclusions in the updated fairness opinion of J.C. Bradford, the
continuing validity of Prison Realty's reasons for the Merger and the
performance of the CCA Common Stock and the Prison Realty Common Shares in the
market since the date of announcement of the proposed Merger. Because of their
view that the proposed Merger is in the long-term best interests of Prison
Realty shareholders, the Prison Realty Board concluded that the decrease in
share prices of both companies would not outweigh its reasons for concluding
that the proposed Merger is in the best interests of shareholders of Prison
Realty.
THE PRISON REALTY BOARD HAS APPROVED THE MERGER, THE MERGER AGREEMENT AND
THE RELATED TRANSACTIONS AND DETERMINED THAT THE MERGER IS ADVISABLE AND IN THE
BEST INTERESTS OF PRISON REALTY AND ITS SHAREHOLDERS, AND BY THE UNANIMOUS VOTE
OF THOSE TRUSTEES PARTICIPATING RECOMMENDS THAT SHAREHOLDERS OF PRISON REALTY
VOTE FOR THE APPROVAL OF THE MERGER, THE MERGER AGREEMENT AND THE RELATED
TRANSACTIONS.
CCA'S REASONS FOR THE MERGER; RECOMMENDATION OF THE CCA BOARD
The CCA Board, by unanimous vote of all directors participating in the
decision, has (i) determined that the Merger Consideration is fair to CCA
shareholders, (ii) adopted the Merger Agreement and the related transactions,
(iii) determined that the terms of the Merger Agreement and the related
transactions thereby are fair to and in the best interests of CCA and its
shareholders, and (iv) resolved to recommend to CCA shareholders that they vote
to approve the Merger Agreement and the related transactions. Two members of the
CCA Board, Doctor R. Crants and Jean-Pierre Cuny, did not participate in the
decision. In accordance with CCA's policy on transactions involving CCA and
Prison Realty, Doctor R. Crants did not participate because he acts as a
director or trustee of both companies. Jean-Pierre Cuny did not participate
because he serves on the CCA Board as a representative of Sodexho, and CCA and
Prison Realty were negotiating certain matters with Sodexho regarding Sodexho's
ownership in New Prison Realty and Operating Company following the Merger. See
"-- Interests of Certain Persons in the Merger." The CCA Board believes that the
Merger represents the best strategic alternative for CCA. The CCA Board believes
that by combining, to the extent consistent with rules applicable to REITs,
CCA's strength as a private prison management company
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and Prison Realty's strength as an owner of prison facilities, the transaction
will create significant opportunities for the surviving company.
In reaching its determination to adopt the Merger Agreement and to
recommend that CCA's shareholders approve the Merger, the CCA Board considered
the information presented to it by CCA's management, as well as CCA's
professional advisers, and weighed the factors associated with the transaction,
including, without limitation, the following:
(i) CCA's Business. The CCA Board reviewed with senior officers of
CCA the alternative of adhering to CCA's existing business plan for
independent internal growth and, in this regard, the historical strength of
CCA's existing operations and CCA's ongoing plan with respect to growth in
its management business and the extent to which certain of the factors
described in this section pose risks to CCA's ability to meet the business
and financial goals contained in CCA's existing business plan. The CCA
Board believed that a significant factor in the relatively high price to
earnings multiple for CCA Common Stock is CCA's historical and anticipated
growth rate; however, given CCA's rapid growth in the past several years,
CCA's Board believed that it would be difficult to maintain as rapid a
growth rate, especially given CCA's increase in size and certain factors
affecting the private corrections industry. Among the factors affecting the
private corrections industry were the fact that many state and local
governments were beginning to operate with budget surpluses which could
adversely affect demand for private correctional services, and the adverse
impact of the aggressive attempts of certain organized labor groups to
oppose privatization of correctional facilities.
(ii) Prison Realty's Business. The CCA Board considered certain
information concerning Prison Realty, including the performance of Prison
Realty, the strength in the market for Prison Realty's Common Shares, the
leading position of Prison Realty as the owner of private prison facilities
and its potential for growth. In this regard, the CCA Board noted that
Prison Realty had access to a market that was generally not available to
CCA, specifically ownership of prison facilities that continued to be
operated by government entities. The CCA Board also noted that the ability
of Prison Realty to provide capital to governments would likely not be
impacted by the recent trend toward operating surpluses of various
governments. The CCA Board believed this opportunity was substantive in
size and represented a large part of the opportunity for privatization in
the future. The CCA Board considered that while the projected growth rate
of Prison Realty was not as great as that of CCA, the surviving company
would be expected to have a growth rate of approximately 25%, which the CCA
Board believed that the surviving company would be able to maintain.
(iii) Opinion of Stephens. The presentation of Stephens (including
the assumptions and methodologies underlying its analyses) made to the CCA
Board and the opinion of Stephens to the effect that, as of the date of
such opinion, the Exchange Ratio was fair from a financial point of view to
CCA and its shareholders. See "-- Opinion of CCA's Financial Adviser."
(iv) Strategic Merits of the Merger. The CCA Board considered that by
entering into the transaction, CCA could seek to capitalize on certain
strategic elements that would not be available if it remained independent
or participated in other transactions. These elements included, among
others:
(a) The fact that following completion of the Merger, the surviving
company would be able to benefit, to the extent consistent with the
rules applicable to REITs, from the ownership and operation of prison
facilities through its ownership of the interests in the Service
Companies and, through the leases and other contractual arrangements to
be entered into with Operating Company. In this regard, the CCA Board
noted the greater return on invested capital that the surviving company
can earn following the Merger compared to Prison Realty's current
contractual arrangements with CCA. As a result, the Merger will give the
surviving company greater flexibility and facilitate its ability to
continue to grow.
(b) The CCA Board's belief that the opportunity to participate in
the market for ownership of correctional facilities would provide a
significant growth opportunity to the surviving company to supplement
the growth in management of facilities. For example, the CCA Board
believed that the
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ability to participate in the ownership of prison facilities which may
be managed by government entities provides an additional vehicle for
growth for the shareholders of the surviving company.
(c) The CCA Board's belief that the increased market capitalization
of the surviving company following the Merger; the increased
shareholders' equity for the surviving company resulting from the Merger
and the establishment of the surviving company's proposed credit
facility would enhance the surviving company's ability to obtain
financing for the ownership of correctional facilities following
completion of the Merger.
(d) The CCA Board's belief, based on projections prepared by
management of CCA and Prison Realty, that the Merger would be accretive
to the anticipated per share funds from operations of Prison Realty
compared to its anticipated results prior to the Merger.
(e) The fact that following completion of the Merger, the surviving
company would operate as a REIT, which will result in the surviving
company not paying any federal income tax at the entity level, assuming
the rules applicable to REITs are followed.
(f) The fact that following completion of the Merger, the surviving
company would pay the Earnings and Profits Distribution as well as a
regular quarterly dividend to the shareholders of the surviving company.
See "-- Distributions".
(v) Structure of Merger; Terms of Merger Agreement.
(a) The CCA Board considered that the Exchange Ratio is a fixed
number and will not be adjusted in the event of any increase or decrease
in the price of CCA Common Stock or Prison Realty Common Shares. The CCA
Board considered that the prices of CCA Common Stock and Prison Realty
Common Shares at the closing of the Merger may vary from their
respective prices at the date of this Joint Proxy Statement-Prospectus
and at the date of the CCA Special Meeting and the Prison Realty Special
Meeting. Such variations may be the result of changes in the business or
operations of Prison Realty or CCA or the prospects of their businesses,
separately or combined; changes in market assessments of Prison Realty
or CCA's business, operations, or prospects or market assessments of the
likelihood that the Merger will be completed; the tax effects of the
Merger, and the timing thereof; general market and economic conditions;
and other factors.
(b) The terms and conditions of the Merger Agreement and related
documents, including the absence of any such term or condition that in
the view of the CCA Board is unduly onerous or is likely to prevent the
completion of the Merger. See "The Merger Agreement."
(c) The fact that the Merger Agreement permits the CCA Board, prior
to the CCA Special Meeting, to furnish information to, or to engage in
negotiations with, third parties and to terminate the Merger Agreement,
in each case in response to an unsolicited acquisition proposal, if the
CCA Board determines that such acquisition proposal is a Superior
Proposal (as hereinafter defined); and the CCA Board's belief that
provisions of the Merger Agreement requiring the payment by CCA of
out-of-pocket expenses of up to $7.0 million in connection with the
Merger Agreement in the event of such a termination would not
unreasonably discourage third parties from making a Superior Proposal.
See "The Merger Agreement -- No Solicitation," "The Merger
Agreement-- Termination" and "The Merger Agreement-- Fees and Expenses."
(vi) Negative Considerations. The CCA Board considered certain
factors which may be characterized as negative considerations including:
(a) The risk that the Merger would not be completed as a result of
the failure of the parties to satisfy or waive any of the conditions to
the closing contained in the Merger Agreement. See "The Merger
Agreement -- Conditions to the Merger."
(b) The risk that some shareholders of CCA would not want to own
shares of a dividend-paying real estate investment trust. The CCA Board
noted that the historical and anticipated results
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of Prison Realty and CCA could support a valuation of the surviving
company that took into account both the ability to pay dividends as well
as growth prospects.
(c) The potentially substantial amount of management time and
effort that would be required to complete the Merger.
In addition, the CCA Board reviewed the provisions of the Merger Agreement
relating to employee benefits described below under "-- Interests of Certain
Persons in the Merger." The CCA Board was aware that such arrangements would
give certain individuals interests in the Merger that were in addition to their
interests as shareholders of CCA generally.
The foregoing discussion of the information and factors considered and
given weight by the CCA Board is not intended to be exhaustive but includes all
material factors considered by the CCA Board. In addition, in reaching the
determination to adopt the Merger Agreement and recommend approval of the Merger
and the related transactions and given the wide variety of factors considered in
connection with its evaluation thereof, the CCA Board did not assign any
relative or specific weights to the foregoing factors, and individual directors
may have given different weights to different factors. The CCA Board did not
make any specific determination as to whether some factors were more significant
than others. Rather, the CCA Board concluded, after weighing the positive and
negative factors described above, that the Merger is the best strategic
alternative for CCA at this time. The CCA Board did not attempt to analyze the
fairness of the Exchange Ratio in isolation from the considerations as to the
businesses of CCA and Prison Realty, the strategic merits of the Merger or the
other considerations referred to above. The CCA Board, however, did take into
account, and placed reliance upon, the analyses performed, and the opinion
rendered, by Stephens as to the fairness, from a financial point of view, of the
Exchange Ratio to CCA and its shareholders. In making its recommendation to
approve the Merger, the CCA Board considered the conclusions in the updated
fairness opinion of Stephens, the continuing validity of CCA's reasons for the
Merger and the performance of the CCA Common Stock and the Prison Realty Common
Shares in the market since the date of announcement of the proposed Merger.
Because of their view that the proposed Merger is in the long-term best
interests of CCA shareholders, the CCA Board concluded that the decrease in
share prices would not outweigh its reasons for concluding that the proposed
Merger is in the best interests of shareholders of CCA.
THE CCA BOARD HAS APPROVED THE MERGER, THE MERGER AGREEMENT AND THE RELATED
TRANSACTIONS AND DETERMINED THAT THE MERGER IS ADVISABLE AND IN THE BEST
INTERESTS OF CCA AND ITS SHAREHOLDERS, AND BY THE UNANIMOUS VOTE OF THOSE
DIRECTORS PARTICIPATING RECOMMENDS THAT SHAREHOLDERS OF CCA VOTE FOR THE
APPROVAL OF THE MERGER, THE MERGER AGREEMENT AND THE RELATED TRANSACTIONS.
OPINION OF PRISON REALTY'S FINANCIAL ADVISER
J.C. Bradford was retained by the Prison Realty Board to assist the Prison
Realty Board in evaluating the proposed Merger and to render an opinion as to
the fairness of the Merger Consideration from a financial point of view to
Prison Realty and its shareholders. J.C. Bradford is a nationally recognized
investment banking firm that regularly engages in the valuation of businesses
and securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements, and valuations for estate, corporate,
and other purposes. J.C. Bradford was selected as the Prison Realty Board's
financial adviser based upon such expertise.
On April 18, 1998, J.C. Bradford delivered its oral and written opinion to
the Prison Realty Board to the effect that, as of such date, the Merger
Consideration was fair to Prison Realty and its shareholders from a financial
point of view. J.C. Bradford has reconfirmed its opinion of April 18, 1998 by
delivering an updated written opinion to the Prison Realty Board, dated as of
the date of this Joint Proxy Statement-Prospectus to the effect that, as of the
date thereof, the Merger Consideration is fair from a financial point of view to
Prison Realty and its shareholders. J.C. Bradford's opinion is directed only to
the fairness from a financial point of view of the Merger Consideration to be
paid by Prison Realty and does not constitute a recommendation to any
shareholder as to whether such shareholder should vote in favor of the Merger.
J.C. Bradford was not asked to and did not recommend a specific exchange ratio
to be implemented pursuant to the Merger. J.C. Bradford's opinion does not
address the likely tax consequences of the Merger to any Prison Realty
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shareholder. In addition, J.C. Bradford was not asked to consider and its
opinion does not address the relative merits of the Merger as compared to any
alternative business strategies that might exist for Prison Realty or the effect
of any other transactions in which Prison Realty might engage. J.C. Bradford did
not make independent appraisals of the assets and liabilities of Prison Realty
and/or CCA (collectively, the "Companies") or any of their subsidiaries or
affiliates. J.C. Bradford assumed that the Merger would qualify as a tax-free
reorganization for United States federal income tax purposes. J.C. Bradford also
assumed that the surviving company would continue to qualify after completion of
the Merger as a REIT for federal income tax purposes. The full text of J.C.
Bradford's written opinion dated the date of this Joint Proxy Statement-
Prospectus, which sets forth the assumptions made, procedures followed, matters
considered, and limits of its review undertaken in connection with the opinion,
is included as Appendix B and is incorporated by reference herein. Prison Realty
shareholders are urged to and should read the opinion in its entirety.
In conducting its analysis and delivering its opinions, J.C. Bradford
considered such financial and other factors as it deemed appropriate and
feasible under the circumstances including, among other things, (i) the Merger
Agreement and its exhibits; (ii) this Joint Proxy Statement-Prospectus; (iii)
the historical and current financial position and results of operations of the
Companies set forth in their respective periodic reports and proxy materials
filed with the Commission, including their Forms 10-K for fiscal year 1997 and
Forms 10-Q for the quarters ended March 31, 1998 and June 30, 1998; (iv) certain
internal financial analyses and forecasts of the Companies for the fiscal years
beginning January 1, 1998 and ending December 31, 2003, prepared by their senior
managements; (v) certain internal financial analyses and forecasts of New Prison
Realty, the Service Companies, and Operating Company for the fiscal years
beginning January 1, 1998 and ending December 31, 2003, prepared by Prison
Realty's and CCA's senior management; (vi) reported stock price and trading data
for the CCA Common Stock, the Prison Realty Common Shares and the Prison Realty
Series A Preferred Shares; (vii) certain financial and securities data of
certain other companies, the securities of which are publicly traded and that
J.C. Bradford believed to be relevant; (viii) prices and premiums paid in
certain other acquisitions and transactions that J.C. Bradford believed to be
relevant.
J.C. Bradford also held discussions with members of the respective senior
management groups of the Companies regarding the past and current business
operations, financial condition, and future prospects of the Companies. In
addition, J.C. Bradford took into account its assessment of general economic,
market, and financial conditions and its experience in other transactions as
well as its experience in securities valuation and its knowledge of the
corrections industry generally.
J.C. Bradford's opinion is necessarily based upon general economic, market,
financial and other conditions as they existed on its date and the information
made available to J.C. Bradford through such date. For purposes of the opinion,
J.C. Bradford relied upon and assumed the accuracy, completeness, and fairness
of the financial and other information made available to it and did not assume
responsibility for independent verification of such information. J.C. Bradford
has assumed, and the managements of the Companies have represented, that the
information provided by the Companies had a reasonable basis and reflected the
best currently available estimates and judgments of the Companies' respective
management groups as to the recent and likely future performance of the
Companies. With the permission of the Prison Realty Board, J.C. Bradford assumed
that certain financing required to complete the Merger and fund Prison Realty's
expected capital commitments for 1999 will be irrevocably obtained on terms
which senior management estimated that it could receive. J.C. Bradford also
relied upon the representations of the Companies' respective management groups
that they were not aware of any information or fact that would make the
information provided to J.C. Bradford incomplete or misleading. J.C. Bradford
was not authorized by the Prison Realty Board to solicit, and did not solicit,
other entities for purposes of a possible business combination. No limitations
were imposed by the Prison Realty Board or Prison Realty on the scope of J.C.
Bradford's investigation or the procedures to be followed in rendering its
opinion. The J.C. Bradford opinion was based upon the information available to
J.C. Bradford and the facts and circumstances as they existed and were subject
to evaluation on the date of the opinion. Events occurring after such date could
materially affect the assumptions used in preparing the opinion, and J.C.
Bradford has no duty or obligation to update or amend its opinion, or otherwise
advise the Prison Realty Board or any other party or person, of the occurrence
of any such events. Notwithstanding the
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foregoing, as required in the Merger Agreement, J.C. Bradford will subsequently
update its opinion to the Prison Realty Board immediately prior to the
completion of the Merger which will necessarily consider any such subsequent
events that may occur. Under the terms of the Merger Agreement, this requirement
may be waived by Prison Realty, although Prison Realty does not intend to waive
this condition.
In preparing its report to the Prison Realty Board, J.C. Bradford performed
a variety of financial and comparative analyses and considered a variety of
factors, including the following: (i) pro forma merger analysis; (ii) discounted
cash flow analysis for CCA; (iii) comparable company analysis for CCA; (iv)
historical price-earnings ratio analysis for CCA; (v) discounted cash flow
analysis for Prison Realty; (vi) comparable company analysis for Prison Realty;
(vii) comparable transaction analysis; (viii) historical price-funds from
operations ("FFO") ratio analysis for Prison Realty; (ix) exchange ratio
analysis; (x) premiums analysis; (xi) stock trading analysis and (xii) rate
spread analysis. The summary of J.C. Bradford's analyses set forth below does
not purport to be a complete description of the analyses underlying J.C.
Bradford's opinion. The preparation of a fairness opinion is a complex process
involving subjective judgments and is not necessarily susceptible to partial
analysis or summary description. In arriving at its opinion, J.C. Bradford did
not attribute any particular weight to any analysis or factor considered by it,
but rather made qualitative judgments as to the significance and relevance of
each analysis and factor. Accordingly, J.C. Bradford believes that its analyses
must be considered as a whole and that selecting portions of its analyses and
the factors considered by it, without considering all analyses and factors,
could create a misleading or incomplete view of the processes underlying such
analyses and its opinion. J.C. Bradford does not believe that any specific
portion of its analysis did not generally support the conclusions of its
fairness opinion. With respect to the comparable company analyses summarized
below, no company utilized as a comparison is identical to the respective
Companies and such analyses necessarily involve complex considerations and
judgments concerning the differences in financial and operating characteristics
of the Companies and other factors that could affect the acquisition or public
trading values of the Companies concerned. In performing its analyses, J.C.
Bradford made numerous assumptions with respect to industry performance, general
business, economic, market, and financial conditions, and other matters. The
analyses performed by J.C. Bradford are not necessarily indicative of actual
values or future results, which may be significantly more or less favorable than
suggested by such analyses. Because such analyses are inherently subject to
uncertainty, being based upon numerous factors or events beyond the control of
the parties or their respective advisers, neither Prison Realty nor J.C.
Bradford or any other person assumes responsibility if future results are
materially different from those forecast.
The following is a summary of the report presented by J.C. Bradford to the
Prison Realty Board on April 18, 1998:
(a) Pro Forma Merger Analysis. Using pro forma merger analysis, based
on information obtained from the senior management of Prison Realty, J.C.
Bradford compared the projected FFO per share both before and after the
proposed transaction through the fiscal year 2003. J.C. Bradford noted that
the pro forma fiscal 1999 FFO per share after the Merger was projected to
be $2.84, which compared favorably to the existing consensus estimate
(defined as the average of research analysts covering Prison Realty) of
$2.75 and Prison Realty's stand-alone internal estimate of $2.78. J.C.
Bradford also performed an analysis of the comparative returns to
shareholders before and after the transaction assuming various price to FFO
per share multiples ("FFO multiples"). J.C. Bradford noted that the pro
forma projections provided by senior management of Prison Realty contained
higher growth rate assumptions for the surviving company than for the sum
of each of the Companies on a stand-alone basis.
(b) Discounted Cash Flow Analysis for CCA. Using discounted cash flow
analysis, based on information obtained from the senior management of CCA,
J.C. Bradford discounted to present value the future cash flows that CCA is
projected to generate through 2003, under various circumstances, assuming
CCA performed in accordance with the earnings forecast of management. J.C.
Bradford calculated terminal values for CCA (i.e., the values at the 2003
fiscal year-end) by applying multiples to earnings before interest, taxes,
depreciation, and amortization ("EBITDA") and net income in the year 2003.
The cash flow streams and terminal values were then discounted to present
values using different discount
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rates chosen to reflect different assumptions regarding CCA's cost of
capital. Based on this analysis, the implied value per share of the CCA
Common Stock ranged from $37.39 to $49.71 which compared favorably to the
implied transaction price in the Merger on April 17, 1998 of $35.11 and the
closing sale price of CCA Common Stock on April 17, 1998 of $33.50.
(c) Comparable Company Analysis for CCA. Using publicly available
information, J.C. Bradford reviewed certain financial and operating data
for several publicly traded companies engaged in businesses with
characteristics similar to CCA's. This group included Cornell Corrections,
Inc., Correctional Services Corp., Wackenhut Corrections Corp., and Youth
Services International, Inc. (the "CCA Comparable Company Group"). J.C.
Bradford calculated the current market price of each company as a multiple
of estimated calendar year 1998 earnings ("1998 P/E"), which ranged from
29.5x to 39.1x; current market price as a multiple of estimated calendar
year 1999 earnings ("1999 P/E"), which ranged from 23.6x to 29.1x; current
market price as a multiple of book value (the "Book Value Multiple"), which
ranged from 2.6x to 9.2x; total adjusted firm value (defined as equity
market value plus net debt plus capitalized operating leases) as a multiple
of latest quarter annualized earnings before interest, taxes, depreciation,
amortization and rent ("4th Quarter Annualized EBITDAR") (the "4th Quarter
Annualized EBITDAR Multiple"), which ranged from 13.2x to 25.1x; total
adjusted firm value as a multiple of projected 1998 earnings before
interest, taxes, depreciation, amortization and rents ("1998 EBITDAR") (the
"1998 EBITDAR Multiple"), which ranged from 10.2x to 19.0x; total adjusted
firm value as a multiple of last twelve months ("LTM") earnings before
interest, taxes, depreciation, amortization and rents ("LTM EBITDAR") (the
"LTM EBITDAR Multiple"), which ranged from 15.7x to 28.4x; total firm value
(defined as equity market value plus net debt) as a multiple of latest
quarter annualized earnings before interest, taxes, depreciation, and
amortization ("4th Quarter Annualized EBITDA") (the "4th Quarter Annualized
EBITDA Multiple"), which ranged from 13.9x to 31.0x; total firm value as a
multiple of projected 1998 earnings before interest, taxes, depreciation
and amortization ("1998 EBITDA") (the "1998 EBITDA Multiple"), which ranged
from 11.3x to 23.2x; total firm value as a multiple of LTM earnings before
interest, taxes, depreciation and amortization ("LTM EBITDA") (the "LTM
EBITDA Multiple"), which ranged from 17.1x to 35.7x; total firm value as a
multiple of latest quarter annualized revenues ("4th Quarter Annualized
Revenue Multiple"), which ranged from 1.8x to 5.9x; and total firm value as
a multiple of LTM revenues (the "LTM Revenue Multiple"), which ranged from
2.1x to 6.9x. J.C. Bradford noted that the 1998 P/E and 1999 P/E multiples
of the CCA Comparable Company Group compared favorably to the implied 1998
P/E and 1999 P/E multiples of 35.1x and 25.3x, respectively, in the Merger.
(d) Historical Price-Earnings Ratio Analysis for CCA. Using
historical price-earnings ratio analysis, J.C. Bradford noted that the
implied forward P/E multiple in the Merger (based on an implied transaction
average of the price in April of $35.11 per share) of 35.1x CCA's forward
earnings was below the historical forward P/E ratios for CCA (calculated as
the price at month-end divided by consensus estimated earnings for the next
four quarters) for 1994, 1995, 1996, 1997 and the first quarter of 1998.
(e) Discounted Cash Flow Analysis for Prison Realty. Using discounted
cash flow analysis, based on information obtained from the senior
management of Prison Realty, J.C. Bradford discounted to present value the
future cash flows that Prison Realty is projected to generate through 2003,
under various circumstances, assuming Prison Realty performed in accordance
with the earnings forecast of management. J.C. Bradford calculated terminal
values for Prison Realty (i.e., the values at the 2003 fiscal year-end) by
applying multiples of FFO in the year 2003. The cash flow streams and
terminal values were then discounted to present values using different
discount rates chosen to reflect different assumptions regarding Prison
Realty's cost of equity. Based on this analysis, the implied value per
Prison Realty Common Share ranged from $22.81 to $33.93, which compared
favorably to the closing price of Prison Realty's Common Shares on April
17, 1998 of $40.13 per share.
(f) Comparable Company Analysis for Prison Realty. Using publicly
available information, J.C. Bradford reviewed certain financial and
operating data for several publicly traded REITs with characteristics
similar to Prison Realty's. This group included the following triple-net
lease REITs: Alexandria Real Estate Equities, Inc., American Health
Properties, Inc., Capital Automotive REIT,
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Capstone Capital Corporation, Captec Net Lease Realty, Inc., Commercial Net
Lease Realty, Inc., Entertainment Properties Trust, Franchise Finance
Corporation of America, Golf Trust of America, Inc., Health & Retirement
Properties Trust, Health Care Property Investors, Inc., Health Care REIT,
Inc., Healthcare Realty Trust, Inc., Lexington Corporate Properties Trust,
LTC Properties, Inc., Meditrust Corporation, National Golf Properties,
Inc., National Health Investors, Inc., National Health Realty, Inc.,
Nationwide Health Properties, Inc., Omega Healthcare Investors, Inc., One
Liberty Properties, Inc., Realty Income Corporation, TriNet Corporate
Realty Trust, Inc., and Universal Health Realty Income Trust (the "Prison
Realty Comparable Company Group"). J.C. Bradford calculated the current
market price of each company as a multiple of estimated 1997 FFO (the "1997
FFO Multiple"), which ranged from 9.6x to 129.6x with an adjusted average
multiple (excluding the high and low) of 14.2x which compared favorably to
Prison Realty's multiple of 45.6x; current market price as a multiple of
estimated 1998 FFO (the "1998 FFO Multiple"), which ranged from 8.6x to
17.9x with an adjusted average multiple (excluding the high and low) of
11.4x which compared favorably to Prison Realty's multiple of 17.9x;
current market price as a multiple of estimated 1999 FFO (the "1999 FFO
Multiple"), which ranged from 7.7x to 14.6x with an adjusted average
multiple (excluding the high and low) of 10.5x which compared favorably to
Prison Realty's multiple of 14.6x; and the annualized dividend rate as a
yield on the current market price (the "Current Dividend Yield"), which
ranged from 4.2% to 9.2% with an adjusted average yield (excluding the high
and low) of 7.3% which compared favorably to Prison Realty's yield of 4.2%.
J.C. Bradford noted that the adjusted average 1998 FFO Multiple and the
adjusted average 1999 FFO Multiple of Prison Realty Comparable Company
Group implied per share prices for the Prison Realty Common Shares of
$25.54 and $28.88, respectively, which compared favorably to the closing
price of Prison Realty's Common Shares on April 17, 1998 of $40.13 per
share.
(g) Comparable Transaction Analysis. Using comparable transaction
analysis, J.C. Bradford calculated the multiples paid in acquisitions of
REITs since January 1, 1995. J.C. Bradford calculated the aggregate equity
consideration paid for each acquired REIT as a multiple of the LTM FFO (the
"LTM FFO Multiple"), which ranged from 10.3x to 19.5x with an adjusted
average multiple of 13.4x; aggregate equity consideration paid for each
acquired REIT as a multiple of estimated current fiscal year FFO (the
"Current Year FFO Multiple"), which ranged from 9.1x to 17.1x with an
adjusted average multiple of 11.7x; and aggregate equity consideration paid
for each acquired REIT as a multiple of estimated next fiscal year FFO (the
"Next Year FFO Multiple"), which ranged from 9.1x to 17.1x with an adjusted
average multiple of 11.7x. Based on this analysis, J.C. Bradford noted that
the Current Year FFO Multiple and Next Year FFO Multiple implied prices of
Prison Realty Common Shares of $26.32 and $29.85, respectively, which were
lower than the closing price of Prison Realty's Common Shares on April 17,
1998 of $40.13 per share.
(h) Historical Price-FFO Ratio Analysis for Prison Realty. Using
historical price-FFO ratio analysis, J.C. Bradford noted that Prison Realty
Common Shares were currently trading within approximately 10% of its
all-time high price-FFO multiple, and that the price of Prison Realty
Common Shares had appreciated 91% since its initial public offering at
$21.00 on July 15, 1997.
(i) Exchange Ratio Analysis. Using exchange ratio analysis, J.C.
Bradford noted that the ratio of CCA's Common Stock price to Prison
Realty's Common Share price had been greater than 0.875 (the Exchange
Ratio) on 129 of the 192 trading days since Prison Realty's initial public
offering on July 15, 1997. J.C. Bradford also noted that since October 31,
1997, the average ratio of CCA's Common Stock price to Prison Realty's
Common Share price had been 0.873.
(j) Premiums Analysis. J.C. Bradford prepared an analysis of the
premiums paid in all 100% stock transactions and for all stock transactions
over $1.0 billion since January 1, 1996 as well as an analysis of the
premiums paid in REIT acquisitions of C Corporations. J.C. Bradford
considered, among other factors, the type of consideration used in the
acquisition and the premiums paid based on the closing price of the
target's shares at one day, one week, and four weeks prior to the
announcement of the transaction. J.C. Bradford noted that the range of
average premiums of such transactions of between 23.9% and 38.5% compared
favorably to the 4.8% premium to be paid to the CCA shareholders in the
Merger based on the stock prices of the Companies on April 17, 1998.
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(k) Stock Trading Analysis. J.C. Bradford reviewed and analyzed the
historical trading volume and prices at which the Prison Realty Common
Shares and the CCA Common Stock have traded since July 15, 1997 and since
January 1, 1996, respectively, as compared to the indexed historical
trading prices for an index comprised of the Prison Realty Comparable
Company Group and the CCA Comparable Company Group, respectively, and the
Standard and Poor's 400 Index.
J.C. Bradford subsequently confirmed its opinion by delivering to the
Prison Realty Board a written opinion dated as of the date of this Joint Proxy
Statement-Prospectus, that, on the basis of and subject to matters set forth
therein, as of the date thereof, the Merger Consideration is fair from a
financial point of view to Prison Realty and its shareholders.
Updated Fairness Analysis. In connection with its updated opinion, J.C.
Bradford updated its analyses to reflect current market conditions, as well as
revisions to the respective forecasts of each of CCA, Prison Realty and the
combined company. J.C. Bradford's updated analyses also reflected adjustments to
the structure of the Merger. The following is a summary of the analysis
completed by J.C. Bradford in connection with its updated opinion dated the date
of this Joint Proxy Statement-Prospectus:
(a) Pro Forma Merger Analysis. Using pro forma merger analysis, based
on revised information obtained from the senior management of Prison
Realty, J.C. Bradford again compared the projected FFO per share both
before and after the proposed transaction through the fiscal year 2003.
J.C. Bradford noted that the pro forma fiscal 1999 FFO per share after the
transaction was projected to be $2.84, which compared favorably to the
existing consensus estimate (defined as the average of research analysts
covering Prison Realty) of $2.76 and Prison Realty's stand-alone internal
estimate of $2.81. J.C. Bradford again noted that the pro forma projections
provided by senior management of Prison Realty contained higher growth rate
assumptions for the combined company than for the sum of each of the
Companies on a stand-alone basis.
(b) Discounted Cash Flow Analysis for CCA. Using discounted cash flow
analysis, based on information obtained from the senior management of CCA,
J.C. Bradford calculated values per share ranging from $22.33 to $31.47 as
compared to the implied transaction price on September 25, 1998 of $18.65
and the closing sale price on September 25, 1998 of $15.06. The lower
values were arrived at due to reduced terminal multiples reflecting the
lower comparable multiples in current market conditions.
(c) Comparable Company Analysis for CCA. Using publicly available
information, J.C. Bradford again reviewed certain financial and operating
data for the CCA Comparable Company Group. J.C. Bradford calculated the
1998 P/E, which ranged from 15.4x to 28.3x; the 1999 P/E, which ranged from
8.8x to 20.3x; the Book Value Multiple, which ranged from 1.1x to 4.3x; the
2nd Quarter Annualized EBITDAR Multiple, which ranged from 7.5x to 14.0x;
the 1999 EBITDAR Multiple, which ranged from 5.0x to 9.8x; the LTM EBITDAR
Multiple, which ranged from 7.2x to 15.4x; the 2nd Quarter Annualized
EBITDA Multiple, which ranged from 7.2x to 14.7x; the 1999 EBITDA Multiple,
which ranged from 4.8x to 10.2x; the LTM EBITDA Multiple, which ranged from
6.6x to 16.1x; the 2nd Quarter Annualized Revenue Multiple, which ranged
from 0.6x to 2.4x; and the LTM Revenue Multiple, which ranged from 0.6x to
2.7x.
(d) Historical Price-Earnings Ratio Analysis for CCA. Using
historical price-earnings ratio analysis, J.C. Bradford noted that the
implied forward P/E multiple in the proposed transaction as of September
25, 1998 was 15.2x CCA's forward earnings and was below the historical
average forward P/E ratios for CCA (calculated as the price at month-end
divided by consensus estimated earnings for the next four quarters) for
1994, 1995, 1996, 1997 and the first quarter of 1998.
(e) Discounted Cash Flow Analysis for Prison Realty. Using discounted
cash flow analysis, based on information obtained from the senior
management of Prison Realty, J.C. Bradford calculated implied values per
share ranging from $22.55 to $30.55 as compared to the closing stock price
of Prison Realty Common Stock on September 25, 1998 of $21.31.
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(f) Comparable Company Analysis for Prison Realty. Using publicly
available information, J.C. Bradford reviewed certain financial and
operating data for the Prison Realty Comparable Company Group. J.C.
Bradford calculated the 1997 FFO Multiple, which ranged from 7.4x to 15.3x
with an adjusted average multiple of 10.6x; the 1998 FFO Multiple, which
ranged from 7.1x to 14.3x with an adjusted average multiple of 10.4x; the
1999 FFO Multiple, which ranged from 6.4x to 12.2x with an adjusted average
multiple of 9.3x; and the Current Dividend Yield, which ranged from 5.5% to
13.4% with an adjusted average yield of 8.3%.
(g) Comparable Transaction Analysis. Using comparable transaction
analysis, J.C. Bradford noted that the Current Year FFO Multiple and Next
Year FFO Multiple implied share prices for Prison Realty of $26.21 and
$29.70, respectively.
(h) Stock Trading Analysis. J.C. Bradford reviewed and analyzed the
historical trading volume and prices at which the Prison Realty Common
Stock and the CCA Common Stock have traded since July 15, 1997 and since
January 1, 1996, respectively, as compared to the indexed historical
trading prices for an index comprised of the Prison Realty Comparable
Company Group and the CCA Comparable Company Group, respectively, and the
Standard and Poor's 400 Index. J.C. Bradford & Co. also evaluated the
decline in the stock prices of each of CCA and Prison Realty after the
announcement of the Merger on April 20, 1998 through September 25, 1998 in
comparison to comparable companies and the broader stock market as a whole.
J.C. Bradford noted that, since the announcement of the Merger on April 20,
1998, the market prices of each of CCA and Prison Realty have declined
55.0% and 46.9%, respectively. During that same period, the CCA Comparable
Company Group and the Prison Realty Comparable Company Group declined 52.4%
and 12.3%, respectively.
(i) Rate-Spread Analysis. J.C. Bradford completed an analysis of the
difference between Prison Realty's cost of capital and the return on
invested capital, or "spread" that Prison Realty can earn on investments,
both under its current arrangement with CCA and after the Merger. J.C.
Bradford noted that the range of spreads that can be earned under its
existing arrangement with CCA is significantly less than the range of
spreads that can be earned on invested capital after the Merger. As a
result, the Merger gives Prison Realty a greater degree of flexibility and
facilitates its ability to continue to grow.
J.C. Bradford was engaged by the Prison Realty Board in connection with the
Prison Realty Board's discharge of its fiduciary obligations to render its
opinion as to the fairness from a financial point of view of the Merger
Consideration. Pursuant to the terms of an engagement letter dated April 18,
1998, Prison Realty agreed to pay J.C. Bradford for acting as financial adviser
to the Prison Realty Board in connection with the Merger a fee as follows: (i) a
fee of $2.0 million payable in cash upon delivery of the April 18, 1998 opinion,
(ii) a fee of $2.0 million payable in cash upon the opinion being updated by
J.C. Bradford for this Joint Proxy Statement-Prospectus, and (iii) if the Merger
is completed, an additional fee of $4.0 million payable in cash upon the closing
of the Merger. In addition to any fees that may be payable to J.C. Bradford,
Prison Realty also agreed to reimburse J.C. Bradford for all its reasonable
out-of-pocket expenses incurred in connection with J.C. Bradford's activity
under its engagement, and to indemnify J.C. Bradford and certain related persons
against certain liabilities relating to or arising out of its engagement,
including certain liabilities under the federal securities laws. In the ordinary
course of its business, J.C. Bradford has traded, and may in the future trade,
securities of the Companies for its own account and for the accounts of its
customers and, accordingly, may at any time hold a long or short position in
such securities. J.C. Bradford acted as a financial adviser to Prison Realty in
its acquisition of USCC which closed on April 17, 1998 and received customary
fees for such services. J.C. Bradford has also, in the past, acted as a lead
underwriter of common stock and preferred stock offerings of the Companies and
provided financial advisory services to the Companies and may continue to do so
and has received, and may receive, fees for the rendering of such services.
OPINION OF CCA'S FINANCIAL ADVISER
Stephens delivered its oral and written opinion to the CCA Board on April
17, 1998 that, on the basis of and subject to the matters set forth therein, as
of the date thereof, the Exchange Ratio was fair from a financial point of view
to CCA and its shareholders. Stephens has confirmed its opinion of April 17,
1998 by
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delivering an updated written opinion to the CCA Board, dated the date of this
Joint Proxy Statement-Prospectus to the effect that, as of the date thereof, the
Exchange Ratio was fair from a financial point of view to CCA and its
shareholders, and will update its opinion prior to the completion of the Merger.
THE FULL TEXT OF THE OPINION OF STEPHENS DATED AS OF THE DATE OF THIS JOINT
PROXY STATEMENT-PROSPECTUS, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS
CONSIDERED AND LIMITS ON THE REVIEW UNDERTAKEN, IS ATTACHED TO THIS JOINT PROXY
STATEMENT-PROSPECTUS AS APPENDIX C AND IS INCORPORATED HEREIN BY REFERENCE.
STEPHENS' OPINION IS NECESSARILY BASED ON ECONOMIC, MARKET AND OTHER CONDITIONS
IN EFFECT ON, AND THE INFORMATION MADE AVAILABLE TO IT AS OF, THE DATE THEREOF.
SUBSEQUENT DEVELOPMENTS MAY AFFECT SUCH OPINION. HOLDERS OF CCA COMMON STOCK
SHOULD READ THE STEPHENS OPINION IN ITS ENTIRETY. THE FOLLOWING SUMMARY IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION. THE
OPINION OF STEPHENS WAS PROVIDED TO THE CCA BOARD FOR ITS INFORMATION AND IS
DIRECTED ONLY TO THE FAIRNESS FROM A FINANCIAL POINT OF VIEW OF THE EXCHANGE
RATIO TO CCA AND ITS SHAREHOLDERS. THE OPINION OF STEPHENS DOES NOT ADDRESS THE
MERITS OF THE UNDERLYING DECISION BY CCA TO ENGAGE IN THE MERGER AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER OF CCA AS TO HOW SUCH SHAREHOLDER
SHOULD VOTE ON THE PROPOSED MERGER OR ANY MATTER RELATED THERETO.
In connection with rendering its opinion, Stephens: (1) analyzed certain
publicly available financial statements and reports regarding Prison Realty and
CCA; (2) analyzed certain internal financial statements and other financial and
operating data (including financial projections) concerning Prison Realty and
CCA and taking into account the pro forma effect of the USCC transaction; (3)
analyzed, on a pro forma basis, the financial effect of the Merger; (4) reviewed
the reported prices and trading activity for Prison Realty Common Shares and CCA
Common Stock; (5) compared the financial performance of Prison Realty and CCA
and the prices and trading activity of Prison Realty Common Shares and CCA
Common Stock with that of certain other comparable publicly-traded companies and
their securities; (6) reviewed the financial terms, to the extent publicly
available, of certain transactions in the REIT and private correctional
industries; (7) reviewed the Merger Agreement and related documents; and (8)
discussed with management of Prison Realty and CCA the operations of and future
business prospects for Prison Realty and CCA and the anticipated financial
consequences of the Merger. Stephens was familiar with the structure of the
proposed transaction, including the fact that the operations of CCA will be
reorganized so that they will ultimately be conducted by certain affiliates of
the surviving company, and Stephens was familiar with the proposed structure of
those affiliates and the proposed relationship between the surviving company and
those affiliates.
Stephens relied on the accuracy and completeness of the information and
financial data provided to it by Prison Realty and CCA, and Stephens' opinion is
based upon such information. Stephens inquired into the reliability of such
information and financial data only to the limited extent necessary to provide a
reasonable basis for its opinion, recognizing that Stephens rendered only an
informed opinion and not an appraisal or certification of value. With respect to
the financial projections prepared by managements of Prison Realty and CCA,
Stephens assumed that they were reasonably prepared on bases reflecting the best
currently available estimates and judgments of the managements of Prison Realty
and CCA as to the expected future financial performance of Prison Realty and
CCA. To the extent that its analysis was based on financial projections for CCA,
Prison Realty, or on pro forma financial information of the surviving company,
Stephens relied on financial projections and pro forma financial information
provided by the management of CCA that reflected the completion of the USCC
transaction. Stephens did not express any opinion as to the prices at which the
CCA Common Stock will trade in the short term following the announcement or
completion of the Merger.
In arriving at its opinion, Stephens performed a variety of financial
analyses, the material portions of which are summarized below. The summary set
forth below does not purport to be a complete description of the analyses
performed by Stephens. In addition, Stephens believes that its analyses must be
considered as a whole and that selecting portions of its analyses and of the
factors considered by it, without considering all such factors and analyses,
could create a misleading view of the process underlying its analyses. Stephens
did not draw any specific conclusions from or with regard to any one method of
analysis. However, Stephens did not identify any one method of analysis which
failed to support its opinion. The matters considered by Stephens in arriving at
its opinion are based on numerous macroeconomic, operating and financial
assumptions with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond Prison Realty and CCA's
control. Any estimates incorporated in the analyses performed
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by Stephens are not necessarily indicative of actual past or future results or
values, which may be significantly more or less favorable than such estimates.
Estimated values do not purport to be appraisals and do not necessarily reflect
the prices at which businesses or companies may be sold in the future, and such
estimates are inherently subject to uncertainty. Arriving at a fairness opinion
is a complex process not necessarily susceptible to partial or summary
description. No public company or transaction involving public companies
utilized as a comparison is identical to Prison Realty or CCA. Accordingly, an
analysis of publicly traded comparable companies and comparable business
combinations is not mathematical; rather it involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the comparable companies involved and other factors that could affect the public
trading value of the comparable companies or company utilized in Stephens'
analysis.
The Stephens opinion is necessarily based upon market, economic and other
conditions as they existed and could be evaluated on, and on the information
made available to Stephens as of, the date of such opinion. As required in the
Merger Agreement, Stephens will update its opinion immediately prior to the
completion of the Merger. Under the terms of the Merger Agreement, this
requirement may be waived by CCA, although CCA does not intend to waive this
condition. Stephens assumed that in the course of obtaining the necessary
regulatory or other consents or approvals (contractual or otherwise) for the
Merger, no restrictions, including any divestiture requirements or amendments or
modifications, would be imposed that would have a material adverse effect on the
contemplated benefits of the Merger. Any such amendments or modifications that
do occur, however, will necessarily be considered by Stephens in delivering its
updated opinion prior to the Merger. The CCA Board did not impose any
limitations on the scope of Stephens' analyses.
The CCA Board retained Stephens as an independent contractor to act as
financial adviser for the purpose of providing a fairness opinion with respect
to the Exchange Ratio. Stephens is a nationally recognized investment banking
and advisory firm. Stephens, as part of its investment banking business, is
continually engaged in the valuation of companies and their securities in
connection with business reorganizations, private placements, negotiated
underwritings, mergers and acquisitions and valuations for estate, corporate and
other purposes. Stephens is familiar with CCA and Prison Realty, Stephens
regularly provides investment banking services to CCA and Prison Realty and
issues periodic research reports regarding their business activities and
prospects. In the ordinary course of business, Stephens and its affiliates may
at any time hold long or short positions, and may trade or otherwise effect
transactions as principal or for the accounts of customers, in debt or equity
securities or options on securities of CCA and Prison Realty. Certain affiliates
of Stephens are investors in, and provide management services to, two private
investment funds affiliated with D. Robert Crants, III and Michael W. Devlin,
who serve as senior management to Prison Realty. Stephens also provides
investment banking brokerage services to these funds.
With the consent of CCA, Stephens has assumed that the Merger: (i) will
qualify as a tax-free reorganization under the Code; (ii) will be accounted for
as described in this Joint Proxy-Statement Prospectus; and (iii) will not change
the status of the surviving company as a REIT. Stephens has also assumed that
the status of the surviving company will not be changed as the result of the
enactment of any federal legislation or promulgation or enactment of any rules
of regulations regarding REITs.
In consideration for Stephens' services as financial adviser to CCA, CCA
has agreed to pay to Stephens a fee equal to $7.0 million, $3.5 million of which
is payable upon completion of the Merger or some other type of business
combination. CCA has also agreed to reimburse Stephens for its reasonable
out-of-pocket expenses, including fees and disbursements of its legal counsel,
plus any sales or use taxes incurred in connection with its activities as
financial adviser in providing a fairness opinion to CCA, and to indemnify
Stephens and certain related persons against certain liabilities in connection
with its engagement, including certain liabilities under the federal securities
laws.
Financial Analysis
The following is a summary of the material financial analyses used by
Stephens in connection with its presentation to the CCA Board on April 17, 1998,
and the preparation of its opinion delivered to the CCA Board.
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Historical Stock Price Analysis. Stephens reviewed the performance of the
per share closing market prices of Prison Realty Common Shares over the period
from July 15, 1997, through April 15, 1998, and the performance of CCA Common
Stock over the period from April 15, 1996 through April 15, 1998. Stephens then
compared the movement of such closing prices for Prison Realty Common Shares
with the movement of a composite index of certain triple-net lease REIT
companies, and the movement of such closing prices for CCA Common Stock with the
movement of a composite index of certain private correctional companies.
Stephens also compared the movement of the closing prices for Prison Realty
Common Shares and CCA Common Stock over the same time period, with the movement
of the Standard and Poor's 500 Index.
Stephens also reviewed the historical ratios of the closing market prices
of CCA Common Stock to Prison Realty Common Shares over the period from July 15,
1997 through April 15, 1998 and compared such ratios with the Exchange Ratio of
0.875x. Stephens noted that the ratio of the closing market prices of CCA Common
Stock to Prison Realty Common Shares over that period ranged from a high of
1.489x on July 15, 1997, to a low of 0.784x on April 6, 1998. Stephens also
noted that the current ratio of the closing market prices of CCA Common Stock to
Prison Realty Common Shares was 0.856x as of April 15, 1998 and that, as of that
date, the average ratios over the previous 30, 60, 90, and 180 day periods were
0.834x, 0.850x, 0.867x, 0.893x, respectively.
Selected Private Correctional Companies Analysis. Stephens compared
certain publicly available financial and operating data and projected financial
performance (based on Wall Street consensus estimates) of five publicly traded
corporations in the private correctional industry, specifically Correctional
Services Corp., Children's Comprehensive Services Inc., Wackenhut Corrections
Corp., Youth Services International Inc. and Cornell Corrections Inc.
(collectively, "CCA Selected Comparable Companies") with corresponding financial
and operating data and projected financial performance of CCA. Such analysis
indicated, among other things, (a) the ratio of the total market capitalization,
as of April 15, 1998 (i.e., market value of common equity plus liquidation value
of redeemable preferred stock, minority interest and total debt less cash and
cash equivalents or the "Total Market Capitalization") to the 1998 estimated
earnings before interest, taxes, depreciation and amortization ("EBITDA") was
22.0x for CCA compared to maximum, median and minimum values for the CCA
Selected Comparable Companies of 16.7x, 14.1x and 12.3x, respectively, (b) the
ratio of the equity market capitalization as of April 15, 1998 (i.e., market
value of common equity or the "Equity Market Capitalization") to the 1998
estimated net income was 35.2x for CCA compared to maximum, median and minimum
values for the CCA Selected Comparable Companies of 38.2x, 36.8x and 27.8x,
respectively, and (c) the ratio of Equity Market Capitalization to the 1999
estimated net income was 24.8x for CCA compared to maximum, median and minimum
values for the CCA Selected Comparable Companies of 29.7x, 26.2x and 21.9x,
respectively.
Selected Triple-Net Lease REIT Analysis. Stephens compared certain
publicly available financial and operating data and projected financial
performance (based on Wall Street consensus estimates) of twenty publicly traded
triple-net lease REITs, specifically American Health Properties, Inc., Capstone
Capital Corporation, Captec Net Lease Realty, Inc., Commercial Net Lease Realty,
Inc., Excel Realty Trust, Inc., Franchise Finance Corporation of America, G & L
Realty Corp., Health Care REIT, Inc., Health and Retirement Properties Trust,
Health Care Property Investors, Inc., Healthcare Realty Trust Incorporated,
Lexington Corporate Properties Trust, LTC Properties, Inc., National Golf
Properties, Inc., National Health Investors, Inc., Nationwide Health Properties,
Inc., Omega Healthcare Investors, Inc., Realty Income Corporation, TriNet
Corporate Realty Trust, Inc. and Universal Health Realty Income Trust
(collectively "Prison Realty Selected Comparable Companies") with corresponding
financial and operating data and projected financial performance of Prison
Realty. Such analysis indicated, among other things, (a) the ratio of the
current market price per share to the 1998 estimated funds from operation
(defined as net income plus depreciation and amortization of goodwill, or the
"FFO") was 18.3x for Prison Realty compared to maximum, median and minimum
values for the Prison Realty Selected Comparable Companies of 12.3x, 11.2x and
8.5x, respectively, and (b) the ratio of the current market price per share to
the 1999 estimated FFO was 14.9x for Prison Realty compared to maximum, median
and minimum values for the Prison Realty Selected Comparable Companies of 11.5x,
10.4x and 7.6x respectively.
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Relative Public Comparable Analysis. Stephens compared the relative
valuations of CCA and Prison Realty derived from applying comparable company
multiples to the projected performance of CCA and Prison Realty. Stephens
applied multiples of Total Market Capitalization to 1998 estimated EBITDA for
CCA of 18.0x - 20.0x, multiples of Equity Market Capitalization to 1998
estimated earnings per share of 35.0x - 40.0x, and to 1999 estimated earnings
per share of 27.5x - 32.5x. Stephens applied multiples of FFO to 1998 estimated
Prison Realty FFO per share of 17.0x - 19.0x and to 1999 estimated FFO per share
of 12.0x - 14.0x. Stephens then compared the implied exchange ratios
representing the high value of CCA to the low value of Prison Realty (which was
0.874x) and the low value of CCA to the high value of Prison Realty (which was
0.672x) versus the Exchange Ratio of 0.875x.
Selected Comparable Transaction Analysis. Stephens reviewed several
transactions involving REITs and operating companies in a related industry and
transactions involving companies in the private correctional industry but deemed
none of them comparable to the Merger, due to its relative size versus the
industry and the fact that Prison Realty was the only publicly traded REIT
operating exclusively in the private correctional industry.
Discounted Cash Flow Analysis. Stephens performed a discounted cash flow
analysis on both Prison Realty and CCA based upon estimates of projected
financial performance prepared by the managements of Prison Realty and CCA.
Utilizing these projections, Stephens calculated a range of implied per share
equity values based upon the discounted net present value of the sum of the
projected stream of unlevered free cash flows from 1999 to the year 2003 and the
projected terminal value at 2003 based upon a range of multiples of projected
EBITDA less net debt at December 31, 1997 for CCA and a range of multiples of
projected FFO for Prison Realty divided by the number of fully diluted shares
outstanding of each company, respectively. Stephens applied several discount
rates (ranging from 9.5% to 10.5% for Prison Realty and 11.5% to 12.5% for CCA)
and multiples of FFO for Prison Realty (ranging from 12.0x to 14.0x) and EBITDA
for CCA (ranging from 10.0x to 12.0x). Utilizing this methodology, the implied
present value per share of Prison Realty Common Shares ranged from $49.22 to
$62.88; and the implied present value per share of CCA Common Stock ranged from
$40.12 to $48.30. Stephens then compared the implied exchange ratios
representing the high value of CCA to the low value of Prison Realty (which was
0.981x) and the low value of CCA to the high value of Prison Realty (which was
0.638x) versus the Exchange Ratio of 0.875x.
Merger Consequences Analysis. Stephens examined the pro forma impact, for
fiscal year 1999, of the Merger and the USCC transaction on estimates of Prison
Realty's FFO per share derived from estimates of Prison Realty financial
performance prepared by the management of Prison Realty and CCA and estimates of
CCA projected financial performance prepared by the management of CCA. The
projected impact arrived at through Stephens' analysis was compared to consensus
analyst earnings estimates for Prison Realty which did not take into account the
impact of the USCC transaction or the Merger. Compared to these consensus
earnings estimates, Stephens concluded that the USCC transaction and the Merger
would collectively be accretive in fiscal year 1999 by approximately $0.07 of
FFO per share. Stephens did not analyze the effect of these transactions
separately.
In addition, Stephens analyzed the potential long-term trading value of a
pro forma share of Prison Realty versus the long term stand-alone trading value
of CCA. Based on management forecasted results and future trading multiples,
Stephens calculated an implied pro forma trading value range post-Merger of an
equivalent share of CCA pre-Merger of $64.13 - $71.46 in 2001 and
$83.05 - $93.23 in 2003 compared to a stand-alone future trading value of CCA of
$56.87 - $66.36 in 2001 and $70.39 - $80.66 in 2003.
Updated Fairness Analysis. Stephens subsequently confirmed its opinion by
delivering to the CCA Board a written opinion dated October 15, 1998, that, on
the basis of and subject to matters set forth therein, as of the date thereof
that the Exchange Ratio is fair from a financial point of view to CCA and its
shareholders. In the process of rendering its updated opinion, Stephens
reviewed, in addition to the analyses described below: (i) the significant stock
price declines of CCA and Prison Realty since April 17, 1998; (ii) the effect of
the USCC transaction on the Merger; and (iii) the effect of changes in the
transaction structure since April 17, 1998. As part of rendering its updated
opinion, Stephens concluded that the Merger, as of the date of the Joint Proxy
Statement-Prospectus, would be accretive to New Prison Realty's FFO per
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share in 1999 by $0.27 when including the effect of the USCC transaction and
accretive by $0.16 when excluding the effect of the USCC transaction. Stephens
concluded that the Exchange Ratio remained fair from a financial point of view
to CCA and its shareholders after this subsequent review. The following is a
summary of the analysis completed by Stephens in connection with its updated
opinion dated October 15, 1998.
Selected Private Correctional Companies Analysis. Stephens compared
certain publicly available financial and operating data and projected financial
performance (based on Wall Street consensus estimates) of the CCA Selected
Comparable Companies with corresponding financial and operating data and
projected financial performance of CCA. Such analysis indicated, among other
things, (a) the ratio of the total market capitalization, as of September 25,
1998 (i.e., market value of common equity plus liquidation value of redeemable
preferred stock, minority interest and total debt less cash and cash equivalents
or the "Total Market Capitalization") to the 1998 estimated earnings before
interest, taxes, depreciation and amortization ("EBITDA") was 12.4x for CCA
compared to maximum, median and minimum values for the CCA Selected Comparable
Companies of 13.5x, 6.8x, and 5.4x, respectively, (b) the ratio of the equity
market capitalization as of September 25, 1998 (i.e., market value of common
equity or the "Equity Market Capitalization") to the 1998 estimated net income
was 20.8x for CCA compared to maximum, median and minimum values for the CCA
Selected Comparable Companies of 29.1x, 16.4x and 10.7x, respectively, and (c)
the ratio of Equity Market Capitalization to the 1999 estimated net income was
14.2x for CCA compared to maximum, median and minimum values for the CCA
Selected Comparable Companies of 20.9x, 11.2x and 8.7x, respectively.
Selected Triple-Net Lease REIT Analysis. Stephens compared certain
publicly available financial and operating data and projected financial
performance (based on Wall Street consensus estimates) of the Prison Realty
Selected Comparable Companies with corresponding financial and operating data
and projected financial performance of Prison Realty. Such analysis indicated,
among other things, (a) the ratio of the current market price per share to the
1998 estimated funds from operation (defined as net income plus depreciation and
amortization of goodwill, or the "FFO") was 8.8x for Prison Realty compared to
maximum, median and minimum values for the Prison Realty Selected Comparable
Companies of 11.0x, 10.3x and 7.8x, respectively, and (b) the ratio of the
current market price per share to the 1999 estimated FFO was 6.4x for Prison
Realty compared to maximum, median and minimum values for the Prison Realty
Selected Comparable Companies of 10.3x, 9.5x and 7.1x respectively.
Relative Public Comparable Analysis. Stephens compared the relative
valuations of CCA and Prison Realty derived from applying comparable company
multiples to the projected performance of CCA and Prison Realty. Stephens
applied multiples of Total Market Capitalization to 1998 estimated EBITDA for
CCA of 13.0x - 15.0x, multiples of Equity Market Capitalization to 1998
estimated earnings per share of 25.0x - 30.0x, and to 1999 estimated earnings
per share of 17.5x - 22.5x. Stephens applied multiples of FFO to 1998 estimated
Prison Realty FFO per share of 12.0x - 14.0x and to 1999 estimated FFO per share
of 10.0x - 12.0x. Stephens then compared the implied exchange ratios
representing the high value of CCA to the low value of Prison Realty (which was
0.681x) and the low value of CCA to the high value of Prison Realty (which was
0.471x) versus the Exchange Ratio of 0.875x.
Discounted Cash Flow Analysis. Stephens performed a discounted cash flow
analysis on both Prison Realty and CCA based upon estimates of projected
financial performance prepared by the managements of Prison Realty and CCA.
Utilizing these projections, Stephens calculated a range of implied per share
equity values based upon the discounted net present value of the sum of the
projected stream of unlevered free cash flows from 1999 to the year 2003 and the
projected terminal value at 2003 based upon a range of multiples of projected
EBITDA less net debt at June 30, 1998 for CCA and a range of multiples of
projected FFO for Prison Realty divided by the number of fully diluted shares
outstanding of each company, respectively. Stephens applied several discount
rates (ranging from 10.5% to 11.5% for Prison Realty and 12.5% to 13.5% for CCA)
and multiples of FFO for Prison Realty (ranging from 10.0x to 12.0x) and EBITDA
for CCA (ranging from 10.0x to 12.0x). Utilizing this methodology, the implied
present value per share of Prison Realty Common Shares ranged from $40.41 to
$48.25; and the implied present value per share of CCA Common Stock ranged from
$34.48 to $42.32. Stephens then compared the implied exchange ratios
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representing the high value of CCA to the low value of Prison Realty (which was
1.047x) and the low value of CCA to the high value of Prison Realty (which was
0.714x) versus the Exchange Ratio of 0.875x.
Merger Consequences Analysis. In addition, Stephens analyzed the potential
long-term trading value of a pro forma share of Prison Realty versus the long
term stand-alone trading value of CCA. Based on management forecasted results
and future trading multiples, Stephens calculated an implied pro forma trading
value range post-Merger of an equivalent share of CCA pre-Merger of
$53.37 - $60.78 in 2001 and $66.52 - $76.61 in 2003 compared to a stand-alone
future trading value of CCA of $44.79 - $53.93 in 2001 and $64.10 - $74.27 in
2003.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendations of the Prison Realty Board and the CCA
Board to approve the Merger and the Merger Agreement, shareholders of each of
Prison Realty and CCA should be aware that some of the directors, trustees,
executive officers and shareholders of Prison Realty and CCA have interests that
may be different from the interests of shareholders of CCA or Prison Realty
generally. The Prison Realty Board and the CCA Board were aware of these
interests when they approved the Merger. See " -- Prison Realty's Reasons for
the Merger; Recommendation of the Prison Realty Board" and " -- CCA's Reasons
for the Merger; Recommendation of the CCA Board."
Relationship with Sodexho
Sodexho is CCA's largest beneficial shareholder. Sodexho owns or has the
right to acquire approximately 14,006,209 shares of CCA Common Stock, or 14.9%
of the outstanding CCA Common Stock on a diluted basis. Because of the ownership
limitation applicable to shareholders of REITs and because of the need to
restructure certain agreements between CCA and Sodexho, representatives of
Sodexho, CCA, Prison Realty and New Prison Realty have entered into an Agreement
in Principle with respect to the relationship between New Prison Realty and
Sodexho. See "New Prison Realty Capital Stock -- Restrictions on Ownership of
Capital Stock." Under the terms of the Agreement in Principle, (i) Sodexho will
reduce its ownership interest in New Prison Realty to below the Ownership Limit
(9.8% of the New Prison Realty's outstanding common shares following the
Merger); (ii) Sodexho will purchase a 16% interest in Operating Company for $8.0
million and will have the right to designate a representative to serve on the
Operating Company Board of Directors; (iii) Sodexho will vote in favor of the
Merger; (iv) Sodexho will have the right to designate a representative to serve
on the New Prison Realty Board following completion of the Merger. Prison Realty
will agree to appoint Jean-Pierre Cuny, currently a director of CCA and an
affiliate of Sodexho, to the New Prison Realty Board. The combination of
Sodexho's favorable vote of approximately 3,890,000 shares of CCA Common Stock
and the favorable vote of approximately 5,278,682 shares of CCA Common Stock
held by executive officers and directors of CCA at the same time, will result in
an affirmative vote of approximately 9,168,682 shares of CCA Common Stock being
secured prior to the vote of shareholders at the CCA Special Meeting, or
approximately 21.9% of the votes needed to approve the Merger.
Relationship with Baron
Baron Capital is currently the largest beneficial holder of Prison Realty
Common Shares, beneficially owning approximately 10.3% of the Prison Realty
Common Shares issued and outstanding as of the date of this Joint Proxy
Statement-Prospectus. Subject to the conditions discussed below, the Baron
Mutual Fund will purchase a 16% interest in Operating Company immediately prior
to the Merger for $8.0 million in cash upon the same or similar terms as
Sodexho's purchase of its interest in Operating Company. The favorable vote of
the Prison Realty Common Shares owned by Baron and its affiliates for approval
of the Merger is a condition to the Baron Mutual Fund's purchase of the interest
in Operating Company. The combination of a favorable vote of the approximately
2,260,394 Prison Realty Common Shares beneficially held by Baron and its
affiliates and the favorable vote of approximately 950,738 Prison Realty Common
Shares held by executive officers and trustees of Prison Realty will result in
an affirmative vote of approximately 3,211,132 Prison Realty Common Shares being
secured prior to the vote of shareholders at the Prison Realty Special Meeting,
or approximately 22.0% of the votes needed to approve the Merger.
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Employment Agreements
Doctor R. Crants is Chief Executive Officer of New Prison Realty and
Operating Company and J. Michael Quinlan is Vice Chairman of New Prison Realty.
At the time of the Merger, Doctor R. Crants will enter into a customary
employment agreement with each of New Prison Realty and Operating Company on
terms substantially similar to Prison Realty's existing employment agreements
with senior management and Mr. Quinlan will enter into an employment agreement
with New Prison Realty on terms substantially similar to his existing employment
agreement with Prison Realty. In addition, New Prison Realty will succeed to
Prison Realty's employment agreements with D. Robert Crants, III, President of
Prison Realty, and Michael W. Devlin, Chief Operating Officer of Prison Realty.
In addition, it is anticipated that other current executive officers of Prison
Realty will enter into employment agreements with New Prison Realty at the time
of the Merger. See "Conflicts of Interest" and "Management and Operations of New
Prison Realty After the Merger."
Treatment of CCA and Prison Realty Options
Pursuant to the terms of the Merger Agreement, unless otherwise required by
the terms of any CCA stock plan (the "CCA Stock Plans"), CCA will seek the
agreement of holders of all options to purchase CCA Common Stock under any CCA
Stock Plan (the "CCA Options"), so that all CCA Options granted under CCA Stock
Plans will be converted into options to purchase New Prison Realty Common Stock
("CCA Rollover Options") with the same conditions, including vesting and
continued employment, as the CCA Options to which they relate. All options to
purchase Prison Realty Common Shares (the "Prison Realty Options") under any
Prison Realty equity plan (the "Prison Realty Equity Plans") will be converted
into options to purchase New Prison Realty Common Stock with the same
conditions, including vesting and continued employment, as the Prison Realty
Options to which they relate (the "Prison Realty Rollover Options", and,
together with the CCA Rollover Options, the "Rollover Options") and will obtain
the agreement of each holder of Prison Realty Options that the Merger and the
completion of the transactions contemplated hereby do not constitute a change in
control under the Prison Realty Equity Plans or otherwise affect the vesting or
other terms of the Prison Realty Options. The obligation of New Prison Realty
pursuant to the Merger Agreement to issue Rollover Options shall be subject to
New Prison Realty's determination that it will be in compliance with applicable
REIT statutes and regulations. In the event that New Prison Realty determines
the treatment of the CCA Rollover Options will not comply with such statutes and
regulations, New Prison Realty may cause any or all CCA Rollover Options to be
cashed out in exchange for a cash payment in the approximate amount of $13.1
million, based on the closing per share market price of CCA Common Stock on
October 14, 1998. See "The Merger Agreement -- Benefit Plans; Stock Plans."
Treatment of CCA Deferred Stock Agreements
Pursuant to the terms of the Merger Agreement, New Prison Realty will
assume CCA's obligations under its Amended and Restated 1989 Stock Bonus Plan
(the "CCA Stock Bonus Plan"), and CCA will seek the agreement of holders of
shares of deferred CCA Common Stock (the "CCA Deferred Stock") that the CCA
Deferred Stock will be converted to shares of deferred New Prison Realty Common
Stock ("New Prison Realty Deferred Stock"), subject to vesting requirements
similar to the CCA Deferred Stock. Certain executive officers of CCA, including
Doctor R. Crants, have entered into agreements to have CCA issue an aggregate of
337,024 shares of CCA Deferred Stock under the CCA Stock Bonus Plan in
connection with CCA's desire to offer long-term incentives to its officers (the
"CCA Deferred Stock Agreements"). Under the terms of the CCA Stock Bonus Plan
and the CCA Deferred Stock Agreements, the shares of CCA Deferred Stock awarded
do not vest until the earliest of the following events: (i) 10 years after the
date the shares of CCA Deferred Stock were awarded; (ii) in the event of the
death or disability of the recipient; or (iii) in the event of a change of
control of CCA (as defined in the CCA Deferred Stock Agreements), but the
holders will agree that the Merger will not accelerate the vesting. See "The
Merger Agreement -- Benefit Plans; Stock Plans."
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Ownership of Operating Company
New Prison Realty will own approximately 9.5% of the capital stock of
Operating Company, which will consist of non-voting common stock. The remaining
90.5% of the capital stock of Operating Company, which consists of voting common
stock, will be owned as follows: (i) 30%, valued at $15.0 million, will be owned
by management employees of Operating Company other than Doctor R. Crants, who
currently serves as Chief Executive Officer of Operating Company and as Chief
Executive Officer of New Prison Realty; (ii) 8%, valued at $4.0 million, will be
owned by management employees of New Prison Realty; (iii) 19.1%, valued at $9.5
million, will be owned by the wardens of the facilities operated by, and other
employees of, Operating Company; (iv) 1.4%, valued at $700,000, will be owned by
certain key employees of Prison Realty; (v) 16%, valued at $8.0 million, will be
owned by Sodexho; and (vi) 16%, valued at $8.0 million, will be owned by the
Baron Mutual Fund. See "Management and Operations of New Prison Realty After the
Merger."
The following table sets forth the percentage and implied monetary value of
the Operating Company common stock owned or to be owned by individuals who were
listed as Named Executive Officers (as that term is defined by Item 402 of
Regulation S-K) in the Prison Realty proxy statement with respect to its annual
meeting of shareholders filed with the Commission on March 23, 1998 (the "Prison
Realty Named Executive Officers") and the CCA proxy statement with respect to
its annual meeting of shareholders filed with the Commission on March 31, 1998
(the "CCA Named Executive Officers"). Each of the Prison Realty Named Executive
Officers in the table also serves as a trustee of Prison Realty and will serve
as a director of New Prison Realty.
<TABLE>
<CAPTION>
PERCENTAGE OF BENEFICIAL IMPLIED MONETARY
BENEFICIAL OWNER OWNERSHIP(%) VALUE($)(1)
- ---------------- ------------------------ ----------------
<S> <C> <C>
Prison Realty Named Executive Officers
J. Michael Quinlan..................................... 2.0% $1,000,000
D. Robert Crants, III.................................. 2.0 1,000,000
Michael W. Devlin...................................... 2.0 1,000,000
CCA Named Executive Officers
Charles A. Blanchette, Jr.............................. 2.0 1,000,000
Darrell K. Massengale.................................. 2.0 1,000,000
David L. Myers......................................... 2.0 1,000,000
</TABLE>
- ---------------
(1) Implied monetary value is based solely on the expected consideration of
approximately $16.0 million to be paid by Sodexho and the Baron Mutual Fund,
for 32% of Operating Company common stock.
Ownership of the Service Companies
New Prison Realty will own only the non-voting common stock of each of the
Service Companies. The non-voting common stock of the Service Companies will
obligate each of the Service Companies to pay to New Prison Realty 95% of its
net income, as determined in accordance with generally accepted accounting
principles ("GAAP"). The voting common stock of each of the Service Companies
will be owned by unaffiliated investors and by wardens of facilities operated by
the Service Companies. The voting common stock of each of the Service Companies
will not be owned by executive officers of either New Prison Realty or CCA. See
"Management and Operations of New Prison Realty After the Merger."
General Conflicts of Interest
Because of the ongoing relationship between CCA and Prison Realty and the
relationships which will exist after completion of the Merger, certain conflicts
of interest will exist. Such conflicts are more fully described in the sections
entitled "Management and Operations of New Prison Realty After the Merger" and
"Conflicts of Interest."
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Certain Other Relationships
Three of the current directors of CCA, including Doctor R. Crants, are
directors of Operating Company and certain of the current directors of CCA serve
as board members of each of the Service Companies but are not expected to have
any ownership interest therein. Charles W. Thomas, a member of the Prison Realty
Board and a director of New Prison Realty, has performed, and will continue to
perform, certain consulting services in connection with the Merger for a fee of
$3.0 million. In addition, Samuel W. Bartholomew, Jr., a member of the CCA Board
and the board of Service Company B, is a principal in the law firm of Stokes &
Bartholomew, P.A., tax and securities counsel to Prison Realty and New Prison
Realty. Rusty L. Moore, a trustee of Prison Realty and a director of New Prison
Realty, is the spouse of a shareholder of Stokes & Bartholomew, P.A. Stokes &
Bartholomew, P.A. also provides certain legal services to CCA and to Operating
Company.
CERTAIN REGULATORY MATTERS
Prison Realty and CCA do not believe that any governmental filings in the
United States, including without limitation any filings under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or any other
federal or state statute or regulation, other than the Articles of Merger to be
filed with respect to the CCA Merger with the Secretary of State of the State of
Tennessee and the State Department of Assessments and Taxation of the State of
Maryland and with respect to the Prison Realty Merger with the State Department
of Assessments and Taxation of the State of Maryland, are required with respect
to the Merger and the issuance of the shares of New Prison Realty Common Stock
and New Prison Realty Series A Preferred Stock.
Completion of the Merger is conditioned upon, among other things, the
absence of any preliminary or permanent injunction or other orders issued by any
court or other judicial or administrative body with competent jurisdiction which
prohibits or prevents completion of the Merger.
ACCOUNTING TREATMENT
The Merger is expected to be accounted for as a common control transfer
from CCA to New Prison Realty at historical cost and the purchase of Prison
Realty by New Prison Realty. CCA will be treated as the acquiring company, and
Prison Realty will be treated as the acquired company for financial reporting
purposes. Accordingly, the historical book basis of the assets, liabilities and
stockholders' equity of CCA will become the carrying value of the assets,
liabilities and stockholders' equity of New Prison Realty, and the assets and
liabilities of Prison Realty will be recorded in the books of New Prison Realty
at their fair value. The purchase method of accounting prescribes that the
acquiring company allocate the cost of an acquired company, including the
expenses of the acquisition, to the assets acquired and liabilities assumed as
of the date of the acquisition based upon their fair values. New Prison Realty
will own all of the non-voting common stock and is entitled to receive 95% of
the earnings of each of the Service Companies. New Prison Realty will account
for its ownership in the Service Companies using the equity method of accounting
as prescribed by APB Opinion No. 18. New Prison Realty will own 9.5% of the
capital stock of Operating Company and will account for its minority interest
using the method of accounting as prescribed by SFAS No. 115.
NO APPRAISAL RIGHTS
Under applicable Tennessee and Maryland law, shareholders are not entitled
to appraisal rights in a merger if, at the record date for the shareholders
meeting to vote on a merger, the shareholders' shares are listed on a national
securities exchange. Accordingly, because the CCA Common Stock and the Prison
Realty Common Shares are both listed on the NYSE, neither the holders of shares
of CCA Common Stock nor the holders of Prison Realty Common Shares are entitled
to appraisal rights in connection with the Merger.
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STOCK EXCHANGE LISTING OF NEW PRISON REALTY COMMON STOCK AND NEW PRISON REALTY
SERIES A PREFERRED STOCK
New Prison Realty will apply to list the shares of New Prison Realty Common
Stock and New Prison Realty Series A Preferred Stock to be issued in the Merger
on the NYSE. CCA and Prison Realty will use their best efforts to cause these
shares to be approved for supplemental listing on the NYSE as the successor to
Prison Realty, subject to official notice of issuance, prior to the Effective
Time.
DELISTING AND DEREGISTRATION OF THE CCA COMMON STOCK
If the Merger is completed, the CCA Common Stock will be delisted from the
NYSE and deregistered under the Securities and Exchange Act of 1934, as amended
(the "1934 Act").
FEDERAL SECURITIES LAWS CONSEQUENCES; RESALE RESTRICTIONS
This Joint Proxy Statement-Prospectus does not cover resales of the New
Prison Realty Capital Stock to be received by the shareholders of CCA and Prison
Realty upon completion of the Merger, and no persons are authorized to make any
use of this Joint Proxy Statement-Prospectus in connection with any such resale.
All shares of New Prison Realty Common Stock and New Prison Realty Series A
Preferred Stock received by CCA and Prison Realty shareholders in the Merger
will be freely transferable except that the shares of New Prison Realty Common
Stock and New Prison Realty Series A Preferred Stock received by persons who are
deemed to be "affiliates" (as such term is defined in the Securities Act of
1933, as amended (the "1933 Act")) of CCA or Prison Realty may be resold by them
only in transactions permitted by the resale provisions of Rule 145 of the Rules
and Regulations promulgated under the 1933 Act or Rule 144 in the case of such
persons who become affiliates of New Prison Realty or as otherwise permitted
under the 1933 Act. Persons who may be deemed to be affiliates of CCA or Prison
Realty generally include individuals or entities that control, are controlled
by, or are under common control with such party and may include officers,
directors and trustees of CCA or Prison Realty as well as significant
shareholders.
In addition, persons who will be officers and directors of New Prison
Realty, Operating Company and each of the Service Companies will agree not to
transfer New Prison Realty Capital Stock for a period of one year after the
Merger without the prior written approval of the New Prison Realty Board of
Directors.
DISTRIBUTIONS
Currently, the Prison Realty Board's distribution policy is to evaluate
Prison Realty's quarterly distributions, based on expected calendar year
operations. The anticipated 1998 distributions to be paid by Prison Realty are
expected to total $1.81 per Prison Realty Common Share. New Prison Realty will
continue to utilize Prison Realty's distribution policy. New Prison Realty
expects that its annualized regular distribution rate for the calendar year
1999, without giving effect to the Earnings and Profit Distribution, will be
within a range of 80% and 85% of its funds from operations per share. As a REIT,
New Prison Realty will be obligated to distribute 95% of its current taxable
income to its stockholders on an annualized basis. The payment of distributions
in the future will depend on tax law requirements, New Prison Realty's financial
condition and earnings, business conditions and other factors. If the Merger is
completed when expected, CCA shareholders and Prison Realty shareholders will
receive cash distributions from New Prison Realty beginning with its regular
distribution for the first quarter of 1999. The distribution for the first
quarter is presently expected to be paid in April 1999. See
"Summary -- Comparative Per Share Market Price and Distribution/Dividend
Information."
CCA has operated as a taxable corporation for federal income tax purposes
since its incorporation. As such, CCA generates taxable income and in some
situations losses. To the extent CCA's taxable income, with certain adjustments,
in any given year is not distributed to its shareholders, it becomes accumulated
earnings and profits. Accumulated earnings and profits are periodically reduced
by losses and distributions or dividends to a company's shareholders in excess
of the company's current taxable income, with certain adjustments. Since 1992,
CCA has not had any losses, and it has never paid any cash dividends to its
shareholders.
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Accordingly, during that time period its accumulated earnings and profits have
never been reduced. After the Merger, New Prison Realty will succeed to CCA's
accumulated earnings and profits. As a REIT, New Prison Realty cannot complete
any taxable year as a REIT with accumulated earnings and profits from a taxable
corporation. Accordingly, to preserve its REIT status, after the Merger, New
Prison Realty will make a distribution of CCA's accumulated earnings and
profits, the Earnings and Profits Distribution, to all holders of shares of New
Prison Realty Common Stock, including those holding New Prison Realty Common
Stock received as a result of the Merger.
New Prison Realty will declare the Earnings and Profits Distribution
payable on shares of New Prison Realty Common Stock in an amount which New
Prison Realty determines is necessary to disburse undistributed accumulated and
current earnings and profits of CCA in order for New Prison Realty to qualify as
a REIT. The actual amount of CCA's earnings and profits cannot be determined by
New Prison Realty until after the Merger and could be affected by a number of
factors, including without limitation: the earnings and profits generated by CCA
prior to the Merger, which would increase the amount of the Earnings and Profits
Distribution; and any cash settlement of CCA Options and other compensation
expenses provided for in the Merger Agreement, which would decrease the number.
Other adjustments may also occur prior to the Merger. Currently, the Earnings
and Profits Distribution is expected to exceed $2.00 per share of New Prison
Realty Common Stock. See "Material Risk Factors -- New Prison Realty Will Be
Dependent on Outside Financing to Support Its Growth; Dilutive Effect of Such
Financing and Potential Reduction of Earnings and Profits Distribution."
Although New Prison Realty will succeed to CCA's accumulated earnings and
profits, New Prison Realty will not receive a corresponding amount of cash from
CCA, as accumulated earnings and profits is an accounting determination which
represents CCA's cumulative profitability, and is not a measure of the actual
availability of funds. Because New Prison Realty will be required to borrow
funds or raise equity capital to make the Earnings and Profit Distribution, the
record date for the Earnings and Profits Distribution will be established in the
fourth quarter of 1999. Former CCA and Prison Realty shareholders who receive
shares of New Prison Realty Common Stock and who hold shares of New Prison
Realty Common Stock until the record date of the Earnings and Profits
Distribution will be entitled to receive the Earnings and Profits Distribution
as will all other holders of shares of New Prison Realty Common Stock on the
distribution record date. It is expected that the Earnings and Profits
Distribution will be paid within 15 days following the distribution record date.
In the event a former CCA or Prison Realty shareholder who receives shares of
New Prison Realty Common Stock in connection with the Merger sells or otherwise
disposes of the shares prior to the distribution record date, he or she will not
receive the Earnings and Profits Distribution.
PENDING LITIGATION REGARDING THE MERGER
In July 1998, a consolidated complaint was filed with respect to a group of
lawsuits originally filed in April 1998 by certain purported shareholders of CCA
in Chancery Court for Davidson County in Nashville, Tennessee, pursuant to an
order in which these lawsuits were ordered to be consolidated into a single
action. The complaint names CCA and its directors as defendants. The plaintiffs
in the action represent a putative class of all public holders of CCA Common
Stock.
The complaint alleges, among other things, that the directors of CCA
breached their fiduciary duties to CCA and CCA's public shareholders. Among the
allegations in this complaint are that the CCA Board agreed to sell CCA at too
low a price, compared to its then current market price, without conducting a
process, such as an auction, for a sale. The complaint seeks, among other
things, preliminary and permanent injunctive relief prohibiting completion of
the Merger as presently proposed and directing CCA or the individual defendants
to adopt a procedure or process, such as an auction, to obtain the highest
possible price for CCA. The complaint also seeks unspecified damages, attorneys'
fees and other relief. CCA is contesting this action vigorously.
Also, on August 6, 1998, a complaint was filed by a purported shareholder
of CCA naming CCA, Doctor R. Crants, Thomas W. Beasley, Charles A. Blanchette
and David L. Myers as defendants. The complaint, filed in Chancery Court for
Davidson County, Tennessee, is a purported class action which alleges that the
individual defendants violated certain provisions of Tennessee law by selling
CCA Common Stock during the
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period from April 1997 through April 1998. Among the allegations in this
complaint are that CCA and the individual defendants made false and misleading
statements to maintain the price of CCA Common Stock at an artificially high
level in order to be able to sell their shares. CCA is contesting this action
vigorously.
PRISON REALTY FINANCINGS
On September 16, 1998, Prison Realty filed the Prison Realty Registration
Statement on Form S-3 with the Commission to register an aggregate of $500.0
million in value of the Prison Realty Common Shares, preferred shares and common
share rights and warrants for sale to the public. (Pursuant to the rules and
regulations of the Commission, CCA is deemed by the Commission to be a
co-registrant on the Prison Realty Registration Statement on Form S-3). Proceeds
from sales under the Prison Realty Registration Statement on Form S-3 will be
used for the general corporate purposes of Prison Realty. These general
corporate purposes may include, without limitation, repayment of maturing
obligations, redemption of outstanding indebtedness, financing (in whole or in
part) of future acquisitions (including acquisitions of companies and/or other
real estate properties in accordance with Prison Realty's business objectives
and strategy), capital expenditures and working capital. As of the date of this
Joint Proxy Statement-Prospectus, Prison Realty has issued and sold 362,731
Prison Realty Common Shares under the Prison Realty Registration Statement on
Form S-3. From the effective date of the Prison Realty Registration Statement on
Form S-3, October 14, 1998, until completion of the Merger, Prison Realty will
not issue a number of Prison Realty Common Shares or securities convertible into
Prison Realty Shares which would cause former Prison Realty shareholders to own
more than 50% of the shares of New Prison Realty Common Stock.
NEW PRISON REALTY FINANCINGS
Prison Realty is exploring various alternative means by which to most
effectively finance the capital needs of New Prison Realty after the Merger,
which needs include the making of the Earnings and Profits Distribution. In an
effort to satisfy such needs, New Prison Realty expects to obtain a commitment
from NationsBank, N.A. ("NationsBank") and Canadian Imperial Bank of Commerce
("CIBC") for a $750.0 million credit facility upon completion of the Merger.
Each of the Service Companies expects to obtain a commitment from NationsBank
for a $20.0 million credit facility upon completion of the Merger. Operating
Company has engaged NationsBanc Montgomery Securities LLC ("NationsBanc
Montgomery") to assist it in the procurement of a $60.0 million credit facility
for Operating Company upon completion of the Merger, of which NationsBank is
expected to commit for $20.0 million. It is expected that the commitment letters
will be subject to customary conditions, including the absence of material
adverse changes with respect to the companies, as well as the condition that
each aspect of the financing plan described herein be consummated.
To further assist in the satisfaction of its capital needs, it is expected
that, upon completion of the Merger, New Prison Realty will file the New Prison
Realty Registration Statement on Form S-3 with the Commission to register an
aggregate of $1.0 billion in value of the New Prison Realty Common Stock,
preferred stock, common stock rights or warrants and debt securities for offer
and sale following the Merger.
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THE MERGER AGREEMENT
The following describes the material terms of the Merger Agreement. A copy
of the Merger Agreement is attached to this Joint Proxy Statement-Prospectus as
Appendix A and is incorporated herein by reference. The description of the
Merger Agreement set forth below is qualified in its entirety by reference
thereto. Shareholders of both CCA and Prison Realty are urged to read the Merger
Agreement in its entirety.
GENERAL
No later than the second business day following the satisfaction or waiver
of conditions set forth in the Merger Agreement (the "Closing Date"), Articles
of Merger and all other appropriate documents will be filed by the parties with
the Secretary of State of the State of Tennessee and the State Department of
Assessments and Taxation of the State of Maryland and the Merger will become
effective upon the filing of the Articles of Merger or at such time thereafter
as is provided in the Articles of Merger.
At the CCA Effective Time, CCA will be merged with and into New Prison
Realty, the separate corporate existence of CCA will cease and New Prison Realty
will continue as the surviving company. At the Prison Realty Effective Time,
Prison Realty will be merged with and into New Prison Realty, the separate
corporate existence of Prison Realty will cease and New Prison Realty will
continue as the surviving company. As a result of the Merger, New Prison Realty
will succeed to and assume all the rights and obligations of CCA and Prison
Realty in accordance with the TBCA, the MCGL and the MRL.
CONVERSION OF SECURITIES
Pursuant to the Merger Agreement, each share of CCA Common Stock issued and
outstanding immediately prior to the CCA Effective Time will be converted into
the right to receive 0.875 share of New Prison Realty Common Stock. Each Prison
Realty Common Share issued and outstanding immediately prior to the Prison
Realty Effective Time will be converted into 1.0 share of New Prison Realty
Common Stock. Each Prison Realty Series A Preferred Share issued and outstanding
immediately prior to the Prison Realty Effective Time will be converted into 1.0
share of New Prison Realty Series A Preferred Stock.
EXCHANGE OF CERTIFICATES; PROCEDURES FOR EXCHANGE
Certificates representing Prison Realty Capital Shares held by Prison
Realty shareholders will automatically represent New Prison Realty Capital
Stock. Accordingly, Prison Realty shareholders may keep their existing
certificates and no exchange agent will be appointed with respect to the Prison
Realty Merger.
Prior to the CCA Effective Time, Prison Realty will appoint a bank or trust
company that CCA has approved to act as exchange agent (the "Exchange Agent")
for the purpose of exchanging certificates representing CCA Common Stock for the
CCA Merger Consideration. As of the CCA Effective Time, New Prison Realty will
make the CCA Merger Consideration available to the Exchange Agent, as needed,
for the benefit of the holders of shares of CCA Common Stock.
No later than ten days after the CCA Effective Time, the Exchange Agent
will mail to each holder of record of a certificate or certificates which
immediately prior to the Effective Time represented outstanding shares of CCA
Common Stock (the "Certificates") a letter of transmittal and instructions on
how to surrender the Certificates in exchange for the CCA Merger Consideration.
The letter of transmittal will specify that delivery will be effected, and risk
of loss and title to a Certificate will pass, only upon proper delivery of such
Certificate to the Exchange Agent. Each holder of record of a Certificate will,
upon surrender to the Exchange Agent of such Certificate, be entitled to receive
in exchange therefor the CCA Merger Consideration in respect of each share of
CCA Common Stock previously represented by such Certificate. The Certificate so
surrendered will forthwith be canceled. In the event of a transfer of ownership
of CCA Common Stock that is not registered in the transfer records of CCA,
payment of the CCA Merger Consideration may be made to a person other than the
person in whose name the Certificate so surrendered is registered if, and only
if, such Certificate is properly endorsed or otherwise in proper form for
transfer and the person requesting such payment pays any transfer or other taxes
required by reason of the payment of the
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CCA Merger Consideration to a person other than the registered holder of such
Certificate or establishes to the satisfaction of the Exchange Agent that such
tax has been paid or is not applicable. Until surrendered, each Certificate will
be deemed at any time after the CCA Effective Time to represent only the right
to receive upon such surrender the CCA Merger Consideration.
After the Effective Time, there will be no further registration of
transfers on the share transfer books of CCA or Prison Realty of the shares of
CCA Common Stock, Prison Realty Common Shares or Prison Realty Series A
Preferred Shares which were outstanding immediately prior to the Effective Time,
and if after the Effective Time, Certificates are presented to New Prison Realty
for transfer, they will be canceled and exchanged for the Merger Consideration
as provided in the Merger Agreement.
Any portion of the CCA Merger Consideration made available to the Exchange
Agent which remains undistributed to the holders of the Certificates six months
after the CCA Effective Time will be delivered to New Prison Realty upon demand,
and any holders of the Certificates who have not theretofore complied with the
exchange provisions of the Merger Agreement may thereafter look only to New
Prison Realty (as general creditors thereof) for payment of their claim for the
CCA Merger Consideration.
No dividends, interest or other distributions with respect to securities of
New Prison Realty constituting part of the CCA Merger Consideration shall be
paid to the holder of any unsurrendered Certificates until such Certificates are
surrendered as provided in the Merger Agreement. Upon such surrender, there
shall be paid, without interest, to the person in whose name the securities of
New Prison Realty have been registered, all dividends, interest and other
distributions payable in respect of such securities on a date subsequent to, and
in respect of a record date after, the CCA Effective Time.
FRACTIONAL SHARES
No fractional shares of New Prison Realty Common Stock shall be issued as a
result of the CCA Merger, but in lieu thereof each holder of shares of CCA
Common Stock otherwise entitled to receive as a result of the CCA Merger a
fractional share of New Prison Realty Common Stock will be entitled to receive a
cash payment representing such holder's proportionate interest in the net
proceeds resulting from the sale (after deduction of all expenses resulting from
such sale) on the NYSE, through one or more of its member firms, of the
fractional shares of New Prison Realty Common Stock all holders of shares of CCA
Common Stock would otherwise be entitled to receive as a result of the CCA
Merger.
WARRANTS TO PURCHASE CCA COMMON STOCK
At the CCA Effective Time, each outstanding warrant to purchase shares of
CCA Common Stock (the "CCA Warrants") whether or not exercisable, shall be
deemed to constitute a warrant to acquire, on substantially the same terms and
conditions as were applicable to the original warrant to which it relates, the
same number of shares of New Prison Realty Common Stock as the holder of such
warrant would have been entitled to receive in the CCA Merger if the holder had
exercised the CCA Warrant in full immediately prior to the CCA Effective Time,
at a price per share of New Prison Realty Common Stock computed in compliance
with the terms of such CCA Warrant.
NOTES CONVERTIBLE INTO CCA COMMON STOCK
Except as otherwise agreed by CCA and the holder of any outstanding note of
CCA convertible into shares of CCA Common Stock (a "CCA Note"), at the CCA
Effective Time, each CCA Note shall be deemed to constitute a note convertible
into, on substantially the same terms and conditions as were applicable to the
CCA Note, the same number of shares of New Prison Realty Common Stock as the
holder would have been entitled to receive pursuant to the CCA Merger had such
holder converted the CCA Note in full immediately prior to the CCA Effective
Time (a "Substitute Convertible Note").
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of
each of CCA and Prison Realty with respect to such party relating to, among
other things: (a) its corporate organization, existence and
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good standing and similar corporate matters; (b) its capitalization; (c) the
authorization, execution, delivery and enforceability of the Merger Agreement;
(d) the absence of conflicts, violations and defaults under its charter or
declaration of trust, or bylaws and certain other agreements and documents; (e)
the absence of required consents, approvals, orders, or authorizations of, or
registrations, declarations or filings with, certain government entities
relating to the Merger; (f) the documents and reports filed with the Commission
and the accuracy and completeness of the information contained therein; (g) this
Joint Proxy Statement-Prospectus and the accuracy and completeness of the
information contained herein; (h) the absence of a material adverse effect (as
defined below) on such party or certain other material changes or events since
December 31, 1997; (i) the existence of necessary permits or approvals from
certain government entities, the absence of material pending or threatened
litigation and compliance with applicable laws; (j) filing of tax returns and
payment of taxes; (k) the absence of defaults under material contracts; (l)
owned and leased real property matters; (m) environmental matters; (n) labor
matters; (o) benefit plans and other matters relating to ERISA; (p) the
shareholder vote required to approve the Merger; (q) the recommendation of such
party's Board with respect to the Merger Agreement; (r) the inapplicability of
the state antitakeover statutes to the Merger; (s) brokers' fees and expenses;
and (t) the receipt of an opinion of such party's financial adviser with respect
to the Merger.
As used in the Merger Agreement and this Joint Proxy Statement-Prospectus,
the term "material adverse effect" means, when used in connection with a party,
any change, effect, event, occurrence or development that is, or is reasonably
likely to be, materially adverse to the business, results of operations or
financial condition of such party and its subsidiaries, taken as a whole, other
than any change, effect, event or occurrence relating to or arising out of (a)
the economy or securities markets in general, (b) the Merger Agreement or the
transactions contemplated thereby or the announcement thereof, or (c) the
private corrections industry in general, and not specifically relating to such
party or its subsidiaries.
CONDUCT OF BUSINESS PENDING THE MERGER; COVENANTS OF CCA
CCA has agreed as to itself and its subsidiaries that, except as set forth
in the Merger Agreement or the disclosure schedule to the Merger Agreement,
during the period from the date of the Merger Agreement until the Effective
Time, CCA and its subsidiaries will conduct business only in the usual, regular
and ordinary course of business consistent with past practice in all material
respects and use their reasonable best efforts to preserve intact their present
business organizations, maintain their rights and franchises, keep available the
services of their current officers and employees and preserve their
relationships with customers, suppliers and others having business dealings with
them to the end that their goodwill and ongoing businesses will not be impaired
at the Effective Time.
CCA has further agreed as to itself and its subsidiaries that (except as
expressly contemplated, required or permitted by the Merger Agreement or as set
forth in its disclosure schedule to the Merger Agreement), during the period
from the date of the Merger Agreement until the Effective Time, CCA will not,
nor will it permit any of its subsidiaries to:
(a) enter into any new line of business, or incur or commit to any
capital expenditures, or any obligations or liabilities in connection with
any capital expenditures, other than capital expenditures and obligations
or liabilities incurred or committed to in the ordinary course of business;
(b) (i) declare, set aside or pay any dividends on or make other
distributions in respect of any capital stock, (ii) adjust, split, combine
or reclassify any capital stock or issue or authorize or propose the
issuance of any other securities in respect of, in lieu of or in
substitution for capital stock, or (iii) except as described herein under
"The Merger -- Interests of Certain Persons in the Merger," repurchase,
redeem or otherwise acquire or permit any subsidiary to purchase or
otherwise acquire, any shares of capital stock or any debt securities,
warrants or options, in each case issued by CCA or any of its subsidiaries;
(c) issue, deliver or sell, or authorize or propose the issuance,
delivery or sale of, any shares of its or any of its subsidiaries' capital
stock of any class or any securities convertible into or exchangeable for,
or any rights, warrants or options to acquire, any of the foregoing, or any
other securities or equity
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equivalents (including stock appreciation rights), or enter into any
agreement with respect to any of the foregoing, other than (i) the issuance
of CCA Common Stock upon the exercise of CCA Options or CCA Warrants that
are outstanding on the date of the Merger Agreement, (ii) consistent with
past practice under any CCA employee benefit plan (a "CCA Benefit Plan"),
(iii) upon the conversion of the CCA Series B Convertible Preferred Stock,
$1.00 par value per share, or the CCA Notes, (iv) pursuant to Sodexho's
participation rights, if any, pursuant to Section 9 of the Sodexho
Shareholders Agreement (as defined in the Merger Agreement) for
participation in issuances permitted under the Merger Agreement;
(d) amend or propose to amend the CCA Charter or similar documents or
the CCA Bylaws or the charter or bylaws of any of CCA's subsidiaries;
(e) merge or consolidate with, or purchase an equity interest in or a
substantial portion of the assets of, any corporation, partnership,
association or other business organization or any division or business
thereof, except pursuant to CCA's International Joint Venture Agreement (as
defined in the Merger Agreement) with Sodexho;
(f) sell, lease, mortgage, encumber or otherwise dispose of any
material assets (including capital stock of subsidiaries), except as to CCA
with respect to the sale to Prison Realty of properties that are described
as "Option Facilities" in the Prison Realty Commission documents as
described in the Merger Agreement;
(g) except for an increase to CCA's revolving credit agreement as
described herein, incur any indebtedness for borrowed money or guarantee
any such indebtedness or issue or sell any debt securities or warrants or
rights to acquire any debt securities of CCA or any of its subsidiaries or
guarantee any debt securities of others or enter into any "keepwell" or
similar arrangement, other than revolving credit borrowings or borrowings
to fund capital expenditures described in clause (a) above, in each case
under CCA's existing credit agreement;
(h) take any action that would result in any of the representations
and warranties of CCA set forth in the Merger Agreement that are qualified
as to materiality being untrue, any of such representations and warranties
that are not so qualified being untrue in any material respect or any of
the conditions to the Merger set forth in the Merger Agreement not being
satisfied;
(i) change its fiscal year or its methods, principles or practices of
accounting in effect at December 31, 1997, except as required by changes in
generally accepted accounting principles, or alter or change in any
material respect its practices and policies relating to the payment of
accrued liabilities or accounts payable;
(j) (i) enter into, adopt, amend or terminate any CCA Benefit Plan or
any agreement, arrangement, plan or policy between such party and one or
more of its directors, officers or employees, except for any such actions
taken in the ordinary course of business consistent with past practice,
(ii) increase in any manner the compensation or fringe benefits of any of
its directors, officers or employees or provide any other benefit not
required by any plan and arrangement as in effect as of the date of the
Merger Agreement, except for normal salary compensation increases, benefit
changes or cash bonus awards made in the ordinary course of business
consistent with past practice, or (iii) create or amend any CCA Stock Plans
(except a deferred compensation plan for non-employee directors) or grant
any equity based award pursuant to any CCA Stock Plans or otherwise;
(k) except as set forth in clause (iii) below, (i) pay, discharge or
satisfy any claims (including claims of shareholders), liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), except for the payment, discharge or satisfaction of
liabilities or obligations in the ordinary course of business consistent
with past practice or in accordance with their terms as in effect on the
date of the Merger Agreement, (ii) waive, release, grant, or transfer any
rights of material value or modify or change in any material respect any
existing license, lease, contract or other document, other than in the
ordinary course of business consistent with past practice, or (iii) settle
or compromise any litigation (whether or not commenced prior to the date of
the Merger Agreement) other than settlements or
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compromises of litigation where the amount paid (after giving effect to
insurance proceeds actually received) in settlement or compromise does not
exceed $1.0 million, provided that the aggregate amount paid in connection
with the settlement or compromise of all such litigation matters does not
exceed $5.0 million;
(1) enter into or commit to enter into, or assume, any operating or
capital lease, other than (i) any such lease contemplated by the CCA
capital budget or CCA's operating budget, a copy of which has been provided
to Prison Realty prior to the date of the Merger Agreement, or (ii) any
such operating lease which is not material to CCA and its subsidiaries,
taken as a whole;
(m) adopt a plan of complete or partial liquidation or resolutions
providing for or authorizing such a liquidation or a dissolution,
consolidation, recapitalization or bankruptcy reorganization;
(n) engage in any transaction with, or enter into any agreement,
arrangement, or understanding with, directly or indirectly, any of CCA's
affiliates, including, without limitation, any transactions, agreements,
arrangements or understandings with any affiliate or other person covered
under Item 404 of Regulation S-K of the Commission that would be required
to be disclosed under Item 404 other than such transactions of the same
general nature, scope and magnitude as are disclosed in the documents
required to be filed with the Commission by CCA since January 1, 1995;
(o) make any material income tax election, amend any material tax
return or settle or compromise any material tax liability; or
(p) authorize any of, or commit or agree to take any of, the actions
described in clauses (a)-(o) above.
In addition, CCA will advise Prison Realty of any change or event which
would cause or constitute a material breach of any of the representations or
warranties of CCA contained in the Merger Agreement. CCA will file all reports
required to be filed by it with the Commission or the NYSE between the date of
the Merger Agreement and the Effective Time and will deliver to Prison Realty
copies of all such reports promptly after the same are filed.
CONDUCT OF BUSINESS PENDING THE MERGER; COVENANTS OF PRISON REALTY
During the period from the date of the Merger Agreement until the Effective
Time, Prison Realty has agreed as to itself and its subsidiaries that Prison
Realty and its subsidiaries shall:
(a) carry on their respective businesses only in the usual, regular
and ordinary course consistent with past practice in all material respects
and use their reasonable best efforts to preserve intact their present
business organizations, maintain their rights and franchises, keep
available the services of their current officers and employees and preserve
their relationships with customers, suppliers and others having business
dealings with them to the end that their goodwill and ongoing businesses
shall not be impaired at the Effective Time;
(b) conduct operations in a manner so as to continue to qualify as a
REIT under the Code;
(c) advise CCA from time to time of the proposed structure of New
Prison Realty and its subsidiaries and affiliated entities at and after the
Effective Time for purposes of CCA's evaluation of the Merger and
description of the Merger and related transactions in this Joint Proxy
Statement-Prospectus; and
(d) advise CCA of any change or event which would cause or constitute
a material breach of any of its representations or warranties contained in
the Merger Agreement and file all reports required to be filed by it with
the Commission or the NYSE between the date of the Merger Agreement and the
Effective Time and deliver to CCA copies of all such reports promptly after
the same are filed.
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Prison Realty has further agreed as to itself and its subsidiaries that,
during the period from the date of the Merger Agreement until the Effective
Time, Prison Realty will not, nor will it permit any of its subsidiaries to:
(a) make any distributions other than at its current rate, provided
that the rate may be increased by the greater of fifteen percent or up to
the minimum amounts as may be required to comply with Section 857(a) of the
Code; or
(b) take any action that would result in any of its representations
and warranties set forth in the Merger Agreement that are qualified as to
materiality being untrue, any of such representations and warranties that
are not so qualified being untrue in any material respect or any of the
conditions to the Merger set forth in the Merger Agreement not being
satisfied.
CONDITIONS TO THE MERGER
The respective obligations of Prison Realty and CCA to effect the Merger
are subject to the satisfaction or waiver at or prior to the Effective Time of
the following conditions:
(a) the approval of the Merger Agreement by the affirmative vote of
the holders of a majority of the outstanding shares of CCA Common Stock and
the approval of the Merger Agreement by the affirmative vote of the holders
of two-thirds of the outstanding shares of Prison Realty Common Shares;
(b) no temporary restraining order, preliminary or permanent
injunction or other order or decree issued by any government entity of
competent jurisdiction enjoining or otherwise preventing the completion of
the Merger being in effect; provided, however, that each of such parties
has agreed to use reasonable best efforts to prevent the entry of any such
injunction or other order or decree and to cause any such injunction or
other order or decree that may be entered to be vacated or otherwise
rendered of no effect;
(c) Prison Realty having obtained the opinion of its tax adviser that
upon, and after, the Effective Time of the Merger and the completion of the
transactions contemplated in connection with the Merger, New Prison Realty
will be in compliance with the requirements for qualification as a REIT
under the Code, and the proposed method of operation of New Prison Realty
as described in this Joint Proxy Statement-Prospectus will enable New
Prison Realty to meet the requirements for taxation as a REIT under the
Code beginning with the year ending December 31, 1999;
(d) the New Prison Realty Capital Stock to be issued in the Merger
having been approved for listing on the NYSE, subject to official notice of
issuance, if applicable;
(e) the New Prison Realty Registration Statement on Form S-4 being
satisfactory in all material respects to CCA and Prison Realty and having
been declared effective, and no stop order suspending the effectiveness of
the New Prison Realty Registration Statement on Form S-4 being in effect
and no proceedings for such purpose being pending before or threatened by
the Commission;
(f) Prison Realty having obtained financing sufficient to fund the
operations of New Prison Realty's business as described in this Joint Proxy
Statement-Prospectus after the Effective Time of the Merger and the
completion of the transactions contemplated in the Merger Agreement; and
(g) CCA having conveyed substantially all of its non-real estate
assets to Correctional Management Services Corporation, Prison Management
Services, LLC, or Juvenile and Jail Facility Management Services, LLC on
substantially the same terms and conditions as described in this Joint
Proxy Statement-Prospectus.
The obligation of Prison Realty to effect the Merger is also subject to the
satisfaction of the following conditions unless waived by Prison Realty:
(a) the representations and warranties of CCA set forth in the Merger
Agreement (i) to the extent qualified by material adverse effect being true
and correct, and (ii) to the extent not qualified by material adverse
effect being true and correct, except that clause (ii) will be deemed
satisfied so long as any
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failures of such representations and warranties to be true and correct do
not individually or in the aggregate have a material adverse effect on CCA,
in each of cases (i) and (ii), as of the date of the Merger Agreement and
as of the Closing Date as though made on and as of the Closing Date, except
as otherwise contemplated by the Merger Agreement, and Prison Realty's
receipt of a certificate to such effect signed on behalf of CCA by its
Chief Executive Officer or its Chief Financial Officer;
(b) CCA having performed in all material respects all material
obligations required to be performed by it under the Merger Agreement at or
prior to the Closing Date, and Prison Realty's receipt of a certificate to
such effect signed on behalf of CCA by its Chief Executive Officer or Chief
Financial Officer;
(c) Prison Realty's receipt of evidence, in form and substance
reasonably satisfactory to it, that such consents, approvals,
authorizations, qualifications and orders of government entities and other
third parties as are necessary in connection with the transactions
contemplated by the Merger Agreement have been obtained, other than those
the failure of which to be obtained, individually or in the aggregate,
would not have a material adverse effect on CCA;
(d) there not being pending any suit, action or proceeding brought by
any government entity seeking to prohibit or limit in any material respect
the ownership or operation by CCA, Prison Realty, or New Prison Realty, any
subsidiary formed pursuant to the Merger or any of their respective
affiliates of a substantial portion of the business or assets of CCA and
its subsidiaries, taken as a whole, or to require any such person to
dispose of or hold separate any material portion of the business or assets
of CCA and its subsidiaries, taken as a whole, as a result of the Merger or
any of the other transactions contemplated by the Merger Agreement or
seeking to impose limitations on the ability of New Prison Realty or any of
its affiliates to acquire or hold, or exercise full rights of ownership of,
any shares of CCA Common Stock, including, without limitation, the right to
vote CCA Common Stock on all matters properly presented to the shareholders
of CCA or seeking to prohibit New Prison Realty or any of its affiliates
from effectively controlling in any material respect a substantial portion
of the business or operations of CCA or its subsidiaries, in each case
after giving effect to any actions required to be taken pursuant to CCA's
and Prison Realty's obligations, among other things, to use all reasonable
best efforts to complete and make effective the Merger, and the other
transactions contemplated by the Merger Agreement;
(e) Prison Realty having received the opinion of its tax adviser with
respect to the status of the Prison Realty Merger as a tax-free
reorganization pursuant to Section 368(a) of the Code; and
(f) Prison Realty having received an update of the J.C. Bradford
opinion on each of the date of mailing of this Joint Proxy
Statement-Prospectus to the shareholders of Prison Realty and the Closing
Date.
The obligation of CCA to effect the Merger is also subject to the
satisfaction of the following conditions unless waived by CCA:
(a) the representations and warranties of Prison Realty set forth in
the Merger Agreement to the extent qualified by material adverse effect
being true and correct, and (ii) to the extent not qualified by material
adverse effect being true and correct, except that clause (ii) will be
deemed satisfied so long as any failures of such representations and
warranties to be true and correct do not individually or in the aggregate
have a material adverse effect on Prison Realty, in each of cases (i) and
(ii), as of the date of the Merger Agreement and as of the Closing Date as
though made on and as of the Closing Date, except as otherwise contemplated
by the Merger Agreement, and CCA's receipt of a certificate to such effect
signed on behalf of Prison Realty by the Chief Executive Officer or
President thereof;
(b) Prison Realty having performed in all material respects all
material obligations required to be performed by it under the Merger
Agreement at or prior to the Closing Date, and CCA's receipt of a
certificate to such effect signed on behalf of Prison Realty by the Chief
Executive Officer or President thereof;
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(c) CCA having received evidence, in form and substance reasonably
satisfactory to it, that such consents, approvals, authorizations,
qualifications and orders of third parties as are necessary in connection
with the transactions contemplated hereby have been obtained, other than
those the failure of which to be obtained, individually or in the
aggregate, would not have a material adverse effect on Prison Realty;
(d) CCA having received the opinion of its tax adviser with respect to
the status of the CCA Merger as a tax-free reorganization pursuant to
Section 368(a) of the Code;
(e) CCA having received an update of the Stephens opinion on each of
the date of mailing of this Joint Proxy Statement-Prospectus to the
shareholders of CCA and on the Closing Date;
(f) Prison Realty having received commitments for a credit agreement
and other financing arrangements sufficient, in the reasonable judgment of
CCA's Board, to fund the operations of New Prison Realty as described in
this Joint Proxy Statement-Prospectus and having provided such commitments
to CCA no later than the date this Joint Proxy Statement-Prospectus is
mailed to CCA's shareholders; and
(g) Prison Realty and each holder of Prison Realty Options having
agreed that the Merger and the completion of the transactions contemplated
hereby shall not constitute a change in control under the Prison Realty
Equity Plans or otherwise affect the vesting or other terms of the Prison
Realty Options.
The Merger Agreement further provides that neither CCA nor Prison Realty
may rely on the failure of any condition described in this section to be
satisfied if such failure was caused by such party's failure to use all
reasonable best efforts to complete the Merger and the other transactions
contemplated by the Merger Agreement.
All of the conditions to the Merger may be waived by the company entitled
to assert the condition, with the exception of the material condition of the
approval of the Merger Agreement by the shareholders of CCA and Prison Realty,
which may not be waived. Prison Realty has waived the requirement of consents of
government entities as to the assignment of the management contracts of CCA, as
described further under "Material Risk Factors -- Ownership of Shares of Capital
Stock of New Prison Realty Involves Risks Inherent in the Corrections and
Detention Industry -- Short-Term Nature of Government Contracts."
NO SOLICITATION
CCA has agreed that it will not, nor will it permit any of its subsidiaries
to, nor will it authorize or permit any officer, director or employee of, or any
investment banker, attorney or other adviser or representative of, CCA or any of
its subsidiaries to, directly or indirectly, (i) solicit, initiate, encourage or
knowingly facilitate the submission of any Takeover Proposal (as hereinafter
defined) or (ii) enter into or participate in any discussions or negotiations
regarding, or furnish to any person any information with respect to, any
Takeover Proposal; provided, however, that prior to the approval of the Merger
Agreement by the shareholders of CCA, CCA may, in response to a bona fide
Takeover Proposal that constitutes a Superior Proposal (as hereinafter defined)
and that was made after the date of the Merger Agreement (and not solicited by
CCA after the date of the Merger Agreement) by any person, and subject to CCA's
obligations to notify Prison Realty as described below, (A) furnish information
with respect to CCA and its subsidiaries to such person and its representatives
pursuant to a confidentiality agreement and discuss such information with such
person and its representatives and (B) participate in negotiations regarding
such Takeover Proposal.
As used in the Merger Agreement and this Joint Proxy Statement-Prospectus
(except as described under " -- Fees and Expenses"), the term "Takeover
Proposal" means any inquiry, proposal or offer from any person relating to any
direct or indirect acquisition or purchase of 20% or more of the assets (based
on the fair market value thereof) of CCA and its subsidiaries, taken as a whole,
other than the transactions contemplated by the Merger Agreement, or of 20% or
more of any class of equity securities of CCA or any of its subsidiaries or any
tender offer or exchange offer (including by CCA or any of its subsidiaries)
that if completed would result in any person beneficially owning 20% or more of
any class of equity securities of CCA or any of its subsidiaries, or any merger,
consolidation, business combination, sale of substantially all assets,
recapitaliza-
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tion, liquidation, dissolution or similar transaction involving CCA or any of
its subsidiaries other than the transactions contemplated by the Merger
Agreement.
Except as described in this section, the CCA Board may not (i) withdraw or
modify, or publicly propose to withdraw or modify, in a manner adverse to Prison
Realty, the approval or recommendation by the CCA Board of the Merger or the
Merger Agreement, (ii) approve or recommend, or propose publicly to approve or
recommend, any Takeover Proposal, or (iii) cause or agree to cause CCA to enter
into any letter of intent, agreement in principle, acquisition agreement or
similar agreement related to any Takeover Proposal. Notwithstanding the
foregoing, if the CCA Board receives a Superior Proposal, the CCA Board may,
prior to the receipt of the approval of the Merger by the shareholders of CCA
and subject to compliance with the provisions described under "-- Fees and
Expenses", withdraw or modify its approval or recommendation of the Merger and
the Merger Agreement, approve or recommend a Superior Proposal or terminate the
Merger Agreement, but in each case only at a time that is at least five business
days after receipt by Prison Realty of written notice advising them that the CCA
Board has resolved to accept a Superior Proposal if it continues to be a
Superior Proposal at the end of such five business day period. As used in the
Merger Agreement and this Joint Proxy Statement-Prospectus, the term "Superior
Proposal" means any bona fide Takeover Proposal (which, for purposes of the
provisions described in the previous paragraph only, may be subject to a due
diligence condition), which proposal was not solicited by CCA after the date of
the Merger Agreement, made by a third party to acquire, directly or indirectly,
for consideration consisting of cash and/or securities, more than 50% of the
shares of CCA Common Stock then outstanding or all or substantially all the
assets of CCA and its subsidiaries and otherwise on terms which the CCA Board
determines in good faith (after consultation with a financial adviser of
nationally recognized reputation) to be more favorable to CCA's shareholders
than the Merger and for which financing, to the extent required, is then
committed or which, in the good faith judgment of the CCA Board, is reasonably
capable of being financed by such third party.
In addition to the obligations of CCA set forth in the preceding
paragraphs, CCA will promptly advise Prison Realty orally and in writing of any
request for information or of any Takeover Proposal, the material terms and
conditions of such request or Takeover Proposal and the identity of the person
making any such request or Takeover Proposal and any determination by the CCA
Board that a Takeover Proposal is or may be a Superior Proposal. CCA will keep
Prison Realty informed as to the status and material details (including
amendments or proposed amendments) of any such request or Takeover Proposal.
None of the provisions described in this section prohibit CCA from taking
and disclosing to its shareholders a position contemplated by Rule 14e-2(a)
promulgated under the 1934 Act or from making any disclosure to CCA's
shareholders if, in the good faith judgment of the CCA Board after consultation
with outside counsel, failure to do so would be inconsistent with its
obligations under applicable law.
ACCESS TO INFORMATION
Each of CCA and Prison Realty has further agreed that it will, and will
cause each of its subsidiaries to, afford to the other party to the Merger
Agreement and to its officers, employees, accountants, counsel and other
representatives (including environmental consultants), reasonable access, during
normal business hours during the period prior to the Effective Time, to their
respective properties, books, records and personnel and, during such period,
each of CCA and Prison Realty will, and will cause each of its subsidiaries to,
furnish promptly to the other party (a) a copy of each report, schedule,
registration statement and other document filed or received by it during such
period pursuant to the requirements of federal or state securities laws, and (b)
such other information concerning its business, properties and personnel as the
other party may reasonably request.
REASONABLE BEST EFFORTS
Subject to the terms and conditions of the Merger Agreement, each of CCA
and Prison Realty will, and will cause its subsidiaries to, use all reasonable
best efforts to take, or cause to be taken, all actions, and to do, or cause to
be done, and to assist and cooperate with the other parties in doing, all things
necessary, proper or advisable to complete and make effective, in the most
expeditious manner practicable, the Merger and the
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other transactions contemplated by the Merger Agreement, including (i) the
obtaining of any necessary consent, authorization, order or approval of, or any
exemption by, any government entity and/or any other public or private third
party which is required to be obtained by such party or any of its subsidiaries
in connection with the Merger and the other transactions contemplated by the
Merger Agreement (provided that CCA will not pay or agree to pay any material
amount to obtain a consent without the prior approval of Prison Realty, which
approval will not be unreasonably withheld or delayed), and the making or
obtaining of all necessary filings and registrations with respect thereto, (ii)
the defending of any lawsuits or other legal proceedings challenging the Merger
Agreement, and (iii) the execution and delivery of any additional instruments
necessary to complete the transactions contemplated by, and to fully carry out
the purposes of, the Merger Agreement.
TERMINATION
The Merger Agreement may be terminated at any time prior to the Effective
Time, whether before or after the approval of the Merger Agreement by the
shareholders of CCA and of Prison Realty:
(a) by mutual written consent of CCA and Prison Realty;
(b) by CCA or Prison Realty upon written notice to the other parties:
(i) if any government entity of competent jurisdiction has issued a
permanent injunction or other order or decree enjoining or otherwise
preventing the completion of the Merger and such injunction or other
order or decree has become final and nonappealable; provided that the
party seeking to terminate the Merger Agreement has used its reasonable
best efforts to prevent or contest the imposition of, or seek the
lifting or stay of, such injunction, order or decree;
(ii) unless the party seeking to terminate the Merger Agreement is
in material breach of its obligations under the Merger Agreement, if CCA
or Prison Realty breaches or fails to perform any of its
representations, warranties, covenants or other agreements under the
Merger Agreement, which breach or failure to perform (A) would give rise
to the failure of a condition to the closing relating to its
representations and warranties or a condition to the closing relating to
its covenants or other agreements and (B) is incapable of being cured by
the party so breaching or failing to perform or is not cured within 30
days after the terminating party gives written notice of such breach to
the other party and such a cure is not effected during such period;
(iii) if the Merger has not been completed on or before March 31,
1999, unless the failure to complete the Merger is the result of a
material breach of the Merger Agreement by the party seeking to
terminate the Merger Agreement; or
(iv) if, upon a vote at a duly held meeting of the shareholders of
CCA or Prison Realty or any adjournment thereof, the approval of the
Merger Agreement by such shareholders is not obtained;
(c) by Prison Realty upon written notice to CCA:
(i) if the CCA Board or any committee thereof withdraws or modifies
in a manner adverse to Prison Realty its approval or recommendation of
the Merger or the Merger Agreement, approves or recommends any Takeover
Proposal or resolves to do any of the foregoing; or
(ii) if CCA enters into any agreement (other than a confidentiality
agreement in accordance with the provisions described under " -- No
Solicitation") with respect to a Superior Proposal or resolves to do so;
or
(d) by CCA, prior to the approval of the Merger Agreement by the
shareholders of CCA and subject to CCA's obligations described under
" -- Fees and Expenses":
(i) if the CCA Board receives a Superior Proposal, but only at such
time that is at least five business days after the receipt by Prison
Realty of written notice advising them that the CCA Board has resolved
to accept such Superior Proposal and it continues to be a Superior
Proposal at the end of such five business day period; or
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(ii) upon written notice to Prison Realty if the Prison Realty
Board or any committee thereof has withdrawn or modified in a manner
adverse to CCA its approval or recommendation of the Merger or the
Merger Agreement or resolves to do so.
FEES AND EXPENSES
Whether or not the Merger is completed, all costs and expenses incurred in
connection with the Merger Agreement and the transactions contemplated thereby
will be paid by the party incurring such costs or expenses, except that CCA has
agreed to reimburse Prison Realty for the cost of certain valuation and
consulting services that will benefit the Surviving Company; the aggregate
amount of such reimbursement will not exceed $5.4 million.
In addition, in the event that (i) the Merger Agreement is terminated by
Prison Realty as described in clause (c) under "-- Termination" above, (ii) the
Merger Agreement is terminated by CCA as described in clause (d)(i) under
"-- Termination" above, or (iii) (x) any person has made a bona fide Takeover
Proposal with respect to CCA after the date of the Merger Agreement and
thereafter the Merger Agreement is terminated by CCA as described in clause
(b)(iii) under "-- Termination" above or by either party as described in clause
(b)(iv) under "-- Termination" above and (y) within 12 months after such
termination a Takeover Agreement (as hereinafter defined) is executed by CCA or
a Takeover Transaction (as hereinafter defined) is completed, then CCA will
reimburse Prison Realty for the documented out-of-pocket fees and expenses
reasonably incurred thereby in connection with the Merger Agreement and the
transactions contemplated thereby (including those which may be incurred in
connection with enforcing the terms of these fee provisions) in an aggregate
amount not in excess of $7.0 million (the "Expenses"). For purposes of this
paragraph, the term "Takeover Transaction" means any transaction if a proposal
to complete such transaction would constitute a Takeover Proposal, the term
"Takeover Agreement" means any letter of intent, agreement in principle,
acquisition agreement or similar agreement to complete a Takeover Transaction
and the term "Takeover Proposal" has the meaning described under " -- No
Solicitation" above except that (1) references to "20%" in the definition of
such term contained in that section will be deemed to be references to "50%" and
(2) the term "Takeover Proposal" will only be deemed to refer to a transaction
involving CCA, or with respect to assets (including the shares of any
subsidiary), of CCA and its subsidiaries taken as a whole. Notwithstanding the
immediately preceding sentence, if any bona fide Takeover Proposal (as defined
in this paragraph but without regard to clause (1) above) made by a person with
respect to CCA is made after the date of the Merger Agreement and CCA accepts
such proposal or any other Takeover Proposal (as defined in this paragraph but
without regard to clause (1) above) made by such person after the termination of
the Merger Agreement, then such accepted proposal will constitute a "Takeover
Proposal" for purposes of clause (iii) above. The reimbursement for expenses
required pursuant to this paragraph shall be reduced by one-half of any amount
previously paid by CCA to Prison Realty in accordance with the preceding
paragraph.
AMENDMENT AND WAIVER
The Merger Agreement may be amended by the parties thereto at any time
before or after approval of the Merger by the shareholders of CCA and of Prison
Realty, provided that after such approval, no amendment may be made which by law
requires further approval by such shareholders without such further approval.
The Merger Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties thereto.
At any time prior to the Effective Time, the parties may, to the extent
legally allowed, (a) extend the time for the performance of any of the
obligations or other acts of the other party to the Merger Agreement, (b) waive
any inaccuracies in the representations and warranties contained in the Merger
Agreement or in any document delivered pursuant thereto and (c) subject to the
provisions described in the preceding paragraph, waive compliance with any of
the agreements or conditions contained in the Merger Agreement. If material
conditions to the Merger are waived by either party after the date of this Joint
Proxy Statement-Prospectus, or any supplement thereto, the companies expect to
resolicit shareholder approval of the Merger. Any agreement on the part of a
party to the Merger Agreement to any such extension or waiver will be valid only
if set forth in
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a written instrument signed on behalf of such party. The failure of any party to
the Merger Agreement to assert any of its rights under the Merger Agreement or
otherwise will not constitute a waiver of those rights.
BENEFIT PLANS; STOCK PLANS
The Merger Agreement provides that following the Effective Time, except as
otherwise provided in the Merger Agreement, New Prison Realty will honor, or
cause to be honored, all obligations under employment agreements, all CCA
Benefit Plans and CCA Stock Plans, all Prison Realty benefit plans and Prison
Realty Equity Plans and all other employee benefit plans, programs, policies and
arrangements of CCA or Prison Realty in accordance with the terms thereof.
Nothing in the Merger Agreement prohibits New Prison Realty from amending or
terminating such agreements, programs, policies and arrangements in accordance
with the terms thereof and with applicable law.
The Merger Agreement also provides that as soon as practicable following
the date of the Merger Agreement, the CCA Board (or, if appropriate, any
committee administering the CCA Stock Plans) shall adopt such resolutions or
take other actions with respect to all CCA Options granted pursuant to any CCA
Stock Plan so that unless otherwise required by the terms of the applicable CCA
Stock Plan (and then in such case, to the extent agreed by the applicable holder
of a CCA Option) all CCA Options granted under CCA Stock Plans shall be
converted into CCA Rollover Options with the same conditions, including vesting
and continued employment, as the CCA Options to which they relate. The
obligation of New Prison Realty pursuant to the foregoing to issue shares of New
Prison Realty Common Stock or CCA Rollover Options is subject to New Prison
Realty's determination that it will be in compliance with applicable REIT
statutes and regulations. In the event that New Prison Realty determines that
the treatment of CCA Rollover Options as described above will not so comply, New
Prison Realty may cause any or all CCA Rollover Options to be cashed out in
exchange for a cash payment equal to the following: the product of (x) the
excess of 0.875 times the closing price of one Prison Realty Common Share on the
NYSE on the date that is five days prior to the Closing Date over the exercise
price per share of the CCA Common Stock subject to the CCA Rollover Options, and
(y) the number of shares of CCA Common Stock subject to such CCA Rollover
Options. All amounts payable pursuant to this paragraph shall be subject to any
required withholding of taxes and shall be paid without interest.
The Merger Agreement also provides that as soon as practicable following
the date of the Merger Agreement, the CCA Board (or, if appropriate, any
committee administering the CCA Stock Plans) shall adopt such resolutions or
take other actions with respect to the CCA Deferred Stock granted under the CCA
Stock Bonus Plan so that shares of CCA Deferred Stock will be converted into
shares of New Prison Realty Deferred Stock subject to vesting requirements
similar to the CCA Deferred Stock.
The Merger Agreement also provides that as soon as practicable following
the date of the Merger Agreement, the Prison Realty Board (or, if appropriate,
any committee administering the Prison Realty Equity Plans) shall adopt such
resolutions or take such other actions with respect to all outstanding Prison
Realty Options granted pursuant to the Prison Realty Equity Plans so that all
Prison Realty Options shall be converted into Prison Realty Rollover Options
with the same conditions, including vesting and continued employment, as the
Prison Realty Options to which they relate and will obtain the agreement of each
holder of Prison Realty Options that the Merger and the completion of the
transactions contemplated hereby do not constitute a change in control under the
Prison Realty Equity Plans or otherwise affect the vesting or other terms of the
Prison Realty Options.
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MANAGEMENT AND OPERATIONS OF NEW PRISON REALTY AFTER THE MERGER
GENERAL
Prison Realty currently is, and after the Merger New Prison Realty will be,
the largest self-administered and self-managed publicly traded REIT in the
United States focused on owning and acquiring correctional and detention
facilities. The management of New Prison Realty will be identical to that of
Prison Realty, except that Doctor R. Crants is Chief Executive Officer of New
Prison Realty, J. Michael Quinlan is Vice Chairman of its Board of Directors,
and Jean-Pierre Cuny is expected to serve as a member of its Board of Directors.
It will be New Prison Realty's primary objective to acquire correctional and
detention facilities and to lease such facilities to third party operators and
to otherwise follow the intentions and objectives set by Prison Realty as more
fully described in this Joint Proxy Statement-Prospectus under the heading "--
Information About the Policies and Objectives of New Prison Realty."
TAX STATUS
Following the Merger, New Prison Realty will operate so as to qualify as a
REIT for federal income tax purposes. To qualify as a REIT, New Prison Realty's
income must be derived from certain sources, including rents from real property
(and generally excluding income from the operation of a correctional and
detention facility). See "Material Federal Income Tax
Consequences -- Qualification and Operation of New Prison Realty as a
REIT -- Income Tests." After the Merger, therefore, New Prison Realty will be
precluded from managing and operating the correctional and detention facilities
that are currently operated by CCA, including those facilities it will acquire
from Prison Realty and CCA in the Merger. Consequently, the facilities to be
owned by New Prison Realty will be leased to Operating Company, of which New
Prison Realty will own 9.5% of the capital stock and economic interest, and the
operations relating to the facilities to be owned by New Prison Realty but which
are operated by CCA will be transferred to Operating Company. Operations
relating to certain CCA-operated facilities owned by government entities will be
transferred to the Service Companies as described below. Operating Company will
operate under the name "Corrections Corporation of America" pursuant to a trade
name use agreement with New Prison Realty, as described herein. The Service
Companies will operate under the name "Corrections Corporation of America"
pursuant to separate trade name use agreements with Operating Company.
OWNERSHIP OF OPERATING COMPANY AND SERVICE COMPANIES
New Prison Realty will own 9.5% of the capital stock of Operating Company,
which will consist of 100% of the non-voting common stock and will represent
9.5% of the economic value of Operating Company. The remaining capital stock,
which will consist of voting common stock, will be owned by management employees
of Operating Company (other than Doctor R. Crants, who is Chief Executive
Officer of Operating Company), by management employees and other key employees
of New Prison Realty, by the wardens of the facilities operated by, and other
non-management employees of, Operating Company, by Sodexho and by the Baron
Mutual Fund as described herein.
New Prison Realty will own only non-voting common stock of each of the
Service Companies. The non-voting common stock of the Service Companies will
obligate each of the Service Companies to pay to New Prison Realty 95% of its
net income, as determined in accordance with GAAP. The voting common stock of
each of the Service Companies will be owned by one or more unaffiliated
investors and by the wardens of the facilities operated by the Service
Companies.
MERGER-RELATED TRANSACTIONS
Prior to or contemporaneously with the completion of the Merger, Prison
Realty and CCA will engage in a series of transactions (the "Merger-Related
Transactions") which are designed to provide for the strategic combination
between the companies and enable New Prison Realty to meet the requirements
applicable to REITs. The Merger-Related Transactions are described below.
- Immediately prior to the Merger, CCA will sell to Operating Company all
of the issued and outstanding capital stock of certain wholly owned
corporate subsidiaries of CCA, certain management contracts and certain
other non-real estate assets related thereto, as described herein, and
will enter into a trade name use agreement with Operating Company, as
described below. In exchange, CCA will receive an installment note in the
principal amount of $137.0 million (the "Operating Company
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Note"), 100% of the non-voting common stock of Operating Company and
certain additional consideration under the trade name use agreement as
described below. The non-voting common stock will represent a 9.5%
economic interest in Operating Company. The Operating Company Note will
be payable over 10 years and will bear interest at a rate of 12% per
annum. Interest only will be payable for the first four years of the
Operating Company Note, and the principal will be amortized over the
following six years. To the extent Operating Company generates available
cash flow from operations in excess of amounts required to make payments
under the Operating Company Credit Facility or other similar financing
arrangements, such funds shall be used to prepay the principal due under
the Operating Company Note. Doctor R. Crants will guarantee payment of
10% of the outstanding principal amount due under the Operating Company
Note.
- Immediately prior to the Merger and in connection with the transactions
described above, CCA will enter into a trade name use agreement with
Operating Company (the "Trade Name Use Agreement"). Under the Trade Name
Use Agreement, which has a term of ten years, CCA will grant to Operating
Company the right to use the name "Corrections Corporation of America"
and derivatives thereof, subject to specified terms and conditions
therein. In consideration for such right, Operating Company will pay a
fee equal to (i) 2.5% of the gross revenues of Operating Company for the
first three years of the Trade Name Use Agreement, and (ii) 3.0% of
Operating Company's gross revenues for the remaining term of the Trade
Name Use Agreement, provided that after completion of the Merger the
amount of such fee may not exceed (a) 2.5% of the gross revenues of New
Prison Realty for the first three years of the Trade Name Use Agreement,
or (b) 3.25% of New Prison Realty's gross revenues for the remaining term
of the Trade Name Use Agreement.
- Immediately prior to the Merger, CCA will transfer to a newly-created
limited liability company, Prison Management Services, LLC, certain
management contracts and all non-real estate assets relating to
government-owned adult prison facilities. In exchange, CCA will receive
100% of the non-voting membership interest in Prison Management Services,
LLC. This interest will obligate Prison Management Services, LLC to make
distributions to CCA equal to 95% of its net income, as determined in
accordance with GAAP.
- Immediately prior to the Merger, CCA will transfer to a newly-created
limited liability company, Juvenile and Jail Facility Management
Services, LLC, certain management contracts and all non-real estate
assets relating to government-owned jails and juvenile facilities. In
exchange, CCA will receive 100% of the non-voting membership interest in
Juvenile and Jail Facility Management Services, LLC. This interest will
obligate Juvenile and Jail Facility Management Services, LLC to make
distributions to CCA equal to 95% of its net income, as determined in
accordance with GAAP.
- Immediately after the Merger, Prison Management Services, LLC will be
merged with and into Service Company A, with Service Company A as the
surviving company. In connection with this merger, New Prison Realty will
receive 100% of the non-voting common stock of Service Company A. The
non-voting common stock will obligate Service Company A to pay dividends
to New Prison Realty equal to 95% of its net income, as determined in
accordance with GAAP.
- Immediately after the Merger, Juvenile and Jail Facility Management
Services, LLC will be merged with and into Service Company B, with
Service Company B as the surviving company. In connection with this
merger, New Prison Realty will receive 100% of the non-voting common
stock of Service Company B. The non-voting common stock will obligate
Service Company B to pay dividends to New Prison Realty equal to 95% of
its net income, as determined in accordance with GAAP.
- Immediately after the Merger, all existing leases between CCA and Prison
Realty will be cancelled and New Prison Realty will enter into a master
lease agreement and leases with respect to each leased property with
Operating Company (the "Operating Company Leases"). The term of the
Operating Company Leases will be 12 years which may be extended at fair
market rates for three additional five-year periods upon the mutual
agreement of New Prison Realty and Operating Company. The facilities
owned by New Prison Realty are expected to generate initial annual rent
of approximately $295.0 million, which represents an 11.1% lease rate
based on their respective values. Prison Realty and CCA believe that the
lease rates represent a fair market rental rate based on comparable
triple-net lease
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<PAGE> 98
transactions. Although New Prison Realty will have general recourse to
Operating Company under the Operating Company Leases, Operating Company's
payment obligations under the Operating Company Leases will not be
secured by any assets of Operating Company. Operating Company's
obligations under the Operating Company Leases, however, will be
cross-defaulted. For a discussion of the terms of the Operating Company
Leases, see "-- Leases with Operating Company."
- Immediately after the Merger, New Prison Realty and Operating Company
will enter into a Right to Purchase Agreement (the "Right to Purchase
Agreement") pursuant to which Operating Company will grant to New Prison
Realty a right to acquire, and lease back to Operating Company at fair
market rental rates, any correctional or detention facility acquired or
developed and owned by Operating Company in the future for a period of 10
years following the date inmates are first received at such facility. The
initial annual rental rate on such facilities will be the fair market
rental rate as determined by New Prison Realty and Operating Company.
Additionally, Operating Company will grant New Prison Realty a right of
first refusal to acquire any Operating Company-owned correctional or
detention facility should Operating Company receive an acceptable third
party offer to acquire any such facility.
- Immediately after the Merger, New Prison Realty will enter into a
services agreement (the "Services Agreement") with Operating Company
pursuant to which Operating Company will serve as a facilitator of the
construction and development of additional facilities on behalf of New
Prison Realty for a term of five years from the date of the Services
Agreement. In such capacity, Operating Company will perform, at the
direction of New Prison Realty, services needed in the construction and
development of correctional and detention facilities, including services
related to identification of potential additional facilities, preparation
of proposals, project bidding, project design, government relations, and
project marketing. In consideration for the performance of such services
by Operating Company, New Prison Realty will pay a fee equal to 5% of the
total capital expenditures (excluding the incentive fee discussed below
and the 5% fee herein referred to) incurred in connection with the
construction and development of a facility, plus an amount equal to $560
per new bed for facility preparation services provided by Operating
Company prior to the date on which inmates are first received at such
facility. Under the terms of the Services Agreement, New Prison Realty
will not be obligated to pay the services fee of $560 per new bed unless
the rent payable under the Operating Company Lease for the facility being
developed is determined based upon the fair market value of the facility
with an applicable lease rate of at least 11.1%.
- Immediately after the Merger, New Prison Realty will enter into a tenant
incentive agreement (the "Tenant Incentive Agreement") with Operating
Company pursuant to which New Prison Realty will pay to Operating Company
an incentive fee to induce Operating Company to enter into Operating
Company Leases with respect to those facilities developed and facilitated
by Operating Company. The amount of the incentive fee will be $840 per
new bed of each facility leased by Operating Company for which Operating
Company has served as developer and facilitator. Under the terms of the
Tenant Incentive Agreement, New Prison Realty will not be obligated to
pay the incentive fee with respect to a facility unless the rent payable
under the Operating Company Lease for the facility is determined based
upon the fair market value of the facility with an applicable lease rate
of at least 11.1%. No fee will be payable with respect to additions to a
facility.
- Immediately after the Merger, each of Service Company A and Service
Company B will enter into an administrative services agreement with
Operating Company (collectively, the "Administrative Services
Agreements") pursuant to which employees of Operating Company's
administrative departments will perform extensive administrative services
(including but not limited to legal, finance, management information
systems and government relations services), as needed, for the Service
Companies. As consideration for the foregoing, each Service Company will
pay Operating Company a management fee of $250,000 per month. This
management fee will be increased annually at the rate of four percent per
year. In addition, Operating Company will enter into a trade name use
agreement with each of the Service Companies under which Operating
Company will grant to each of the Service Companies the
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right to use the name "Corrections Corporation of America" and
derivatives thereof, subject to specified terms and conditions therein.
OWNERSHIP STRUCTURE
After the completion of the Merger and the Merger-Related Transactions, the
structure of New Prison Realty, Operating Company, Service Company A and Service
Company B will be as follows:
(CCA Organizational Chart)
OPERATING COMPANY
General. Operating Company is authorized to issue up to 200,000,000 shares
of capital stock consisting of 100,000,000 shares of voting common stock (the
"Operating Company Voting Common Stock") and 100,000,000 shares of non-voting
common stock (the "Operating Company Non-Voting Common Stock" and together with
the Operating Company Voting Common Stock, the "Operating Company Capital
Stock"). As of the date of this Joint Proxy Statement-Prospectus, all of the
issued and outstanding shares of Operating Company Capital Stock are held by
certain of the management and employees of Prison Realty and CCA, who hold
shares of Operating Company Voting Common Stock.
Immediately prior to the Merger, CCA will sell to Operating Company all of
the issued and outstanding stock of certain of CCA's wholly owned corporate
subsidiaries (one of which will own the management contracts relating to the
international facilities managed by CCA) and certain management contracts
relating to the facilities owned by Prison Realty and all non-real estate assets
relating to such contracts and will also enter into the Trade Name Use Agreement
with Operating Company. The management contracts to be sold
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<PAGE> 100
to Operating Company will specifically include management contracts relating to
the following facilities (the "Operating Company Contracts"):
<TABLE>
<CAPTION>
FACILITY LOCATION BED CAPACITY(1)
- -------- -------- ---------------
<S> <C> <C>
Bent County Correctional Facility.......... Las Animas, Colorado 700
Bridgeport Pre-Parole Transfer Facility.... Bridgeport, Texas 200
California City Correctional Facility...... California City, California 2,304
Central Arizona Detention Center........... Florence, Arizona 2,048
Cibola County Corrections Center........... Milan, New Mexico 376
Cimarron Correctional Facility............. Cushing, Oklahoma 960
*Coffee Correctional Facility............... Nicholls, Georgia 508
Davis Correctional Facility................ Holdenville, Oklahoma 960
D.C. Correctional Treatment Facility....... Washington, D.C. 866
Diamondback Correctional Facility.......... Watonga, Oklahoma 1,440
Eden Detention Center...................... Eden, Texas 1,225
Eloy Detention Center...................... Eloy, Arizona 1,500
Houston Processing Center.................. Houston, Texas 411
Huerfano County Correctional Facility...... Walsenburg, Colorado 752
*Kit Carson Correctional Center............. Burlington, Colorado 768
Laredo Processing Center................... Laredo, Texas 258
Leavenworth Detention Center............... Leavenworth, Kansas 327
Lee Adjustment Center...................... Beatyville, Kentucky 500
Marion Adjustment Center................... St. Mary, Kentucky 600
*Maurice Sigler Detention Facility.......... Frostproof, Florida 1,008
*Mendota Correctional Facility.............. Mendota, California 1,024
Mineral Wells Pre-Parole Transfer
Facility................................. Mineral Wells, Texas 2,103
*Montana Correctional Facility.............. Shelby, Montana 512
*Mountainview Correctional Institution...... Spruce Pine, North Carolina 528
New Mexico Women's Correctional Facility... Grants, New Mexico 322
North Fork Correctional Center............. Sayre, Oklahoma 1,440
Northeast Ohio Correctional Center......... Youngstown, Ohio 2,016
Otter Creek Correctional Center............ Wheelwright, Kentucky 400
Pamlico Correctional Institution........... Bayboro, North Carolina 528
Prairie Correctional Facility.............. Appleton, Minnesota 1,338
River City Correctional Center............. Louisville, Kentucky 363
San Diego Correctional Facility............ San Diego, California 1,000
San Diego Jail............................. San Diego, California 200
Shelby Training Center..................... Memphis, Tennessee 200
Southern Nevada Women's Correctional
Facility................................. Las Vegas, Nevada 500
T. Don Hutto Correctional Center........... Taylor, Texas 480
Torrance County Detention Facility......... Estancia, New Mexico 910
West Tennessee Detention Center............ Mason, Tennessee 600
*Wheeler Correctional Facility.............. Alamo, Georgia 508
Whiteville Correctional Facility........... Whiteville, Tennessee 1,536
</TABLE>
- ---------------
* Facilities currently under construction.
(1) Listed bed capacity does not include the following number of beds currently
under expansion at the following facilities: Central Arizona Detention
Center--256 beds; Cibola County Corrections Center--484 beds; Coffee
Correctional Facility--1,016 beds; Lee Adjustment Center--256 beds; Marion
Adjustment Center--256 beds; Mountainview Correctional Institution--528
beds; Otter Creek Correctional Center--256 beds; Pamlico Correctional
Institution--528 beds; and Wheeler Correctional Facility--1,016 beds.
In exchange for the foregoing assets, CCA will receive the Operating
Company Note in the principal amount of $137.0 million, 100% of the issued and
outstanding shares of Operating Company Non-Voting Common Stock, representing
9.5% of all of the issued and outstanding Operating Company Capital Stock, and
certain additional consideration under the Trade Name Use Agreement, as
described below. The Operating
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Company Note will be payable over 10 years and will bear interest at a rate of
12% per annum. Interest only will be payable for the first four years of the
Operating Company Note, and the principal will be amortized over the following
six years. To the extent Operating Company generates available cash flow from
operations in excess of amounts required to make payments under the Operating
Company Credit Facility or other similar financing arrangements, such funds
shall be used to prepay the principal due under the Operating Company Note.
Doctor R. Crants will guarantee payment of 10% of the outstanding principal
amount due under the Operating Company Note. Sodexho and the Baron Mutual Fund
have each agreed to purchase a 16% interest in Operating Company, each for $8.0
million, immediately prior to the Merger.
Following completion of the Merger, New Prison Realty will own
approximately 9.5% of Operating Company Capital Stock, which will consist of
Operating Company Non-Voting Common Stock. The remaining 90.5% of Operating
Company Capital Stock, which consists of Operating Company Voting Common Stock,
will be owned as follows: (i) 30%, valued at $15.0 million, will be owned by
management employees of Operating Company other than Doctor R. Crants, who is
Chief Executive Officer of both New Prison Realty and Operating Company; (ii)
8%, valued at $4.0 million, will be owned by management employees of New Prison
Realty; (iii) 19.1%, valued at $9.5 million, will be owned by the wardens of the
facilities operated by, and other employees of, Operating Company; (iv) 1.4%,
valued at $700,000, will be owned by certain key employees of Prison Realty; (v)
16%, valued at $8.0 million, will be owned by Sodexho; and (vi) 16%, valued at
$8.0 million, will be owned by the Baron Mutual Fund. The shares held by the
wardens will be restricted and will vest if, and only if, they remain employed
by Operating Company or one of the Service Companies from the Closing Date
through December 31, 2003. Any shares that are forfeited by wardens will remain
outstanding and will be held in trust for the benefit of the remaining wardens
until December 31, 2003, whereupon they will vest and will be distributed to
wardens still employed.
The following table sets forth the percentage of the Operating Company
Capital Stock owned by: (i) each person who will be a beneficial owner of more
than 5% of the outstanding Operating Company Capital Stock; (ii) New Prison
Realty; (iii) the Prison Realty Named Executive Officers and the CCA Named
Executive Officers, each as a group; and (iv) certain officers of Prison Realty
and CCA, current key employees of Prison Realty and CCA and wardens of
facilities to be managed by Operating Company, each as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF
BENEFICIAL
BENEFICIAL OWNER OWNERSHIP (%)
- ---------------- -------------
<S> <C>
Sodexho..................................................... 16.0%
Baron Mutual Fund........................................... 16.0
New Prison Realty........................................... 9.5(1)
Named Executive Officers of Prison Realty as a Group........ 6.0
Named Executive Officers of CCA as a Group.................. 6.0
Certain Officers of Prison Realty and CCA as a Group........ 26.0
Current Key Employees of Prison Realty and CCA as a Group... 12.0
Wardens of Operating Company Facilities as a Group.......... 8.5
-----
100.0%
=====
</TABLE>
- ---------------
(1) Operating Company Non-Voting Common Stock
Management. The Board of Directors of Operating Company currently consists
of three members. These include Lucius E. Burch, III, who serves as Chairman,
Doctor R. Crants, and R. Clayton McWhorter. It is anticipated that the Board of
Directors of Operating Company will be expanded after the Merger to include the
representatives of Sodexho and Baron. Doctor R. Crants is the Chairman, Chief
Executive Officer and President of CCA, and the Chief Executive Officer of
Operating Company. Darrell K. Massengale, currently the Chief Financial Officer
of CCA, is Chief Financial Officer of Operating Company and the other current
corporate officers of CCA will hold similar positions with Operating Company.
Leases. Immediately after the Merger, New Prison Realty and Operating
Company will enter into the Operating Company Leases. The rent schedules under
the Operating Company Leases provide for a relatively stable source of cash flow
and opportunities to participate in future growth in revenues experienced by
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Operating Company. The rent for the first year for each facility under the
Operating Company Leases will initially be set at a fixed amount and will be
increased each year by the percentage of the rent applicable to a particular
facility in the preceding year, such percentage being equal to the greater of
(i) 4%, or (ii) the percentage which is 25% of the percentage increase in the
gross management revenues realized by Operating Company from its operations at
such facility for the prior year, exclusive of any increase attributable to
expansion in the size of or the number of beds in such facility.
The obligations of Operating Company under each Operating Company Lease
will be cross-defaulted to each of the other Operating Company Leases with
respect to payment defaults, certain bankruptcy and insolvency related defaults
and defaults relating to any Operating Company default on a material debt
obligation or any substantial adverse judgment not covered by insurance and not
promptly paid by Operating Company. Although New Prison Realty will have general
recourse to Operating Company under the Operating Company Leases, Operating
Company's payment obligations under such Operating Company Leases will not be
secured by any assets of Operating Company.
Right to Purchase Agreement. While it is not anticipated that Operating
Company will acquire or develop additional correctional or detention facilities
in the future, in connection with the Merger, New Prison Realty and Operating
Company will enter into the Right to Purchase Agreement whereby New Prison
Realty will have an option to acquire, and lease back to Operating Company at
fair market value, any correctional or detention facility acquired or developed
and owned by Operating Company in the future, for a period of ten years
following the date on which service is commenced with respect to such facility.
For facilities acquired pursuant to the Right to Purchase Agreement, the initial
annual rental rate will be the fair market rental rates, as determined by New
Prison Realty and Operating Company. Additionally, New Prison Realty will have a
right of first refusal in the event Operating Company obtains an acceptable
third party offer to acquire or provide mortgage secured financing to finance
more than 90% of the cost of any correctional or detention facility now owned or
which is acquired or developed by it or its subsidiaries in the future. Pursuant
to such right, prior to selling any such facility, or mortgaging more than 90%
of the cost of such facility, Operating Company must first offer to sell such
facility to New Prison Realty or have New Prison Realty finance such facility,
as applicable, on the same terms and conditions contained in such third party
offer. With respect to a sale of any such facility, if New Prison Realty
declines to purchase such facility at a price or on terms set forth in such
third party offer, Operating Company will be free to sell such facility for a
specified period of time at a price at least equal to the price offered to New
Prison Realty, and on terms and conditions substantially consistent with those
offered to New Prison Realty. With respect to a first mortgage financing of 90%
of the cost of any such facility, if New Prison Realty declines to provide such
financing on the terms set forth in such third party offer, Operating Company
will be free to obtain first mortgage financing from a third party on terms and
conditions no less favorable to Operating Company than those contained in the
third party offer.
Trade Name Use Agreement. Prior to the Merger, and in connection with the
sale of the management contracts and other assets described above, CCA will
enter into the Trade Name Use Agreement with Operating Company. Under the Trade
Name Use Agreement, CCA will grant to Operating Company the right to use the
name "Corrections Corporation of America" and derivatives thereof, in
conformance with standards reasonably set by CCA for the periods commencing on
the date of execution and terminating on the tenth anniversary thereof. The
agreement may also be terminated upon 10 days' written notice from CCA to
Operating Company; the occurrence of a change in control of Operating Company;
the liquidation or bankruptcy of Operating Company; or in the event of an
unauthorized transfer of the right to use the name "Corrections Corporation of
America" and derivatives thereof by Operating Company. In addition, Operating
Company will acknowledge that CCA owns all rights, title and interest in and to
the name "Corrections Corporation of America" and derivatives thereof and agrees
that it will do nothing inconsistent with such ownership. In consideration for
such right, Operating Company will pay to CCA a fee equal to the sum of (i) 2.5%
of the gross revenues of Operating Company for the first three years of the
Trade Name Use Agreement, and (ii) 3.0% of Operating Company's gross revenues
for the remaining term of the Trade Name Use Agreement, provided that after
completion of the Merger the amount of such fee may not exceed (a) 2.5% of the
gross revenues of New Prison Realty for the first three years of the agreement,
or (b) 3.25% of New Prison Realty's gross revenues for the remaining term of the
agreement.
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Services Agreement. Immediately after the Merger, Operating Company will
enter into the Services Agreement with New Prison Realty pursuant to which
Operating Company will serve as a facilitator of the construction and
development of additional facilities on behalf of New Prison Realty for a term
of five years from the date of the Services Agreement. In such capacity,
Operating Company will perform, at the direction of New Prison Realty, such
services as are customarily needed in the construction and development of
correctional and detention facilities, including services related to
identification of potential additional facilities, preparation of proposals,
project bidding, project design, government relations and project marketing. In
consideration for the performance of such services, Operating Company will
receive a fee equal to 5% of the total capital expenditures (excluding the
incentive fee discussed below and the 5% fee herein referred to) incurred in
connection with the construction and development of a facility, plus an amount
equal to $560 per new bed at the facility. Under the terms of the Services
Agreement, New Prison Realty will not be obligated to pay the services fee of
$560 per new bed unless the rent payable under the Operating Company Lease for
the facility being developed is determined based upon the fair market value of
the facility with an applicable lease rate of at least 11.1%.
Tenant Incentive Agreement. Immediately after the Merger, Operating
Company will enter into the Tenant Incentive Agreement with New Prison Realty
pursuant to which New Prison Realty will pay to Operating Company an incentive
fee to induce Operating Company to enter into Operating Company Leases with
respect to those facilities developed and facilitated by Operating Company. The
amount of the incentive fee will be $840 per new bed of each facility leased by
Operating Company for which Operating Company has served as developer and
facilitator. Under the terms of the Tenant Incentive Agreement, New Prison
Realty will not be obligated to pay the incentive fee with respect to a facility
unless the rent payable under the Operating Company Lease for the facility is
determined based upon the fair market value of the facility with an applicable
lease rate of at least 11.1%. No fee will be payable with respect to additions
to a facility.
SERVICE COMPANY A
The Board of Directors of Service Company A consists of three members.
These include Thomas W. Beasley, who serves as Chairman, Doctor R. Crants, and
Joseph F. Johnson, Jr. It is anticipated that these individuals will remain as
directors of Service Company A after the Merger, although the Board of Directors
of Service Company A may be expanded at such time.
Immediately prior to the Merger, CCA will transfer to Prison Management
Services, LLC the following assets: (i) certain management contracts described
below, and (ii) all non-real estate assets relating to such contracts. In
exchange, CCA will receive 100% of the non-voting membership interest in Prison
Management Services, LLC. This non-voting membership interest will obligate
Prison Management Services, LLC to make distributions to CCA equal to 95% of its
net income, as determined in accordance with GAAP.
Immediately following the Merger, Prison Management Services, LLC will be
merged into Service Company A, with Service Company A as the surviving company.
In connection with this merger, New Prison Realty will receive 100% of the
non-voting common stock of Service Company A. The non-voting common stock of
Service Company A will obligate Service Company A to pay dividends to New Prison
Realty equal to 95% of Service Company A's net income, as determined in
accordance with GAAP.
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The management contracts that will be owned by Service Company A after
completion of the Merger-Related Transactions will consist primarily of
contracts relating to government-owned adult prison facilities and will
specifically include the following (the "Service Company A Contracts"):
<TABLE>
<CAPTION>
FACILITY LOCATION BED CAPACITY
- -------- -------- ------------
<S> <C> <C>
Bay Correctional Facility........................ Panama City, Florida 750
Delta Correctional Facility...................... Greenwood, Mississippi 1,016
Gadsden Correctional Institution................. Gadsden, Florida 800
Guayama Correctional Center...................... Guayama, Puerto Rico 1,000
Hardeman County Correctional Facility............ Whiteville, Tennessee 2,016
Idaho Correctional Facility...................... Boise, Idaho 1,250
Lawrenceville Correctional Center................ Lawrenceville, Virginia 1,500
Ponce Adult Correctional Facility................ Ponce, Puerto Rico 1,000
South Central Correctional Facility.............. Clifton, Tennessee 1,506
Wilkinson County Correctional Facility........... Woodville, Mississippi 850
Winn Correctional Center......................... Winnfield, Louisiana 1,474
</TABLE>
Simultaneously with the transfer of assets by CCA to Prison Management
Services, LLC, Privatized Management Services Investors, LLC, an unaffiliated
privately held investment limited liability company, will contribute to Prison
Management Services, LLC approximately $3.0 million in consideration for a
voting membership interest in Prison Management Services, LLC. None of the
members or managers of Privatized Management Services Investors, LLC will be
employees or directors of New Prison Realty or shareholders of Operating Company
or Service Company B and no employee or director of New Prison Realty or
shareholder of Operating Company or Service Company B will have any direct or
indirect interest in Privatized Management Services, LLC. After the merger of
Prison Management Services, LLC into Service Company A, Privatized Management
Services, LLC will own 85% of the voting common stock of Service Company A. The
remaining 15% of the voting common stock will be owned by the wardens of
facilities operated by Service Company A. The shares held by the wardens will be
restricted and will vest if, and only if, they remain employed by Service
Company A from the Closing Date through December 31, 2003. Any shares that are
forfeited by wardens will remain outstanding and will be held in trust for the
benefit of the remaining wardens until December 31, 2003, whereupon they will
vest and will be distributed to wardens still employed.
SERVICE COMPANY B
The Board of Directors of Service Company B consists of three members.
These include Samuel W. Bartholomew, Jr., who serves as Chairman, Doctor R.
Crants, and William F. Andrews. It is anticipated that these individuals will
remain as directors after the Merger, although the Board of Directors of Service
Company B may be expanded at such time.
Immediately prior to the Merger, CCA will transfer to Juvenile and Jail
Facility Management Services, LLC the following assets: (i) certain management
contracts described below, and (ii) all non-real estate assets relating to such
contracts. In exchange, CCA will receive 100% of the non-voting membership
interest in Juvenile and Jail Facility Management Services, LLC. This non-voting
membership interest will obligate Juvenile and Jail Facility Management
Services, LLC to make distributions to CCA equal to 95% of its net income, as
determined in accordance with GAAP.
Immediately following the Merger, Juvenile and Jail Facility Management
Services, LLC will be merged into Service Company B, with Service Company B as
the surviving company. In connection with this merger, New Prison Realty will
receive 100% of the non-voting common stock of Service Company B. The non-voting
common stock of Service Company B will obligate Service Company B to pay
dividends to New Prison Realty equal to 95% of Service Company B's net income,
as determined in accordance with GAAP.
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The management contracts that will be owned by Service Company B after
completion of the Merger-Related Transactions will consist primarily of
contracts relating to government-owned jails and juvenile detention facilities
and will specifically include the following (the "Service Company B Contracts"):
<TABLE>
<CAPTION>
FACILITY LOCATION BED CAPACITY(1)
- -------- -------- ---------------
<S> <C> <C>
Bartlett State Jail........................... Bartlett, Texas 962
Bay County Jail............................... Panama City, Florida 276
Bay County Jail Annex......................... Panama City, Florida 401
Brownfield Intermediate Sanction Facility..... Brownfield, Texas 200
Citrus County Detention Facility.............. Lecanto, Florida 300
David L. Moss Criminal Justice Center......... Tulsa, Oklahoma 1,440
Davidson County Juvenile Detention Center..... Nashville, Tennessee 100
Elizabeth Detention Center.................... Elizabeth, New Jersey 300
Hernando County Jail.......................... Brooksville, Florida 302
Lake City Correctional Center................. Lake City, Florida 350
Liberty County Jail........................... Liberty, Texas 382
Marion County Jail II......................... Indianapolis, Indiana 670
Metro-Davidson County Detention Facility...... Nashville, Tennessee 1,092
Okeechobee Juvenile Offender Correction
Center...................................... Okeechobee, Florida 96
Ponce Youthful Offender Correctional
Facility.................................... Ponce, Puerto Rico 500
Silverdale Facilities......................... Chattanooga, Tennessee 503
Southwest Indiana Youth Village............... Vincennes, Indiana 132
Tall Trees.................................... Memphis, Tennessee 63
Venus Pre-Release Center...................... Venus, Texas 1,000
</TABLE>
- ---------------
(1) Listed bed capacity does not include 128 beds currently under expansion at
the Silverdale Facilities.
Simultaneously with the transfer of assets by CCA to Juvenile and Jail
Facility Management Services, LLC, Correctional Services Investors, LLC, an
unaffiliated privately held investment limited liability company, will
contribute to Juvenile and Jail Facility Management Services, LLC approximately
$3.0 million in consideration for a voting membership interest in Juvenile and
Jail Facility Management Services, LLC. None of the members or managers of
Correctional Services Investors, LLC will be employees or directors of New
Prison Realty or shareholders of Operating Company or Service Company A and no
employee or director of New Prison Realty or shareholder or director of
Operating Company or Service Company A will have any direct or indirect interest
in Juvenile and Jail Facility Management Services, LLC. After the merger of
Juvenile and Jail Facility Management Services, LLC into Service Company B,
Correctional Services Investors, LLC will own 85% of the voting common stock of
Service Company B. The remaining 15% of the voting common stock will be owned by
the wardens of facilities operated by Service Company B. The shares held by the
wardens will be restricted and will vest if, and only if, they remain employed
by Service Company B from the Closing Date through December 31, 2003. Any shares
that are forfeited by wardens will remain outstanding and will be held in trust
for the benefit of the remaining wardens until December 31, 2003, whereupon they
will vest and will be distributed to wardens still employed.
ADMINISTRATIVE SERVICES AGREEMENTS AND TRADE NAME USE AGREEMENTS
Upon completion of the Merger, Operating Company will enter into an
Administrative Services Agreement with each of Service Company A and Service
Company B pursuant to which employees of Operating Company's administrative
departments will perform extensive administrative services (including, but not
limited to legal, finance, management information systems and government
relations services), as needed, for the Service Companies. In connection
therewith, Operating Company will also grant to each of Service Company A and
Service Company B the right to use the name "Corrections Corporation of America"
and derivatives thereof in connection with the servicing of its contracts. As
consideration for the foregoing, each Service Company will pay Operating Company
a management fee of $250,000 per month. This management fee will be increased
annually at the rate of four percent per year. In addition, Operating
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<PAGE> 106
Company will enter into a trade name use agreement with each of the Service
Companies under which Operating Company will grant to each of the Service
Companies the right to use the name "Corrections Corporation of America" and
derivatives thereof, subject to specified terms and conditions therein.
BENEFIT PLANS
After the Merger, the Corrections Corporation of America Employee Savings
and Stock Ownership Plan, the U.S. Corrections Corporation Amended and Restated
401(k) Plan, and the CCA Prison Realty Trust Employee Savings and Stock
Ownership Plan will be merged into one or more successor qualified plans to be
maintained by Operating Company, the Service Companies and New Prison Realty. It
is anticipated that the successor plan or plans will permit salary reduction
contributions under Section 401(k) of the Code and employer matching
contributions. Participants in the plan or plans will be permitted to direct
investment of their account balances and will be allowed to choose among several
investment alternatives, including New Prison Realty Common Stock.
Operating Company and the Service Companies may, after the Merger, adopt
one or more stock option plans and/or other equity-based compensation plans for
the benefit of their employees. Under these plans, Operating Company and the
Service Companies may issue incentive stock options, non-qualified options or
other equity-based compensation to management and other key employees. Doctor R.
Crants will not be awarded options or other equity-based compensation under any
of these plans.
LEASES WITH OPERATING COMPANY
The Operating Company Lease for each facility to be owned by New Prison
Realty conveys a leasehold interest in 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 lessor's proprietary property (the "Operating Company
Leased Property"). Each facility to be owned by New Prison Realty will be leased
to Operating Company as the lessee under a master lease (the "Operating Company
Master Lease") with a primary term of 12 years (the "Fixed Term"). The Operating
Company 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 New Prison Realty and Operating Company. Fair
market rates for Extended Terms will be determined mutually by New Prison Realty
and Operating Company 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 relevant 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
Operating Company Lease shall be subject to earlier termination upon the
occurrence of certain contingencies described in the Operating Company Lease.
Additionally, each Operating Company Lease may be terminated by New Prison
Realty, at its option, at any time after the first five years of the Operating
Company Lease, upon 18 months written notice to Operating Company.
Use of the Facilities. Each Operating Company Lease permits Operating
Company to operate the Operating Company Leased Property only as a correctional
or detention facility. Operating Company has the responsibility in each
Operating Company Lease to obtain and maintain all licenses, certificates and
permits in order to use and operate each facility.
Amounts Payable Under the Operating Company Leases; Net Provisions. During
the Fixed Term and any Extended Terms, the Operating Company will pay annual
base rent (the "Annual Base Rent"), which will be payable in monthly
installments. The Annual Base Rent for each Operating Company Leased Property
will be increased each year by a base rent escalation formula.
Each Operating Company Lease with respect to an Operating Company Leased
Property is what is commonly known as a "triple-net" lease or "absolute net"
lease, under which Operating Company 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
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levies, excises, fees, and all other government charges with respect to each
Operating Company 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 Operating
Company Leased Property.
Maintenance, Modification and Capital Additions. Under each Operating
Company Lease, Operating Company will, at its sole cost and expense, maintain
each Operating Company 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 Operating Company Leased Property in good order, repair
and appearance (excluding ordinary wear and tear). New Prison Realty will not be
required to build or rebuild any improvements to any Operating Company Leased
Property, or to make any repairs, replacements, alterations, restorations or
renewals to any Operating Company Leased Property.
Operating Company, at its sole cost and expense, may make alterations,
additions, changes and/or improvements to each Operating Company Leased Property
with the prior written consent of New Prison Realty, provided that the value and
primary intended use of such Operating Company Leased Property (determined in
New Prison Realty's reasonable judgment) is not impaired. All machinery,
equipment, furniture, furnishings, and other personal property installed at the
expense of the lessee on any Operating Company Leased Property, will remain the
property of Operating Company until the expiration or earlier termination of the
Operating Company Lease.
Each Operating Company Lease provides that, at the request of Operating
Company, New Prison Realty may make capital additions including constructing one
or more new buildings or other improvements to a particular Operating Company
Leased Property which are not normal or recurring to the maintenance of an
Operating Company Leased Property. A capital addition to an Operating Company
Leased Property may necessitate an amendment to an existing Operating Company
Lease or new lease agreement setting forth any changes in the premises, rent, or
other similar terms of the Operating Company Lease as a result of the capital
addition. In certain situations, a capital addition to an Operating Company
Leased Property may be made directly by Operating Company and financed by third
parties, with the prior written consent of New Prison Realty. In the case of a
capital addition not undertaken or financed by New Prison Realty, New Prison
Realty will have an option to acquire and lease back to Operating Company such
capital addition for a period of 10 years following the date on which inmates
are first received at such capital addition, at a cost and at an annual rental
rate equal to fair market rental rates.
Environmental Matters. Each Operating Company Lease makes various
representations and warranties relating to environmental matters with respect to
each Operating Company Leased Property. Each Operating Company Lease also
requires Operating Company to indemnify and hold harmless New Prison Realty and
any holder of a mortgage, deed or trust or other security agreement on an
Operating Company Leased Property (an "Operating Company Mortgagee") from and
against all liabilities, costs and expenses imposed upon or asserted against New
Prison Realty or the Operating Company 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 Operating Company Leased Property. The Operating Company Leases also
provide, however, that Operating Company will not be liable with respect to
matters or events that arise after the commencement date of the applicable
Operating Company Lease as a result of the negligence or misconduct of New
Prison Realty.
Assignment and Subletting. The Operating Company Leases provide that
Operating Company may not, without the prior written consent of New Prison
Realty, assign, sublease, mortgage, pledge, hypothecate, encumber or otherwise
transfer any Operating Company Lease or any interest therein with respect to all
or any part of the Operating Company Leased Property. The Operating Company
Leases further state that such consent may be granted or withheld by New Prison
Realty in its sole discretion. An assignment of an Operating Company Lease will
be deemed to include any "change of control" (as described below), of Operating
Company as if such change of control were an assignment of the Operating Company
Lease. A "change of control" of Operating Company means, for purposes of the
Operating Company Leases, the sale by
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Operating Company of a controlling interest in Operating Company, or the sale or
other transfer of all or substantially all of the assets of Operating Company. A
"change of control" also means any transaction pursuant to which Operating
Company is merged with or consolidated into another entity, and Operating
Company is not the surviving entity. The Operating Company Leases further
provide that no assignment will in any way impair the continuing primary
liability of Operating Company under the Operating Company Leases.
Damage to, or Condemnation of, an Operating Company Leased Property. In
the event of any damage or destruction to any facility, Operating Company has
the obligation to fully repair or restore the same at Operating Company'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 New Prison Realty. 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 Operating Company has fully complied
with the insurance obligations with respect to such facility (including
maintaining insurance against loss of rents), Operating Company may terminate
the Operating Company Lease with respect to that facility, upon turning over all
insurance proceeds to New Prison Realty 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 New Prison Realty's financial statements on the date of damage.
In the event of a condemnation or taking of any Operating Company Leased
Property, so long as such condemnation was not due to Operating Company's
failure to maintain the particular Operating Company Leased Property, the
Operating Company Lease will terminate as to the portion of the Operating
Company Leased Property taken, and in the event of a partial taking, Operating
Company is obligated to repair the portion not taken, if the same does not
render the Operating Company Leased Property unsuitable for Operating Company's
then use and occupancy, but only to the extent of the condemnation award. The
total condemnation award shall be payable to New Prison Realty, except that
Operating Company may recover the value of its improvements and the value of its
leasehold interest so long as the amount of the award paid to New Prison Realty
is equal to the net book value of the facility, as reflected on New Prison
Realty's financial statements on the date of the condemnation.
Indemnification Generally. Under the Operating Company Lease, Operating
Company indemnifies, and is obligated to save harmless, New Prison Realty from
and against all liabilities, costs and expenses (including reasonable attorneys'
fees and expenses) imposed upon or asserted against New Prison Realty as owner
of the applicable Operating Company 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 Operating Company Leased Property; (ii) any use,
misuse, non-use, condition, maintenance or repair by Operating Company of the
Operating Company Leased Property; (iii) any impositions (which are the
obligations of Operating Company to pay pursuant to the applicable provisions of
such Operating Company Lease); (iv) any claim of any person incarcerated in the
Operating Company Leased Property, including claims alleging breach or violation
of such person's civil or legal rights; (v) any failure on the part of Operating
Company to perform or comply with any of the terms of the Operating Company
Lease or any sublease; (vi) any claims by a prisoner arising from or relating to
such individual's incarceration or detention in any Operating Company Leased
Property; and (vii) any liability New Prison Realty may incur or suffer as a
result of any permitted contest by Operating Company under any Operating Company
Lease.
Events of Default. An "event of default" will be deemed to have occurred
under the Operating Company Master Lease and any individual Operating Company
Lease if Operating Company fails to perform any covenant and does not diligently
undertake to cure the same after 30 days' notice from New Prison Realty; if the
interest of Operating Company in any Operating Company Leased Property is levied
upon or attached and is not discharged in a specified period of time; if New
Prison Realty shall fail to qualify as a REIT under the Code; or if any
representation or warranty of Operating Company is incorrect. An "event of
default" will be deemed to have occurred under the Operating Company Master
Lease and all of the Operating Company Leases, if Operating Company fails to pay
any rent within 15 days after notice of non-payment from New Prison Realty; if
any bankruptcy proceedings are instituted by or against Operating Company and,
if against
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Operating Company, they are not dismissed within 90 days; if any material part
of the property of Operating Company is levied upon or attached in any
proceeding; if Operating Company defaults in any payment of any obligations for
borrowed money having a principal balance of $15.0 million or more in the
aggregate and such default is not discharged within 90 days; if any
representation or warranty made by Operating Company pursuant to any Operating
Company Lease proves to be materially incorrect and is not corrected within 30
days; the failure of Prison Realty to qualify as a REIT under the Code; or if
Operating Company is the subject of a non-appealable final judgment in an amount
greater than $5.0 million, which is not covered by insurance or discharged by
Operating Company within a specified period of time.
In the event of any event of default referable to a specific Operating
Company Leased Property, New Prison Realty may evict Operating Company from such
Operating Company Leased Property and either terminate the Operating Company
Lease or re-let the Operating Company Leased Property. In either event,
Operating Company shall remain responsible for the rental value of such
Operating Company Leased Property for the remainder period of the term in excess
of rents received by New Prison Realty from any successor occupant. In addition,
New Prison Realty may exercise any other rights that it may have under law. In
the event New Prison Realty evicts Operating Company from an Operating Company
Leased Property, the Operating Company Master Lease will remain in full force
and effect for all other Operating Company Leased Properties. With respect to
certain events of default under the Operating Company Master Lease which are not
referable to a specific Operating Company Leased Property (including Operating
Company's failure to timely pay rent), New Prison Realty shall have all of the
foregoing rights and remedies with respect to all of the Operating Company
Leased Properties.
The Operating Company 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 Operating Company Leased Property. Because the facilities are located in
various states, the Operating Company Leases may be subject to restrictions
imposed by applicable local law. Neither the Operating Company Master Lease nor
any of the other agreements entered into between Operating Company and New
Prison Realty prohibits or otherwise restricts New Prison Realty's ability to
lease properties to parties other than Operating Company.
APPRAISAL OF PROPERTIES; FAIRNESS OF OPERATING COMPANY LEASE PAYMENTS
For New Prison Realty to qualify as a REIT, at least 75% of the value of
its total assets must be represented by real estate assets and cash, cash items
and government securities at the close of each quarter. See "Material Federal
Income Tax Consequences -- Qualification and Operation of New Prison Realty as a
REIT -- Asset Tests." The value of New Prison Realty's assets, other than
certain marketable securities, generally must be determined in good faith by the
New Prison Realty Board. In connection with the determination of the value of
New Prison Realty's facilities, the Prison Realty Board engaged NationsBanc
Montgomery to provide the Prison Realty Board, and subsequently the New Prison
Realty Board, with a financial valuation of such facilities. NationsBanc
Montgomery's financial valuation was based on standard valuation methodologies,
including a comparable transactions analysis and a discounted cash flow
analysis. In addition, the Prison Realty Board engaged NationsBanc Montgomery to
prepare an analysis of publicly available lease rates paid on similar related
properties, including correctional, lodging, assisted living, office and golf
properties. The financial valuation and lease rate comparisons provided by
NationsBanc Montgomery are known collectively as the "NationsBanc Montgomery
Appraisal." The NationsBanc Montgomery Appraisal indicated that the proposed
11.1% lease rate for New Prison Realty's facilities is reasonable and comparable
to the lease rates paid with respect to those properties analyzed. The
NationsBanc Montgomery Appraisal, however, is not binding on the IRS.
INFORMATION ABOUT THE POLICIES AND OBJECTIVES OF NEW PRISON REALTY
The following is a discussion of New Prison Realty's expected policies and
objectives regarding growth, investment, financing, working capital and other
policies and objectives. The policies will be determined by the New Prison
Realty Board and may be revised from time to time at the discretion of the New
Prison Realty Board without a vote of the New Prison Realty stockholders.
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Growth Policies and Objectives. New Prison Realty's objective will be to
acquire from both private prison owners and operators and government entities
additional correctional and detention facilities that meet its investment
criteria. New Prison Realty expects that attractive opportunities will 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. Some of 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, New Prison Realty expects that, in an attempt to
address fiscal pressures of matching revenue collections with projected
expenses, such government entities 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 of New Prison Realty
expects that such situations will enable New Prison Realty 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.
High occupancy rates and prison overcrowding have resulted in an increased
demand for new federal, state and local correctional and detention facilities.
While New Prison Realty expects to grow primarily from acquisitions and the
expansion of existing correctional and detention facilities, New Prison Realty
anticipates that opportunities will exist for it to provide mortgage or other
appropriate financing to government entities and private prison managers in
circumstances where ownership by New Prison Realty will not be otherwise
attractive.
In addition to the ownership of correctional and detention facilities for
both private prison operators and government entities, New Prison Realty expects
that opportunities will exist for ownership of non-prison facilities such as
those currently being developed by Prison Realty for Community Education
Partners, Inc., a privately-held Delaware corporation ("CEP"), which develops
and operates publicly funded, privately operated alternative education programs
for at-risk youth. New Prison Realty further expects that as CEP grows, and the
demand for alternative educational programs grows, the opportunity for ownership
of such facilities and expansion opportunities will be significantly increased.
Investment Policies and Objectives. New Prison Realty's investment
objectives will be to maximize current returns to its shareholders through
increases in cash flow available for distribution and to increase long-term
total returns to shareholders. New Prison Realty will seek to accomplish its
objectives through: (i) ownership interests in facilities; (ii) selective
acquisitions of additional correctional and detention facilities from both
private prison managers and government entities; (iii) expansion of existing
facilities; and (iv) construction or development of new correctional and
detention facilities.
New Prison Realty will consider a variety of factors in evaluating
potential investments in correctional or detention facilities, including: (i)
the reputation and creditworthiness of the current owner, manager or developer
of the facility; (ii) the proposed terms for purchasing the facility; (iii) the
proposed terms for leasing the facility, including rental payments and lease
terms; (iv) the quality of construction of the facility; (v) the quality of
operations at an existing facility or the quality of other operations of a
prison manager for a new facility; (vi) the status of existing facilities as
facilities accredited by the American Correctional Association; and (vii) the
relationship between the prison manager and the contracting correctional
authority.
New Prison Realty may purchase or lease properties for long-term
investment, expand and improve the facilities presently owned or sell such
properties, in whole or in part, when circumstances warrant. New Prison Realty
may also participate with other entities in property ownership through joint
ventures or other types of
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co-ownership. Equity investments may be subject to existing mortgage financing
and other indebtedness which have priority over the equity interest of New
Prison Realty.
While New Prison Realty will emphasize equity real estate investments, it
may, in its discretion, invest in mortgages, equity or debt securities of other
REITs, partnerships and other real estate interests. Such mortgage investments
may include participating in convertible mortgages. New Prison Realty does not
intend to purchase securities of, or interests in, other entities engaged in
real estate activities.
There will be no limitations on the percentage of New Prison Realty's
assets that may be invested in any one property, venture or type of security.
The New Prison Realty Board may establish limitations as it deems appropriate
from time to time. No limitations have been set on the number of properties in
which New Prison Realty may seek to invest or on the concentration of
investments in any one geographic region.
Financing Policies and Objectives. New Prison Realty expects to maintain a
ratio of debt to total capitalization of 50% or less. The New Prison Realty
Board may, however, reevaluate this policy and decrease or increase such ratio
accordingly. New Prison Realty will determine its financing policies in light of
then current economic conditions, relative costs of debt and equity capital,
market values of properties, growth and acquisition opportunities and other
factors. New Prison Realty expects to use bank financing to acquire additional
correctional and detention facilities, and for certain other purposes, including
expanding existing facilities and working capital, as necessary. If the New
Prison Realty Board determines that additional funding is desirable, New Prison
Realty may raise such funds through additional equity offerings, debt financing
or retention of cash flow (subject to provisions in the Code concerning
taxability of undistributed REIT income and REIT qualification), or a
combination of these methods.
Indebtedness incurred by New Prison Realty may be in the form of publicly
or privately placed debt instruments or financings from banks, institutional
investors or other lenders, any of which indebtedness may be unsecured or may be
secured by mortgages or other interests in the property owned by New Prison
Realty. There are no limits on the number or amounts of mortgages or other
interests which may be placed on any one property. In addition, such
indebtedness may be with or without recourse to all or any part of the property
of New Prison Realty or may be limited to the particular property to which the
indebtedness relates. The proceeds from any borrowings may be used for the
payment of distributions, as working capital, to refinance indebtedness or to
finance acquisitions, expansions or developments of new properties.
In the event that the New Prison Realty Board determines to raise
additional equity capital, the New Prison Realty Board may, without stockholder
approval, issue additional New Prison Realty Common Stock or other equity
interests (including New Prison Realty Preferred Stock and other securities
senior to the New Prison Realty Common Stock) in any manner (and on such terms
and for such consideration) it deems appropriate, including in exchange for
property. See "The Merger -- New Prison Realty Financings." The New Prison
Realty Bylaws require the approval of at least two-thirds of the members of the
New Prison Realty Board for New Prison Realty to issue equity securities other
than New Prison Realty Common Stock issued: (a) for at least the fair market
value thereof at the time of issuance as determined in good faith by a majority
of the New Prison Realty Board; (b) pursuant to any share incentive or option
plans of New Prison Realty; or (c) in a bona fide underwritten public offering
managed by one or more nationally recognized investment banking firms. Existing
stockholders would have no preemptive right to purchase New Prison Realty Common
Stock issued in any offering, and any such offering might cause a dilution of a
stockholder's investment in New Prison Realty.
Working Capital Reserves Policies and Objectives. New Prison Realty will
maintain working capital reserves (and when not sufficient, access to
borrowings) in amounts that the New Prison Realty Board will determine to be
adequate to meet normal contingencies in connection with the operation of its
business and investments.
Other Policies and Objectives. New Prison Realty intends to operate in a
manner that will not subject it to regulation under the Investment Company Act
of 1940. New Prison Realty does not intend: (i) to invest in the securities of
other issuers for the purpose of exercising control over such issuer; (ii) to
underwrite securities of other issuers; or (iii) to trade actively in loans or
other investments.
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New Prison Realty may make investments other than as previously described
(including bonds, preferred stocks, and common stocks), although it is not
currently expected that it will do so. New Prison Realty may repurchase or
otherwise reacquire any securities it may issue. The New Prison Realty Board
does not intend to cause New Prison Realty to repurchase any of its securities,
and any such action would be taken only in conformity with applicable federal
and state laws and the requirements for operating so as to qualify as a REIT
under the Code. New Prison Realty may make loans to third parties, including,
without limitation, to its officers and to joint ventures in which it decides to
participate. Such loans will generally require the approval of the New Prison
Realty Board.
Loans by New Prison Realty to Operating Company and its affiliates or to a
joint venture in which Operating Company participates will require the approval
of New Prison Realty's Independent Committee.
At all times, New Prison Realty intends to operate and make investments in
such a manner as to be consistent with the requirements of the Code to qualify
as a REIT unless the New Prison Realty Board determines to revoke New Prison
Realty's REIT election because it is no longer beneficial to qualify as a REIT
because of changes in future economic, market or legal conditions, or changes in
the Code or in the Treasury Regulations.
CONFLICTS OF INTEREST
Several conflicts of interest currently exist on the part of Prison Realty,
its trustees and officers and on the part of CCA, its directors and officers.
These conflicts are described in Prison Realty's Annual Report on Form 10-K/A
for the year ended December 31, 1997, as filed on March 18, 1998 and amended on
March 30, 1998, and in CCA's Annual Report on Form 10-K/A for the year ended
December 31, 1997, as filed on March 30, 1998 and amended on September 16, 1998
and September 25, 1998. In addition, as a result of the completion of the
Merger, several conflicts of interest will continue to exist. The following
description sets forth these principal conflicts of interest, including the
relationships through which they arise or may arise, and the policies and
procedures that will be implemented by New Prison Realty and Operating Company
to address those conflicts.
RELATIONSHIPS WHICH MAY GIVE RISE TO CONFLICTS OF INTEREST
After the Merger, some persons may have conflicts of interest in connection
with the operation of New Prison Realty, Operating Company and the Service
Companies. These conflicts impose a risk that these persons will favor their own
interests over the interests of Prison Realty or CCA in the Merger or over the
interests of New Prison Realty after the Merger in connection with the
operations of New Prison Realty and Operating Company and the ongoing
relationship between these companies. In addition, some trustees and officers of
Prison Realty have employment and ownership interests in Operating Company which
may create a conflict.
Doctor R. Crants is the Chairman of the Prison Realty Board and is the
Chief Executive Officer of New Prison Realty and Operating Company. Doctor R.
Crants is also a member of the New Prison Realty Board and of Operating
Company's Board of Directors. D. Robert Crants, III, President of Prison Realty
and the son of Doctor R. Crants, is the President of New Prison Realty and a
member of the New Prison Realty Board. D. Robert Crants, III, as well as certain
other officers of Prison Realty and officers of Operating Company, will also
own, directly or indirectly, shares in New Prison Realty and Operating Company,
all as more fully described in "The Merger -- Interests of Certain Persons in
the Merger."
Following completion of the Merger, it is expected that a portion of
Operating Company will be owned by Sodexho. Jean-Pierre Cuny, an affiliate of
Sodexho, is expected to be Sodexho's designee to the New Prison Realty Board.
New Prison Realty will own all of the Operating Company Non-Voting Common Stock,
which will represent approximately 9.5% of the value of all of the outstanding
Operating Company Common Stock. The remaining 90.5% of the Operating Company
Capital Stock, which consists of Operating Company Voting Common Stock, will be
owned as follows: (i) 30%, valued at $15.0 million, will be owned by management
employees of Operating Company other than Doctor R. Crants, who is Chief
Executive Officer of both New
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Prison Realty and Operating Company; (ii) 8%, valued at $4.0 million, will be
owned by management employees of New Prison Realty; (iii) 19.1%, valued at $9.5
million, will be owned by the wardens of the facilities operated by, and other
management employees of, Operating Company; (iv) 1.4%, valued at $700,000, will
be owned by certain key employees of Prison Realty; (v) 16%, valued at $8.0
million, will be owned by Sodexho; and (vi) 16%, valued at $8.0 million, will be
owned by the Baron Mutual Fund. See "Management and Operations of New Prison
Realty After the Merger."
Some trustees and officers of Prison Realty, who will also hold positions
with New Prison Realty, have affiliations with persons or entities providing
professional advice to Prison Realty and CCA in connection with the Merger. D.
Robert Crants, III and Michael W. Devlin, Chief Operating Officer of Prison
Realty, are principals of DC Investment Partners, LLC, a limited liability
company which serves as the general partner of five private investment
partnerships. DC Investment Partners, LLC is owned by D. Robert Crants, III,
Michael W. Devlin, Stephens Group, Inc., an affiliate of Stephens, the financial
adviser to CCA in connection with the Merger, and Lucius E. Burch, III, who is
Chairman of the Board of Directors of Operating Company and a member of the CCA
Board. Doctor R. Crants and other directors of CCA who are directors of
Operating Company or one of the Service Companies are investors in one or more
of the private investment partnerships managed by DC Investment Partners, LLC.
Rusty L. Moore, a trustee of Prison Realty, is the spouse of a shareholder of
Stokes & Bartholomew, P.A., tax and securities counsel to Prison Realty and New
Prison Realty. Stokes & Bartholomew, P.A. also provides certain legal services
to CCA and may provide legal services to Operating Company. Samuel W.
Bartholomew, Jr., a shareholder of Stokes & Bartholomew, P.A., serves as a
director of Service Company B. In addition, in conjunction with the evaluation
by the Prison Realty Board of the Merger, Charles W. Thomas, a member of the
Prison Realty Board, has performed, and will continue to perform, certain
consulting services in connection with the Merger.
SITUATIONS IN WHICH CONFLICTS OF INTEREST MAY ARISE
Financial Terms of Leases, Trade Name Use Agreement, Services Agreement and
Tenant Incentive Agreement. The financial terms of the Operating Company
Leases, the Trade Name Use Agreement, the Services Agreement, the Tenant
Incentive Agreement and the Right to Purchase Agreement were determined by
Prison Realty and CCA in consultation with their financial advisers in a manner
to reflect the fair market value and rental of the facilities, a fair value for
the use of the CCA intellectual property, a fair value for the development
services rendered in connection with the construction and development of new
facilities and a fair value for providing incentives to Operating Company to
enter into Operating Company Leases with respect to facilities developed and
facilitated by Operating Company. Both Prison Realty and CCA considered the
rules applicable to REITs in establishing these financial terms. There were no
arm's-length negotiations between Prison Realty and Operating Company regarding
these financial terms.
Valuation of the Facilities. Prison Realty management, and subsequently
New Prison Realty management, is relying on the valuation of all facilities
acquired by New Prison Realty from Prison Realty and CCA and an analysis of
appropriate lease rates applicable to such facilities provided by NationsBanc
Montgomery in determining that New Prison Realty will meet certain REIT
requirements after the Merger. NationsBank, an affiliate of NationsBanc
Montgomery, is providing the CCA Credit Facility and the Prison Realty Credit
Facility prior to the Merger. NationsBank, along with CIBC, is expected to
provide a commitment to provide financings for both New Prison Realty and the
Service Companies after the Merger, as well as a portion of the financing for
Operating Company. See "The Merger -- New Prison Realty Financings."
Potential for Future Conflicts. Because of the ongoing relationship
between New Prison Realty and Operating Company, the companies may be in
situations where they have differing interests. Accordingly, the potential
exists for disagreements as to the compliance with the Operating Company Leases.
Additionally, the possible need by New Prison Realty, from time to time, to
finance, refinance or effect a sale of any of the properties managed by
Operating Company may result in a need to modify the Operating Company Lease
with respect to such property. Any such modification will require the consent of
Operating Company, and the lack of consent from Operating Company could
adversely affect New Prison Realty's ability to complete such financings or
sale. Because of the relationships described above, there exists the risk that
New Prison Realty
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will not achieve the same results in its dealings with Operating Company that it
might achieve if such relationships did not exist.
Policies and Procedures for Addressing Conflicts. The significant
contractual and other ongoing relationships between New Prison Realty and
Operating Company, as described herein, may present conflicts for some directors
and officers of both New Prison Realty and Operating Company. New Prison Realty
and Operating Company have adopted or will adopt appropriate policies and
procedures to be followed by the New Prison Realty Board and Operating Company's
Board of Directors to attempt to address those conflicts. Such procedures may
include requiring Doctor R. Crants to abstain from making management decisions
in his capacity as an officer or director of New Prison Realty and Operating
Company, with respect to matters that present a conflict of interest between the
companies, and to abstain from voting as a director of either company, with
respect to matters that present a conflict of interest between the companies.
Pursuant to the New Prison Realty Bylaws, the Independent Committee of the
New Prison Realty Board, which currently consists of the six directors who are
not employees of New Prison Realty and are not and will not be affiliated with
Operating Company, must approve actions of the New Prison Realty Board regarding
the election of the operators for New Prison Realty's properties, including
Operating Company or its affiliates, the entering into of any agreement with
Operating Company or its affiliates, and the completion of any transaction
between New Prison Realty and Operating Company or its affiliates, including the
negotiation and enforcement of any lease of New Prison Realty's properties. The
current members of the Independent Committee are Monroe J. Carell, Jr., John W.
Eakin, Jr., Ted Feldman, Jackson W. Moore, Richard W. Cardin, and Joseph V.
Russell.
New Prison Realty will adopt Prison Realty's current business conduct
policy which will provide a guideline for the New Prison Realty Board's
assessment of a conflict, stating that a potential conflict would exist whenever
an employee or director has an interest in or connection with an enterprise with
which New Prison Realty has transacted or might transact business or with
individuals associated with such an enterprise, when that interest is of such a
nature that it might influence the independent judgment of such employee or
director. The policy will cover conflicting interests that are direct or
indirect, through an enterprise in which an employee or director has an
interest. Whether or not a conflict of interest exists will be determined by the
Independent Committee of the New Prison Realty Board, on a case-by-case basis in
accordance with the policies and procedures established by the New Prison Realty
Board.
It is anticipated that the Independent Committee of the New Prison Realty
Board will approve actions of the New Prison Realty Board concerning the
entering into of any agreement with Operating Company or its affiliates and the
completion of any transaction between New Prison Realty and Operating Company or
its affiliates, including, but not limited to, the negotiation and enforcement
of the terms of any Operating Company Lease, the Trade Name Use Agreement, the
Operating Company Note, the Services Agreement or the Tenant Incentive
Agreement.
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material federal income tax consequences
that may be relevant to current and prospective shareholders of Prison Realty
and CCA. This discussion does not address all aspects of taxation that may be
relevant to particular shareholders or to particular types of shareholders
subject to special tax treatment under the federal income tax laws (including,
without limitation, tax exempt organizations, insurance companies, financial
institutions, broker-dealers, foreign corporations, and persons who are not
citizens of the United States), nor does it address the impact of state, local
or foreign tax laws. This discussion is based on the Code, applicable Department
of Treasury regulations ("Treasury Regulations"), judicial authority and
administrative rulings and practice, all as of the date of this Joint Proxy
Statement-Prospectus.
EACH SHAREHOLDER OF PRISON REALTY AND CCA IS URGED TO CONSULT ITS TAX
ADVISER REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE MERGER AND THE OPERATIONS
OF NEW PRISON REALTY, INCLUDING THE STATE, LOCAL, FOREIGN AND OTHER TAX
CONSEQUENCES OF SUCH MERGER AND OPERATIONS, AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
TAX CONSEQUENCES OF THE MERGER
Bass, Berry & Sims PLC, tax counsel to CCA, will deliver an opinion to CCA
dated the Closing Date to the effect that the CCA Merger will be treated for
United States federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the Code. Stokes & Bartholomew, P.A., tax counsel to Prison
Realty, will deliver an opinion to Prison Realty dated the Closing Date to the
effect that the Prison Realty Merger will be treated for United States federal
income tax purposes as a reorganization within the meaning of Section 368(a) of
the Code. The opinions of Bass, Berry & Sims PLC and Stokes & Bartholomew, P.A.
are based on various assumptions and on certain factual representations of
Prison Realty and CCA and are not binding on the IRS or any court. Accordingly,
no assurance can be given that the IRS will not challenge the opinions of Bass,
Berry & Sims PLC and Stokes & Bartholomew, P.A. or that any such challenge would
not be successful.
Tax Consequences to Shareholders of CCA
In the opinion of Bass, Berry & Sims PLC, the tax consequences of the
Merger to the shareholders of CCA will be as follows:
(i) CCA will not recognize gain or loss on the transfer of its assets
and liabilities to New Prison Realty pursuant to the CCA Merger;
(ii) New Prison Realty will not recognize gain or loss on the transfer
of New Prison Realty Common Stock to the shareholders of CCA pursuant to
the CCA Merger;
(iii) No gain or loss will be recognized by the shareholders of CCA as
a result of the CCA Merger or the Prison Realty Merger;
(iv) The aggregate tax basis of the New Prison Realty Common Stock
received by a shareholder of CCA pursuant to the CCA Merger (including any
fractional share of New Prison Realty Common Stock for which cash is
received) will be the same as the aggregate tax basis of the shareholder's
shares of CCA Common Stock exchanged therefor; and
(v) Cash received by a shareholder of CCA in lieu of a fractional
share of New Prison Realty Common Stock will be treated as received in
exchange for such fractional interest, and gain or loss will be recognized
in an amount equal to the difference between the amount of cash received
and the portion of that shareholder's adjusted tax basis in the shares of
CCA Common Stock allocated to such fractional interest. Such gain or loss
generally will be treated as capital gain or loss if the shareholder holds
its CCA Common Stock as a capital asset on the Closing Date.
Tax Consequences to Shareholders of Prison Realty
In the opinion of Stokes & Bartholomew, P.A., the tax consequences of the
Merger to the shareholders of Prison Realty will be as follows:
(i) Prison Realty will not recognize gain or loss on the transfer of
its assets and liabilities to New Prison Realty pursuant to the Prison
Realty Merger;
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(ii) New Prison Realty will not recognize gain or loss on the transfer
of New Prison Realty Common Stock or New Prison Realty Series A Preferred
Stock to the shareholders of Prison Realty;
(iii) No gain or loss will be recognized by the shareholders of Prison
Realty as a result of the CCA Merger or the Prison Realty Merger; and
(iv) The aggregate tax basis of the New Prison Realty Common Stock or
New Prison Realty Series A Preferred Stock received by a shareholder of
Prison Realty will be the same as the aggregate tax basis of the
shareholder's shares of Prison Realty exchanged therefor.
The conclusion that New Prison Realty will not recognize gain or loss as a
result of the foregoing transactions assumes that New Prison Realty will make an
election pursuant to IRS Notice 88-19 with respect to CCA's assets and
liabilities and that the availability or nature of such election is not modified
as proposed in the Clinton Administration's fiscal year 1999 budget proposal.
See " -- Qualification and Operation of New Prison Realty as a REIT -- Taxation
of New Prison Realty" below. New Prison Realty intends to make an election
pursuant to IRS Notice 88-19 if such election is available. If New Prison Realty
were to fail to make the election, or if it were no longer available, gain would
have to be recognized on the later to occur of the CCA Merger or the effective
date of New Prison Realty's election of REIT status. Such gain would be measured
by the difference between the fair market value of CCA properties and their
adjusted tax basis and would be an obligation of New Prison Realty.
TAX CONSEQUENCES OF TRANSFERS TO OPERATING COMPANY AND SERVICE COMPANIES
Immediately prior to the Merger, CCA will sell to Operating Company all of
the issued and outstanding stock of certain of CCA's wholly owned corporate
subsidiaries and certain management contracts and all non-real estate assets,
including accounts receivable and accounts payable relating to such contracts in
consideration for the Operating Company Note, 100% of the issued and outstanding
shares of Operating Company Non-Voting Common Stock equaling 9.5% of the issued
and outstanding Operating Company Capital Stock and certain additional
consideration under the Trade Name Use Agreement. This sale will not qualify for
non-recognition treatment. Therefore, CCA will be required to recognize gain
equal to the difference between the total amount realized by CCA and CCA's basis
in the assets sold. The total amount realized will equal the principal amount of
the Operating Company Note, plus the fair market value of the Operating Company
Non-Voting Common Stock. Although CCA will be eligible to recognize gain
attributable to the Operating Company Note under the installment method, it
presently intends to elect out of the installment method, and thus will be
required to recognize the full amount of gain on the sale in the year the sale
is completed.
Immediately prior to the Merger, CCA will transfer to Prison Management
Services, LLC and Juvenile and Jail Facility Management Services, LLC certain
management contracts, all non-real estate assets relating to such contracts, and
certain other assets in exchange for a non-voting membership interest in each of
the companies. Simultaneously with these transfers, Privatized Management
Services Investors, LLC will contribute approximately $3.0 million to Prison
Management Services, LLC, and Correctional Services Investors, LLC will
contribute approximately $3.0 million to Juvenile and Jail Facility Management
Services, LLC, in exchange for voting membership interests in each Company.
These transfers by CCA are expected to qualify for non-recognition treatment
under Code Section 721. Accordingly, CCA will recognize no gain on the
transfers, and will have a basis in the interests of the companies received
equal to its basis in the assets transferred.
Immediately after the Merger, each of Prison Management Services, LLC and
Juvenile and Jail Facility Management Services, LLC will merge with and into a
separate Service Company. After these mergers, each of the Service Companies
will hold certain management contracts, all non-real estate assets relating to
such contracts, and certain other assets. New Prison Realty will own 100% of the
non-voting stock of each of the Service Companies. These mergers are anticipated
to qualify for non-recognition treatment under Code Section 351. Accordingly,
New Prison Realty will recognize no gain on the transfers, and will have a basis
in the shares of non-voting common stock received equal to its basis in its
interests in Prison Management Services, LLC and Juvenile and Jail Facility
Management Services, LLC.
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QUALIFICATION AND OPERATION OF NEW PRISON REALTY AS A REIT
General
New Prison Realty intends to elect to be taxed as a REIT for federal income
tax purposes commencing with its taxable year ending December 31, 1999. New
Prison Realty believes it will be organized and will operate in such a manner as
to qualify for taxation as a REIT under the Code. However, no assurance can be
given that New Prison Realty will qualify or will remain qualified as a REIT.
The requirements relating to the federal income tax treatment of REITs and
their shareholders are highly technical and complex. The following discussion
sets forth only the material aspects of those requirements. This summary is
qualified in its entirety by the applicable Code provisions, rules and Treasury
Regulations promulgated thereunder, and administrative and judicial
interpretation thereof.
Opinion of Counsel
In the opinion of Stokes & Bartholomew, P.A., tax counsel to New Prison
Realty, New Prison Realty, commencing with its taxable year ending December 31,
1999, will be organized in conformity with the requirements for qualification as
a REIT within the meaning of the Code, and its proposed method of operation will
enable it to meet the requirements for qualification and taxation as a REIT
under the Code. The opinion of Stokes & Bartholomew, P.A. is based on various
assumptions described in this Joint Proxy Statement-Prospectus under "Material
Federal Income Tax Consequences" and on certain factual representations of
Prison Realty and is not binding on the IRS or any court. Accordingly, no
assurance can be given that the IRS will not challenge the opinion of Stokes &
Bartholomew, P.A. or that any such challenge would not be successful. Moreover,
New Prison Realty's qualification and taxation as a REIT depends upon the
ability of New Prison Realty to meet, through actual annual operating results,
the distribution levels, diversity of stock ownership and the various other
qualification tests imposed under the Code, the results of which have not been
and will not be reviewed by Stokes & Bartholomew, P.A. Accordingly, no assurance
can be given that the actual results of New Prison Realty's operations for any
one taxable year will satisfy such requirements.
Taxation of New Prison Realty
A REIT generally is not subject to federal corporate income taxes on that
portion of its ordinary income or capital gain that is distributed currently to
its stockholders because the REIT provisions of the Code generally allow a REIT
to deduct dividends paid to its stockholders. This deduction for dividends paid
to stockholders substantially eliminates the federal "double taxation" on
earnings (once at the corporate level and once again at the stockholder level)
that generally results from investment in a C corporation (i.e., a corporation,
such as CCA, which is generally subject to full corporate level tax).
However, REITs may be subject to federal income tax in the following
circumstances. First, a REIT will be taxed at regular corporate rates on any
undistributed REIT taxable income and undistributed net capital gains. Second,
under certain circumstances, a REIT may be subject to the "alternative minimum
tax" on its items of tax preference, if any. Third, if the REIT has (i) net
income from the sale or other disposition of "foreclosure property" (generally,
property acquired by reason of a default on a lease or an indebtedness held by a
REIT) that is held primarily for sale to customers in the ordinary course of
business, or (ii) other non-qualifying net income from foreclosure property, it
will be subject to tax at the highest corporate rate on such income. Fourth, if
the REIT has net income from a "prohibited transaction" (generally, a sale or
other disposition of property held primarily for sale to customers in the
ordinary course of business, other than foreclosure property), such income will
be subject to a 100% tax. Fifth, if the REIT should fail to satisfy the 75%
gross income test or the 95% gross income test (as discussed below), and has
nonetheless maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on the net income
attributable to the greater of the amount by which the REIT fails the 75% or 95%
test, multiplied by a fraction intended to reflect the REIT's profitability.
Sixth, if the REIT should fail to distribute with respect to each calendar year
at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95%
of its REIT capital gain net income for such year, and (iii) any undistributed
taxable income from prior periods, the REIT will be subject to a 4% excise tax
on the excess of such required distribution over the
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amounts actually distributed. Seventh, if a C corporation (i.e., a corporation,
such as CCA, which is generally subject to a full corporate-level tax) elects to
be taxed as a REIT, and the REIT, during the ten-year period beginning on the
effective date of its REIT election (the "Restriction Period"), recognizes gain
on the disposition of any asset held by the C corporation, then pursuant to
guidelines issued by the IRS in IRS Notice 88-19 (the "Built-in Gain Rules"),
the excess of the fair market value of such asset at the beginning of the
applicable Restriction Period over the REIT's adjusted basis in such asset as of
the beginning of such Restriction Period (the "Built-in Gain") will be subject
to a tax at the highest regular corporate rate. This result as to the
recognition of Built-in Gain assumes that the REIT makes an election pursuant to
IRS Notice 88-19 or applicable future administrative rules or Treasury
Regulations.
New Prison Realty will be subject to the Built-in Gain Rules as to assets
acquired by it from CCA in the CCA Merger (the "CCA Assets"). New Prison Realty
intends to make an election pursuant to IRS Notice 88-19 with respect to the CCA
Assets, if such election is available. Assuming it does so, any Built-in Gain
recognized by New Prison Realty on disposition of any CCA Assets during the
Restriction Period will be subject to tax at the highest corporate rate.
Organizational Requirements
General. The Code defines a REIT as a corporation, trust or association:
(i) that is managed by one or more trustees or directors; (ii) the beneficial
ownership of which is evidenced by transferable shares or by transferable
certificates of beneficial interest; (iii) which would be taxable as a domestic
corporation but for the REIT provisions of the Code; (iv) that is neither a
financial institution nor an insurance company; (v) the beneficial ownership of
which is held by 100 or more persons; and (vi) during the last half of each
taxable year, not more than 50% in value of the outstanding capital stock of
which is owned, directly or indirectly (through the application of certain
attribution rules), by five or fewer individuals (as defined in the Code to
include certain entities).
The Code provides that conditions (i) through (iv), inclusive, must be met
during the entire taxable year and that condition (v) must be met during at
least 335 days of a taxable year of 12 months, or during a proportionate part of
a taxable year of less than 12 months. For taxable years beginning after 1997,
if a REIT complies with Treasury Regulations that provide procedures for
ascertaining the actual ownership of its shares for such taxable year and the
REIT did not know (and with the exercise of reasonable diligence could not have
known) that it failed to meet the requirement of condition (vi) above for such
taxable year, the REIT will be treated as having met the requirement of
condition (vi) for such year.
New Prison Realty will satisfy the requirements set forth in (i) through
(iv) above and will issue sufficient New Prison Realty Common Stock pursuant to
the Merger with sufficient diversity of ownership to allow it to satisfy
conditions (v) and (vi) above. The New Prison Realty Charter will include
certain restrictions regarding transfers of New Prison Realty Common Stock that
are intended to assist New Prison Realty in satisfying the stock ownership
requirements described in (v) and (vi) above. Such restrictions may not be
adequate in all cases, however, to prevent transfers of New Prison Realty Common
Stock in violation of the ownership limitations. See "New Prison Realty Capital
Stock -- Restrictions on Ownership of Capital Stock."
Qualified REIT Subsidiaries. In addition to the foregoing organizational
requirements, a REIT must also satisfy certain other tests (described below)
regarding the nature of its income and assets. In applying these tests, a
corporation that is a "qualified REIT subsidiary" (within the meaning of Section
856(i) of the Code) will not be treated as a separate corporation. Instead all
of its assets, liabilities, income, deductions and credits will be treated as
owned, realized or incurred (as the case may be) directly by the REIT. In
general, a qualified REIT subsidiary is a corporation, all of the stock of which
is owned by a REIT. After the Closing Date, New Prison Realty will have a number
of "qualified REIT subsidiaries." In applying the income and asset tests
described below to New Prison Realty, the separate existence of these
subsidiaries will be ignored, and their assets, liabilities, income, deductions
and credits will be treated as assets, liabilities, income, deductions and
credits of New Prison Realty.
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Income Tests
General. For a REIT to maintain its qualification as such, it must satisfy
two gross income requirements on an annual basis. First, at least 75% of the
REIT's gross income (excluding gross income from prohibited transactions) for
each taxable year must be derived directly or indirectly from investments
relating to real property (including rents from real property, lease commitment
fees, certain mortgage interest and dividends from qualified REITs) or from
"qualified temporary investment income" (generally, income attributable to the
temporary investment of new capital received by the REIT) (the "75% income
test"). Second, at least 95% of the REIT's gross income (excluding gross income
from prohibited transactions) for each taxable year must be derived from the
foregoing sources or from dividends, interest, and gain from the sale or
disposition of stock or securities (the "95% income test").
If New Prison Realty fails to satisfy one or both of the 75% income test or
the 95% income test for any taxable year, it may nevertheless qualify as a REIT
for such year if it is entitled to relief under certain provisions of the Code.
These relief provisions generally will be available if (i) the failure to meet
such tests was due to reasonable cause and not due to willful neglect, (ii) a
schedule of the sources of qualifying income is attached to New Prison Realty's
federal income tax return for such taxable year, and (iii) any incorrect
information on the schedule was not due to fraud with intent to evade tax. It is
not possible, however, to state whether in all circumstances New Prison Realty
would be entitled to the benefit of these relief provisions. As discussed above,
in "-- Qualification and Operation of New Prison Realty as a REIT -- Taxation of
New Prison Realty", even if these relief provisions apply, a tax would be
imposed with respect to the excess net income.
Rents from Real Property. "Rents from real property" means generally the
gross amount received for the use of, or the right to use, a REIT's real
property. Rents received by a REIT will qualify as "rents from real property"
only if several conditions are met. First, the leases under which the rents are
paid must be respected as true leases for federal income tax purposes and not
treated as service contracts, joint ventures or some other type of arrangement.
The determination of whether a lease is a true lease depends on surrounding
facts and circumstances. In making such a determination, courts have considered
a variety of factors, including the following: (i) the intent of the parties,
(ii) the form of the agreement, (iii) the degree of control over the property
retained by the property owner (e.g., whether the lessee has substantial control
over the operation of the property or whether the lessee is required to use its
best efforts to perform its obligations under the agreement), and (iv) the
extent to which the property owner retains the risk of loss with respect to the
property (e.g., whether the lessee bears the risk of increases in operating
expenses or the risk of damage with respect to the property) or the potential
for economic gains with respect to the property (e.g., appreciation).
Immediately following the Merger, New Prison Realty and Operating Company
will enter into the Operating Company Leases relating to those facilities owned
by New Prison Realty that are not leased to government entities. The terms and
conditions of the Operating Company Leases are described under "Management and
Operations of New Prison Realty After the Merger -- Leases with Operating
Company." Stokes & Bartholomew, P.A. is of the opinion that the Operating
Company Leases will qualify as true leases for federal income tax purposes. Such
opinion is based, in part, on the following facts: (i) the Operating Company
Leases are styled as leases (e.g., New Prison Realty will hold legal title to
the facilities, and the Operating Company Leases will give Operating Company the
right to possession of the facilities), and New Prison Realty and Operating
Company have represented that they intend their relationship to be that of
lessor and lessee, (ii) New Prison Realty has represented that the useful life
of each of the facilities extends for a significant period of time beyond
expiration of the Operating Company Leases, (iii) New Prison Realty has
represented that the facilities will have significant residual value after
expiration of the terms of the Operating Company Leases, (iv) the Operating
Company Leases do not provide Operating Company with the right to purchase the
facilities at a bargain price, (v) New Prison Realty will be entitled to receive
significant rental income under the Operating Company Leases, and (vi) New
Prison Realty and Operating Company have represented that the rents payable
under the Operating Company Leases are fair market rents.
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There are, however, no controlling Treasury Regulations, published rulings
or judicial decisions involving leases with terms substantially the same as the
Operating Company Leases that address whether such leases are true leases for
federal income tax purposes. Therefore, the opinion of Stokes & Bartholomew,
P.A. with respect to the status of the Operating Company Leases is based upon
all of the facts and circumstances and upon rulings and judicial decisions
involving situations that are considered by Stokes & Bartholomew, P.A. to be
analogous. If the Operating Company Leases are recharacterized as service
contracts or partnership agreements rather than true leases, part or all of the
payments that New Prison Realty receives from Operating Company would not be
considered rent and would not otherwise satisfy the various requirements for
qualification as "rents from real property." In that event, New Prison Realty
likely would not satisfy either the 75% income test or the 95% income test and,
as a result, would lose its REIT status.
Another requirement for the qualification of rents as "rents from real
property" is that a REIT, or an owner of 10% or more of a REIT, must not own,
directly or constructively (through the application of certain stock attribution
rules), 10% or more of the voting power or total number of outstanding shares of
a corporate tenant or 10% or more of the assets or net profits of a noncorporate
tenant (a "Related Party Tenant") at any time during a taxable year. To enable
New Prison Realty to comply with these rules, the New Prison Realty Charter
provides that no person may own, directly or constructively (through application
of certain stock attribution rules), more than 9.8% of the outstanding shares of
New Prison Realty Common Stock or 9.8% of the outstanding shares of New Prison
Realty Preferred Stock. See "New Prison Realty Capital Stock -- Restrictions on
Ownership of Capital Stock." Assuming these ownership limitations are complied
with, no person should own (directly or constructively) 10% or more of both New
Prison Realty and a tenant of New Prison Realty.
New Prison Realty will, however, own directly all of the Operating Company
Non-Voting Common Stock. The total number of shares of the Operating Company
Non-Voting Common Stock will equal 9.5% of the shares of the Operating Company
Capital Stock outstanding, and such shares will represent a 9.5% economic
interest in Operating Company. Therefore, New Prison Realty's ownership of these
shares should not be a violation of the Related Party Tenant rules. Furthermore,
New Prison Realty does not intend, and has represented that it will not,
increase its direct or constructive ownership of Operating Company to a level
which would violate the Related Party Tenant rules.
New Prison Realty will also hold the Operating Company Note. If the
Operating Company Note is treated for federal income tax purposes as equity
rather than debt, New Prison Realty could be deemed to own in excess of 10% of
the total outstanding Operating Company Capital Stock in violation of the
Related Party Tenant rules. The characterization of an instrument as debt or
equity is a question of fact to be determined from all surrounding facts and
circumstances, no one of which is conclusive. Among the criteria that have been
found relevant in characterizing such instruments are the following: (i) the
intent of the parties, (ii) the extent of participation in management by the
holder of the instrument, (iii) the ability of the corporation to obtain funds
from outside sources, (iv) the "thinness" of the capital structure in relation
to debt (based on fair market value of the debtor's assets, including intangible
assets), (v) the risk involved, (vi) the formal indicia of the arrangement,
(vii) the relative position of the creditor in question versus other creditors
regarding payment of interest and principal, (viii) the voting power of the
holder of the instrument, (ix) the provision of a fixed rate of interest, (x)
the contingency of the obligation to repay, (xi) the source of repayment, (xii)
the presence or absence of a fixed maturity date, and (xiii) whether the note is
guaranteed or otherwise secured.
Stokes & Bartholomew, P.A. is of the opinion that the Operating Company
Note will be treated as debt for federal income tax purposes. Such opinion is
based, in part, on various facts, including that the Operating Company Note (i)
will be clearly denominated as debt, (ii) will have a fixed maturity date of 10
years, (iii) will provide for a fixed rate of interest, (iv) will require that
interest only be payable during the first four years of the term of the
Operating Company note and that principal be amortized over years five through
ten of such term, (v) will require that certain excess cash flow be used to
prepay the note and (vi) will be partially guaranteed by Doctor R. Crants. In
addition, Operating Company will represent that, based upon internal
projections, it anticipates that the Operating Company Note will be repaid prior
to its maturity date. There are, however, no controlling Treasury Regulations,
published rulings or judicial decisions involving indebtedness with terms
substantially the same as the Operating Company Note that address whether such
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indebtedness is debt for federal income tax purposes. Therefore, the opinion of
Stokes & Bartholomew, P.A. with respect to the status of the Operating Company
Note is based upon all of the facts and circumstances and upon rulings and
judicial decisions involving situations that are considered by Stokes &
Bartholomew, P.A. to be analogous. If the Operating Company Note is
recharacterized as equity, part or all of the payments that New Prison Realty
receives from Operating Company would not be considered as "rents from real
property". In that event, based upon the expected amount of rent to be paid to
New Prison Realty by Operating Company under the Operating Company Leases, New
Prison Realty likely would not satisfy either the 75% income test or the 95%
income test and, as a result, would lose its REIT status.
In addition to the foregoing requirements, the amount of rent, to qualify
as "rents from real property", must not be based in whole or in part on the
income or profits of any person. However, rents received or accrued generally
will not be disqualified as "rents from real property" solely by reason of being
based on a fixed percentage or percentages of receipts or sales. Also, if rent
attributable to personal property leased in connection with a lease of real
property is greater than 15% of the total rent received under the lease, then
the portion of rent attributable to such personal property will not qualify as
"rents from real property". Finally, rents generally will not qualify as "rents
from real property" if the REIT operates or manages the property or furnishes or
renders services to the tenants of such property, other than through an
independent contractor who is adequately compensated and from whom the REIT
derives no income. A REIT, however, (i) may directly perform certain services
that are "usually or customarily rendered" in connection with the rental of
space for occupancy only and are not otherwise considered "rendered to the
occupant" of the property, and (ii) may render, for tax years beginning after
1997, a de minimis amount of otherwise impermissible services, if the amount
received for such services does not exceed 1% of all income from the property
during the tax year. The amount treated as received for impermissible services
generally may not be less than 150% of the cost to the REIT in rendering or
furnishing such services. Amounts received for otherwise impermissible services
do not qualify as "rents from real property" even if within the 1% limitation.
If the amount received by the REIT for impermissible services exceeds the 1%
limitation, then no amounts received or accrued from the property during the tax
year will qualify as "rents from real property". The rents received by New
Prison Realty from Operating Company should satisfy these requirements.
Mortgage Interest. All interest (other than interest based on the net
income of any person) is qualifying income for purposes of the 95% income test.
However, only interest on obligations secured by mortgages on real property or
on interests in real property is qualifying income for purposes of the 75%
income test. If the loan value of real property (determined as of the time the
commitment to make or purchase the loan becomes binding) equals or exceeds the
amount of the loan, all interest on the loan will be allocated to the real
property and will thus qualify as mortgage interest. If the loan value is less
than the amount of the loan, interest will be allocated to the real property in
the same proportion as the loan value bears to the amount of the loan. Interest
received under an installment contract for the sale of real property should be
treated as mortgage interest to the extent of the value of the underlying real
property.
New Prison Realty will acquire from CCA and Prison Realty in the Merger
certain leases to government entities. Under each of these leases, either (i)
the governmental entity, as lessee, has an option to purchase the leased
facility for a specified, below-market amount, which typically declines over the
term of the lease, or (ii) the facility automatically reverts to the government
entity at the conclusion of the lease. Primarily because of these features, it
is likely that the leases will be treated as financing arrangements for federal
income tax purposes rather than as true leases. Therefore, a portion of each
lease payment will be treated as interest income, and a portion will be treated
as a return of principal. The interest should be treated as mortgage interest to
the extent of the value of the underlying facility and therefore as qualifying
income for purposes of both the 75% income test and the 95% income test. If,
however, the amount financed exceeds the value of the underlying real property,
interest will be allocated to the underlying property (and thus treated as
mortgage interest) in the same proportion as the loan value of the property
bears to the amount of the loan. In rendering its opinion as to the
qualification of New Prison Realty as a REIT, Stokes & Bartholomew, P.A. has
assumed that the value of the underlying real property under each of the
government leases equals or exceeds the amount of the financing.
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Other Sources of Income. After the Merger, New Prison Realty will realize
on a regular basis (i) interest income under the Operating Company Note, (ii)
license fees under the Trade Name Use Agreement relating to the use of the CCA
name, and (iii) dividend income on its non-voting common stock in Service
Company A and Service Company B. Because CCA intends to elect out of the
installment method, gain attributable to the Operating Company Note will be
recognized by CCA in the year of sale. The interest income under the Operating
Company Note and the dividends from Service Company A and Service Company B
should be qualifying income for purposes of the 95% income test but not for
purposes of the 75% income test. The license fees under the Trade Name Use
Agreement will be nonqualifying for purposes of both the 95% income test and the
75% income test. New Prison Realty anticipates that, taking into account these
other sources of income, it will nonetheless satisfy the 75% income test and the
95% income test.
Potential Reallocation of Income. The IRS has the authority under a number
of Code sections to reallocate income and deductions between New Prison Realty
and Operating Company. For example, the IRS may assert that the rents payable by
Operating Company are excessive and treat the excess as attributable to the
Trade Name Use Agreement, the management contracts acquired with the Operating
Company Note or some other source. Such a reallocation could cause New Prison
Realty to fail one or both of the 75% income test and the 95% income test, which
in turn could cause New Prison Realty to lose its status as a REIT. To ensure
that the amounts charged as rent under the Operating Company Leases are fair
market rents, New Prison Realty has obtained independent appraisals of the
facilities and an independent analysis of the appropriate lease rates for the
facilities. This appraisal and analysis will not be binding on the IRS, however,
and the IRS may attempt to reallocate the payments from Operating Company as
described above. If the IRS is successful, New Prison Realty may lose its status
as a REIT. In rendering its opinion as to the qualification of New Prison Realty
as a REIT, Stokes & Bartholomew, P.A. has assumed that the payments from
Operating Company to New Prison Realty are correctly allocated in the Operating
Company Leases and other agreements between Operating Company and New Prison
Realty.
Asset Tests
For New Prison Realty to qualify as a REIT, at the close of each quarter of
its taxable year it must also satisfy three tests relating to the nature of its
assets. First, at least 75% of the value of New Prison Realty's total assets
must be represented by real estate assets (which for this purpose includes real
estate assets held by a "qualified REIT subsidiary" of New Prison Realty) and
cash, cash items and government securities. Second, no more than 25% of New
Prison Realty's total assets may be represented by securities other than those
in the 75% asset class. Third, of the investments included in the 25% asset
class, the value of any one issuer's securities owned by New Prison Realty may
not exceed 5% of the value of New Prison Realty's total assets, and New Prison
Realty may not own more than 10% of any one issuer's outstanding voting
securities (excluding securities of a "qualified REIT subsidiary" or another
REIT).
Total assets for purposes of these tests include only those assets that
appear on New Prison Realty's balance sheet prepared in accordance with
generally accepted accounting principles. In applying the 5% and 10% tests, the
term "issuer" has the same meaning as when used in the Investment Company Act of
1940, as amended (the "ICA"). Under the ICA, such term means generally "every
person who issues or proposes to issue any security, or has outstanding any
security which it has issued." Under this definition and various administrative
rulings interpreting this definition, each of the Service Companies and
Operating Company should be treated as a separate issuer.
The asset tests are generally applied as of the close of each quarter.
Shares in other REITs generally are valued at the higher of market value or
asset value. Securities (other than REIT shares) for which market quotations are
readily available must be valued at market value. The value of all other REIT
assets must be determined in good faith by the New Prison Realty Board.
As of the end of the first calendar quarter after the Closing Date, the
total value of New Prison Realty's real estate assets are expected to exceed 75%
of the value of New Prison Realty's total assets. In addition, New Prison Realty
should not own more than 10% of the voting securities of any one issuer, nor
should the value of any one issuer's securities exceed 5% of the value of New
Prison Realty's total assets. If, however, the Service
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Companies and Operating Company are not treated as separate issuers, New Prison
Realty likely would not satisfy the 5% test or the 10% test and as a result
would not qualify as a REIT.
In an effort to ensure compliance with the asset tests, New Prison Realty
has obtained appraisals of the facilities and will obtain appraisals of the
Operating Company Note, the Operating Company Non-Voting Common Stock, and the
non-voting common stock of Service Company A and Service Company B. These
appraisals, however, will not be binding on the IRS, and the IRS may assert that
New Prison Realty has not satisfied one or more of the asset tests. If the IRS
is successful in any such challenge, New Prison Realty might lose its status as
a REIT. In rendering its opinion as to the qualification of New Prison Realty as
a REIT, Stokes & Bartholomew, P.A. has assumed that New Prison Realty will
satisfy the asset tests.
After initially meeting the asset tests at the close of any quarter, New
Prison Realty will not lose its status as a REIT for failure to satisfy the
asset tests at the end of a later quarter solely by reason of changes in asset
values. If the failure to satisfy the asset tests results from an acquisition of
securities or other property during a quarter, the failure can be cured by
disposition of sufficient non-qualifying assets within 30 days after the close
of that quarter. It is intended that New Prison Realty will maintain adequate
records of the value of its assets to ensure compliance with the asset tests,
and will take such other action within 30 days after the close of any quarter as
may be required to cure any noncompliance. However, there can be no assurance
that such other action always will be successful.
Annual Distribution Requirements
To be taxed as a REIT, New Prison Realty will be required to meet certain
annual distribution requirements. New Prison Realty will be required to
distribute dividends (other than capital gain dividends) to its stockholders in
an amount at least equal to (1) the sum of (a) 95% of New Prison Realty's "REIT
taxable income" (computed without regard to the dividends paid deduction and New
Prison Realty's net capital gain) and (b) 95% of the net income, if any, from
foreclosure property in excess of the special tax on income from foreclosure
property, minus (2) the sum of certain items of non-cash income. Such
distributions must be paid in the taxable year to which they relate, or in the
following taxable year if declared before New Prison Realty timely files its tax
return for such year and if paid on or before the first regular dividend payment
after such declaration.
To the extent that New Prison Realty does not distribute all of its net
capital gain or distributes at least 95% (but less than 100%) of its REIT
taxable income, as adjusted, it will be subject to tax on the undistributed
portion, at regular ordinary and capital gains corporate tax rates. Furthermore,
if New Prison Realty fails to distribute for each calendar year at least the sum
of (a) 85% of its REIT ordinary income for such year, (b) 95% of its REIT
capital gain net income for such year, and (c) any undistributed ordinary income
and capital gain net income from prior periods, New Prison Realty will be
subject to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed. New Prison Realty intends to make timely
distributions sufficient to satisfy this annual distribution requirement and to
avoid liability for excise taxes.
It is possible that, from time to time, New Prison Realty may not have
sufficient cash or other liquid assets to meet the 95% distribution requirement
due to timing differences between the actual receipt of income and actual
payment of deductible expenses and the inclusion of such income and deduction of
such expenses in arriving at taxable income of New Prison Realty or if the
amount of nondeductible expenses such as principal amortization or capital
expenditures exceed the amount of non-cash deductions. In the event that such
situation occurs, and New Prison Realty is not able to meet such requirement by
distributions made in the following taxable year in accordance with those
requirements of the Code described above, in order to meet the 95% distribution
requirement, New Prison Realty may find it necessary to arrange for short-term,
or possibly long-term, borrowings or to pay dividends in the form of taxable
share dividends. If the amount of nondeductible expenses exceeds non-cash
deductions, New Prison Realty may refinance its indebtedness to reduce principal
payments and borrow funds for capital expenditures.
Under certain circumstances in which an adjustment is made by the IRS that
affects the amount that should have been distributed for a prior taxable year,
New Prison Realty may be able to rectify the failure to
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meet such distribution requirement by paying "deficiency dividends" to
stockholders in the later year, which may be included in New Prison Realty's
deduction for dividends paid for the earlier year. Thus, New Prison Realty may
be able to avoid being taxed on amounts distributed as deficiency dividends;
however, New Prison Realty will be required to pay interest based upon the
amount of any deduction taken for deficiency dividends.
Non-REIT Earnings and Profits
To maintain its qualification as a REIT, New Prison Realty will be required
to make the Earnings and Profits Distribution before the end of its first
calendar year as a REIT. Under applicable ordering rules, distributions made by
New Prison Realty to comply with this requirement generally will be treated as
having been made first from CCA's accumulated earnings and profits, and then
from New Prison Realty's current and accumulated earnings and profits. The
Earnings and Profits Distribution will be taken into account by the stockholders
of New Prison Realty (including former shareholders of CCA and Prison Realty who
become New Prison Realty stockholders in the Merger and who remain New Prison
Realty stockholders as of the record date for the Earnings and Profits
Distribution) as ordinary dividend income. Although the law is not entirely
clear, the Earnings and Profits Distribution might not be eligible for the
dividends received deduction generally available for corporate stockholders. In
rendering its opinion as to the qualification of New Prison Realty as a REIT,
Stokes & Bartholomew, P.A. has assumed that New Prison Realty will distribute
all of CCA's earnings and profits in accordance with the foregoing requirements.
Failure to Qualify
If New Prison Realty fails to qualify for taxation as a REIT in any taxable
year, and certain relief provisions do not apply, New Prison Realty would be
subject to tax (including any applicable alternative minimum tax) on its income
at regular corporate rates. Distributions to stockholders in any year in which
New Prison Realty fails to qualify will not be deductible by New Prison Realty
nor will they be required to be made. In such event, to the extent of current or
accumulated earnings and profits, all distributions to stockholders will be
taxable as ordinary income, and subject to certain limitations of the Code,
corporate distributees may be eligible for the dividends received deduction.
Unless entitled to relief under specific statutory provisions, New Prison Realty
also will be disqualified from taxation as a REIT for the four taxable years
following the year during which qualification was lost. It is not possible to
state whether in any circumstances New Prison Realty would be entitled to such
statutory relief.
Taxation of U.S. Stockholders
As used herein, the term "U.S. Stockholder" means a holder of shares of New
Prison Realty Common Stock or New Prison Realty Series A Preferred Stock that
(for United States federal income tax purposes) (i) is a citizen or resident of
the United States, (ii) is a corporation, partnership, or other entity created
or organized in or under the laws of the United States or of any political
subdivision thereof, (iii) is an estate (or generally a trust for tax years of
such trust beginning before January 1, 1997) the income of which is subject to
United States federal income taxation regardless of its source, or (iv) is a
trust if a United States court is able to exercise primary supervision over the
administration of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust. For any taxable
year for which New Prison Realty qualifies for taxation as a REIT, amounts
distributed to taxable U.S. Stockholders will be taxed as set forth below.
Distributions Generally. Distributions to U.S. Stockholders, other than
capital gain dividends discussed below, will be taxable as ordinary income to
such holders up to the amount of New Prison Realty's current or accumulated
earnings and profits. Such distributions generally are not eligible for the
dividends received deduction for corporations, although the Earnings and Profits
Distribution may be eligible for such deduction. See "-- Non-REIT Earnings and
Profits." To the extent that New Prison Realty makes distributions in excess of
its current or accumulated earnings and profits, such distributions will first
be treated as a tax-free return of capital, reducing the tax basis of the U.S.
Stockholders' New Prison Realty Capital Stock and thereafter will be taxable as
gain realized from the sale of such stock. Dividends declared by New Prison
Realty in October, November, or December of any year payable to a U.S.
Stockholder of record on a specified date in any such
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month will be treated as paid by New Prison Realty and received by the U.S.
Stockholder on December 31 of such year, provided that the dividend is actually
paid by New Prison Realty during January of the following calendar year. U.S.
Stockholders may not include on their own income tax returns any tax losses of
New Prison Realty.
New Prison Realty will be treated as having sufficient earnings and profits
to treat as a dividend any distribution by New Prison Realty up to the greater
of its current or accumulated earnings and profits. As a result, U.S.
Stockholders may be required to treat certain distributions that would otherwise
result in a tax-free return of capital as taxable dividends. Moreover, any
"deficiency dividends" will be treated as an ordinary "dividend" or a capital
gain dividend, as the case may be, regardless of New Prison Realty's earnings
and profits.
Capital Gain Dividends. Dividends to U.S. Stockholders that are properly
designated by New Prison Realty as capital gain dividends will be treated as
gain from the sale or exchange of a capital asset held for more than one year
(to the extent they do not exceed New Prison Realty's actual net capital gain)
without regard to the period for which the U.S. Stockholder has held the New
Prison Realty Capital Stock. Corporate U.S. Stockholders, however, may be
required to treat up to 20% of certain capital gain dividends as ordinary
income. Capital gain dividends are not eligible for the dividends received
deduction for corporations.
Under recently-enacted legislation effective for gains taken into account
after May 6, 1997, individual U.S. Stockholders and U.S. Stockholders that are
estates and trusts are subject to federal income tax on net capital gains at
different tax rates depending upon the nature of the gain and the holding period
of the asset disposed of. In Notice 97-64, the IRS has provided guidance for
REITs to report information necessary for U.S. Stockholders to compute the
appropriate tax in respect of capital gains dividends. In general, capital gain
dividends will be designated in a written notice to U.S. Stockholders as a 20%
rate gain distribution, an unrecaptured Section 1250 gain distribution or a 28%
rate gain distribution.
Although a REIT is taxed on its undistributed net capital gains, for
taxable years beginning after 1997, a REIT may elect to include all or a portion
of such undistributed net capital gains in the income of its U.S. Stockholders.
In such event, the U.S. Stockholder will receive a credit or refund for the
amount of tax paid by the REIT on such undistributed net capital gains.
Passive Activity and Loss; Investment Interest Limitations. Distributions
from New Prison Realty and gain from the disposition of shares of New Prison
Realty Capital Stock ordinarily will not be treated as "passive activity income"
for federal income tax purposes, and therefore, U.S. Stockholders generally will
not be able to apply any "passive losses" against such income. Dividends from
New Prison Realty (to the extent they do not constitute a return of capital)
generally will be treated as investment income for purposes of the investment
interest limitation. Net capital gain from the disposition of shares of New
Prison Realty Capital Stock and capital gain dividends generally will be
excluded from investment income unless the taxpayer elects to have the gain
taxed at ordinary rates.
Dispositions of New Prison Realty Capital Stock. A U.S. Stockholder will
recognize gain or loss on the sale or exchange of shares of New Prison Realty
Capital Stock to the extent of the difference between the amount realized on
such sale or exchange and the holder's tax basis in such shares. Such gain or
loss generally will constitute long-term capital gain or loss if the U.S.
Stockholder has held such shares for more than one year and in case of an
individual, will be taxed at a lower rate in such instance. Losses incurred on
the sale or exchange of shares of New Prison Realty Capital Stock held for six
months or less (after applying certain holding period rules), however, generally
will be deemed long-term capital losses to the extent of any long-term capital
gain dividends received by the U.S. Stockholder with respect to such shares.
Treatment of Tax-exempt U.S. Stockholders. The IRS has ruled that amounts
distributed by a REIT out of its earnings and profits to a tax-exempt pension
trust did not constitute unrelated business taxable income ("UBTI"). Although
rulings are merely interpretations of law by the IRS and may be revoked or
modified, based on this analysis, indebtedness incurred by New Prison Realty in
connection with the acquisition of an investment should not cause any income
derived from the investment to be treated as UBTI upon the distribution of such
income as dividends to a tax-exempt entity. A tax-exempt entity that incurs
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indebtedness to finance its purchase of shares, however, will be subject to UBTI
by virtue of the debt-financed income rules.
In addition, tax-exempt pension and certain other tax-exempt trusts that
hold more than 10% (by value) of the interests in a REIT are required to treat a
percentage of REIT dividends as UBTI. The requirement applies only if (i) the
qualification of the REIT depends upon the application of a "look-through"
exception to the restriction on REIT shareholdings by five or fewer individuals,
including such trusts (see generally "New Prison Realty Capital
Stock -- Restrictions on Ownership of Capital Stock"), and (ii) the REIT is
"predominantly held" by such tax-exempt trusts. It is not anticipated that
qualification of New Prison Realty as a REIT will depend upon application of the
"look-through" exception or that New Prison Realty will be "predominantly held"
by such trusts.
Special Tax Consequences for Foreign Stockholders
The rules governing United States federal income taxation of non-resident
alien individuals, foreign corporations, foreign partnerships, and foreign
trusts and estates (collectively, "Non-U.S. Stockholders") are complex, and the
following discussion is intended only as a summary of such rules. Prospective
Non-U.S. Stockholders should consult with their own tax advisers to determine
the impact of federal, state and local income tax laws on an investment in New
Prison Realty, including any reporting requirements, as well as the tax
treatment of such an investment under their home country laws.
In general, Non-U.S. Stockholders will be subject to United States federal
income tax with respect to their investment in New Prison Realty if such
investment is "effectively connected" with the Non-U.S. Stockholder's conduct of
a trade or business in the United States. A corporate Non-U.S. Stockholder that
receives income that is (or is treated as) effectively connected with a United
States trade or business also may be subject to the branch profits tax under
Section 884 of the Code, which is payable in addition to United States corporate
income tax. The following discussion will apply to Non-U.S. Stockholders whose
investment in New Prison Realty is not so effectively connected. New Prison
Realty expects to withhold United States federal income tax, as described below,
on the gross amount of any distributions paid to a Non-U.S. Stockholder unless
(i) a lower treaty rate applies and the required form evidencing eligibility for
that reduced rate is filed with New Prison Realty, or (ii) the Non-U.S.
Stockholder files an IRS Form 4224 or applicable successor form with New Prison
Realty, claiming that the distribution is "effectively connected" income.
A distribution by New Prison Realty that is not attributable to gain from
the sale or exchange by New Prison Realty of a United States real property
interest and that is not designated by New Prison Realty as a capital gain
dividend will be treated as an ordinary income dividend to the extent made out
of current or accumulated earnings and profits. Generally, an ordinary income
dividend will be subject to a United States withholding tax equal to 30% of the
gross amount of the distribution unless such tax is reduced or eliminated by an
applicable tax treaty. A distribution of cash in excess of New Prison Realty's
earnings and profits will be treated first as a return of capital that will
reduce a Non-U.S. Stockholder's basis in its shares of stock (but not below
zero) and then as gain from the disposition of such shares, the tax treatment of
which is described under the rules discussed below with respect to dispositions
of shares.
Distributions by New Prison Realty that are attributable to gain from the
sale or exchange of a United States real property interest will be taxed to a
Non-U.S. Stockholder under the Foreign Investment in Real Property Tax Act of
1980 ("FIRPTA"). Under FIRPTA, such distributions are taxed to a Non-U.S.
Stockholder as if such distributions were gains "effectively connected" with a
United States trade or business. Accordingly, a Non-U.S. Stockholder will be
taxed at the normal capital gain rates applicable to a U.S. Stockholder (subject
to any applicable alternative minimum tax and a special alternative minimum tax
in the case of non-resident alien individuals). Distributions subject to FIRPTA
also may be subject to a 30% branch profits tax in the hands of a corporate
Non-U.S. Stockholder that is not entitled to treaty exemption.
New Prison Realty will be required to withhold from distributions to
Non-U.S. Stockholders, and remit to the IRS, (i) 35% of designated capital gain
dividends (or, if greater, 35% of the amount of any distributions that could be
designated as capital gain dividends), and (ii) 30% of ordinary dividends paid
out of earnings and profits. In addition, if New Prison Realty designates prior
distributions as capital gain dividends,
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subsequent distributions, up to the amount of such prior distributions not
withheld against, will be treated as capital gain dividends for purposes of
withholding. A distribution in excess of New Prison Realty's earnings and
profits may be subject to 30% dividend withholding if at the time of the
distribution it cannot be determined whether the distribution will be in an
amount in excess of New Prison Realty's current or accumulated earnings and
profits. Tax treaties may reduce New Prison Realty's withholding obligations. To
take advantage of a reduced withholding rate under a tax treaty, the Non-U.S.
Stockholder must file an appropriate form with New Prison Realty. If the amount
withheld by New Prison Realty with respect to a distribution to a Non-U.S.
Stockholder exceeds the Non-U.S. Stockholder's United States tax liability with
respect to such distribution (as determined under the rules described in the two
preceding paragraphs), the Non-U.S. Stockholder may file for a refund of such
excess from the IRS. It should be noted that the 35% withholding tax rate on
capital gain dividends currently corresponds to the maximum income tax rate
applicable to corporations, but is higher than the 20% maximum rate on capital
gains of individuals.
Unless the shares of New Prison Realty Capital Stock constitute a "United
States real property interest" within the meaning of FIRPTA or are effectively
connected with a U.S. trade or business, a sale of such shares by a Non-U.S.
Stockholder generally will not be subject to United States taxation. The shares
of New Prison Realty Capital Stock will not constitute a United States real
property interest if New Prison Realty is a "domestically-controlled REIT." A
domestically-controlled REIT is a REIT in which at all times, during a specified
testing period, less than 50% in value of its shares is held directly or
indirectly by Non-U.S. Stockholders. It is currently anticipated that New Prison
Realty will be a domestically-controlled REIT, and therefore that the sale of
shares of New Prison Realty Capital Stock will not be subject to taxation under
FIRPTA. However, because both the New Prison Realty Common Stock and New Prison
Realty Series A Preferred Stock will be publicly traded, no assurance can be
given that New Prison Realty will continue to be a domestically-controlled REIT.
Notwithstanding the foregoing, capital gain not subject to FIRPTA will be
taxable to a Non-U.S. Stockholder if the Non-U.S. Stockholder is a nonresident
alien individual who is present in the United States for 183 days or more during
the taxable year and certain other conditions apply, in which case the
nonresident alien individual will be subject to a 30% tax on such individual's
capital gains. If New Prison Realty did not constitute a domestically-controlled
REIT, whether a Non-U.S. Stockholder's sale of New Prison Realty Capital Stock
would be subject to tax under FIRPTA as a sale of a United States real property
interest would depend on whether the shares were "regularly traded" (as defined
by applicable Treasury Regulations) on an established securities market (e.g.,
the NYSE, on which New Prison Realty Common Stock and Series A Preferred Stock
will be listed) and on the size of the selling shareholder's interest in New
Prison Realty. Where shares of stock are readily traded on an established
securities market, and where the selling shareholder owns (including
constructive ownership) during a specified testing period no more than 5% of
that class of shares, the sale is not subject to tax under FIRPTA. If the gain
on the sale of New Prison Realty Capital Stock were subject to taxation under
FIRPTA, the Non-U.S. Stockholder would be subject to the same treatment as a
U.S. Stockholder with respect to such gain (subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of nonresident
alien individuals). In any event, a purchaser of New Prison Realty Capital Stock
from a Non-U.S. Stockholder will not be required under FIRPTA to withhold on the
purchase price if the purchased shares of New Prison Realty Capital Stock are
regularly traded on an established securities market or if New Prison Realty is
a domestically-controlled REIT. Otherwise, under FIRPTA the purchaser of shares
of New Prison Realty Capital Stock may be required to withhold 10% of the
purchase price and remit such amount to the IRS.
Information Reporting Requirements and Backup Withholding Tax
New Prison Realty will report to its U.S. Stockholders and the IRS the
amount of distributions paid during each calendar year and the amount of tax
withheld, if any. Under certain circumstances, U.S. Stockholders may be subject
to backup withholding at a rate of 31% with respect to distributions paid.
Backup withholding will apply only if the stockholder (i) fails to furnish its
taxpayer identification number ("TIN") (which, for an individual, would be such
individual's Social Security Number), (ii) furnishes an incorrect TIN, (iii) is
notified by the IRS that it has failed properly to report payments of interest
and dividends, or (iv) under certain circumstances, fails to certify, under
penalty of perjury, that it has furnished a correct TIN and has not been
notified by the IRS that it is subject to backup withholding for failure to
report interest and
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dividend payments. Backup withholding will not apply with respect to payments
made to certain exempt recipients, such as corporations and tax-exempt
organizations. U.S. Stockholders should consult their own tax advisers regarding
their qualification for exemption from backup withholding and the procedure for
obtaining such an exemption. Backup withholding is not an additional tax.
Rather, the amount of any backup withholding with respect to a payment to a U.S.
Stockholder will be allowed as a credit against such U.S. Stockholder's United
States federal income tax liability and may entitle such U.S. Stockholder to a
refund, provided that the required information is furnished to the IRS.
Additional issues may arise pertaining to information reporting and backup
withholding with respect to Non-U.S. Stockholders. Non-U.S. Stockholders should
consult their tax advisers with respect to any such information reporting and
backup withholding requirements.
State and Local Tax Consequences
New Prison Realty will be, and its stockholders may be, subject to state or
local taxation in various state or local jurisdictions, including those in which
New Prison Realty or its stockholders transact business or reside. The state and
local tax treatment of New Prison Realty and its stockholders may not conform to
the federal income tax consequences discussed above. Consequently, prospective
stockholders should consult their own tax advisers regarding the effect of state
and local tax laws on their investment in New Prison Realty.
Possible Federal Tax Developments
General. The rules dealing with federal income taxation are constantly
under review by the IRS, the Treasury Department, Congress and the appropriate
courts. New federal tax legislation or other provisions may be enacted into law
or new interpretations, rulings or Treasury Regulations could be adopted or
judicial decisions rendered, all of which could affect the taxation of New
Prison Realty or of its stockholders. No prediction can be made as to the
likelihood of passage of any new tax legislation or other provisions either
directly or indirectly affecting New Prison Realty or its stockholders.
Consequently, the tax treatment described herein may be modified prospectively
or retroactively by such legislative, judicial or administrative action.
Proposed Tax Legislation. On February 2, 1998, President Clinton released
the Proposal. Two provisions contained in the Proposal potentially could affect
New Prison Realty if enacted in final form as presently proposed. The first
provision addresses the ownership by a REIT of a non-REIT corporation. Under
current law, a REIT is prohibited from owning more than 10% of the voting
securities of any issuer, but generally is not restricted in its ability to own
non-voting securities of an issuer. Under the Proposal, a REIT, subject to
certain "grandfathering" rules, would be prohibited from owning 10% or more of
the voting securities or value of an issuer. If this provision is signed into
law in its current form, New Prison Realty could be required to reduce its
ownership in the Service Companies, which would likewise reduce the amount of
dividends New Prison Realty would receive from the Service Companies. The effect
of this provision, therefore, would be to reduce the overall expected economic
benefit which is to be derived by New Prison Realty from the Merger.
The second provision deals with the treatment of the Built-in Gain of a C
corporation which merges with, or is converted into, a REIT. Under current law,
a REIT that merges with a C corporation, or a C corporation that converts to a
REIT, under guidelines issued by the IRS in IRS Notice 88-19, is subject to a
corporate level tax on any Built-in Gain recognized during the ten-year period
following the merger or change in status. Under the Proposal, all Built-in Gain
would be taxable immediately upon the merger or change in status. If this
provision is signed into law in its current form, New Prison Realty could be
required to recognize CCA's Built-in Gain at the time it elects to be taxed as a
REIT. The resulting tax liability likely would be so high as to eliminate the
possibility of a merger between CCA and Prison Realty.
Neither of the two provisions was included in the Internal Revenue Service
Restructuring and Reform Act of 1998, signed into law on July 22, 1998, or in
the tax provisions of the Transportation Equity Act for the 21st Century, signed
into law on June 9, 1998. However, legislation containing provisions similar to
those described in this section could be introduced in Congress at any time and,
although it is not believed to be
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likely, the effective date for any such legislation could be March 26, 1998
(i.e., the date of "first committee action"). In addition, other legislation as
well as administrative interpretations or court decisions, also could change the
tax laws with respect to New Prison Realty's qualification as a REIT and the
federal income tax consequences of such qualification.
ERISA CONSIDERATIONS
The following is intended to be a summary only and is not a substitute for
careful planning with a professional. Employee benefit plans subject to ERISA,
and other sections of the Code should consult with their own tax or other
appropriate counsel regarding the application of ERISA and the Code to an ERISA
Plan's decision whether to approve the Merger. ERISA Plans should also consider
the entire discussion under the heading of "Material Federal Income Tax
Consequences."
Before determining whether to approve the Merger, an ERISA Plan fiduciary
should ensure that such approval is in accordance with ERISA's general fiduciary
standards, as set forth in Part 4 of Subtitle B of Title I of ERISA. In making
such a determination, an ERISA Plan fiduciary should ensure that approval of the
Merger is in accordance with the governing instruments and the overall
investment policy of the ERISA Plan, and should consider the effect of the
Merger on the ERISA Plan's compliance with the diversification and composition
requirements of ERISA.
Fiduciaries of Individual Retirement Accounts ("IRAs") or employee benefit
plans qualified under Code Section 401(a) that are not subject to ERISA, such as
governmental plans, church plans, and plans that do not cover any common law
employees ("Non-ERISA Plans"), should carefully consider the impact of
applicable state law and the terms of the IRA or Non-ERISA Plan document on the
IRA's or Non-ERISA Plan's decision whether to approve the Merger.
Fiduciaries of ERISA Plans, Non-ERISA Plans and IRAs should also consider
whether the assets of Prison Realty will constitute "plan assets" subject to
ERISA and the prohibited transactions provisions of Code Section 4975 after the
Merger. The DOL has promulgated a regulation under ERISA, 29 C.F.R. 2510.3-101
(the "DOL Regulation"), that specifies the circumstances under which the
underlying assets of an entity in which an ERISA Plan acquires an equity
interest will be considered to be assets of the ERISA Plan for purposes of ERISA
(including the prohibited transaction rules of Section 406 of ERISA) and the
prohibited transaction provisions of Code Section 4975. Similarly, the DOL
Regulation applies to determine when the underlying assets of an entity in which
an ERISA Plan, a Non-ERISA Plan or an IRA acquires an equity interest will be
considered plan assets under Code Section 4975. If the assets of Prison Realty
were considered to be assets of an ERISA Plan investor, management of Prison
Realty would be ERISA fiduciaries with respect to such ERISA Plan, and Prison
Realty would be subject to ERISA, including ERISA's prohibited transaction
rules, and the prohibited transaction rules of the Code. Similarly, if the
assets of Prison Realty were considered to be assets of a Non-ERISA Plan
investor or an IRA investor, Prison Realty would be subject to the prohibited
transaction provisions of Code Section 4975.
Under the DOL Regulation, when an ERISA Plan, a Non-ERISA Plan, or an IRA
invests in an equity interest in an entity, the ERISA Plan's, Non-ERISA Plan's,
or IRA's assets are considered to include such equity interest but generally are
not considered to include the entity's underlying assets. However, if the ERISA
Plan's, Non-ERISA Plan's, or IRA's investment is in an equity interest that is
neither a "publicly-offered security" nor a security issued by an investment
company registered under the Investment Company Act of 1940, the ERISA Plan's,
Non-ERISA Plan's, or IRA's assets include both the equity interest and an
undivided interest in each of the underlying assets of the entity, unless it is
established that the entity is an operating company or that equity participation
in the entity by benefit plan investors is not significant.
The DOL Regulation defines a "publicly-offered security" as a security that
is (i) "freely transferable," (ii) part of a class of securities that is "widely
held," and (iii) either part of a class of securities registered under the 1934
Act or sold pursuant to an effective registration statement under the Securities
Act of 1933, as amended (the "1933 Act") and part of a class of securities
registered under the 1934 Act within 120 days after the end of the fiscal year
of the issuer during which the offering occurred. The New Prison Realty
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Common Stock and the New Prison Realty Series A Preferred Stock will be issued
in an offering registered under the 1933 Act and will be registered under the
1934 Act.
Under the DOL Regulation, a security is "widely held" only if it is part of
a class of securities that is owned by 100 or more investors independent of the
issuer and of one another. A security will not fail to be "widely held" because
the number of independent investors falls below 100 subsequent to the initial
public offering as a result of events beyond the issuer's control. Since the
Prison Realty stock will be held by more than 100 independent investors, it will
be "widely held" within the meaning of the DOL Regulation.
The DOL Regulation provides that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The transferability of the Prison Realty
Capital Stock is restricted for the purpose of preventing a change in ownership
of such stock that would result in Prison Realty failing to qualify as a REIT
under the Code. See "New Prison Realty Capital Stock -- Restrictions on
Ownership of Capital Stock" and "Comparison of Rights of Shareholders of CCA and
Stockholders of New Prison Realty -- Restrictions on Ownership and Transfer of
Capital Stock." The transferability of the New Prison Realty Capital Stock held
by certain persons may also be restricted pursuant to federal securities laws.
See "The Merger -- Federal Securities Laws Consequences; Resale Restrictions."
However, the DOL Regulation sets forth several factors (in the context of an
offering where the minimum investment is $10,000 or less) that ordinarily will
not, alone or in combination, affect a finding that a security is "freely
transferable." Among these factors are the following: (i) any restriction on, or
prohibition against, any transfer or assignment that would result in a
termination or reclassification of the entity for federal or state tax purposes
or that would violate any state or federal law or court order, (ii) any
requirement that advance notice of a transfer or assignment be given to the
entity, (iii) any requirements that either the transferor or transferee, or
both, execute documentation setting forth representations as to compliance with
any restrictions on transfer described in the DOL Regulation as not affecting
free transferability, and (iv) any limitation or restriction on transfer or
assignment that is not created or imposed by the issuer or a person acting on
behalf of the issuer. New Prison Realty believes that the restrictions imposed
on the transfer of the shares of the New Prison Realty Capital Stock are
analogous to these restrictions on transferability generally permitted under the
DOL Regulation and do not result in the failure of the New Prison Realty Capital
Stock to be "freely transferable." Furthermore, New Prison Realty is not aware
of any other facts or circumstances restricting the transferability of the New
Prison Realty Capital Stock that are not included among those described in the
DOL Regulation as not affecting the free transferability of the New Prison
Realty Capital Stock, and New Prison Realty does not expect or intend to impose
in the future any restrictions on transferability that would not be among the
permissible restrictions described in the DOL Regulation.
Assuming that the New Prison Realty Capital Stock will be "freely
transferable" within the meaning of the DOL Regulation, New Prison Realty
believes that the New Prison Realty Capital Stock will be "publicly-offered
securities" within the meaning of the DOL Regulation. It therefore intends to
proceed on the basis that the assets of New Prison Realty will not constitute
ERISA Plan, Non-ERISA Plan, or IRA assets.
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INFORMATION ABOUT OUR COMPANIES
INFORMATION ABOUT PRISON REALTY
General
Prison Realty was formed on April 23, 1997 to acquire, develop, and lease
private and public correctional and detention facilities. Prison Realty has
elected to be taxed and has operated so as to qualify as a REIT under sections
856 through 860 of the Code commencing with its taxable year ended December 31,
1997.
On July 18, 1997, Prison Realty commenced operations upon the completion of
its initial public offering of 21,275,000 Prison Realty Common Shares (including
2,775,000 Prison Realty Common Shares issued as a result of the exercise of an
over-allotment option by the underwriters). The Prison Realty Common Shares were
issued at an initial offering price of $21.00 per share, generating gross
proceeds to Prison Realty of $446.8 million. The aggregate proceeds to Prison
Realty, net of underwriters' discount and offering costs, were approximately
$412.1 million, $308.1 million of which was used to purchase nine facilities
from CCA.
Prison Realty was formed to capitalize on the opportunities created by the
perceived growing trend toward privatization in the corrections and detention
industry, including the increased demand for private correctional and detention
facilities. The principal business strategy of Prison Realty is to own and
develop correctional and detention facilities that meet Prison Realty's
investment criteria, to acquire such facilities from both private prison
managers and government entities, to expand the design capacity of its existing
facilities, and to lease all such facilities under long-term leases to qualified
third-party operators. As of October 14, 1998, Prison Realty owned 20
facilities, with a total design capacity of 16,030 beds. In addition, Prison
Realty currently has one facility under construction which has a total design
capacity of approximately 528 beds and is expected to be completed in November
of 1998. Prison Realty also has options to acquire up to 11 additional
facilities from CCA, with an aggregate design capacity of 11,450 beds, which are
currently under construction or development by CCA. In addition, Prison Realty
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 date on which inmates are first received with respect to such facility.
Prison Realty is the largest self-administered and self-managed, publicly traded
REIT in the United States focused on owning and acquiring correctional and
detention facilities.
Prison Realty leases 17 of its facilities to CCA, which manages the
facilities. CCA also manages one of Prison Realty's other facilities, which is
leased to the State of North Carolina. CCA is the largest developer and manager
of privatized correctional and detention facilities worldwide. Prison Realty
also leases one of its facilities to a private operator other than CCA and
leases two of its facilities to government entities, all pursuant to terms
materially consistent with the leases with CCA.
As a REIT, Prison Realty generally will not be subject to federal income
tax to the extent that it distributes its earnings and profits to its
shareholders and maintains its qualification as a REIT. In order to qualify as a
REIT, Prison Realty'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, Prison Realty is precluded from operating
correctional and detention facilities and, as a consequence, intends to lease
all such properties pursuant to long-term, non-cancellable leases.
Recent Acquisition of Assets
Prison Realty has historically focused its investments on privately-managed
facilities which are owned and operated by CCA or its subsidiaries. However,
Prison Realty has pursued and is continuing to pursue other opportunities,
including acquisitions and leasebacks of, or financings for, facilities owned
and operated by various government entities and private operators other than
CCA. Prison Realty believes it has significant access to potential development
and acquisition opportunities through its relationship with CCA and the
experience and industry contacts of the Prison Realty Board and management,
particularly those of J. Michael Quinlan, Prison Realty's Chief Executive
Officer and a member of the Prison Realty Board and former head of the Federal
Bureau of Prisons.
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On April 17, 1998, Prison Realty and its wholly-owned subsidiary USCA
Corporation ("USCA") and USCC, a privately-held owner and former operator of
correctional and detention facilities entered into and completed an agreement of
merger, whereby USCA merged with and into USCC and Prison Realty acquired all of
the outstanding capital stock and derivative securities of USCC in exchange for
a cash payment to the shareholders of USCC of approximately $157.0 million (the
"USCC Merger"). As a result of the USCC Merger, Prison Realty assumed certain
liabilities of USCC. Immediately prior to the USCC Merger, CCA purchased USCC's
facility management contracts and the corresponding enterprise value of
operations from USCC for $10.0 million in cash. Accordingly, as a result of the
USCC Merger, Prison Realty acquired only real estate properties.
By virtue of the USCC Merger, Prison Realty acquired four correctional and
detention facilities in Kentucky, one in Ohio and two, one of which is currently
under construction, in North Carolina. Such facilities currently have an
aggregate design capacity of approximately 5,200 beds. Prior to the USCC Merger,
USCC operated the Kentucky facilities as correctional and detention facilities
and leased the Ohio facility to Hamilton County, Ohio. By contrast, Prison
Realty does not operate any of the acquired facilities. Instead, Prison Realty
leases the Kentucky facilities to CCA; leases the completed North Carolina
facility to the State of North Carolina, which has contracted with CCA to
operate the facility; and expects to lease the North Carolina facility currently
under construction to the State of North Carolina, which will contract with CCA
to operate the facility. In addition, Prison Realty continues to lease the Ohio
facility to Hamilton County, Ohio.
On May 4, 1998, Prison Realty purchased the Leo Chesney Center, a 200 bed
correctional facility located in Live Oak, California. The facility, acquired
for a purchase price of approximately $5.1 million, is leased to and operated by
Cornell Corrections Corporation under contract with the California Department of
Corrections. Prison Realty is currently expanding the facility to increase the
rated capacity by approximately 72 beds.
In June of this year, Prison Realty began development of two educational
facilities, one in Houston, Texas and one in Dallas, Texas, for CEP, which
develops and operates publicly funded, privately operated alternative education
programs for at-risk youth. Prison Realty intends to renovate and lease the
facilities to CEP pursuant to terms and conditions materially consistent with
Prison Realty's current relationship with private prison operators.
Certain Information Incorporated by Reference
Certain information relating to principal shareholders and security
ownership of management, executive compensation, various benefit plans
(including share option plans), certain relationships and related transactions
and other related matters as to Prison Realty is set forth in Prison Realty's
Annual Report on Form 10-K/A for the year ended December 31, 1997, incorporated
herein by reference. Shareholders of Prison Realty and CCA desiring a copy of
such document may contact Prison Realty by mail at 10 Burton Hills Boulevard,
Suite 100, Nashville, Tennessee 37215 or by telephone at (615) 263-0200, as
indicated under "Other Matters -- Where You Can Find More Information."
INFORMATION ABOUT CCA
General
CCA is the largest developer and manager of privatized correctional and
detention facilities worldwide. CCA's facilities are located in 22 states, the
District of Columbia, Puerto Rico, Australia and the United Kingdom. CCA,
through its United Kingdom joint venture, UKDS, manages one facility in the
United Kingdom and, through its Australian joint venture, Corrections
Corporation of Australia, Pty. Ltd., manages two facilities in Australia. As of
October 14, 1998, CCA had contracts to manage 78 correctional and detention
facilities with an aggregate design capacity of 64,956 beds. Of these 78
facilities, 65 facilities, with an aggregate design capacity of 47,142 beds, are
currently in operation and 13 are under development by CCA. Of the 13 facilities
under development, ten will be financed and owned by CCA, and are subject to an
option to purchase by Prison Realty. Of the 13 facilities under development by
CCA, five are scheduled to commence operations during 1998. In addition, as of
October 14, 1998, CCA had outstanding written responses to
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requests for proposal and other solicitations for an additional 13 projects with
an aggregate design capacity of 8,716 beds.
The services provided by CCA to government agencies include the integrated
design, construction and management of new correctional and detention facilities
and the redesign, renovation and management of older facilities. In addition to
providing the fundamental residential services relating to adult and juvenile
inmates, CCA's facilities offer a large variety of rehabilitation and education
programs including basic education, life skills and employment training and
substance abuse treatment. CCA also provides health care (including medical,
dental and psychiatric services), institutional food services, transportation
requirements, and work and recreational programs. Management of CCA believes
that its proven ability to deliver a full range of high quality correctional and
detention facility management services on a cost-effective and efficient basis
to government agencies provides such agencies with sufficient incentives to
choose CCA when awarding new contracts or renewing existing contracts.
In addition to the opening of new facilities, in recent years CCA has
expanded its service capabilities and broadened its geographic presence in the
United States market through a series of strategic acquisitions of prison
management companies and individual facilities, as well as the acquisition of
TransCor America, Inc., an inmate transportation company. CCA intends to
continue to pursue strategic acquisitions of prison management companies and
facilities when the proposed acquisition enhances shareholder value.
Recent Acquisition of Assets
On April 17, 1998, CCA acquired all of the issued and outstanding capital
stock of eight subsidiaries of USCC (the "USCC Acquisition"). By virtue of the
USCC Acquisition, CCA acquired contracts to manage four currently operating
facilities in Kentucky and one in North Carolina, each of which is owned by
Prison Realty, as well as one each in Florida and Texas, each of which is owned
by government entities of Florida and Texas, respectively. CCA, or one of its
affiliates, currently leases the four Kentucky facilities from Prison Realty, or
one of its subsidiaries, pursuant to the terms of a master lease. The North
Carolina facility currently operated by CCA is owned by Prison Realty, who
leases such facility to the State of North Carolina. CCA also acquired by virtue
of the USCC Acquisition the right to enter into a contract to manage a North
Carolina facility owned by Prison Realty that is currently under construction.
CCA expects to operate the uncompleted North Carolina facility pursuant to a
contract with the State of North Carolina, which will lease the facility from
Prison Realty. The total number of beds currently operated or under construction
related to the USCC Acquisition is 5,543.
Relationship and Related Transactions with Sodexho
In June 1994, CCA entered into an international strategic alliance with
Sodexho for the purpose of pursuing prison management business outside the
United States. In connection with the formation of the 1994 international
alliance, Sodexho purchased 2,800,000 shares of CCA Common Stock at a purchase
price, as adjusted, of $3.75 per share and a $7,000,000 convertible subordinated
note bearing interest at 8.5% with a conversion price, as adjusted, of $3.58 per
share. In consideration of Sodexho's agreement to enter into the international
strategic alliance with CCA, CCA, among other things, (i) entered into a forward
contract pursuant to which Sodexho is entitled to purchase at any time on or
before December 31, 1999 (extended from original date of December 31, 1997), up
to $20,000,000 aggregate principal amount of CCA's convertible subordinated
notes bearing interest at LIBOR plus 1.35%, with a conversion price, as
adjusted, of $6.83 per share, and (ii) granted Sodexho a presently exercisable
warrant expiring on December 31, 1999, covering 4,400,000 shares of CCA Common
Stock with an exercise price, as adjusted, of $3.95 per share. In December 1996,
in connection with Sodexho's purchase of shares in UKDS, CCA agreed to extend
the expiration date of the warrant to December 31, 1999. In June 1995, as a
result of its preemptive right triggered by the issuance of shares of CCA Common
Stock to the shareholders of Concept Incorporated in connection with CCA's
acquisition of Concept Incorporated, Sodexho purchased 1,090,000 shares of CCA
Common Stock from CCA at a purchase price, as adjusted, of $7.625 per share. In
April 1996, as a result of its preemptive right triggered in connection with the
issuance of 7.5% convertible notes, Sodexho purchased $30,000,000 in convertible
notes
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from CCA. The notes bear interest at 7.5% payable quarterly and are convertible
into shares of CCA Common Stock at a conversion price, as adjusted, of $25.91
per share.
Sodexho has also agreed to limit its beneficial ownership interest in CCA
to 25% (or 30% in certain limited circumstances) through June 23, 1999, subject
to earlier termination upon the occurrence of a change in control (the
"Standstill Period"). A change in control is defined for this purpose as: (i) a
party acquiring more than 20% of the CCA Common Stock; (ii) a 10% shareholder
publicly announcing an intent to commence a tender offer for CCA; (iii) the
termination of Doctor R. Crants as CCA's Chief Executive Officer or the failure
by Doctor R. Crants to own at least 2% of the outstanding CCA Common Stock; (iv)
the CCA Board no longer consisting of a majority of continuing directors; or (v)
an acquirer publicly announcing an intent to commence a tender offer and the CCA
Board publicly recommending that the shareholders of CCA accept such tender
offer. "Continuing directors" means the directors of CCA as of June 23, 1994 and
each other director, if such other director's nomination for election to the CCA
Board is recommended by a majority of the then continuing directors.
During the Standstill Period, Sodexho has agreed to vote shares of CCA
Common Stock held by it in the same fashion as either CCA's public shareholders
or the CCA Board, at Sodexho's option, on the election of directors and certain
other matters. Sodexho has also agreed that, during the Standstill Period, it
will not solicit proxies under any circumstances, or become a participant in any
election contest, or make an offer for the acquisition of substantially all of
the assets or capital stock of CCA or induce or assist any other person to make
such an offer. Until Sodexho's ownership in CCA is reduced to below 400,000
shares of CCA Common Stock, Sodexho has the right to nominate one member to the
CCA Board and, without Sodexho's consent, CCA may not increase the number of
directors on the CCA Board to eight or more. In addition, Sodexho has a
preemptive right to purchase additional shares of CCA Common Stock or securities
convertible into or exchangeable for CCA Common Stock in any issuance of
securities by CCA in any amount necessary to enable Sodexho to maintain a
percentage ownership in CCA equal to 20% of the CCA Common Stock on a fully
diluted basis. CCA plans to use the proceeds from these future financings to
fund new capital projects. In consideration of the placement of the
aforementioned securities and these future financings, CCA agreed to pay Sodexho
$3,960,000 over a four-year period ending in 1998.
Doctor R. Crants is a member of the Board of Directors of Sodexho Marriott
Services, Inc. ("SMS"). SMS was formed in March 1998, when Marriott
International, Inc. acquired the North American food service and facilities
management operations of Sodexho. As a result of such acquisition, SMS is the
largest food service and facilities management company in North America. Sodexho
owns 49% of SMS.
For information relating to an Agreement in Principle among CCA, Prison
Realty and Sodexho relating to the Merger, see "The Merger -- Interests of
Certain Persons in the Merger -- Relationship with Sodexho."
Certain Information Incorporated by Reference
Certain information relating to principal shareholders and security
ownership of management, executive compensation, various benefit plans
(including share option plans), certain relationships and related
transactions and other related matters as to CCA is set forth in CCA's Annual
Report on Form 10-K/A for the year ended December 31, 1997, incorporated herein
by reference. Shareholders of CCA and Prison Realty desiring a copy of such
document may contact CCA by mail at 10 Burton Hills Boulevard, Nashville,
Tennessee 37215 or by telephone at (615) 263-3000, as indicated under "Other
Matters -- Where You Can Find More Information."
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NEW PRISON REALTY CAPITAL STOCK
This section of the Joint Proxy Statement-Prospectus describes the New
Prison Realty Capital Stock. To the extent that it relates to the New Prison
Realty Charter or the New Prison Realty Bylaws, the following description does
not purport to be complete and is qualified in its entirety by reference to the
New Prison Realty Charter and the New Prison Realty Bylaws, both of which may be
obtained from New Prison Realty.
GENERAL
Under the New Prison Realty Charter, the total number of shares of all
classes of New Prison Realty Capital Stock that New Prison Realty has authority
to issue is 320,000,000, consisting of 300,000,000 shares of New Prison Realty
Common Stock and 20,000,000 shares of New Prison Realty preferred stock, $0.01
par value per share (the "New Prison Realty Preferred Stock"). As of the
Effective Time, approximately 96,420,000 shares of New Prison Realty Common
Stock will be issued as consideration in the Merger and 4,300,000 shares of New
Prison Realty Series A Preferred Stock will be issued as consideration in the
Merger.
COMMON STOCK
The holders of shares of New Prison Realty Common Stock are entitled to one
vote per share on all matters voted on by holders of New Prison Realty Common
Stock, including the election of directors, and, except as otherwise required by
law or provided in any resolution adopted by the New Prison Realty Board with
respect to any series of New Prison Realty Preferred Stock establishing the
powers, designations, preferences and relative, participating, option or other
special rights of such series, the holders of such New Prison Realty Common
Stock exclusively possess all voting power. The New Prison Realty Charter does
not provide for cumulative voting in the election of directors. Subject to any
preferential rights of holders of shares of the New Prison Realty Series A
Preferred Stock or any other outstanding series of New Prison Realty Preferred
Stock, the holders of shares of New Prison Realty Common Stock are entitled to
such distributions as may be declared from time to time by the New Prison Realty
Board from funds available therefor, and upon liquidation are entitled to
receive pro rata all assets of New Prison Realty available for distribution to
such holders. All shares of New Prison Realty Common Stock and New Prison Realty
Series A Preferred Stock are fully paid and nonassessable and the holders
thereof do not have preemptive rights.
PREFERRED STOCK
New Prison Realty is authorized to issue up to 20,000,000 shares of New
Prison Realty Preferred Stock, from time to time, in one or more series, with
such designating powers, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions, qualifications
and terms or conditions of redemption, in each case, if any, as are permitted by
the MGCL and as the New Prison Realty Board may determine prior to issuance
thereof by filing articles supplementary to the New Prison Realty Charter,
without any further vote or action by New Prison Realty's stockholders. An
aggregate of 4,300,000 shares of New Prison Realty Series A Preferred Stock have
been authorized and will be issued as consideration in the Merger. The shares of
the New Prison Realty Series A Preferred Stock represent the only series of New
Prison Realty Preferred Stock that will be issued as consideration in the
Merger. Certain terms of the New Prison Realty Series A Preferred Stock,
including date of maturity, rank, dividends, liquidation preference, redemption,
voting rights, and conversion will be set forth in a registration statement on
Form 8-A to be filed with the Commission prior to completion of the Merger.
RESTRICTIONS ON OWNERSHIP OF CAPITAL STOCK
For New Prison Realty to qualify as a REIT under the Code, it must meet
certain requirements concerning the ownership of its outstanding shares.
Specifically, not more than 50% of the value of the outstanding New Prison
Realty Capital Stock may be owned, directly or indirectly, by five or fewer
individuals (as defined in the Code to include certain entities) during the last
half of a taxable year, and New Prison Realty must be beneficially owned by 100
or more persons during at least 335 days of a taxable year of 12 months or
during a proportionate part of a shorter taxable year. See "Material Federal
Income Tax
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Consequences -- Qualification and Operation of New Prison Realty as a
REIT -- Organizational Requirements." In addition, New Prison Realty must meet
certain requirements regarding the nature of its gross income in order to
qualify as a REIT. One such requirement is that at least 75% of New Prison
Realty's gross income for each year must consist of rents from real property and
income from certain other real property investments. The rents received by New
Prison Realty from a lessee will not qualify as rents from real property, which
likely would result in loss of REIT status for New Prison Realty, if New Prison
Realty owns, directly or constructively, 10% or more of the ownership interests
in a lessee within the meaning of Section 856(d)(2)(B) of the Code. See
"Material Federal Income Tax Consequences -- Qualification and Operation of New
Prison Realty as a REIT."
Because New Prison Realty intends to operate so as to continue to qualify
as a REIT, among other reasons, the New Prison Realty Charter, subject to
certain exceptions described below, provides that no person may own, or be
deemed to own by virtue of the attribution provisions of the Code, more than
9.8% of: (i) the number of outstanding shares of New Prison Realty Common Stock,
or (ii) the number of outstanding shares of New Prison Realty Preferred Stock
(the "Ownership Limit" or "Ownership Limit Provision"). Any transfer of shares
of New Prison Realty Common Stock or New Prison Realty Preferred Stock that
would: (i) result in any person owning, directly or indirectly, shares of New
Prison Realty Common Stock or New Prison Realty Preferred Stock in excess of the
Ownership Limit; (ii) result in the shares of New Prison Realty Common Stock and
New Prison Realty Preferred Stock being owned by fewer than 100 persons
(determined without reference to any rules of attribution); (iii) result in New
Prison Realty being "closely held" within the meaning of Section 856(h) of the
Code; or (iv) cause New Prison Realty to own, directly or constructively, 10% or
more of the ownership interests in a tenant of New Prison Realty's real
property, within the meaning of Section 856(d)(2)(B) of the Code, shall be null
and void, and the intended transferee will acquire no rights in such shares of
New Prison Realty Common Stock or New Prison Realty Preferred Stock.
Subject to certain exceptions described below, any purported transfer of
shares of New Prison Realty Common Stock or New Prison Realty Preferred Stock
that would: (i) result in any person owning, directly or indirectly, shares of
New Prison Realty Common Stock or New Prison Realty Preferred Stock in excess of
the Ownership Limit; (ii) result in the shares of New Prison Realty Common Stock
and New Prison Realty Preferred Stock being owned by fewer than 100 persons
(determined without reference to any rules of attribution); (iii) result in
shares of New Prison Realty being "closely held" within the meaning of Section
856(h) of the Code; or (iv) cause New Prison Realty to own, directly or
constructively, 10% or more of the ownership interests in a tenant of New Prison
Realty's real property, within the meaning of Section 856(d)(2)(B) of the Code,
will result in such shares being designated as "Stock-in-Trust" and transferred
automatically to a trust (the "Stock Trust") effective on the day before the
purported transfer of such shares of New Prison Realty Common Stock or New
Prison Realty Preferred Stock. The record holder of the shares of New Prison
Realty Common Stock or New Prison Realty Preferred Stock that are designated as
Stock-in-Trust (the "Prohibited Owner") will be required to submit such number
of shares of New Prison Realty Common Stock or New Prison Realty Preferred Stock
to New Prison Realty for registration in the name of the trustee of the Stock
Trust (the "Stock Trustee"). The Stock Trustee will be designated by New Prison
Realty, but will not be affiliated with Prison Realty or any Prohibited Owner.
The beneficiary of the Stock Trust (the "Beneficiary") will be one or more
charitable organizations that are named by New Prison Realty.
Stock-in-Trust will remain issued and outstanding shares of New Prison
Realty Common Stock or New Prison Realty Preferred Stock and will be entitled to
the same rights and privileges as all other shares of the same class or series.
The Stock Trustee will receive all dividends and distributions on the
Stock-in-Trust and will hold such dividends and distributions in trust for the
benefit of the Beneficiary. The Stock Trustee will vote all Stock-in-Trust and
will designate a permitted transferee of the Stock-in-Trust, provided that the
permitted transferee (i) purchases such Stock-in-Trust for valuable
consideration, and (ii) acquires such Stock-in-Trust without such acquisition
resulting in a transfer to another Stock Trust.
The Prohibited Owner with respect to Stock-in-Trust will be required to
repay the Stock Trustee the amount of any dividends or distributions received by
the Prohibited Owner (i) that are attributable to any Stock-in-Trust, and (ii)
the record date of which was on or after the date that such shares became
Stock-in-
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Trust. The Prohibited Owner generally will receive from the Stock Trustee the
lesser of (i) the price per share such Prohibited Owner paid for the shares of
New Prison Realty Common Stock or New Prison Realty Preferred Stock that were
designated as Stock-in-Trust (or, in the case of a gift or bequest, the Market
Price (as hereinafter defined) per share on the date of such transfer), or (ii)
the price per share received by the Stock Trustee from the sale of such
Stock-in-Trust. Any amounts received by the Stock Trustee in excess of the
amounts to be paid to the Prohibited Owner will be distributed to the
Beneficiary.
The Stock-in-Trust will be deemed to have been offered for sale to Prison
Realty, or its designee, at a price per share equal to the lesser of (i) the
price per share in the transaction that created such Stock-in-Trust (or, in the
case of a gift or bequest, the Market Price per share on the date of such
transfer), or (ii) the Market Price per share on the date that New Prison
Realty, or its designee, accepts such offer. New Prison Realty will have the
right to accept such offer for a period of 90 days after the later of (i) the
date of the purported transfer which resulted in such Stock-in-Trust, or (ii)
the date New Prison Realty determines in good faith that a transfer resulting in
such Stock-in-Trust occurred.
"Market Price" means the last reported sales price of the shares of New
Prison Realty Common Stock or New Prison Realty Series A Preferred Stock, as
applicable, reported on the NYSE on the trading day immediately preceding the
relevant date, or if such shares are not then traded on the NYSE, the last
reported sales price of such shares on the trading day immediately preceding the
relevant date as reported on any exchange or quotation system over which such
shares may be traded, or if such shares are not then traded over any exchange or
quotation system, then the market price of such shares on the relevant date as
determined in good faith by the New Prison Realty Board.
Any person who acquires or attempts to acquire shares of New Prison Realty
Common Stock or New Prison Realty Preferred Stock in violation of the foregoing
restrictions, or any person who owned shares of New Prison Realty Common Stock
or New Prison Realty Preferred Stock that were transferred to a Stock Trust,
will be required (i) to give immediate written notice to New Prison Realty of
such event, and (ii) to provide to New Prison Realty such other information as
New Prison Realty may request in order to determine the effect, if any, of such
transfer on New Prison Realty's status as a REIT.
All persons who own, directly or indirectly, more than 5% (or such lower
percentages as required pursuant to regulations under the Code) of the
outstanding shares of New Prison Realty Common Stock and New Prison Realty
Preferred Stock must, within 30 days after January 1 of each year, provide to
Prison Realty a written statement or affidavit stating the name and address of
such direct or indirect owner, the number of shares of New Prison Realty Common
Stock and New Prison Realty Preferred Stock owned directly or indirectly by such
owner, and a description of how such shares are held. In addition, each direct
or indirect stockholder shall provide to New Prison Realty such additional
information as New Prison Realty may request in order to determine the effect,
if any, of such ownership on New Prison Realty's status as a REIT and to ensure
compliance with the Ownership Limit Provision.
The Ownership Limit generally will not apply to the acquisition of shares
of New Prison Realty Common Stock or New Prison Realty Preferred Stock by an
underwriter that participates in a public offering of such shares. In addition,
the New Prison Realty Board, upon such conditions as the New Prison Realty Board
may direct, may exempt a person from the Ownership Limit under certain
circumstances. New Prison Realty will exempt Baron and certain of its affiliates
from the Ownership Limit prior to the completion of the Merger.
All certificates representing shares of New Prison Realty Common Stock or
New Prison Realty Preferred Stock currently bear, or will bear when issued, a
legend referring to the restrictions described above.
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COMPARISON OF RIGHTS
OF SHAREHOLDERS OF CCA AND STOCKHOLDERS OF NEW PRISON REALTY
CCA is currently organized as a corporation under the laws of the State of
Tennessee and New Prison Realty is organized as a corporation under the laws of
the State of Maryland. As a Tennessee corporation, CCA is subject to the TBCA,
the CCA Charter and the CCA Bylaws. As a Maryland corporation, New Prison Realty
is governed by the MGCL, the New Prison Realty Charter and the New Prison Realty
Bylaws. Shareholders of CCA will, upon completion of the Merger, become
stockholders of New Prison Realty whose rights will then be governed by the
MGCL, the New Prison Realty Charter and the New Prison Realty Bylaws. Certain
differences among the TBCA, the MGCL and the CCA and New Prison Realty governing
documents are summarized below.
This summary of the comparative rights of the shareholders of CCA and the
stockholders of New Prison Realty does not purport to be complete and is subject
to and qualified in its entirety by reference to the TBCA, the MGCL, the CCA
Charter, the CCA Bylaws, the New Prison Realty Charter and the New Prison Realty
Bylaws. The CCA Charter and the CCA Bylaws may be obtained from CCA, without
charge, by contacting the Secretary of CCA at Corrections Corporation of
America, 10 Burton Hills Blvd., Nashville, Tennessee 37215. The New Prison
Realty Charter and the New Prison Realty Bylaws may be obtained from New Prison
Realty, without charge, by contacting the Secretary of New Prison Realty at
Prison Realty Corporation, 10 Burton Hills Blvd., Nashville, Tennessee 37215.
STATUS AS A REIT UNDER THE CODE
The TBCA, the CCA Charter and the CCA Bylaws do not address CCA's status as
a corporation.
Under the New Prison Realty Charter, the New Prison Realty Board must use
all reasonable efforts to ensure that New Prison Realty satisfies the
requirements for qualification as a REIT under the Code. The New Prison Realty
Board may take no action to disqualify New Prison Realty as a REIT or to
otherwise revoke New Prison Realty's election to be taxed as a REIT without the
affirmative vote of the holders of not less than two-thirds of all the
outstanding shares of New Prison Realty entitled to vote on such matter at a
meeting of the stockholders.
AUTHORIZED SHARES OF CAPITAL STOCK
As of October 14, 1998 there were 150,000,000 shares of CCA Common Stock
authorized, of which 83,840,275 shares of CCA Common Stock were issued and
outstanding.
As of October 14, 1998, there were 320,000,000 shares of New Prison Realty
Common Stock authorized, of which, on the Effective Time, it is currently
anticipated that approximately 96,420,000 shares of New Prison Realty Common
Stock will be issued as consideration in the Merger, and there were 20,000,000
shares of New Prison Realty Preferred Stock authorized, 4,300,000 of which have
been designated as New Prison Realty Series A Preferred Stock and of which, on
the Effective Time, 4,300,000 shares of New Prison Realty Series A Preferred
Stock will be issued as consideration in the Merger.
RESTRICTIONS ON OWNERSHIP AND TRANSFER OF CAPITAL STOCK
Because CCA is a corporation, its shareholders are not subject to
restrictions on ownership of CCA Common Stock or CCA Preferred Stock.
For New Prison Realty to qualify as a REIT under the Code, it must meet
certain requirements concerning the ownership of the New Prison Realty Capital
Stock. See, "New Prison Realty Capital Stock -- Restrictions on Ownership of
Capital Stock." Accordingly, stockholders of New Prison Realty Common Stock and
New Prison Realty Series A Preferred Stock are subject to the Ownership Limit.
The Ownership Limit may have the effect of delaying, deferring, or preventing a
change of control of New Prison Realty without the consent of the New Prison
Realty Board. See "Material Risk Factors -- Certain Provisions of New Prison
Realty's Governing Documents May Limit Changes in Control of New Prison Realty"
and "New Prison Realty Capital Stock -- Restrictions on Ownership of Capital
Stock."
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INSPECTION OF BOOKS AND RECORDS
Under the TBCA, a Tennessee corporation's shareholders are entitled to
inspect and copy, during regular business hours, at the corporation's principal
office, the minutes of shareholders' meetings and the charter, bylaws, annual
reports, and certain other records of the corporation, provided the shareholder
gives the corporation written notice of his or her demand at least five business
days before the date on which he or she wishes to inspect and copy the records.
In addition, a shareholder who makes a demand in good faith, for a proper
purpose, and describes with reasonable particularity his or her purpose and the
records he or she desires to inspect, if the records are directly connected with
this purpose, may also, upon five days' written notice, inspect and copy
accounting records of the corporation, the records of shareholders and excerpts
from minutes of any meeting of the corporation's board of directors, records of
any action of a committee of the corporation's board of directors while acting
in place of the board of directors on behalf of the corporation, minutes of any
meeting of the shareholders, and records of actions taken by the shareholders or
board of directors without a meeting.
The MGCL allows a stockholder to inspect and copy, during usual hours of
business, the corporation's bylaws, minutes of stockholders' meetings, annual
reports, and voting trust agreements. A written request is required from a
stockholder in order to view a statement showing all securities issued by the
corporation in the previous twelve months. Persons who have been stockholders of
the corporation for more than six months and also own at least five percent of
the outstanding shares of any class of the corporation may inspect and copy the
corporation's books of account and stock ledger, request a written statement of
the corporation's assets and liabilities and request a list of the holders of
shares of the same class.
NOMINATIONS AND PROPOSALS OF STOCKHOLDERS
The TBCA, the CCA Charter and the CCA Bylaws do not specify how nominations
of persons for election to the CCA Board and proposals of business to be
considered by shareholders may be made at annual and special meetings.
The MGCL does not specify how nominations of persons for election to the
New Prison Realty Board and proposals of business to be considered by
stockholders may be made at annual and special meetings. Under the New Prison
Realty Bylaws, however, procedures for the making of nominations and proposals
of stockholder business at stockholders' meetings are specified. At an annual
meeting of stockholders, nominations of persons for election to the New Prison
Realty Board and proposals of business to be considered by the stockholders may
be made: (i) pursuant to New Prison Realty's notice of meeting; (ii) by or at
the direction of the New Prison Realty Board; or (iii) by any stockholder of New
Prison Realty who gives timely notice in writing to the secretary of New Prison
Realty, is a stockholder of record at the time of giving of notice and is
entitled to vote at the meeting. To be timely, the notice must be delivered to
the secretary at the principal executive offices of New Prison Realty not less
than 60 days nor more than 90 days prior to the first anniversary of the
preceding year's annual meeting; provided, however, that in the event the date
of the annual meeting is advanced by more than 30 days or delayed by more than
60 days from such anniversary date, notice by the stockholder to be timely must
be so delivered not earlier than the 90th day prior to such annual meeting and
not later than the close of business on the later of the 60th day prior to such
annual meeting or the tenth day following the day on which public announcement
of the date of such meeting is first made.
The notice must set forth (i) as to each person whom the stockholder
proposes to nominate for election or reelection as a director all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required pursuant to
Regulation 14A under the 1934 Act (including such person's written consent to be
named in the proxy statement as a nominee and to serving as a director if
elected); (ii) as to any other business that the stockholder proposes to bring
before the meeting, a brief description of the business desired to be brought
before the meeting, the reasons for conducting such business at the meeting and
any material interest in such business of such stockholder and of the beneficial
owner, if any, on whose behalf the proposal is made; and (iii) as to the
stockholder giving the notice and the beneficial owner, if any, on whose behalf
the nomination or proposal is made, the name and address of such stockholder, as
they appear on New Prison Realty's books, and of such beneficial owner and the
number of
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each class of shares of New Prison Realty Capital Stock which are owned
beneficially and of record by such stockholder and such beneficial owner. In the
event the number of directors to be elected to the New Prison Realty Board is
increased and there is no public announcement naming all the nominees for
director or specifying the size of the increased New Prison Realty Board made by
New Prison Realty at least 70 days prior to the first anniversary of the
preceding year's annual meeting, a stockholder's notice will be considered
timely, but only with respect to nominees for any new positions created by such
increase, if it is delivered to the secretary at the principal executive offices
of New Prison Realty not later than the close of business on the tenth day
following the day on which public announcement is first made by New Prison
Realty.
At special meetings of stockholders, only such business may be conducted as
has been brought before the meeting pursuant to New Prison Realty's notice of
meeting. Nominations of persons for election to the New Prison Realty Board may
be made at a special meeting of stockholders at which directors are to be
elected (i) pursuant to New Prison Realty's notice of meeting; (ii) by or at the
direction of the New Prison Realty Board; or (iii) provided that the New Prison
Realty Board has determined that directors will be elected at such special
meeting, by any stockholder who gives timely written notice to the secretary of
New Prison Realty, is a stockholder of record at the time of giving notice and
is entitled to vote at the meeting. In the event New Prison Realty calls a
special meeting of stockholders for the purpose of electing one or more
directors to the New Prison Realty Board, any such stockholder may nominate a
person or persons for election to such position as specified in New Prison
Realty's notice of meeting. A stockholder's written notice will be timely if it
contains the information required above and is delivered to the secretary at the
principal executive offices of New Prison Realty not earlier than the 90th day
prior to such special meeting and not later than the close of business on the
later of the 60th day prior to such special meeting or the tenth day following
the day on which public announcement is first made of the date of the special
meeting and of the nominees proposed by the directors to be elected at such
meeting. Any stockholder nominating directors or proposing business must also
comply with all applicable requirements of state law and of the 1934 Act and all
the rules and regulations thereunder with respect to such notice.
The advance notification requirements for the election of directors will
ensure that the New Prison Realty Board can carry out its responsibilities of
reviewing the composition of the New Prison Realty Board and having adequate
information regarding qualifications and backgrounds of nominees for directors.
Similarly, the advance notification requirements for proposals are designed to
ensure that the New Prison Realty Board has a sufficient time to review such a
proposal and include the proposal in the proxy materials for the meeting.
Although these provisions do not give the New Prison Realty Board any power to
approve or disapprove stockholder nominations for the election of directors or
stockholder proposals, they may have the effect of precluding a contest for the
election of directors if the established procedures are not followed and may
discourage or deter a third party from conducting a solicitation of the proxies
to elect its own slate of directors without regard to whether this might be
harmful or beneficial to New Prison Realty and its stockholders.
STOCKHOLDERS' MEETINGS
The CCA Bylaws call for an annual meeting of the shareholders of CCA to be
held within three months of the last day of CCA's fiscal year. The CCA Bylaws
also provide that the CCA Board, the chairman of the CCA Board or the president
of CCA may call a special meeting. The TBCA also allows the holders of at least
ten percent of all the votes entitled to be cast on an issue proposed to be
considered to make a written demand for a special meeting.
The New Prison Realty Bylaws require an annual meeting of stockholders to
be held in May of each year. The MGCL and the New Prison Realty Bylaws provide
that a special meeting of the stockholders of New Prison Realty may be called by
the president of New Prison Realty, the chairman of the New Prison Realty Board,
a majority of the New Prison Realty Board or a duly designated committee of the
New Prison Realty Board. The secretary of New Prison Realty must call a special
meeting of the stockholders on the written request of stockholders entitled to
cast at least a majority of all the votes entitled to be cast at the meeting.
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ACTION BY STOCKHOLDERS WITHOUT A MEETING
Under the TBCA and the CCA Bylaws, action required or permitted to be taken
at a shareholders' meeting may be taken without a meeting if all shareholders
entitled to vote on the action consent to taking such action without a meeting.
If such consent is obtained, the affirmative vote of the number of shares that
would be necessary to authorize or take such action at a meeting is the act of
the shareholders.
Under the MGCL, any action required or permitted to be taken at a meeting
of the stockholders may be taken without a meeting if an unanimous written
consent that sets forth the action is signed by each stockholder entitled to
vote on the matter and a written waiver of any right to dissent is signed by
each stockholder entitled to notice of the meeting but not entitled to vote at
it.
SEPARATE SHAREHOLDER VOTING GROUPS
The TBCA provides that holders of the outstanding shares of a class of
stock are entitled to vote as a separate voting group upon a proposed amendment
to the charter if the amendment would (i) change the aggregate number of
authorized shares of the class; (ii) affect an exchange or reclassification of
all or part of the shares of the class into shares of another class, or of
another class into shares of the class; (iii) change the designation, rights,
preferences or limitations of all or part of the shares of the class; (iv)
change the shares of all or part of the class into a different number of shares
of the same class; (v) create a new class or change a subordinate or inferior
class into a class having rights or preferences with respect to distribution or
dissolution that are prior, superior to or substantially equal to the shares of
the class, or increase the rights of a superior class; (vi) limit or deny an
existing preemptive right; (vii) authorize a share dividend of shares of such
class in respect to shares of another class; or (viii) cancel or otherwise
affect rights to distributions or dividends that have accumulated but not yet
been declared on all or part of the shares of the class.
There is no provision in the MGCL that entitles the holders of outstanding
shares of classes of stock to vote as a separate voting group.
NUMBER OF DIRECTORS
Under the TBCA and the CCA Charter, the CCA Board may, by a two-thirds
vote, determine the number of directors, but there may not be less than three.
Under the MGCL, the New Prison Realty Charter and the New Prison Realty
Bylaws, the New Prison Realty Board may determine the number of directors, but
there may not be more than 16 nor may there be less than three.
CLASSIFIED BOARD
The TBCA permits a Tennessee corporation's bylaws to provide for a
classified board of directors of two or three groups with staggered terms;
however, the CCA Bylaws do not provide for a classified board of directors.
The New Prison Realty Charter provides for a staggered board of directors
consisting of three classes as nearly equal in size as the then-authorized
number of directors constituting the New Prison Realty Board permits. Each
director will serve for a term ending on the date of the third annual meeting
following the annual meeting of stockholders at which such director was elected;
provided, however, that the initial terms of the three classes expire in 1999,
2000 and 2001, respectively.
The New Prison Realty Board believes that a classified board is
advantageous to New Prison Realty and its stockholders because three-year terms
will enhance the likelihood of continuity and stability in the composition of,
and in the policies formulated by, the New Prison Realty Board. The New Prison
Realty Board believes that this, in turn, will permit the New Prison Realty
Board to more effectively represent the interests of all stockholders. A
classified board could, however, have the effect of making the removal of
incumbent directors time-consuming, costly and difficult, which could discourage
a third party from making a tender offer or otherwise attempting to effect a
change in control of New Prison Realty or other transactions that a stockholder
may deem beneficial.
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ACTION BY THE BOARD
Pursuant to the TBCA and the CCA Bylaws, a majority of the number of
directors of CCA then in office constitutes a quorum for the transaction of
business, provided that at no time will a quorum consist of fewer than one-third
of the number of directors then prescribed. If a quorum is present when a vote
is taken, the affirmative vote of a majority of the directors present is the act
of the CCA Board.
Pursuant to the MGCL and the New Prison Realty Bylaws, a majority of the
entire New Prison Realty Board constitutes a quorum. If a quorum is present when
a vote is taken, the affirmative vote of a majority of the directors present is
the act of the New Prison Realty Board. Under the New Prison Realty Charter,
however, the New Prison Realty Board may take no action to disqualify New Prison
Realty as a REIT or to otherwise revoke New Prison Realty's election to be taxed
as a REIT without the affirmative vote of the holders of not less than
two-thirds of all of the outstanding shares of New Prison Realty Capital Stock
entitled to vote on such matter at a meeting of the stockholders.
Pursuant to the New Prison Realty Bylaws, two-thirds of the New Prison
Realty Board constitutes a quorum at any meeting where the Prison Realty Board
will act to approve the actions set forth below and such actions are effective
only if approved by two-thirds of the New Prison Realty Board. Such actions
include: (i) a change in control of New Prison Realty; (ii) any amendment to the
New Prison Realty Charter or the New Prison Realty Bylaws (except for such
amendments as may be required in the reasonable discretion of two-thirds of the
New Prison Realty Board to maintain New Prison Realty's status as a REIT under
the Code); (iii) any waiver or modification of the Ownership Limit; (iv) the
issuance of any equity securities, (other than New Prison Realty Common Stock
issued for at least the market value thereof at the time of issuance as
determined in good faith by a majority of the New Prison Realty Board, pursuant
to any share incentive or option plan of New Prison Realty, or in a bona fide
underwritten public offering managed by one or more nationally recognized
investment banking firms), or rights to acquire any such securities; and (v)
acquisitions, dispositions or financing of assets by New Prison Realty in excess
of 25% of total market capitalization whether by merger, purchase, sale or
otherwise.
REMOVAL OF DIRECTORS
Under the TBCA and the CCA Bylaws, a director may be removed with or
without cause by a vote of two-thirds of the shareholders or, with cause, by a
vote of a majority of the directors. In addition, under the TBCA, a director may
be removed in a judicial proceeding commenced by the corporation or at least 10%
of its shareholders if the court finds that the director engaged in fraudulent
or dishonest conduct or gross abuse of authority or discretion and removal is in
the best interest of the corporation.
Under the MGCL and the New Prison Realty Charter, a director may be
removed, with or without cause, upon the affirmative vote of a majority of the
holders of the shares of New Prison Realty Capital Stock entitled to vote in the
election of directors.
VACANCIES ON THE BOARD
Under the TBCA and the CCA Bylaws, a vacancy on the CCA Board created by
the removal of the director or an increase in the number of directors may be
filled by the vote of the shareholders, the vote of the CCA Board, or the vote
of a majority of the CCA Board then in office, although less than a quorum.
Under the MGCL and the New Prison Realty Charter, stockholders of New
Prison Realty may elect a successor to fill a vacancy on the corporation's board
of directors which results from the removal of a director. The New Prison Realty
Bylaws also provide that any vacancy on the New Prison Realty Board may be
filled by a majority of the New Prison Realty Board.
LIMITATION OF LIABILITY
Under the TBCA and the CCA Charter, the directors of CCA are not liable to
CCA or its shareholders for monetary damages for breach of fiduciary duty as a
director. This provision does not, however, eliminate or limit the liability of
a CCA director for (i) any breach of a director's duty of loyalty to the
corporation or its
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shareholders, (ii) acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, or (iii) the payment of
unlawful distributions to shareholders.
The New Prison Realty Charter limits the liability of its directors and
officers to New Prison Realty or its stockholders for money damages to the
maximum extent permitted by Maryland law. Maryland law permits such a limitation
but does not permit restricting or limiting the liability of its directors or
officers to New Prison Realty or its stockholders: (i) to the extent that it is
proved that the director or officer actually received an improper benefit or
profit in money, property, or services for the amount of the benefits or profit
and money, property, or services actually received or (ii) to the extent that a
judgment or other final adjudication adverse to the person is entered in a
proceeding based on a finding in the proceeding that the director or officer's
action, or failure to act, was the result of active and deliberate dishonesty
and was material to the cause of action adjudicated in the proceeding.
INDEMNIFICATION
The TBCA requires CCA to indemnify an individual made a party to a
proceeding because the individual is or was a director, officer, employee or
agent of CCA against liability incurred in the proceeding if (i) the
individual's conduct was in good faith, (ii) the individual reasonably believed
(a) in the case of conduct in the individual's official capacity with the
corporation, that the individual's conduct was in the corporation's best
interest and (b) in all other cases, that the individual's conduct was at least
not opposed to the corporation's best interest; and (iii) in the case of any
criminal proceeding, the individual had no reasonable cause to believe that the
individual's conduct was unlawful. Under the TBCA, the termination of a
proceeding by judgment, order, settlement, conviction, or upon a plea of nolo
contendre or its equivalent is not of itself determinative that the director,
officer, employee or agent of CCA did not meet this required standard of
conduct. The CCA Bylaws require CCA to indemnify its directors, officers,
employees and agents to the fullest extent permitted by Tennessee law.
The MGCL requires New Prison Realty to indemnify any director or officer
made a party to any proceeding by reason of service in that capacity for New
Prison Realty unless it is established that (i) the act or omission of the
individual was material to the matter giving rise to the proceeding and (a) was
committed in bad faith or (b) was the result of active and deliberate
dishonesty; or (ii) the individual actually received an improper personal
benefit in money, property or services; or (iii) in the case of a criminal
proceeding, the individual had reasonable cause to believe that the act or
omission was unlawful. Under the MGCL, the termination of any proceeding by
judgment, order, or settlement does not create a presumption that the director
or officer of New Prison Realty did not meet this standard of conduct. The
termination of any proceeding by conviction, or a plea of nolo contendre or its
equivalent, or an entry of an order of probation prior to judgment, however,
does create a rebuttable presumption that the director or officer did not meet
this standard of conduct. The New Prison Realty Charter and the New Prison
Realty Bylaws require New Prison Realty to indemnify its directors or officers
to the fullest extent permitted by Maryland law.
AMENDMENTS TO THE CHARTER
Under the TBCA, before the shareholders of a Tennessee corporation may vote
on an amendment to the corporation's charter, the board of directors must
recommend the amendment to the shareholders, unless the board determines that
because of a conflict of interest it should make no recommendation. The TBCA and
the CCA Charter require approval by a majority of the votes entitled to be cast
by the shareholders on the amendment by any voting group with respect to which
the amendment would create dissenters' rights.
Under the MGCL, before the stockholders of a Maryland corporation may vote
on an amendment to the charter, the board of directors must declare the
amendment advisable and direct that it be submitted to the stockholders for
consideration. The MGCL requires approval by two-thirds of all the votes
entitled to be cast on the matter by the stockholders.
AMENDMENTS TO THE BYLAWS
The TBCA provides that, unless reserved by the charter to the shareholders,
the power to amend or repeal a corporation's bylaws is vested in the board of
directors, subject to the power of the shareholders to
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repeal or amend the bylaws. The CCA Bylaws allow the shareholders or the CCA
Board, by a majority vote, to amend the CCA Bylaws.
The MGCL has no similar provision regarding amendments to the bylaws;
however, under the New Prison Realty Bylaws, the New Prison Realty Board has the
exclusive power to amend the New Prison Realty Bylaws.
DISTRIBUTIONS
The TBCA, the CCA Charter and the CCA Bylaws do not require distributions
to be made to the shareholders of CCA.
Under the New Prison Realty Charter, the New Prison Realty Board must use
all reasonable efforts to ensure that New Prison Realty satisfies the
requirements for qualification as a REIT under the Code, including the amount
and timing of its distributions to its stockholders; nevertheless, holders of
New Prison Realty Common Stock have no right to any distributions unless and
until authorized and declared by the New Prison Realty Board. Because of the
provisions of the Code applicable to REITs, New Prison Realty intends to make
quarterly distributions as described in "The Merger -- Distributions." See
"Material Federal Income Tax Consequences -- Qualification and Operation of New
Prison Realty as a REIT -- Annual Distribution Requirements."
DISSOLUTION
The TBCA provides that a Tennessee corporation may be dissolved if the
corporation's board of directors proposes dissolution and a majority of the
outstanding shares of the corporation's common stock entitled to vote thereon
approves. The corporation's board of directors may condition its submission of a
proposal for dissolution on any basis, including a greater shareholder vote
requirement. In addition, a court may dissolve a corporation in a proceeding
instituted by the Attorney General if it is established that the corporation (i)
obtained its charter through fraud, (ii) exceeded or abused its legal authority,
(iii) violated a provision of law resulting in the forfeiture of its charter, or
(iv) conducted business in a persistently fraudulent or illegal manner. A court
may dissolve a corporation in a proceeding instituted by a shareholder if it is
established that (i) the directors are deadlocked and the management of
corporate affairs and the shareholders cannot break the deadlock, (ii) directors
have acted, are acting or are willing to act in a manner that is illegal,
oppressive or fraudulent, (iii) shareholders are deadlocked in voting and then
fail to elect directors for at least two annual meeting dates, or (iv) corporate
assets are being misapplied or wasted. A court may also dissolve a corporation
in a proceeding instituted by a creditor in certain circumstances of insolvency.
The MGCL provides that a Maryland corporation may be dissolved if a
majority of the corporation's board of directors proposes dissolution and
two-thirds of all the votes entitled to be cast by the stockholders on the
matter approve. In addition, stockholders entitled to cast at least 25% of all
the votes entitled to be cast in the election of directors of a corporation may
petition a court of equity to dissolve the corporation on the grounds that (i)
the directors are so divided respecting the management of the corporation's
affairs that the votes required for action by the board cannot be obtained or
(ii) stockholders are so divided that directors cannot be elected. Any
stockholder entitled to vote in the election of directors may petition a court
of equity to dissolve the corporation on grounds that (i) the stockholders are
so divided that they have failed, for a period which includes at least two
consecutive annual meeting dates, to elect successors to directors whose terms
would have expired on the election and qualification of their successors or (ii)
the acts of the directors or those in control of the corporation are illegal,
oppressive, or fraudulent. Any stockholder or creditor of a corporation may
petition a court of equity to dissolve the corporation on grounds that the
corporation is unable to meet its debts as they mature in the ordinary course of
business.
DISSENTERS' RIGHTS
Under the TBCA, a shareholder is entitled to dissent from and obtain
payment of the fair value of the shareholder's shares in the event of (i)
completion of a plan of merger, if shareholder approval is required and the
shareholder is entitled to vote on the merger or if the corporation is a
subsidiary that is merged with its
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parent; (ii) completion of a share exchange to which the corporation is a party
and is the corporation whose shares will be acquired, if the shareholder is
entitled to vote on the plan; (iii) completion of a sale of exchange of all or
substantially all of the property of the corporation other than the usual and
regular course of business, if the shareholder is entitled to vote on the sale
or exchange; (iv) an amendment of the charter that materially and adversely
affects rights in respect of a dissenter's shares because it (a) alters or
abolishes a preferential right of the shares, (b) creates, alters or abolishes a
right in respect of redemption, (c) alters or abolishes a preemptive right of
the holder of the shares to acquire shares or other securities, (d) excludes or
limits the right of the shares to vote on any matter or to accumulate votes, or
(e) reduces the number of shares owned by the shareholder to a fractional share,
if the fractional share is to be acquired for cash; or (v) any corporate action
taken pursuant to a shareholder vote to the extent the charter, bylaws or
resolution of the board of directors provides that voting or non-voting
shareholders are entitled to dissent and obtain payment for their shares. No
shareholder may dissent as to any shares of a security which is listed on an
exchange registered under Section 6 of the 1934 Act or is a "national market
systems security" as defined in rules promulgated pursuant to the 1934 Act.
Under the MGCL, a stockholder has the right to demand and receive payment
of the fair value of the stockholder's shares from the successor if (i) the
corporation consolidates or merges with another corporation; (ii) the
stockholder's stock is to be acquired in a share exchange; (iii) the corporation
transfers all or substantially all of its assets; (iv) the corporation amends
its charter in a way which alters the contract rights, as expressly set forth in
the charter, of any outstanding stock and substantially adversely affects the
stockholder's rights, unless the right to do so is reserved by the charter of
the corporation; or (v) in certain situations, if the transaction is governed by
the business combination provisions of the MGCL. A stockholder may not demand
the fair value of the stockholder's shares and is bound by the terms of the
transaction if the shares are (i) listed on a national securities exchange,
including the NYSE, or (ii) that of the successor in a merger unless (a) the
merger alters the contract rights of the shares as expressly set forth in the
charter and the charter does not reserve the right to do so, or (b) the shares
are to be changed or converted in whole or in part in the merger into something
other than either shares in a successor or cash or other rights or interest
arising out of provisions for the treatment of fractional shares of the
successor.
ANTI-TAKEOVER STATUTES
Business Combinations. The Tennessee Business Combination Act (the
"TN-Business Combination Act") provides that a party owning ten percent or more
of the stock in a resident domestic corporation (an "interested shareholder")
cannot engage in a business combination with the resident domestic corporation
unless the combination (i) takes place at least five years after the interested
shareholder first acquired ten percent or more of the resident domestic
corporation and (ii) either (a) is approved by at least two-thirds of the
non-interested voting shares of the resident domestic corporation or (b)
satisfies certain fairness conditions specified in the TN-Business Combination
Act. These restrictions apply unless (i) the business combination is approved by
the resident domestic corporation's board of directors before the shareholder
becomes an interested shareholder or (ii) the resident domestic corporation
enacts a charter amendment or bylaw to remove itself entirely from the
TN-Business Combination Act at least two years before the shareholder becomes an
interested shareholder, with the approval of a majority of the shareholders who
have held shares for more than one year prior to the vote. Neither the CCA
Charter nor the CCA Bylaws remove CCA from coverage under the TN-Business
Combination Act.
The United States Court of Appeals for the Sixth Circuit has held that the
TN-Business Combination Act is unconstitutional to the extent that it applies to
corporations organized under the laws of states other than Tennessee.
Under the MGCL, certain business combinations between a Maryland
corporation and a person who beneficially owns ten percent or more of the voting
power of the corporation's shares or an affiliate or associate of the
corporation who, at any time within the two-year period prior to the date in
question, was the beneficial owner of ten percent or more of the voting power of
the corporation's shares (an "interested stockholder") or an affiliate thereof
are prohibited for five years after the most recent date on which the
stockholder became an interested stockholder. Thereafter, any such business
combination must be recommended by the board of
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directors of the corporation and approved by the affirmative vote of at least
(a) 80% of the votes entitled to be cast by holders of outstanding voting shares
or the corporation and (b) two-thirds of the votes entitled to be cast by
holders of outstanding voting shares of the corporation other than shares held
by the interested stockholder or an affiliate with whom the business combination
is be effected, unless, among other things, the corporation's stockholders
receive a minimum price (as defined in the MGCL) for their shares and the
consideration is received in cash or in the same form as previously paid by the
interested stockholder for its shares. The business combination provision of the
MGCL does not apply to business combinations with a corporation if the directors
of the corporation, by resolution, exempt business combinations specifically,
generally, or generally by types, as to specifically identified or unidentified
existing or future interested stockholders, from the business combination
provisions, if the exemption is in place before the stockholder becomes an
interested stockholder. By resolution, the New Prison Realty Board will exempt
Sodexho and Baron and certain of its affiliates from the business combination
provisions prior to the completion of the Merger.
Other Constituencies. Tennessee law provides an exemption from liability
for officers and directors of a resident domestic corporation who do not approve
proposed business combinations or who approve charter amendments and bylaws
removing their corporations from the TN-Business Combination Act's coverage as
long as the officers and directors acted in "good faith belief" that the
proposed business combinations would adversely affect their corporation's
employees, customers, suppliers, or the communities in which their corporation
operates and such factors are permitted to be considered by the board of
directors under the corporation's charter. The CCA Charter does not, however,
authorize its officers and directors to consider these factors.
The United States Court of Appeals for the Sixth Circuit has held that
Tennessee's other constituencies provision is unconstitutional as it applies to
target corporations organized under the laws of states other than Tennessee.
The MGCL contains no similar provisions regarding other constituencies.
Control Share Acquisitions. The Tennessee Control Share Acquisition Act
(the "TN-Control Share Acquisition Act") strips a purchaser's shares of voting
rights any time an acquisition of shares in a Tennessee corporation brings the
purchaser's voting power to one-fifth, one-third or a majority of all voting
power. The purchaser's voting rights can be reinstated only after a majority
vote of the other shareholders. The purchaser may demand a special meeting of
shareholders to conduct such a vote. The purchaser can demand such a meeting
before making a control share acquisition if the purchaser holds at least ten
percent of the outstanding shares and announces a good faith intention to make a
controlled share acquisition. A corporation may or may not redeem the
purchaser's shares if the purchaser's shares are not granted voting rights.
The TN-Control Share Acquisition Act applies only to a Tennessee
corporation that has adopted a provision in its charter or bylaws expressly
declaring that the TN-Control Share Acquisition Act applies to it, as CCA has in
the CCA Charter. This provision of the CCA Charter may only be amended by the
affirmative vote of at least 80% of the total voting power of all shares of CCA
stock, considered as one class.
The United States Court of Appeals for the Sixth Circuit has held that the
TN-Control Share Acquisition Act is unconstitutional as it applies to target
corporations organized under the laws of states other than Tennessee.
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
authorized by a vote of two-thirds of the votes entitled to be cast on the
matter, excluding shares owned by the acquiror or by officers or directors who
are employees of the corporation. "Control Shares" are voting shares which, if
aggregated with all other such shares previously acquired by the acquiror, or in
respect of which the acquiror is able to exercise or direct the exercise of
voting power, would entitle the acquiror to exercise voting power in electing
directors within one of the following ranges of voting power (i) one-fifth or
more but less than one-third, (ii) one-third or more but less than a majority,
or (iii) a majority of all voting power. Control shares do not include shares
the acquiring
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person is then entitled to vote as a result of having previously obtained
shareholder approval. A "control share acquisition" means the acquisition of
control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of trustees to call a special meeting of stockholders to be
held within 50 days of demand to consider the voting rights of the shares. If no
request for a meeting is made, the real estate investment trust may itself
present the question as any shareholders meeting.
If voting rights are authorized at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the control shares (except those for which voting rights have previously
been authorized) for fair value determined without regard to the absence of
voting rights for the control shares, as of the date of the last control share
acquisition or of any meeting of stockholders at which the voting rights of such
shares are considered and not authorized. If voting rights for control shares
are authorized at a stockholders meeting and the acquiror becomes entitled to
vote a majority of the shares entitled to vote, all other stockholders may
exercise appraisal rights. The fair value of the shares as determined for
purposes of such approval rights may not be less than the highest price per
share paid by the acquiror in the control share acquisition.
The control share acquisition statute does not apply to shares acquired in
a merger, consolidation or share exchange if the corporation is a party to the
transaction, or to an acquisition authorized or exempted by the charter or
bylaws of the corporation.
New Prison Realty's Bylaws contain a provision exempting from the control
share acquisition statute any and all acquisitions by any person of shares of
New Prison Realty Common Stock. There can be no assurance that such provision
will not be amended or eliminated at any point in the future. If the foregoing
exemption in the Bylaws is rescinded, the control share acquisition statute
could have the effect of discouraging offers to acquire New Prison Realty and of
increasing the difficulty of consummating any such offer.
Greenmail. The Tennessee Greenmail Act (the "TN-Greenmail Act") applies to
any corporation chartered under the laws of Tennessee which has a class of
voting stock registered or traded on a national securities exchange or
registered with the Commission pursuant to Section 12(g) of the 1934 Act. The
TN-Greenmail Act provides that it is unlawful for any corporation to purchase,
either directly or indirectly, any of its shares at a price above their market
value, from any person who holds more than three percent of the class of the
securities purchased if such person has held shares for less than two years,
unless either the purchase is first approved by the affirmative vote of a
majority of the outstanding shares of each class of voting stock issued by the
corporation or the corporation makes an offer of at least equal value per share
of all shareholders of the class.
The United States Court of Appeals for the Sixth Circuit has held that the
TN-Greenmail Act is unconstitutional as it applies to target corporations
organized under the laws of states other than Tennessee.
The MGCL contains no similar provisions regarding greenmail.
Investor Protection. The Tennessee Investor Protection Act ("TIPA")
applies to tender offers directed at corporations ("Offeree Companies") that
have substantial assets in Tennessee and that are either incorporated in or have
a principal office in Tennessee. TIPA requires an offeror making a tender offer
for an Offeree Company to file a TIPA registration statement with the
Commissioner of Commerce and Insurance (the "Commissioner"). If the offeror
intends to gain control of the Offeree Company, the TIPA registration statement
must indicate any plans the offeror has for the Offeree Company. The
Commissioner may require additional information material to the takeover offer
and may call for hearings. TIPA does not apply to an offeror if the Offeree
Company's board of directors recommends the offer to its shareholders.
In addition to requiring the offeror to file a registration statement with
the Commissioner, TIPA requires the offeror and the Offeree Company to deliver
to the Commissioner all solicitation materials used in connection with the
tender offer. TIPA prohibits fraudulent, deceptive or manipulative acts or
practices by
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other side, and gives the Commissioner standing to apply or equitable relief to
the Chancery Court of Davidson County, Tennessee, or to any other chancery court
having jurisdiction whenever it appears to the Commissioner that the offeror,
the Offeree Company, or any of their respective affiliates have engaged in or is
about to engage in a violation of TIPA. Upon proper showing, the Chancery Court
may grant injunctive relief and civil and criminal penalties for violations.
The United States Court of Appeals for the Sixth Circuit has held that TIPA
is unconstitutional to the extent that it applies to corporations organized
under the laws of states other than Tennessee.
The MGCL contains no similar provisions regarding investor protection.
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COMPARISON OF RIGHTS OF SHAREHOLDERS OF
PRISON REALTY AND STOCKHOLDERS OF NEW PRISON REALTY
Prison Realty is currently organized as a real estate investment trust
under the laws of the State of Maryland, and New Prison Realty is currently
organized as a corporation under the laws of the State of Maryland. As a
Maryland real estate investment trust, Prison Realty is governed by the MRL,
certain provisions of the MGCL, the Prison Realty Declaration of Trust and the
Prison Realty Bylaws. As a Maryland corporation, New Prison Realty is governed
by the MGCL, the New Prison Realty Charter, and the New Prison Realty Bylaws.
Shareholders of Prison Realty will, upon completion of the Merger, become
stockholders of New Prison Realty whose rights will then be governed by the
MGCL, the New Prison Realty Charter and the New Prison Realty Bylaws. Certain
differences among the MRL, the MGCL and the Prison Realty and New Prison Realty
governing documents are summarized below.
This summary of the comparative rights of the shareholders of Prison Realty
and the stockholders of New Prison Realty does not purport to be complete and is
subject to and qualified in its entirety by reference to the MRL and the MGCL
and also to the Prison Realty Declaration of Trust, the Prison Realty Bylaws,
the New Prison Realty Charter, and the New Prison Realty Bylaws. Copies of
Prison Realty's Declaration of Trust and Bylaws, each as currently in effect,
may be obtained from Prison Realty, without charge, by contacting the Secretary
of Prison Realty at CCA Prison Realty Trust, 10 Burton Hills Boulevard, Suite
100, Nashville, Tennessee 37215. The New Prison Realty Charter and the New
Prison Realty Bylaws may be obtained from New Prison Realty, without charge, by
contacting the Secretary of New Prison Realty at Prison Realty Corporation, 10
Burton Hills Boulevard, Nashville, Tennessee 37215.
AUTHORIZED CAPITAL SHARES AND SHARES OF CAPITAL STOCK
As of October 14, 1998, there were 90,000,000 shares of Prison Realty
Common Shares authorized, of which 21,945,569 shares of Prison Realty Common
Shares were issued and outstanding, and there were 10,000,000 shares of Prison
Realty preferred shares authorized, of which 4,600,000 have been designated as
Prison Realty Series A Preferred Shares, and of which 4,300,000 shares of Prison
Realty Series A Preferred Shares were issued and outstanding.
As of October 14, 1998, there were 320,000,000 shares of New Prison Realty
Common Stock authorized, of which, on the Effective Time, it is currently
anticipated that approximately 96,420,000 shares of New Prison Realty Common
Stock will be issued as consideration in the Merger, and there were 20,000,000
shares of New Prison Realty Preferred Stock authorized, 4,300,000 of which have
been designated as New Prison Realty Series A Preferred Stock and of which, on
the Effective Time, 4,300,000 shares of New Prison Realty Series A Preferred
Stock will be issued as consideration in the Merger.
STANDARD OF CONDUCT FOR TRUSTEES AND DIRECTORS
The MRL does not contain a provision concerning the standard of conduct for
trustees of a Maryland real estate investment trust. Under Maryland law,
however, a trustee of a Maryland real estate investment trust is not personally
liable for the obligations of the real estate investment trust unless the
trustee would otherwise be liable to the real estate investment trust or its
shareholders for an act that constitutes bad faith, willful misfeasance, gross
negligence, or reckless disregard of the trustee's duties. In addition, the
Prison Realty Declaration of Trust requires each trustee of Prison Realty to
perform his or her duties in good faith, in a manner the trustee reasonably
believes to be in the best interests of Prison Realty, and with the care an
ordinarily prudent person in a like position would have exercised under similar
circumstances.
The MGCL requires each director of New Prison Realty to perform his or her
duties in good faith, in a manner the director reasonably believes to be in the
best interests of New Prison Realty and with the care an ordinarily prudent
person in a like position would use under similar circumstances. Under Maryland
law, a person who performs his or her duties as a director in accordance with
these standards has no personal liability by reason of being or having been a
director of a corporation.
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INDEMNIFICATION
The MRL confers upon a Maryland real estate investment trust the power to
indemnify trustees or officers, of the trust to the same extent as is permitted
for directors or officers of a Maryland corporation under the MGCL.
The MGCL requires Prison Realty and New Prison Realty to indemnify any of
their respective trustees, directors or officers who are successful on the
merits or otherwise in the defense of any proceeding to which they are made a
party by reason of service in such capacity, against reasonable expenses
incurred in connection with the proceeding.
The MGCL allows a Maryland corporation to indemnify any director or officer
made a party to any proceeding by reason of service in that capacity unless it
is established that: (i) the act or omission of the individual was material to
the matter giving rise to the proceeding and (a) was committed in bad faith or
(b) was the result of active and deliberate dishonesty; or (ii) the individual
actually received an improper personal benefit in money, property or services;
or (iii) in the case of a criminal proceeding, the individual had reasonable
cause to believe that the act or omission was unlawful. Under the MGCL, the
termination of any proceeding by judgment, order, or settlement does not create
a presumption that the director or officer of a Maryland corporation did not
meet this standard of conduct. The termination of any proceeding by conviction,
or a plea of nolo contendre or its equivalent, or an entry of an order of
probation prior to judgment, however, does create a rebuttal presumption that
the director did not meet this standard of conduct.
The Prison Realty Declaration of Trust, the Prison Realty Bylaws, the New
Prison Realty Charter and the New Prison Realty Bylaws require Prison Realty and
New Prison Realty to indemnify their respective trustees, directors or officers
to the fullest extent permitted by Maryland law.
NUMBER OF TRUSTEES OR DIRECTORS
The MRL does not specify the number of trustees that a real estate
investment trust organized under Maryland law must have on its Board of
Trustees. The Prison Realty Declaration of Trust and the Prison Realty Bylaws
allow the Prison Realty Board to set the number of trustees in their discretion
from time to time, although, pursuant to the Prison Realty Declaration of Trust,
there may be no more than 15 nor less than three trustees.
The MGCL requires New Prison Realty to have at least three directors. The
New Prison Realty Charter and New Prison Realty Bylaws allow the New Prison
Realty Board to determine the number of directors by a resolution adopted by a
majority of the New Prison Realty Board, although the New Prison Realty Charter
requires that there be no more than 16 nor less than three directors.
REMOVAL OF TRUSTEES OR DIRECTORS
Under the MRL and the Prison Realty Bylaws, a trustee may be removed, with
or without cause, upon the affirmative vote of a majority of the shareholders
entitled to vote in the election of trustees. In addition, under the Prison
Realty Declaration of Trust, a trustee may be removed with or without cause,
upon the affirmative vote of a majority of the Prison Realty Board.
Under the MGCL and the New Prison Realty Charter, directors of New Prison
Realty may be removed, with or without cause, upon the affirmative vote of a
majority of the holders of the shares of New Prison Realty Capital Stock
entitled to vote on the election of directors.
VACANCIES ON THE BOARD
Subject to the rights of holders of Prison Realty Series A Preferred Shares
to elect additional trustees, the Prison Realty Declaration of Trust and Bylaws
provide that any vacancy on the Prison Realty Board may be filled by the
affirmative vote of a majority of the remaining trustees, although less than a
quorum, and any trustee so elected shall serve for the remainder of the term of
the class of trustees to which he or she was elected.
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Under the MGCL, stockholders of a Maryland corporation may elect a
successor to fill a vacancy on the corporation's board of directors which
results from the removal of a director. The New Prison Realty Bylaws also
provide that any vacancy on the New Prison Realty Board may be filled by a
majority of the New Prison Realty Board.
QUORUM AND VOTING OF THE BOARD
Pursuant to the Prison Realty Bylaws, except for the actions described in
the following sentence, a majority of trustees are necessary to constitute a
quorum. Pursuant to the Prison Realty Bylaws, six trustees are necessary to
constitute a quorum to approve the actions set forth below and such actions
shall not be effective unless approved by six of the trustees. Such actions
include: (i) a change in control of Prison Realty; (ii) any amendment to the
Prison Realty Declaration of Trust or the Prison Realty Bylaws (except for such
amendments as may be required in the reasonable discretion of two-thirds of the
Prison Realty Board to maintain Prison Realty's status as a REIT under the
Code); (iii) any waiver or modification of the Ownership Limit; (iv) the
issuance of any equity securities, (other than Prison Realty Common Shares
issued for at least the market value thereof at the time of issuance as
determined in good faith by a majority of the Prison Realty Board of Trustees,
pursuant to any share incentive or option plan of Prison Realty, or in a bona
fide underwritten public offering managed by one or more nationally recognized
investment banking firms), or rights to acquire any such securities; and (v)
acquisitions, dispositions or financings of assets by Prison Realty in excess of
25% of total market capitalization whether by merger, purchase, sale or
otherwise.
The New Prison Realty Bylaws also generally require a majority of directors
to constitute a quorum. The New Prison Realty Bylaws, however, require a quorum
of two-thirds of New Prison Realty's directors at any meeting where the board
will act to approve the special actions referenced above, as they relate to New
Prison Realty, and such actions are effective only if approved by two-thirds of
the board then in office.
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UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
On September 29, 1998, CCA, Prison Realty, and New Prison Realty entered
into the Merger Agreement, pursuant to which (i) CCA will merge with and into
New Prison Realty on December 31, 1998, with New Prison Realty being the
surviving company, and (ii) Prison Realty will merge with and into New Prison
Realty on January 1, 1999, with New Prison Realty being the surviving company.
Additionally, on April 17, 1998, Prison Realty acquired all of the outstanding
capital stock and derivative securities of U.S. Corrections Corporation for a
cash payment to U.S. Corrections Corporation's shareholders of $157.0 million
plus the assumption of certain liabilities.
The Merger will be accounted for as a common control transfer from CCA to
New Prison Realty at historical cost and the purchase of Prison Realty by New
Prison Realty. As such, CCA will be treated as the acquiring company and Prison
Realty will be treated as the acquired company for financial reporting purposes.
The general provisions of the purchase method of accounting prescribe that: (i)
Prison Realty's assets and liabilities be recorded at fair market value, as
required by Accounting Principles Board Opinion No. 16; (ii) CCA's assets and
liabilities be carried forward at historical cost; (iii) CCA's historical
financial statements be presented as the continuing accounting entity's; and
(iv) the equity section of the balance sheet and earnings per share be
retroactively restated to reflect the effect of the exchange ratio established
in the Merger Agreement. The Unaudited Pro Forma Combined Financial Statements
have been adjusted to reflect the above provisions.
The purchase method of accounting prescribes that the assets and
liabilities owned by Prison Realty be adjusted to estimated fair market value.
The fair market value of the assets and liabilities of Prison Realty have been
determined based upon preliminary estimates and are subject to change as
additional information is obtained. Management does not anticipate that the
preliminary allocation of purchase costs based upon the estimated fair market
value of the assets and liabilities of Prison Realty will materially change;
however, the allocation of purchase costs is subject to final determination
based upon estimates and other evaluations of fair market value as of the close
of the transactions. Therefore, the allocations reflected in the following
selected unaudited pro forma financial information may differ from the amounts
ultimately determined.
The following Unaudited Pro Forma Combined Financial Statements represent
the unaudited pro forma combined financial results for New Prison Realty (the
continuing registrant) as of June 30, 1998 and the six months then ended and
year ended December 31, 1997, respectively. The Pro Forma Combined Statement of
Operations is presented as if the Merger had occurred as of the beginning of the
period indicated and therefore incorporates certain assumptions that are
included in the Notes to Pro Forma Combined Statement of Operations. The Pro
Forma Combined Balance Sheet is presented as if the Merger had occurred on June
30, 1998 and therefore incorporates certain assumptions that are included in the
Notes to Pro Forma Combined Balance Sheet. The pro forma information does not
purport to represent what New Prison Realty's financial position or results of
operations actually would have been had the Merger, in fact, occurred on such
date or at the beginning of the period indicated, or to project New Prison
Realty's financial position or results of operations at any future date or for
any future period.
141
<PAGE> 153
PRISON REALTY CORPORATION
(NEW PRISON REALTY)
PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SUM OF CCA NEW
PRO FORMA PRISON REALTY TOTAL PRISON REALTY
CCA PRISON REALTY ADJUSTMENTS PRO FORMA PRO FORMA ADJUSTED
(HISTORICAL) (HISTORICAL) H ADJUSTMENTS ADJUSTMENTS PRO FORMA
------------ ------------- ----------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash, cash equivalents and
restricted cash.................. $133,455 $ 5,029 $ (3,505) $ -- $ (3,505) $ 134,979
Accounts receivable, net of
allowances....................... 115,712 -- (110,860) -- (110,860) 4,852
Prepaid expenses................... 7,374 -- (7,374) -- (7,374) --
Other.............................. 3,207 -- (3,207) -- (3,207) --
-------- -------- --------- --------- --------- ----------
Total current assets......... 259,748 5,029 (124,946) -- (124,946) 139,831
Property and equipment, net.......... 432,785 743,016 (36,058) 407,068A 269,053 1,444,854
(136,957)B
35,000F
Other long-term assets:
Notes receivable................... 57,661 -- 137,000 -- 137,000 194,661
Investment in direct financing
leases........................... 76,024 -- -- -- -- 76,024
Deferred tax assets................ 12,946 -- -- (52,946)C (12,946) --
40,000C
Investments........................ -- -- 138,866 -- 138,866 138,866
Other assets....................... 56,437 2,148 (73,534) -- (73,534) (14,949)
-------- -------- --------- --------- --------- ----------
$895,601 $750,193 $ 41,328 $ 292,165 $ 333,493 $1,979,287
======== ======== ========= ========= ========= ==========
Current liabilities:
Accounts payable................... $ 63,737 $ 11,820 $ (19,516) $ -- $ (19,516) $ 56,041
Accrued salaries and wages......... 11,699 -- (11,699) -- (11,699) --
Line of credit..................... -- 215,000 -- -- -- 215,000
Distributions payable.............. -- 11,320 -- 273,000G 273,000 284,320
Income taxes payable............... 3,875 -- -- -- -- 3,875
Deferred tax liabilities........... 1,799 -- -- (1,799)C (1,799) --
Other accrued expenses............. 25,157 -- (6,616) 35,000F 35,341 60,495
(6,275)B
Current portion of long-term
debt............................. 5,841 -- -- -- -- 5,841
Current portion of deferred gain on
real estate and investments...... 13,223 -- -- (13,223)B (13,223) --
-------- -------- --------- --------- --------- ----------
Total current liabilities.... 125,331 238,140 (24,599) 286,703 262,104 625,575
Long-term debt net of current
portion............................ 265,659 -- -- -- -- 265,659
Deferred gain on real estate
transactions....................... 117,459 -- -- (117,459)B (117,459) --
Deferred gain on sale of contracts... -- -- 118,659 -- 118,659 118,659
Deferred tax liabilities............. -- -- -- 40,000C 40,000 40,000
Other noncurrent liabilities......... -- -- -- -- -- --
-------- -------- --------- --------- --------- ----------
Total liabilities............ 508,449 238,140 94,060 209,244 303,304 1,049,893
-------- -------- --------- --------- --------- ----------
Stockholders' equity
Preferred stock.................... 376 43 (376) -- (376) 43
Common stock....................... 80,927 216 728 (81,190)D (79,752) 1,391
710D
Additional paid-in capital......... 224,402 518,226 (18,575) 407,068A 185,332 927,960
81,190D
(710)D
(6,432)E
(277,209)G
Retained earnings.................. 99,670 (6,432) (52,732) (51,147)C (93,238) --
6,432E
(4,209)G
Treasury stock at cost............. (18,223) -- 18,223 -- 18,223 --
-------- -------- --------- --------- --------- ----------
Total stockholders' equity... 387,152 512,053 (52,732) 82,921 30,189 929,394
-------- -------- --------- --------- --------- ----------
$895,601 $750,193 $ 41,328 $ 292,165 $ 333,493 $1,979,287
======== ======== ========= ========= ========= ==========
</TABLE>
142
<PAGE> 154
NOTES TO PRO FORMA COMBINED BALANCE SHEET
A To record the increase in Prison Realty's assets to fair market value
resulting from the allocation of the purchase price. The estimated purchase
price was calculated as follows:
<TABLE>
<S> <C>
Implied common stock value of Prison Realty based on average
share price at announcement of Merger of $37.86 multiplied
by the common shares outstanding of 21,576................ $ 816,867
Implied preferred stock value of Prison Realty based on
average share price at announcement of Merger of $23.78
multiplied by the preferred shares outstanding of 4,300... 102,254
---------
Total implied fair market value of Prison
Realty........................................... 919,121
Less net book value of net assets........................... (512,053)
---------
Asset basis adjustment...................................... $ 407,068
=========
</TABLE>
B To record reduction in basis of real estate assets related to the deferred
gain carried on the books of CCA prior to the Merger. The deferred gain
resulted from previous sales of real estate assets to Prison Realty.
C To record adjustments to CCA's deferred tax assets and liabilities due to the
tax status of New Prison Realty as a REIT subsequent to the Merger.
D To restate CCA's stockholders' equity for the effects of the common control
transfer from CCA to New Prison Realty. Each share of CCA Common Stock
outstanding as of the date of the common control transfer (approximately
81,190 after retirement of treasury shares and conversion of Series B
Preferred Stock) will be converted into 0.875 shares of New Prison Realty
Common Stock, resulting in the issuance of approximately 71,042 New Prison
Realty Common Stock to CCA common shareholders. The CCA Common Stock has a
$1.00 par value per share and New Prison Realty Common Shares have a $0.01
par value per share.
E To eliminate the retained earnings of Prison Realty.
F To record the estimated costs of the Merger to be capitalized in accordance
with the purchase method of accounting as prescribed by APB Opinion No. 16.
G To record the estimated Earnings and Profits Distribution which will be paid
in the calendar year of the completion of the Merger.
H Refer to Schedule of CCA Pro Forma Balance Sheet Adjustments for details of
the sum of CCA pro forma adjustments.
143
<PAGE> 155
SCHEDULE OF CCA
PRO FORMA BALANCE SHEET ADJUSTMENTS
AS OF JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SERVICE SERVICE OPERATING SUM OF
COMPANY A COMPANY B COMPANY CCA PRO FORMA CCA PRO FORMA
EE FF GG ADJUSTMENTS ADJUSTMENTS
--------- --------- --------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current assets:
Cash, cash equivalents and restricted
cash................................. $ (880) $ (1,276) $ (1,349) $ -- $ (3,505)
Accounts receivable, net of
allowances........................... (17,824) (23,924) (69,112) -- (110,860)
Prepaid expenses....................... (799) (1,228) (5,347) -- (7,374)
Other.................................. (566) (818) (1,823) -- (3,207)
-------- -------- -------- -------- ---------
Total current assets............ (20,069) (27,246) (77,631) -- (124,946)
Property and equipment, net.............. (21,033) (15,025) -- -- (36,058)
Other long-term assets:
Notes receivable....................... -- -- -- 137,000CC 137,000
Investment in direct financing
leases............................... -- -- -- -- --
Deferred tax assets.................... -- -- -- -- --
Investments............................ 35,867 38,285 83,055 (83,055)CC 138,866
4,750CC
(35,867)HH
67,058HH
67,058II
(38,285)II
Other assets........................... (5,464) (5,552) (34,786) (27,732)DD (73,534)
-------- -------- -------- -------- ---------
$(10,699) $ (9,538) $(29,362) $ 90,927 $ 41,328
======== ======== ======== ======== =========
Current liabilities:
Accounts payable....................... $ (4,887) $ (3,900) $(10,729) $ -- $ (19,516)
Accrued salaries and wages............. (2,930) (2,338) (6,431) -- (11,699)
Line of credit......................... -- -- -- -- --
Distributions payable.................. -- -- -- -- --
Income taxes payable................... -- -- -- -- --
Deferred tax liabilities............... -- -- -- -- --
Other accrued expenses................. (2,882) (3,300) (12,202) 25,000JJ 6,616
Current portion of long-term debt...... -- -- -- -- --
Current portion of deferred gain on
real estate and investments.......... -- -- -- -- --
-------- -------- -------- -------- ---------
Total current liabilities....... (10,699) (9,538) (29,362) 25,000 (24,599)
Long-term debt net of current portion.... -- -- -- -- --
Deferred gain on real estate
transactions........................... -- -- -- -- --
Deferred gain on sale of contracts....... -- -- -- 58,695CC 118,659
31,191HH
28,773II
Deferred tax liabilities................. -- -- -- -- --
Other noncurrent liabilities............. -- -- -- -- --
-------- -------- -------- -------- ---------
Total liabilities............... (10,699) (9,538) (29,362) 143,659 94,060
-------- -------- -------- -------- ---------
Stockholders' equity:
Preferred stock........................ -- -- -- (376)BB (376)
Common stock........................... -- -- -- (1)AA 728
729BB
Additional paid-in capital............. -- -- -- (18,222)AA (18,575)
(353)BB
Retained earnings...................... -- -- -- (27,732)DD (52,732)
(25,000)JJ
Treasury stock at cost................. -- -- -- 18,223AA 18,223
-------- -------- -------- -------- ---------
Total stockholders' equity...... -- -- -- (52,732) (52,732)
-------- -------- -------- -------- ---------
$(10,699) $ (9,538) $(29,362) $ 90,927 $ 41,328
======== ======== ======== ======== =========
</TABLE>
144
<PAGE> 156
NOTES TO SCHEDULE OF CCA PRO FORMA BALANCE SHEET ADJUSTMENTS
AA To record retirement of CCA treasury shares immediately prior to the common
control transfer.
BB To record conversion of CCA Series B Preferred Stock into CCA Common Stock.
Each share of CCA Series B Preferred Stock is convertible into 1.94 shares
of CCA Common Stock in accordance with the pre-existing call provision. The
CCA Series B Preferred Stock and the CCA Common Stock both have par values
of $1.00 per share.
CC To record the sale of certain contracts and the related assets and
liabilities to Operating Company in exchange for a $137,000 ten year
installment note and 9.5% of the common stock of Operating Company (valued
at the implied value of $4,750). The implied value of the Operating Company
common stock is derived from the cash investments anticipated from outside
investors aggregating $16,000 in return for voting common stock equaling a
total economic interest of 32% of Operating Company, which in management's
opinion, is the best indicator of fair market value. The net book value of
the assets to be sold to Operating Company of $83,055 result in a total gain
of $58,695 which will be deferred in accordance with Staff Accounting
Bulletin ("SAB") 81 and amortized into income over the six year period in
which principal payments on the $137,000 installment note will be received
in accordance with the installment method of gain recognition.
DD Represents adjustment to write off deferred start-up and project development
costs to be expensed in accordance with Statement of Position ("SOP") 98-5,
"Reporting on the Start-Up Activities" which CCA anticipates adopting
immediately prior to the Merger.
EE On or about the time of the Merger, New Prison Realty and CCA, through a
series of transactions, will transfer to Service Company A certain
management contracts relating to government-owned prison facilities and
certain other net assets in exchange for shares of non-voting common stock
of Service Company A. This adjustment collapses the net assets related to
the management contracts to be transferred to Service Company A into an
investment in the service company prior to the sale of the contracts and
related net assets.
FF On or about the time of the Merger, New Prison Realty and CCA, through a
series of transactions, will transfer to Service Company B certain
management contracts relating to government-owned prison facilities and
certain other net assets in exchange for shares of non-voting common stock
of Service Company B. This adjustment collapses the net assets related to
the management contracts to be transferred to Service Company B into an
investment in the service company prior to the sale of the contracts and
related net assets.
GG Immediately prior to the Merger, CCA will sell to Operating Company certain
management contracts relating to Prison Realty-owned prison facilities and
certain other net assets in exchange for an installment note in the
principal amount of $137,000 and 9.5% of the common stock of Operating
Company. This adjustment collapses the net assets related to the management
contracts to be sold to Operating Company into an investment in Operating
Company prior to the sale of the contracts and related net assets.
HH To record the sale of certain contracts and the related assets and
liabilities to Service Company A in exchange for shares of non-voting common
stock of Service Company A valued at the implied value of $67,058. The
implied value of Service Company A is derived from the cash investments
anticipated from outside investors aggregating $3,000 in return for voting
common stock equaling a total economic interest of 4.25% of Service Company
A, which in management's opinion, is the best indicator of fair market
value. The net book value of the assets to be sold to Service Company A of
$35,867 result in a total gain of $31,191 which will be deferred and
recognized into income in subsequent periods in accordance with SAB 81.
II To record the sale of certain contracts and the related assets and
liabilities to Service Company B in exchange for shares of non-voting common
stock of Service Company B valued at the implied value of $67,058. The
implied value of Service Company B is derived from the cash investments
anticipated
145
<PAGE> 157
from outside investors aggregating $3,000 in return for voting common stock
equaling a total economic interest of 4.25% of Service Company B, which in
management's opinion, is the best indicator of fair market value. The net
book value of the assets to be sold to Service Company A of $38,285 result
in a total gain of $28,773 which will be deferred and recognized into
income in subsequent periods in accordance with SAB 81.
JJ To record the pro forma effects of anticipated compensation charges to be
recognized by CCA during the fourth quarter of 1998 resulting from the
issuance of 4,999,996 shares of Operating Company voting common stock to
certain employees of CCA. The anticipated fair market value of these common
shares is based upon the implied value of Operating Company derived from
the cash investments anticipated from outside investors aggregating $16,000
in return for voting common stock equaling a total economic interest of 32%
of Operating Company, which in management's opinion, is the best indicator
of fair market value.
146
<PAGE> 158
PRISON REALTY CORPORATION
(NEW PRISON REALTY)
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SUM OF SUM OF NEW
CCA PRISON REALTY PRISON REALTY
CCA PRISON REALTY PRO FORMA PRO FORMA ADJUSTED
HISTORICAL HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
A B C D F, G
---------- ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues.............................. $ 462,249 $19,980 $(462,249) $ 62,048 $ 82,028
---------- ------- --------- -------- --------
Expenses:
Operating........................... 330,470 -- (330,470) -- --
Lease............................... 18,684 -- (18,684) -- --
General and administrative.......... 16,025 981 (14,525) 500 2,981
Depreciation and amortization....... 14,093 5,088 (6,182) 11,868 24,867
---------- ------- --------- -------- --------
379,272 6,069 (369,861) 12,368 27,848
---------- ------- --------- -------- --------
Operating income...................... 82,977 13,911 (92,388) 49,680 54,180
Equity in earnings of subsidiaries.... -- -- -- (13,252) (13,252)
Licensing fees........................ -- -- -- (2,051) (2,051)
Interest (income) expenses............ (4,119) (416) 258 (9,842) (14,119)
---------- ------- --------- -------- --------
Income before income taxes............ 87,096 14,327 (92,646) 74,825 83,602
Provision for income taxes............ 33,141 -- (33,141) -- --
---------- ------- --------- -------- --------
Net income............................ 53,955 14,327 (59,505) 74,825 83,602
Dividends to Preferred Shareholders... -- -- -- -- --
---------- ------- --------- -------- --------
Net income available to Common
Shareholders........................ $ 53,955 $14,327 $ (59,505) $ 74,825 $ 83,602
========== ======= ========= ======== ========
Net income per common share:
Basic............................... $ 0.70 $ 0.66 $ 0.94
Diluted............................. $ 0.61 $ 0.65 $ 0.83
Weighted average common shares
outstanding, basic.................. 77,221 21,576 (9,653)E 89,144
Weighted average common shares
outstanding, diluted................ 90,239 22,007 (11,280)E 100,966
</TABLE>
147
<PAGE> 159
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER
31, 1997
A Represents the historical consolidated statement of operations of CCA for the
year ended December 31, 1997.
B Represents the historical consolidated statement of operations of Prison
Realty for the period from inception (July 18, 1997) to December 31, 1997.
C Represents the sum of CCA pro forma adjustments which remove the historical
results of operations related to the management contracts to be sold or
transferred as presented in the following Schedule of CCA Pro Forma Statement
of Operations Adjustments.
D Represents the sum of Prison Realty pro forma adjustments which include the
pro forma effects of the acquisition of USCC and the pro forma effects of the
Merger as presented in the following Schedule of Prison Realty Pro Forma
Statement of Operations Adjustments.
E Represents reduction in weighted average shares outstanding based on exchange
ratio of 0.875 common shares of New Prison Realty in exchange for each
outstanding share of CCA Common Stock resulting from the common control
transfer.
F Pro forma adjustments do not include any impact of non-recurring compensation
expense in the event New Prison Realty causes any Rollover Options to be
cashed out in exchange for a cash payment.
G Pro forma adjustments do not include any impact of the Services Agreement and
Tenant Incentive Agreement since those agreements relate to future facility
construction and development services rather than historical facility
construction.
148
<PAGE> 160
SCHEDULE OF CCA
PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SERVICE COMPANY A SERVICE COMPANY B OPERATING COMPANY SUM OF CCA PRO
AA BB CC FORMA ADJUSTMENTS
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Revenues..................... $(118,805) $(90,510) $(252,934) $(462,249)
--------- -------- --------- ---------
Expenses:
Operating.................. (92,419) (72,438) (165,613) (330,470)
Lease...................... (3,452) (88) (15,144) (18,684)
General and
administrative.......... (4,158) (3,168) (7,199) (14,525)
Depreciation and
amortization............ (3,204) (1,978) (1,000) (6,182)
--------- -------- --------- ---------
(103,233) (77,672) (188,956) (369,861)
--------- -------- --------- ---------
Operating Income............. (15,572) (12,838) (63,978) (92,388)
Equity in earnings of
subsidiaries............... -- -- -- --
Licensing fees............... -- -- -- --
Interest (income) expense.... 100 8 150 258
--------- -------- --------- ---------
Income before income taxes... (15,672) (12,846) (64,128) (92,646)
Provision for income taxes... (5,963) (4,888) (22,290) (33,141)
--------- -------- --------- ---------
Net Income................... $ (9,709) $ (7,958) $ (41,838) $ (59,505)
========= ======== ========= =========
</TABLE>
149
<PAGE> 161
NOTES TO SCHEDULE OF CCA PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS FOR THE
YEAR ENDED DECEMBER 31, 1997
AA On or about the time of the Merger, New Prison Realty and CCA, through a
series of transactions, will transfer to Service Company A certain
management contracts relating to government-owned prison facilities and
certain other net assets in exchange for shares of non-voting common stock
of Service Company A. This adjustment removes the historical results of
operations related to the management contracts to be transferred to Service
Company A as if the Merger and transfer had occurred as of January 1, 1997.
BB On or about the time of the Merger, New Prison Realty and CCA, through a
series of transactions, will transfer to Service Company B certain
management contracts relating to government-owned prison facilities and
certain other net assets in exchange for shares of non-voting common stock
of Service Company B. This adjustment removes the historical results of
operations related to the management contracts to be transferred to Service
Company B as if the Merger and transfer had occurred as of January 1, 1997.
CC Immediately prior to the Merger, CCA will sell to Operating Company certain
management contracts relating to Prison Realty-owned prison facilities and
certain other net assets in exchange for an installment note in the
principal amount of $137,000 and 9.5% of the common stock of Operating
Company. This adjustment removes the historical results of operations
related to the management contracts to be sold to Operating Company as if
the Merger and sale had occurred as of January 1, 1997.
150
<PAGE> 162
SCHEDULE OF PRISON REALTY
PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SUM OF
PRISON REALTY USCC OTHER PRISON REALTY
PRO FORMA ACQUISITION PRO FORMA PRO FORMA
ADJUSTMENTS AAA ADJUSTMENTS ADJUSTMENTS
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Revenues............................. $(19,980)BBB $17,050CCC $ 64,978FFF $ 62,048
-------- ------- -------- --------
Expenses:
Operating.......................... -- -- -- --
Lease.............................. -- -- -- --
General and administrative......... -- -- 500KKK 500
Depreciation and amortization...... -- 3,875DDD 7,993GGG 11,868
-------- ------- -------- --------
-- 3,875 8,493 12,368
-------- ------- -------- --------
Operating income..................... (19,980) 13,175 56,485 49,680
Equity in earnings of subsidiaries... -- -- (13,252)HHH (13,252)
Licensing fees....................... -- -- (2,051)III (2,051)
Interest (income) expense............ -- 6,598EEE (16,440)JJJ (9,842)
-------- ------- -------- --------
Income before income taxes........... (19,980) 6,577 88,228 74,825
Provision for income taxes........... -- -- -- --
-------- ------- -------- --------
Net income........................... (19,980) 6,577 88,228 74,825
Dividends to Preferred
Shareholders....................... -- -- -- --
-------- ------- -------- --------
Net income available to Common
Shareholders....................... $(19,980) $ 6,577 $ 88,228 $ 74,825
======== ======= ======== ========
</TABLE>
151
<PAGE> 163
NOTES TO SCHEDULE OF PRISON REALTY PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS
FOR THE YEAR ENDED
DECEMBER 31, 1997
AAA Prison Realty, and its wholly-owned subsidiary USCA, and USCC, entered into
and completed an Agreement of Merger effective April 17, 1998, whereby USCA
merged with and into USCC and Prison Realty acquired all of the outstanding
capital stock and derivative securities of USCC in exchange for a cash
payment to the shareholders of USCC of approximately $157,000 and
assumption of certain liabilities of USCC. In the USCC Merger, Prison
Realty acquired the real estate assets of USCC only. These adjustments
reflect the pro forma results of operations resulting from the real estate
assets acquired by Prison Realty in the USCC Merger as if the USCC Merger
had occurred on January 1, 1997.
BBB Represents adjustments to remove historical rental revenues based on
leases previously existing between CCA and Prison Realty.
CCC Represents adjustments to record rental revenues assuming an 11.1% lease
rate on the real estate assets acquired in the USCC Merger, as if the USCC
Merger had occurred January 1, 1997. The lease rate percentage is the rate
expected to be specified in the leases between New Prison Realty and
Operating Company, and Prison Realty believes that the lease rate
represents a fair market rental rate based on comparable "triple net"
lease transactions. Rentals are not included for assets under development
at the time of the USCC Merger as the assets would not have been
operational during the period.
DDD To record depreciation expense on assets acquired from USCC.
EEE To record interest expense on debt incurred in conjunction with the USCC
Merger, net of capitalized interest on real estate assets acquired while
construction was in progress.
FFF To record rental revenue from Operating Company based upon leases to be
entered into immediately following the Merger. Rental revenues are not
included in the pro forma income statement for periods prior to the date a
facility began operations.
GGG To record additional depreciation expense on real estate assets of Prison
Realty based on the application of the purchase method of accounting.
Depreciation expense was prorated for properties becoming operational
during the year. The increase in Prison Realty's assets to fair market
value was allocated to buildings and improvements, machinery and equipment
and land in accordance with Prison Realty's historical net book values of
each asset category. The resulting increases to buildings and improvements
and machinery and equipment has been depreciated (on a pro forma basis)
over 40 years and 10 years, respectively, utilizing the straight line
depreciation method.
HHH To record equity in earnings (under the equity method of accounting) of
Service Company A and Service Company B based on New Prison Realty's 95%
equity interest in accordance with EITF 95-6, "Accounting by a Real Estate
Investment Trust for an Investment in a Service Corporation." The
calculation of the pro forma earnings amount is as follows:
<TABLE>
<S> <C>
Historical annual net income of Service Company A........... $ (9,709)
Historical annual net income of Service Company B........... (7,958)
--------
(17,667)
Pro forma aggregate annual payments by Service Companies A
and B to Operating Company for general and administrative
services, net of taxes.................................... 3,717
--------
Adjusted aggregate annual net income of Service Company A
and Service Company B..................................... 13,950
New Prison Realty's equity interest......................... 95%
--------
New Prison Realty's earnings in equity interests............ $ 13,252
========
</TABLE>
152
<PAGE> 164
The pro forma aggregate annual payments by Service Companies A and B to
Operating Company for general and administrative services is the amount
anticipated to be paid (based on forecasted amounts) by Service Companies
A and B upon execution of the Operating Company Services Agreements with
each of the service companies. This amount is subject to change. However,
subsequent revisions are not expected to be material.
New Prison Realty's earnings in the equity interests of Service Company A
and Service Company B has not been adjusted for the additional
depreciation/amortization to be recorded by Service Company A and Service
Company B resulting from the increase in the service companies' assets to
fair market value because the expected depreciation/amortization to be
recognized by Service Company A and Service Company B will approximate
the expected recognition of the deferred gain on sale of contracts by New
Prison Realty.
III To record income from licensing fees paid by Operating Company for the
use of the Corrections Corporation of America name.
JJJ To record interest income on the installment note receivable from
Operating Company.
KKK To record anticipated additional general and administrative expenses
assuming a full year of operations. Historical expenses of Prison Realty
only include operations from July 18, 1997 (inception) to December 31,
1997. All expenses are considered normal and recurring.
153
<PAGE> 165
PRISON REALTY CORPORATION
(NEW PRISON REALTY)
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SUM OF NEW
PRISON CCA SUM OF PRISON PRISON REALTY
CCA REALTY PRO FORMA REALTY PRO FORMA ADJUSTED
HISTORICAL HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
A B C D F, G
---------- ---------- ----------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues............................. $ 305,369 $30,073 $(305,369) $38,309 $ 68,382
---------- ------- --------- ------- --------
Expenses:
Operating.......................... 214,342 -- (214,342) -- --
Lease.............................. 24,936 -- (24,936) -- --
General and administrative......... 10,463 1,010 (9,713) 250 2,010
Depreciation and amortization...... 7,287 8,593 (3,980) 5,935 17,835
---------- ------- --------- ------- --------
257,028 9,603 (252,971) 6,185 19,845
---------- ------- --------- ------- --------
Operating income..................... 48,341 20,470 (52,398) 32,124 48,537
Equity in earnings of subsidiaries... -- -- -- (14,268) (14,268)
Licensing fees....................... -- -- -- (1,697) (1,697)
Interest (income) expense............ (5,211) 2,311 5,211 (4,921) (2,610)
---------- ------- --------- ------- --------
Income before income taxes........... 53,552 18,159 (57,609) 53,010 67,112
Provision for income taxes........... 14,021 -- (14,021) -- --
---------- ------- --------- ------- --------
Net income........................... 39,531 18,159 (43,588) 53,010 67,112
Dividends to Preferred
Shareholders....................... -- 3,569 -- -- 3,569
---------- ------- --------- ------- --------
Net income available to Common
Shareholders....................... $ 39,531 $14,590 $ (43,588) $53,010 $ 63,543
========== ======= ========= ======= ========
Net income per common share:
Basic.............................. $ 0.49 $ 0.68 $ 0.69
Diluted............................ $ 0.44 $ 0.66 $ 0.63
Weighted average common shares
outstanding, basic................. 79,924 21,576 (9,990)E 91,510
Weighted average common shares
outstanding, diluted............... 90,252 22,053 (11,281)E 101,024
</TABLE>
154
<PAGE> 166
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED
JUNE 30, 1998
A Represents the historical consolidated statement of operations of CCA
for the six months ended June 30, 1998.
B Represents the historical consolidated statement of operations of Prison
Realty for the six months ended June 30, 1998.
C Represents the sum of CCA pro forma adjustments which remove the historical
results of operations related to the management contracts to be sold or
transferred as presented in the following Schedule of CCA Pro Forma
Statement of Operations Adjustments.
D Represents the sum of Prison Realty pro forma adjustments which include
the pro forma effects of the acquisition of USCC and the pro forma effects
of the Merger as presented in the following Schedule of Prison Realty Pro
Forma Statement of Operations Adjustments.
E Represents reduction in weighted average shares outstanding based on
exchange ratio of 0.875 common shares of New Prison Realty in exchange for
each outstanding share of CCA Common Stock resulting from the common control
transfer.
F Pro forma adjustments do not include any impact of non-recurring
compensation in the event New Prison Realty causes any Rollover Options to
be cashed out in exchange for a cash payment.
G Pro forma adjustments do not include any impact of the Services Agreement
and Tenant Incentive Agreement since those agreements relate to future
facility construction and development services rather than historical
facility construction.
155
<PAGE> 167
SCHEDULE OF CCA
PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
OPERATING SUM OF CCA
SERVICE COMPANY A SERVICE COMPANY B COMPANY PRO FORMA
AA BB CC ADJUSTMENTS
----------------- ----------------- --------- -----------
<S> <C> <C> <C> <C>
Revenues............................... $(76,468) $(61,019) $(167,882) $(305,369)
-------- -------- --------- ---------
Expenses:
Operating............................ (56,250) (48,059) (110,033) (214,342)
Lease................................ (1,642) (61) (23,233) (24,936)
General and administrative........... (2,620) (2,091) (5,002) (9,713)
Depreciation and amortization........ (2,031) (1,449) (500) (3,980)
-------- -------- --------- ---------
(62,543) (51,660) (138,768) (252,971)
-------- -------- --------- ---------
Operating income....................... (13,925) (9,359) (29,114) (52,398)
Equity in earnings of subsidiaries..... -- -- -- --
Licensing fees......................... -- -- -- --
Interest (income) expense.............. 50 12 5,149 5,211
-------- -------- --------- ---------
Income before income taxes............. (13,975) (9,371) (34,263) (57,609)
Provision for income taxes............. (3,659) (2,453) (7,909) (14,021)
-------- -------- --------- ---------
Net Income............................. $(10,316) $ (6,918) $ (26,354) $ (43,588)
======== ======== ========= =========
</TABLE>
156
<PAGE> 168
NOTES TO SCHEDULE OF CCA PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS FOR THE
SIX MONTHS ENDED JUNE 30, 1998
AA On or about the time of the Merger, New Prison Realty and CCA, through a
series of transactions, will transfer to Service Company A certain
management contracts relating to government-owned prison facilities and
certain other net assets in exchange for shares of non-voting common stock
of Service Company A. This adjustment removes the historical results of
operations related to the management contracts to be transferred to Service
Company A as if the Merger and transfer had occurred as of January 1, 1998.
BB On or about the time of the Merger, New Prison Realty and CCA, through a
series of transactions, will transfer to Service Company B certain
management contracts relating to government-owned prison facilities and
certain other net assets in exchange for shares of non-voting common stock
of Service Company B. This adjustment removes the historical results of
operations related to the management contracts to be transferred to Service
Company B as if the Merger and transfer had occurred as of January 1, 1998.
CC Immediately prior to the Merger, CCA will sell to Operating Company certain
management contracts relating to Prison Realty-owned prison facilities and
certain other assets and liabilities in exchange for an installment note in
the principal amount of $137,000 and 9.5% of the common stock of Operating
Company. This adjustment removes the historical results of operations
related to the management contracts to be sold to Operating Company as if
the Merger and sale had occurred as of January 1, 1998.
157
<PAGE> 169
SCHEDULE OF PRISON REALTY
PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SUM OF
PRISON REALTY USCC OTHER PRISON REALTY
PRO FORMA ACQUISITION PRO FORMA PRO FORMA
ADJUSTMENTS AAA ADJUSTMENTS ADJUSTMENTS
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Revenues............................. $(29,564)BBB $8,525CCC $59,348FFF $38,309
-------- ------ ------- -------
Expenses:
Operating.......................... -- -- -- --
Lease.............................. -- -- -- --
General and administrative......... -- -- 250KKK 250
Depreciation and amortization...... -- 1,938DDD 3,997GGG 5,935
-------- ------ ------- -------
-- 1,938 4,247 6,185
-------- ------ ------- -------
Operating income..................... (29,564) 6,587 55,101 32,124
Equity in earnings of subsidiaries... -- -- (14,268)HHH (14,268)
Licensing fees....................... -- -- (1,697)III (1,697)
Interest (income) expense............ -- 3,299EEE (8,220)JJJ (4,921)
-------- ------ ------- -------
Income before income taxes........... (29,564) 3,288 79,286 53,010
Provision for income taxes........... -- -- -- --
-------- ------ ------- -------
Net income........................... (29,564) 3,288 79,286 53,010
Dividends to Preferred
Shareholders....................... -- -- -- --
-------- ------ ------- -------
Net income available to Common
Shareholders....................... $(29,564) $3,288 $79,286 $53,010
======== ====== ======= =======
</TABLE>
158
<PAGE> 170
NOTES TO SCHEDULE OF PRISON REALTY PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS
FOR THE SIX MONTHS
ENDED JUNE 30, 1998
AAA Prison Realty, and its wholly-owned subsidiary USCA, and USCC, entered into
and completed an Agreement of Merger effective April 17, 1998, whereby USCA
merged with and into USCC and Prison Realty acquired all of the outstanding
capital stock and derivative securities of USCC in exchange for a cash
payment to the shareholders of USCC of approximately $157,000 and
assumption of certain liabilities of USCC. In the USCC Merger, Prison
Realty acquired the real estate assets of USCC only. These adjustments
reflect the pro forma results of operations resulting from the real estate
assets acquired by Prison Realty in the USCC Merger as if the USCC Merger
had occurred on January 1, 1998.
BBB Represents adjustments to remove historical rental revenues based on
leases previously existing between CCA and Prison Realty.
CCC Represents adjustment to record rental revenues assuming an 11.1% lease
rate on the real estate assets acquired in the USCC Merger, as if the USCC
Merger had occurred January 1, 1998. The lease rate percentage is the rate
expected to be specified in the leases between New Prison Realty and
Operating Company, and Prison Realty believes that the lease rate
represents a fair market rental rate based on comparable "triple net"
lease transactions. Rentals are not included for assets under development
at the time of the USCC Merger as the assets would not have been
operational during the period.
DDD To record depreciation expense on assets acquired from USCC.
EEE To record interest expense on debt incurred in conjunction with the USCC
Merger, net of capitalized interest on real estate assets acquired while
construction was in progress.
FFF To record rental revenue from Operating Company based upon leases to be
entered into immediately following the Merger. Rental revenues are not
included in the pro forma income statement for periods prior to the date a
facility began operations.
GGG To record additional depreciation expense on real estate assets of Prison
Realty based on the application of the purchase method of accounting.
Depreciation expense was prorated for properties becoming operational
during the quarter. The increase in Prison Realty's assets to fair market
value was allocated to buildings and improvements, machinery and equipment
and land in accordance with Prison Realty's historical net book values of
each asset category. The resulting increases to buildings and improvements
and machinery and equipment has been depreciated (on a pro forma basis)
over 40 years and 10 years, respectively, utilizing the straight line
depreciation method.
HHH To record equity in earnings (under the equity method of accounting) of
Service Company A and Service Company B based on New Prison Realty's 95%
equity interest in accordance with EITF 95-6. The calculation of the pro
forma earnings amount is as follows:
<TABLE>
<S> <C>
Historical six months net income of Service Company A....... $(10,316)
Historical six months net income of Service Company B....... (6,918)
--------
(17,234)
Pro forma aggregate payments during the six months ended
June 30 by Service Companies A and B to Operating Company
for general and administrative services, net of taxes..... 2,214
--------
Adjusted aggregate six months net income of Service Company
A and Service Company B................................... 15,020
New Prison Realty's equity interest......................... 95%
--------
New Prison Realty's earnings in equity interests............ $ 14,268
========
</TABLE>
The pro forma aggregate annual payments by Service Companies A and B to
Operating Company for general and administrative services is the amount
anticipated to be paid (based on forecasted
159
<PAGE> 171
amounts) by Service Companies A and B upon execution of the Operating
Company Services Agreements with each of the service companies. This
amount is subject to change. However, subsequent revisions are not
expected to be material.
New Prison Realty's earnings in the equity interests of Service Company A
and Service Company B has not been adjusted for the additional
depreciation/amortization to be recorded by Service Company A and Service
Company B resulting from the increase in the service companies' assets to
fair market value because the expected depreciation/amortization to be
recognized by Service Company A and Service Company B will approximate
the expected recognition of the deferred gain on sale of contracts by New
Prison Realty.
III To record income from licensing fees paid by Operating Company for the
use of the Corrections Corporation of America name.
JJJ To record interest income on the installment note receivable from
Operating Company.
KKK To record anticipated additional general and administrative expenses. All
expenses are considered normal and recurring.
160
<PAGE> 172
ADDITIONAL INFORMATION
RECENT DEVELOPMENTS
Bank Financings
On June 24, 1998, CCA entered into an Amended and Restated Credit Agreement
with a syndication of banks arranged by First Union, NationsBank and CIBC,
whereby CCA's existing revolving credit facility, the CCA Credit Facility, was
increased from $170.0 million to $350.0 million. The increase and amendment to
the CCA Credit Facility allows CCA to continue its budgeted expansion plans
during the interim period prior to the completion of the Merger, as well as
provide for working capital and funds for general corporate purposes. The CCA
Credit Facility will mature on the earlier of the date of the completion of the
Merger or September 6, 1999. Interest on amounts drawn under the CCA Credit
Facility is based on First Union's Base Rate, plus an applicable Base Rate
Margin or a LIBOR rate plus an applicable LIBOR Margin, as each of those terms
is defined in the Amended and Restated Credit Agreement.
On July 31, 1998, Prison Realty also entered into an Amended and Restated
Credit Agreement with a syndication of banks arranged by First Union,
NationsBank and CIBC, whereby Prison Realty's existing revolving credit
facility, the Prison Realty Credit Facility, was increased from $225.0 million
to $300.0 million. The Prison Realty Credit Facility matures on July 18, 2000.
The proceeds from the Prison Realty Credit Facility are being used for the
acquisition of additional correctional and detention facilities as well as for
working capital and general corporate purposes.
New Prison Realty expects to obtain a commitment from NationsBank and CIBC
for a $750.0 million revolving credit facility, the New Prison Realty Credit
Facility, upon completion of the Merger. The $750.0 million represents the
aggregate amount available to each of CCA and Prison Realty under their current
credit facilities. Each of the Service Companies expects to receive a commitment
from NationsBank for a $20.0 million credit facility upon completion of the
Merger. Operating Company has engaged NationsBanc Montgomery to assist in the
procurement of a $60.0 million credit facility for Operating Company upon
completion of the Merger, of which NationsBank is expected to commit $20.0
million. It is expected that the commitment letters will be subject to customary
conditions, including the absence of material adverse changes with respect to
the companies, as well as the condition that each aspect of the financing plan
described herein be consummated.
Securities Financings
On September 16, 1998, Prison Realty filed the Prison Realty Registration
Statement on Form S-3 to register an aggregate of $500.0 million in value of
Prison Realty Common Shares, preferred shares and common share rights and
warrants for sale to the public. Proceeds from these offerings will be used for
the general corporate purposes of Prison Realty. These general corporate
purposes may include, without limitation, repayment of maturing obligations,
redemption of outstanding indebtedness, financing (in whole or part) of future
acquisitions (including acquisitions of companies and/or other real estate
properties in accordance with Prison Realty's business objectives and strategy),
capital expenditures and working capital. As of the date of this Joint Proxy
Statement-Prospectus, Prison Realty has issued and sold 362,731 Prison Realty
Common Shares under the Prison Realty Registration Statement on Form S-3. From
the effective date of the Prison Realty Registration Statement on Form S-3,
October 14, 1998, until completion of the Merger, Prison Realty will not issue a
number of Prison Realty Common Shares or securities convertible into Prison
Realty Common Shares which would cause former Prison Realty shareholders to own
more than 50% of the shares of New Prison Realty Common Stock.
LEGAL OPINIONS
The validity of the issuance of New Prison Realty Capital Stock to be
issued in connection with the Merger has been passed upon by Miles & Stockbridge
P.C., special Maryland counsel to Prison Realty and New Prison Realty, and
Stokes & Bartholomew, P.A., counsel to Prison Realty and New Prison Realty.
161
<PAGE> 173
Stokes & Bartholomew, P.A., counsel for Prison Realty and the shareholders
of Prison Realty, will render its opinion with respect to certain federal income
tax considerations of the merger of Prison Realty into New Prison Realty and the
operation of New Prison Realty after the Merger. Bass, Berry & Sims PLC, counsel
for CCA and the shareholders of CCA, will render its opinion with respect to
certain federal income tax consequences of the merger of CCA into New Prison
Realty. See "Material Federal Income Tax Consequences."
EXPERTS
The consolidated financial statements of Prison Realty and its subsidiaries
as of December 31, 1997 included in its annual report on Form 10-K/A, which is
incorporated by reference herein, have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports thereto, and are
incorporated by reference in reliance upon the authority of said firm as experts
in giving said reports.
The consolidated financial statements of CCA and its subsidiaries as of
December 31, 1997 and 1996, and for each of the years in the three-year period
ended December 31, 1997 included in its annual report on Form 10-K/A, which is
incorporated by reference herein, have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report thereto, and are
incorporated by reference in reliance upon the authority of said firm as experts
in giving said reports.
The balance sheet of Operating Company as of September 11, 1998 (except for
certain matters discussed therein as to which the date is September 28, 1998)
included herein has been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports thereto, and is included in reliance
upon the authority of said firm as experts in giving said reports.
Representatives of Arthur Andersen LLP are expected to be present at the
CCA Special Meeting and at the Prison Realty Special Meeting. In each case, such
representatives will have the opportunity to make a statement if they desire to
do so and are expected to be available to respond to appropriate questions.
SHAREHOLDER PROPOSALS
Prison Realty Shareholders
A proper proposal submitted by a shareholder in accordance with applicable
rules and regulations must be received at Prison Realty's executive offices no
later than November 30, 1998, to be included in Prison Realty's 1999 Proxy
Statement and form of proxy relating to Prison Realty's 1999 Annual Meeting of
Shareholders. A proper proposal submitted by a shareholder in accordance with
applicable rules and regulations must be received at Prison Realty's executive
offices no earlier than February 5, 1999 and no later than March 8, 1999 to be
presented at Prison Realty's 1999 Annual Meeting of Shareholders.
CCA Shareholders
A proper proposal submitted by a shareholder in accordance with applicable
rules and regulations must be received at CCA's executive offices no later than
November 30, 1998 to be included in CCA's 1999 Proxy Statement and form of proxy
relating to CCA's 1999 Annual Meeting of Shareholders. If a proper proposal
submitted by a shareholder in accordance with applicable rules and regulations
is received at CCA's executive offices later than February 15, 1999, the proxies
of Prison Realty's management with respect to CCA's 1999 Annual Meeting of
Shareholders will have discretionary voting authority with respect to such
shareholder proposal.
162
<PAGE> 174
OTHER MATTERS
As of the date of this Joint Proxy Statement-Prospectus, the CCA Board
knows of no matters that will be presented for consideration at the CCA Special
Meeting other than as described in this Joint Proxy Statement-Prospectus. If any
other matters shall properly come before the CCA Special Meeting and be voted
upon, the enclosed proxy will be deemed to confer discretionary authority on the
individuals named as proxies therein to vote the shares represented by such
proxies as to any such matters. The persons named as proxies intend to vote or
not to vote in accordance with the recommendation of the management of CCA.
As of the date of this Joint Proxy Statement-Prospectus, the Prison Realty
Board knows of no matters that will be presented for consideration at the Prison
Realty Special Meeting other than as described in this Joint Proxy
Statement-Prospectus. If any other matters shall properly come before the Prison
Realty Special Meeting and be voted upon, the enclosed proxy will be deemed to
confer discretionary authority on the individuals named as proxies therein to
vote the shares represented by such proxies as to any such matters. The persons
named as proxies intend to vote or not to vote in accordance with the
recommendation of the management of Prison Realty.
WHERE YOU CAN FIND MORE INFORMATION
New Prison Realty has filed with the Commission the New Prison Realty
Registration Statement on Form S-4 under the Securities Act that registers the
New Prison Realty Common Stock and the New Prison Realty Series A Preferred
Stock to be issued and exchanged with the CCA shareholders and the Prison Realty
shareholders in connection with the Merger. The New Prison Realty Registration
Statement on Form S-4, including the attached exhibits and schedules, contains
additional relevant information about New Prison Realty and the New Prison
Realty Common Stock and the New Prison Realty Series A Preferred Stock. The
rules and regulations of the Commission allow New Prison Realty to omit certain
information included in the New Prison Realty Registration Statement on Form S-4
from this Joint Proxy Statement-Prospectus.
In addition, Prison Realty and CCA have filed, and New Prison Realty will
file, reports, proxy statements and other information with the Commission under
the Exchange Act. You may read and copy this information at the following
locations of the Commission:
<TABLE>
<S> <C> <C>
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, DC 20549 New York, NY 10048 Suite 1400
Chicago, IL 60661-2511
</TABLE>
You may also obtain copies of this information by mail from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Room 1024,
Washington, DC 20549, at prescribed rates.
The Commission also maintains an Internet site on the World Wide Web that
contains reports, proxy statements and other information about issuers, like
Prison Realty and CCA, who file electronically with the Commission. The address
of the site is "http://www.sec.gov."
You can also inspect reports, proxy statements and other information about
Prison Realty and CCA at the offices of the NYSE, 20 Broad Street, New York, NY
10005.
The Commission allows Prison Realty and CCA to incorporate by reference
information into this Joint Proxy Statement-Prospectus. This means that the
companies can disclose important information to you by referring you to another
document filed separately with the Commission. The information incorporated by
reference is considered to be a part of this Joint Proxy Statement-Prospectus,
except for any information that is superseded by other information that is set
forth directly in this document.
163
<PAGE> 175
This Joint Proxy Statement-Prospectus incorporates by reference the
documents set forth below that Prison Realty and CCA have previously filed with
the Commission. They contain important information about the companies and their
financial condition.
<TABLE>
<CAPTION>
PRISON REALTY COMMISSION FILINGS (FILE NO. 1-13049) PERIOD
- --------------------------------------------------- ------
<S> <C>
Annual Report on Form 10-K/A.................... Year ended December 31, 1997, as filed March
18, 1998, and as amended on March 30, 1998
Quarterly Reports on Form 10-Q.................. Quarters ended:
- March 31, 1998, as filed May 15, 1998
- June 30, 1998, as filed August 14, 1998
Current Reports on Form 8-K..................... Filed:
- May 4, 1998
- April 22, 1998
- September 30, 1998
Registration Statements on Form 8-A............. Filed:
- January 27, 1998
- May 28, 1997
</TABLE>
<TABLE>
<CAPTION>
CCA COMMISSION FILINGS (FILE NO. 1-13560) PERIOD
- ----------------------------------------- ------
<S> <C>
Annual Report on Form 10-K/A................. Year ended December 31, 1997, as filed March
30, 1998, and as amended on September 16,
1998 and September 25, 1998
Quarterly Report on Form 10-Q/A.............. Quarters ended:
- March 31, 1998, as filed May 15, 1998, and
as amended on June 5, 1998
- June 30, 1998, as filed August 14, 1998,
and as amended on September 29, 1998
Current Report on Form 8-K................... Filed:
- April 22, 1998
- September 30, 1998
Registration Statement on Form 8-B........... Filed:
- June 10, 1997
</TABLE>
Prison Realty and CCA incorporate by reference additional documents that
either company may have filed with the Commission between the date of this Joint
Proxy Statement-Prospectus and the respective dates of the Prison Realty Special
Meeting and the CCA Special Meeting. These documents include periodic reports,
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as proxy
statements.
Prison Realty has supplied all information contained or incorporated by
reference in this Joint Proxy Statement-Prospectus relating to Prison Realty, as
well as all pro forma financial information, CCA has supplied all such
information relating to CCA, and New Prison Realty has supplied all such
information relating to New Prison Realty.
You can obtain any of the documents incorporated by reference in this
document through Prison Realty or CCA, as applicable, or from the Commission
through the Commission's Internet site on the World Wide Web at the Internet
address set forth above. Documents incorporated by reference are available from
the appropriate company without charge, excluding any exhibits to those
documents, unless the exhibit is specifically incorporated by reference as an
exhibit to this Joint Proxy Statement-Prospectus. You can obtain documents
incorporated by reference in this Joint Proxy Statement-Prospectus by requesting
them in writing or by telephone from the appropriate company at the following
addresses:
<TABLE>
<CAPTION>
PRISON REALTY CCA
------------- ---
<S> <C>
10 Burton Hills Boulevard, Suite 100 10 Burton Hills Boulevard
Nashville, Tennessee 37215 Nashville, Tennessee 37215
(615) 263-0200 (615) 263-3000
</TABLE>
164
<PAGE> 176
If you would like to request documents from CCA, please do so by November
23, 1998 to receive them before the CCA Special Meeting. If you would like to
request documents from Prison Realty, please do so by November 25, 1998 to
receive them before the Prison Realty Special Meeting. If you request any
incorporated documents from us, they will be mailed to you by first class mail,
or another equally prompt means, within one business day after your request is
received.
You should rely only on the information contained in or incorporated by
reference in this Joint Proxy Statement-Prospectus in considering how to vote
your shares at the Prison Realty Special Meeting or the CCA Special Meeting.
Neither Prison Realty nor CCA has authorized anyone to provide you with
information that is different from the information contained in this document.
This Joint Proxy Statement-Prospectus is dated October 15, 1998. You should not
assume that the information contained in this document is accurate as of any
date other than that date. Neither the mailing of this Joint Proxy
Statement-Prospectus nor the issuance of Prison Realty Common Shares upon the
completion of the Merger shall create any implication to the contrary.
165
<PAGE> 177
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CORRECTIONAL MANAGEMENT SERVICES CORPORATION
Report of Independent Public Accountants.................. F-2
Balance Sheet as of September 11, 1998.................... F-3
Notes to Balance Sheet.................................... F-4
</TABLE>
F-1
<PAGE> 178
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Correctional Management Services Corporation:
We have audited the accompanying balance sheet of CORRECTIONAL MANAGEMENT
SERVICES CORPORATION (a Tennessee corporation) as of September 11, 1998. This
financial statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Correctional Management Services
Corporation as of September 11, 1998, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
September 11, 1998
(Except for certain matters
discussed in Note 2 as to
which the date is September 28, 1998)
F-2
<PAGE> 179
CORRECTIONAL MANAGEMENT SERVICES CORPORATION
BALANCE SHEET
SEPTEMBER 11, 1998
<TABLE>
<S> <C>
ASSETS
Cash........................................................ $100
====
LIABILITIES AND SHAREHOLDERS' EQUITY
Shareholders' Equity:
Preferred shares, $.01 par value; 50,000,000 shares
authorized; none outstanding........................... $ --
Common shares -- Class A, $.01 par value; 100,000,000
shares authorized; 10,000 shares issued and
outstanding............................................ 100
Common shares -- Class B, $.01 par value; 100,000,000
shares authorized; none outstanding.................... --
----
$100
====
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-3
<PAGE> 180
CORRECTIONAL MANAGEMENT SERVICES CORPORATION
NOTES TO BALANCE SHEET
SEPTEMBER 11, 1998
1. ORGANIZATION
Correctional Management Services Corporation (the "Company") was formed
August 13, 1998 as a Tennessee corporation and capitalized on September 11,
1998. The Company has had no operations to date but has issued 10,000 common
shares to a founding shareholder.
2. SUBSEQUENT EVENTS -- ISSUANCES OF COMMON STOCK
In addition to the 10,000 shares of voting common stock previously issued
to a founding shareholder, the Company issued 4,989,996 shares of voting common
stock to certain additional founding shareholders on September 22, 1998. The
founding shareholders are currently management and employees of Corrections
Corporation of America ("CCA") and CCA Prison Realty Trust ("Prison Realty").
Additionally, on September 22, 1998, the Company issued 850,001 shares of
voting common stock to certain wardens of CCA facilities. The shares held by the
wardens are restricted and will vest if, and only if, the wardens become
employees and remain employees of the Company through December 31, 2003. The
Company intends to expense the fair market value (approximately $4,250,000) of
these restricted securities over the respective vesting period.
As a result of the aforementioned issuances of voting common stock, the
Company had 5,849,997 shares of voting common stock issued and outstanding as of
September 22, 1998.
3. INTENTIONS OF THE COMPANY (UNAUDITED)
Subject to the completion of proposed merger transactions ("the Merger")
between Corrections Corporation of America ("CCA"), CCA Prison Realty Trust
("Prison Realty") and Prison Realty Corporation ("New Prison Realty")
correctional facilities owned by Prison Realty or acquired by New Prison Realty
in the Merger will be leased to the Company and the operations relating to such
facilities will be transferred to the Company, as discussed below.
Immediately prior to the Merger, CCA will sell to the Company certain
management contracts and certain other net assets. In exchange, CCA will receive
an installment note in the principal amount of $137,000 (the "Note") and
nonvoting common stock of the Company representing 9.5% of the outstanding
common stock, and certain additional consideration under a trade name use
agreement, as described below. The Note will be payable over 10 years and will
bear interest at a rate of 12% per annum. Interest only will be payable for the
first four years of the Note and the principal will be payable over the
following six years. At the time of the Merger, it is expected that outside
investors will purchase a 32% interest in the Company for cash.
Immediately prior to the Merger and in connection with the transactions
described above, CCA will enter into a trade name use agreement with the Company
(the "Trade Name Use Agreement"). Under the Trade Name Use Agreement, CCA will
grant to the Company the right to use the name "Corrections Corporation of
America" and derivatives thereof, subject to specified terms and conditions
therein.
Immediately after the Merger, the Company will enter into a services
agreement (the "Operating Company Services Agreement") with New Prison Realty
pursuant to which the Company will serve as a facilitator of the construction
and development of additional facilities on behalf on New Prison Realty. In
consideration for the performance of such services, the Company will receive a
fee based upon a percentage of total capital expenditures incurred by New Prison
Realty in connection with the construction and development of a facility. In
consideration of certain facility preparation services to be performed by
Company personnel, the Company will also receive a per bed fee from New Prison
Realty.
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CORRECTIONAL MANAGEMENT SERVICES CORPORATION
NOTES TO BALANCE SHEET -- (CONTINUED)
Immediately after the Merger, the Company will enter into a tenant
incentive agreement (the "Tenant Incentive Agreement") with New Prison Realty
pursuant to which New Prison Realty will pay the Company a per bed fee for
entering into a new Lease.
Immediately after the Merger, all existing leases between CCA and Prison
Realty will be cancelled and New Prison Realty will enter into non-cancellable
"triple-net" leases with the Company (the "Leases"). The term of the Leases will
be 12 years which may be extended at fair market rates for three additional
five-year periods upon the mutual agreement of New Prison Realty and the
Company.
The Company will be dependent upon the management contracts acquired from
CCA for its initial revenues. Also, due to the nature of the business and the
contractual relationships with New Prison Realty, the Company's ability to be
successful is dependent on a number of factors, including key personnel and
availability of financial resources.
Immediately after the Merger, the Company will enter into administrative
service agreements with two newly formed service companies, Prison Management
Services, Inc. and Juvenile and Jail Facility Management Services, Inc. pursuant
to which employees of the Company's administrative departments will perform
administrative services (including, but not limited to, legal, finance,
management information systems and government relations services), as needed,
for the two service companies. In connection therewith, the Company will grant
each of the service companies the right to use the name "Corrections Corporation
of America" in connection with the servicing of management contracts. As
consideration for the foregoing, the Company will receive a service fees of
$250,000 per month from each service company.
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APPENDIX A
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
DATED AS OF SEPTEMBER 29, 1998
BY AND AMONG
CORRECTIONS CORPORATION OF AMERICA,
CCA PRISON REALTY TRUST,
AND
PRISON REALTY CORPORATION
<PAGE> 183
TABLE OF CONTENTS
<TABLE>
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ARTICLE I
THE MERGER................................................ A-1
SECTION 1.01. The Merger.................................. A-1
SECTION 1.02. Closing..................................... A-1
SECTION 1.03. Effective Time.............................. A-1
SECTION 1.04. Effects of the Merger....................... A-2
SECTION 1.05. Constituent Documents....................... A-2
SECTION 1.06. Directors................................... A-2
SECTION 1.07. Officers.................................... A-2
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL SHARES OF THE
CONSTITUENT ENTITIES; EXCHANGE OF CERTIFICATES......... A-2
SECTION 2.01. Effect on Capital Shares.................... A-2
SECTION 2.02. Exchange of Certificates.................... A-3
SECTION 2.03. Company Series B Convertible Preferred
Stock.................................................. A-4
SECTION 2.04. Stock Options............................... A-4
SECTION 2.05. Employee Stock Ownership Plans.............. A-4
SECTION 2.06. Warrants to Purchase Company Common Stock... A-4
SECTION 2.07. Notes Convertible into Company Common
Stock.................................................. A-5
SECTION 2.08. Adjustments................................. A-5
SECTION 2.09. Fractional Shares........................... A-5
SECTION 2.10. Lost Certificates........................... A-5
ARTICLE III
REPRESENTATIONS AND WARRANTIES............................ A-6
SECTION 3.01. Representations and Warranties of the
Company................................................ A-6
SECTION 3.02. Representations and Warranties of Prison
Realty................................................. A-15
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS................. A-23
SECTION 4.01. Covenants of the Company.................... A-23
SECTION 4.02. Covenants of Prison Realty.................. A-25
SECTION 4.03. No Solicitation............................. A-25
ARTICLE V
ADDITIONAL AGREEMENTS..................................... A-27
SECTION 5.01. Preparation of the Joint Proxy
Statement-Prospectus................................... A-27
SECTION 5.02. Access to Information....................... A-27
SECTION 5.03. Shareholders Meeting........................ A-27
SECTION 5.04. Reasonable Best Efforts..................... A-27
SECTION 5.05. Benefits Matters............................ A-28
SECTION 5.06. Stock-Based Compensation.................... A-28
SECTION 5.07. Fees and Expenses........................... A-28
SECTION 5.08. Indemnification, Exculpation and
Insurance.............................................. A-29
SECTION 5.09. Transfer Taxes.............................. A-30
SECTION 5.10. Resignation of Directors.................... A-30
SECTION 5.11. Stock Exchange Listing...................... A-30
SECTION 5.12. Tax-Free Reorganization..................... A-30
SECTION 5.13. Rule 145 Affiliates......................... A-30
</TABLE>
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<TABLE>
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ARTICLE VI
CONDITIONS PRECEDENT...................................... A-30
SECTION 6.01. Conditions to Each Party's Obligation To
Effect the Merger...................................... A-30
SECTION 6.02. Conditions to Obligation of Prison Realty To
Effect the Merger...................................... A-31
SECTION 6.03. Conditions to Obligation of the Company To
Effect the Merger...................................... A-32
SECTION 6.04. Frustration of Closing Conditions........... A-32
ARTICLE VII
TERMINATION AND AMENDMENT................................. A-33
SECTION 7.01. Termination................................. A-33
SECTION 7.02. Effect of Termination....................... A-33
SECTION 7.03. Amendment................................... A-34
SECTION 7.04. Extension; Waiver........................... A-34
SECTION 7.05. Procedure for Termination, Amendment,
Extension or Waiver.................................... A-34
ARTICLE VIII
GENERAL PROVISIONS........................................ A-34
SECTION 8.01. Nonsurvival of Representations and
Warranties............................................. A-34
SECTION 8.02. Notices..................................... A-34
SECTION 8.03. Definitions; Interpretation................. A-35
SECTION 8.04. Counterparts................................ A-36
SECTION 8.05. Entire Agreement; No Third-Party
Beneficiaries; Rights of Ownership..................... A-36
SECTION 8.06. Governing Law............................... A-36
SECTION 8.07. Publicity................................... A-36
SECTION 8.08. Assignment.................................. A-36
SECTION 8.09. Enforcement................................. A-36
</TABLE>
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THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER dated as of
September 29, 1998 (this "Agreement"), is by and among CORRECTIONS CORPORATION
OF AMERICA, a Tennessee corporation (the "Company"), CCA PRISON REALTY TRUST, a
Maryland real estate investment trust ("Prison Realty") and Prison Realty
Corporation, a Maryland corporation, and amends and restates the Agreement and
Plan of Merger by and between the Company and Prison Realty dated as of April
18, 1998.
WHEREAS the Boards of Directors of the Company and Prison Realty
Corporation and the Board of Trustees of Prison Realty have approved the merger
of the Company with and into Prison Realty Corporation (the "CCA Merger") and
the merger of Prison Realty with and into Prison Realty Corporation (the "Prison
Realty Merger," and collectively with the CCA Merger, the "Merger"), upon the
terms and subject to the conditions set forth in this Agreement;
WHEREAS the Merger requires the approval of this Agreement by the
affirmative vote (the "Company Shareholder Approval") of the holders of a
majority of the outstanding shares of common stock, $1.00 par value per share of
the Company ("Company Common Stock") and Series B Convertible Preferred Stock
(as hereinafter defined) (together, the "Company Capital Stock") and the
affirmative vote of the holders of two-thirds of the outstanding shares of
Prison Realty's common shares, $0.01 par value per share (the "Prison Realty
Common Shares") (the "Prison Realty Shareholder Approval"); and
WHEREAS Prison Realty and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and also to prescribe various conditions to the Merger; and
WHEREAS for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), and this Agreement is
intended to be and is adopted as a plan of reorganization.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
parties hereto agree as follows:
ARTICLE 1
THE MERGER
SECTION 1.01. The Merger. Upon the terms and subject to the conditions
set forth in this Agreement, and in accordance with the Tennessee Business
Corporation Act (the "TBCA"), the Maryland General Corporation Law (the "MGCL")
and Title 8 of the Corporations and Associations Article of the Annotated Code
of Maryland (the "Maryland REIT Law" or "MRL"), the Company shall be merged with
and into Prison Realty Corporation (the "CCA Merger") at the CCA Effective Time
(as hereinafter defined) and Prison Realty shall be merged with and into Prison
Realty Corporation (the "Prison Realty Merger," and collectively, with the CCA
Merger, the "Merger") at the Effective Time (as defined in Section 1.03).
Following the Merger, the separate corporate existence of each of the Company
and Prison Realty shall cease, and Prison Realty Corporation shall continue as
the surviving company (the "Surviving Company"), and shall succeed to and assume
all the rights and obligations of the Company and of Prison Realty in accordance
with the TBCA, the MGCL and the MRL.
SECTION 1.02. Closing. Unless this Agreement shall have been terminated
and the transactions contemplated herein abandoned pursuant to Section 7.01, and
subject to the satisfaction or waiver of the conditions set forth in Article VI,
the closing of the Merger (the "Closing") will take place at 10:00 a.m. on a
date to be specified by the parties, which shall be no later than the second
business day following the satisfaction or waiver of all the conditions set
forth in Article VI which by their terms are capable of being satisfied prior to
the Closing (the "Closing Date"), at the offices of Stokes & Bartholomew, P.A.,
unless another time, date or place is agreed to by the parties hereto.
SECTION 1.03. Effective Time. Subject to the provisions of this
Agreement, as soon as practicable on the Closing Date, articles of merger and
all other appropriate documents (in any such case, the "Articles of Merger")
shall be duly prepared, executed, acknowledged and filed by the parties in
accordance with the relevant provisions of the TBCA, the MGCL and the MRL with
the Secretary of State of the State of
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Tennessee (the "Tennessee Secretary of State") and the Maryland State Department
of Assessments and Taxation (the "Maryland Department"). The CCA Merger shall
become effective on December 31, 1998 at the time of day specified in the
Articles of Merger filed with the Tennessee Secretary of State and the Maryland
Department (the "CCA Effective Time"). The Prison Realty Merger shall become
effective on January 1, 1999 at the time of day specified in the Articles of
Merger filed with the Maryland Department (the "Prison Realty Effective Time,"
and as to the Merger, the "Effective Time").
SECTION 1.04. Effects of the Merger. The Merger shall have the effects
set forth in Section 48-21-108 of the TBCA, Section 3-114 of the MGCL and
Section 8-501.1(n) of the MRL.
SECTION 1.05. Constituent Documents. (a) The Articles of Incorporation of
Prison Realty Corporation as in effect immediately prior to the Effective Time
shall be the governing document of the Surviving Company (with such amendments
as may be set forth in the Articles of Merger or an amendment hereto) until
thereafter changed or amended as provided therein or by applicable law.
(b) The bylaws of Prison Realty Corporation as in effect immediately prior
to the Effective Time shall be the bylaws of the Surviving Company until
thereafter changed or amended as provided therein or by applicable law.
SECTION 1.06. Directors. The trustees of Prison Realty immediately prior
to the Effective Time shall be the directors of the Surviving Company, until the
earlier of their resignation or removal or until their respective successors are
duly elected and qualified, as the case may be, and Prison Realty and Prison
Realty Corporation agree that, if the Board of Directors of the Company shall so
request, the Surviving Company will cause Jean-Pierre Cuny to be elected to its
Board of Directors immediately after the Effective Time.
SECTION 1.07. Officers. The officers of Prison Realty immediately prior
to the Effective Time shall be the officers of the Surviving Company, until the
earlier of their resignation or removal or until their respective successors are
duly elected and qualified, as the case may be, except that Doctor R. Crants,
Jr. shall become Chairman and Chief Executive Officer of the Surviving Company.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL SHARES
OF THE CONSTITUENT ENTITIES; EXCHANGE OF CERTIFICATES
SECTION 2.01. Effect on Capital Shares. By virtue of the Merger and
without any action on the part of the Company, Prison Realty or Prison Realty
Corporation or the holders of Company Capital Stock or any Prison Realty Capital
Shares (as hereinafter defined) (collectively, "Shares"):
(a) Cancellation of Certain Shares. As of the Effective Time, each
share of Company Common Stock or Prison Realty Capital Shares that is owned
by Prison Realty or by the Company (other than those held in connection
with the Company Stock Plans (as defined in Section 3.01(b)) or the Prison
Realty Equity Plans (as defined in Section 3.02(b)) shall automatically be
canceled and retired and shall cease to exist and no consideration shall be
delivered in exchange therefor.
(b) Conversion of Company Common Stock. As of the CCA Effective Time,
each issued and outstanding share of Company Common Stock (other than
shares to be canceled in accordance with Section 2.01(a)) shall be
converted into the right to receive from the Surviving Company following
the CCA Merger 0.875 share of common stock, $0.01 par value per share, of
the Surviving Company ("Surviving Company Common Stock") (the "CCA Merger
Consideration") and shall no longer be outstanding and shall automatically
be canceled and retired and shall cease to exist, and each holder of a
certificate representing any such shares of Company Common Stock shall
cease to have any rights with respect thereto except the right to receive
the CCA Merger Consideration, without interest thereon.
(c) Conversion of Prison Realty Common Shares. As of the Prison Realty
Effective Time, each issued and outstanding share of Prison Realty Common
Shares (other than shares to be canceled in accordance with Section
2.01(a)) shall be converted into 1.0 share of Common Stock of the Surviving
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Company (the "Prison Realty Common Merger Consideration") following the
Prison Realty Merger and shall no longer be outstanding and shall
automatically be canceled and retired and shall cease to exist, and each
holder of a certificate representing any such Prison Realty Common Shares
shall be deemed to hold the same number of shares of Surviving Company
Common Stock, which shall continue to be represented by the certificate.
(d) Conversion of Prison Realty Preferred Shares. As of the Prison
Realty Effective Time, each issued and outstanding share of Prison Realty
8% Series A Cumulative Preferred Shares, $0.01 par value per share ("Prison
Realty Series A Preferred Shares," and, together with the Prison Realty
Common Shares, the "Prison Realty Capital Shares") (other than shares to be
canceled in accordance with Section 2.01(a)) shall be converted into 1.0
share of 8% Series A Cumulative Preferred Stock, $0.01 par value per share,
of the Surviving Company (the "Surviving Company Series A Preferred Stock")
(the "Prison Realty Preferred Merger Consideration") following the Prison
Realty Merger and shall no longer be outstanding and shall automatically be
canceled and retired and shall cease to exist, and each holder of a
certificate representing any such Prison Realty Series A Preferred Shares
shall be deemed to hold the same number of shares of Surviving Company
Series A Preferred Stock, which shall continue to be represented by the
certificate (the Prison Realty Common Merger Consideration and the Prison
Realty Preferred Merger Consideration are collectively defined as the
"Prison Realty Merger Consideration").
SECTION 2.02. Exchange of Certificates. (a) Exchange Agent. Prior to the
Effective Time, Prison Realty shall appoint a bank or trust company that is
reasonably satisfactory to the Company to act as exchange agent (the "Exchange
Agent") for the purpose of exchanging certificates representing Company Common
Stock (the "Certificates" and each a "Certificate") for the CCA Merger
Consideration. The Surviving Company will make available to the Exchange Agent,
as needed, the CCA Merger Consideration. Promptly after the Effective Time, the
Surviving Company will send, or will cause the Exchange Agent to send, to each
holder of shares of Company Common Stock at the Effective Time (other than the
Company or Prison Realty or any of their Subsidiaries (as defined in Section
8.03)) a letter of transmittal for use in such exchange (which shall specify
that the delivery shall be effected, and risk of loss and title shall pass, only
upon proper delivery of the Certificates to the Exchange Agent) and instructions
for use in effecting the surrender of the Certificates for payment therefor.
(b) Each holder of shares of Company Common Stock that have been converted
into the right to receive the Merger Consideration will be entitled to receive,
upon surrender to the Exchange Agent of a Certificate, together with a properly
completed letter of transmittal, the CCA Merger Consideration in respect of each
share of Company Common Stock represented by such Certificate. Until so
surrendered, each such Certificate shall, after the Effective Time, represent
for all purposes only the right to receive such CCA Merger Consideration.
(c) If any portion of the CCA Merger Consideration is to be paid to a
person (as defined in Section 8.03) other than the person in whose name the
Certificate is registered, it shall be a condition to such payment that the
Certificate so surrendered shall be properly endorsed or otherwise be in proper
form for transfer and that the person requesting such payment shall pay to the
Exchange Agent any transfer or other taxes required as a result of such payment
to a person other than the registered holder of such Certificate or establish to
the satisfaction of the Exchange Agent that such tax has been paid or is not
payable.
(d) After the Effective Time, there shall be no further registration of
transfers of shares of Company Common Stock or Prison Realty Capital Shares. If,
after the Effective Time, Certificates are presented to the Surviving Company,
they shall be canceled and promptly exchanged for the consideration provided
for, and in accordance with the procedures set forth in this Article.
(e) Any portion of the CCA Merger Consideration made available to the
Exchange Agent pursuant to Section 2.03(a) that remains unclaimed by the holders
of shares of Company Common Stock six months after the Effective Time shall be
returned to the Surviving Company upon demand, and any such holder who has not
exchanged shares of Company Common Stock for the CCA Merger Consideration in
accordance with this Section prior to that time shall thereafter look only to
the Surviving Company for payment of the CCA Merger Consideration in respect of
such shares of Company Common Stock. Notwithstanding the foregoing,
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the Surviving Company shall not be liable to any holder of Company Common Stock
for any amount paid to a public official pursuant to applicable abandoned
property laws.
(f) No dividends, interest or other distributions with respect to
securities of the Surviving Company constituting part of the CCA Merger
Consideration shall be paid to the holder of any unsurrendered Certificates
until such Certificates are surrendered as provided in this Section. Upon such
surrender, there shall be paid, without interest, to the person in whose name
the securities of the Surviving Company have been registered, all dividends,
interest and other distributions payable in respect of such securities on a date
subsequent to, and in respect of a record date after, the Effective Time.
(g) After the Effective Time, upon request from a holder of a certificate
of Prison Realty Capital Shares (which shall be deemed to represent Surviving
Company Capital Stock after the Merger) and the surrender of such certificate in
compliance with instructions to the holder from the Surviving Company, the
Surviving Company will issue a new certificate for Surviving Company Capital
Stock in exchange for the certificate so surrendered.
SECTION 2.03. Company Series B Convertible Preferred Stock. Immediately
prior to the CCA Effective Time, the Company shall cause all issued and
outstanding shares of its Series B Convertible Preferred Stock, $1.00 par value
per share (the "Series B Convertible Preferred Stock") to be converted to shares
of Company Common Stock pursuant to Section 1.E.1. of the Articles of Amendment
to the Company's Charter dated October 2, 1997.
SECTION 2.04. Stock Options. At the CCA Effective Time, each option to
purchase shares of Company Common Stock granted pursuant to the Company Stock
Plans (as hereinafter defined) (a "Company Option") shall become a Company
Rollover Option pursuant to Section 5.06 hereof, and at the Prison Realty
Effective Time, each option to purchase shares of Prison Realty Common Shares (a
"Prison Realty Option") shall become a Prison Realty Rollover Option (as
hereinafter defined) pursuant to Section 5.06 hereof.
SECTION 2.05. Employee Stock Ownership Plans. (a) Company Employee Stock
Ownership Plan. As of the CCA Effective Time, benefits under the Company's
Employee Stock Ownership Plan (the "Company ESOP") shall cease to accrue, but
the Company ESOP shall not be terminated. As soon as practicable after the
Effective Time, the Company ESOP will be merged into one or more successor plans
sponsored by those companies that will acquire the governmental contracts
presently held by the Company. The rights of participants in the Company ESOP
with respect to any offering period then underway under the Company ESOP shall
be determined by treating the last business day prior to the Effective Time as
the last day of such offering period and by making such other pro-rata
adjustments as may be necessary to reflect the reduced offering period but
otherwise treating such offering period as a fully effective and completed
offering period for all purposes of the Company ESOP. Prior to the Effective
Time, the Company shall take all actions (including, if appropriate, amending
the terms of the Company ESOP) that are necessary to give effect to the
transactions contemplated by this Section.
(b) Prison Realty Employee Share Ownership Plan. As of the Prison Realty
Effective Time, benefits under Prison Realty's Employee Share Ownership Plan
(the "Prison Realty ESOP") shall cease to accrue, but the Prison Realty ESOP
shall not be terminated. As soon as practicable after the Effective Time, the
Prison Realty ESOP will be merged into one or more successor plans sponsored by
the Surviving Company. The rights of participants in the Prison Realty ESOP with
respect to any offering period then underway under the Prison Realty ESOP shall
be determined by treating the last business day prior to the Effective Time as
the last day of such offering period and by making such other pro-rata
adjustments as may be necessary to reflect the reduced offering period but
otherwise treating such offering period as a fully effective and completed
offering period for all purposes of the Prison Realty ESOP. Prior to the
Effective Time, Prison Realty shall take all actions (including, if appropriate,
amending the terms of the Prison Realty ESOP) that are necessary to give effect
to the transactions contemplated by this Section.
SECTION 2.06. Warrants to Purchase Company Common Stock. At the CCA
Effective Time, each warrant to purchase shares of Company Common Stock
outstanding (the "Company Warrants") whether or
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not exercisable, shall be deemed to constitute a warrant to acquire, on
substantially the same terms and conditions as were applicable to the original
warrant to which it relates (a "Substitute Warrant"), the same number of shares
of Surviving Company Common Stock as the holder of such warrant would have been
entitled to receive pursuant to the Merger had such holder exercised such
Company Warrant in full immediately prior to the CCA Effective Time, at a price
per share of Surviving Company Common Stock computed in compliance with the
terms of such Company Warrant; provided, however, that the number of shares of
Surviving Company Common Stock that may be purchased upon exercise of such
Substitute Warrant shall not include any fractional share. Prior to the CCA
Effective Time, the Company will use its best efforts to obtain such consents,
if any, as may be necessary to give effect to the transactions contemplated by
this Section. In addition, prior to the Effective Time, the Company will use its
best efforts to make any amendments to the terms of the Company Warrants that
are necessary to give effect to the transactions contemplated by this Section.
Except as contemplated by this Section, the Company will not, after the date
hereof, without the written consent of Prison Realty, amend any outstanding
warrants to purchase shares of Company Common Stock.
SECTION 2.07. Notes Convertible into Company Common Stock. Except as
otherwise agreed by the Company and the holder of any outstanding note of the
Company convertible into shares of Company Common Stock (a "Company Note"), at
the CCA Effective Time, each Company Note shall be deemed to constitute a note
convertible into, on substantially the same terms and conditions as were
applicable to the original note to which it relates (a "Substitute Convertible
Note"), the same number of shares of Surviving Company Common Stock as the
holder of such Company Note would have been entitled to receive pursuant to the
Merger had such holder converted such note in full immediately prior to the CCA
Effective Time; provided, however, that the number of shares of Surviving
Company Common Stock that may be purchased upon conversion of such Substitute
Convertible Note shall not include any fractional share. Prior to the Effective
Time, the Company will use its best efforts to obtain such consents, if any, as
may be necessary to give effect to the transactions contemplated by this
Section. In addition, prior to the CCA Effective Time, the Company will use its
best efforts to make any amendments to the terms of the Company Notes that are
necessary to give effect to the transactions contemplated by this Section.
Except as contemplated by this Section, the Company will not, after the date
hereof, without the written consent of Prison Realty, amend any outstanding
Company Notes.
SECTION 2.08. Adjustments. If at any time during the period between the
date of this Agreement and the Effective Time, any change in the outstanding
Capital Shares of Prison Realty or the outstanding capital stock of the Company
shall occur, including by reason of any reclassification, recapitalization,
stock split or combination, exchange or readjustment of shares, or any stock
dividend thereon with a record date during such period, the Merger Consideration
shall be adjusted appropriately.
SECTION 2.09. Fractional Shares. No fractional shares of Surviving
Company Common Stock shall be issued to Company shareholders in the Merger, but
in lieu thereof each holder of shares of Company Common Stock otherwise entitled
to receive as a result of the Merger a fractional share of Surviving Company
Common Stock will be entitled to receive a cash payment representing such
holder's proportionate interest in the net proceeds resulting from the sale
(after deduction of all expenses resulting from such sale) on the New York Stock
Exchange ("NYSE") through one or more of its member firms of the fractional
shares of Surviving Company Common Stock all holders of shares of Company Common
Stock would otherwise be entitled to receive as a result of the Merger.
SECTION 2.10. Lost Certificates. If any Certificate shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and, if required by
the Surviving Company, the posting by such person of a bond, in such reasonable
amount as the Surviving Company may direct, as indemnity against any claim that
may be made against it with respect to such Certificate, the Exchange Agent will
issue in exchange for such lost, stolen or destroyed Certificate the Merger
Consideration to be paid in respect of the Shares represented by such
Certificates as contemplated by this Article.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.01. Representations and Warranties of the Company. Except as
set forth in the Company SEC Documents (as defined in Section 3.01(d)) filed
with the Securities and Exchange Commission (the "SEC") and publicly available
prior to the date hereof (the "Company Filed SEC Documents") or on the
Disclosure Schedule delivered by the Company to Prison Realty prior to the
execution of this Agreement (the "Company Disclosure Schedule"), which Company
Disclosure Schedule constitutes a part hereof and is true and correct in all
material respects, the Company represents and warrants to Prison Realty as
follows:
(a) Organization and Authority. The Company is a corporation duly
incorporated and validly existing and in good standing under the laws of
the State of Tennessee with full corporate power and authority to own its
properties and conduct its business as now conducted and is duly qualified
or authorized to do business and is in good standing in all jurisdictions
where the failure to so qualify could have a material adverse effect (as
defined in Section 8.03(a)). The Company does not have a direct or indirect
ownership interest in any subsidiary corporation, joint venture,
partnership or other entity, except for those entities listed on the
Company Disclosure Schedule, each of which is duly formed and in good
standing under the laws of its jurisdiction of formation, with full power
and authority to own its properties and conduct its business as now
conducted, and is duly qualified or authorized to do business and is in
good standing in all jurisdictions where the failure to so qualify could
have a material adverse effect upon the conduct of business or the
ownership or leasing of property by it in such jurisdiction. Each
Subsidiary holds all licenses, certificates, permits, franchises and
authorizations from governmental authorities necessary for the conduct of
its business. Except as set forth in the Company Disclosure Schedule, the
Company owns all the outstanding capital stock or ownership interests of
each Subsidiary free and clear of any Liens (as hereinafter defined) and
there are no rights to subscribe for or purchase any shares of capital
stock or ownership interests of any Subsidiary. The Company has made
available to Prison Realty complete and correct copies of its charter and
bylaws and the charter and bylaws (or other organizational documents) of
each of its Subsidiaries, in each case as amended to the date of this
Agreement.
(b) Capital Structure. The authorized capital stock of the Company
consists of 150,000,000 shares of Company Common Stock and 1,000,000 shares
of preferred stock, $1.00 par value per share, of the Company, of which
400,000 shares have been designated Series B Convertible Preferred Stock.
At the close of business on September 25, 1998, (A) 83,085,955 shares of
Company Common Stock were outstanding, (B) 376,464 shares of Series B
Convertible Preferred Stock were outstanding, (C) Company Options to
acquire 2,706,297 shares of Company Common Stock from the Company pursuant
to the Company's equity incentive plans listed on the Company Disclosure
Schedule (the "Company Stock Plans") were outstanding, (D) Company Warrants
to acquire 4,400,000 shares of Company Common Stock from the Company were
outstanding, (E) the Company Notes convertible into 3,883,605 shares of
Company Common Stock were outstanding; and (F) the Securities Purchase
Agreement between the Company and Sodexho Alliance, S.A., a French
corporation ("Sodexho") dated as of June 3, 1994, granting Sodexho the
right to purchase notes convertible into shares of Company Common Stock
were outstanding. Other than as set forth above, at the close of business
on April 17, 1998, there were outstanding no shares of Company Capital
Stock or options, warrants or other rights to acquire Company Capital Stock
from the Company. Since April 17, 1998, (x) there have been no issuances by
the Company of shares of Company Capital Stock other than issuances of
shares of Company Common Stock pursuant to the exercise of Company Options
outstanding as of April 17, 1998 and (y) there have been no issuances by
the Company of options, warrants or other rights to acquire capital stock
from the Company except as expressly permitted by this Agreement. No bonds,
debentures, notes or other indebtedness having the right to vote (or
convertible into or exchangeable for securities having the right to vote)
on any matters on which shareholders of the Company may vote are issued or
outstanding, except the Company Notes. All outstanding shares of Company
Common Stock are, and any shares of Company Common Stock which may be
issued upon the exercise of Company Options or Company Warrants or
conversion of the Company Notes when issued will be, duly authorized,
validly
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issued, fully paid and nonassessable, and will be delivered free and clear
of all claims, liens, encumbrances, pledges or security interests
(collectively, "Liens") and not subject to preemptive rights, except
pursuant to that certain Stockholders Agreement dated as of June 23, 1994
by and among the Company, Sodexho, and certain shareholders of the Company
(the "Sodexho Stockholders Agreement"). Other than as set forth above, and
except for this Agreement, the Company Stock Plans, the Company Options,
the Company Warrants and the Company Notes, there are no outstanding
securities, options, warrants, calls, rights, commitments, agreements or
undertakings of any kind to which the Company or any of its Subsidiaries is
a party or by which the Company or any of its Subsidiaries is bound
obligating the Company or any of its Subsidiaries to issue, deliver or
sell, or cause to be issued, delivered or sold, additional shares of
capital stock or other equity or voting securities of the Company or of any
Subsidiary of the Company or obligating the Company or any of its
Subsidiaries to issue, grant, extend or enter into any such security,
option, warrant, call, right, commitment, agreement or undertaking. There
are no outstanding obligations of the Company or any of its Subsidiaries to
repurchase, redeem or otherwise acquire any shares of capital stock of the
Company or any of its Subsidiaries and, to the knowledge of the executive
officers of the Company, as of the date hereof, no irrevocable proxies have
been granted with respect to shares of Company Common Stock or equity of
Subsidiaries of the Company.
(c) Authorization. The Company has all requisite corporate power and
authority to enter into this Agreement and, subject to obtaining the
Company Shareholder Approval with respect to the Merger, to consummate the
transactions contemplated hereby. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of the
Company, subject to obtaining the Company Shareholder Approval with respect
to the Merger. This Agreement has been duly executed and delivered by the
Company and constitutes a valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, subject to
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance, fraudulent transfer and other similar laws from time to time in
effect. The execution and delivery of this Agreement does not, and the
consummation of the transactions contemplated hereby will not, conflict
with, or result in any breach or violation of, or default (with or without
notice or lapse of time or both) under, or result in the termination of, or
accelerate the performance required by, or give rise to a right of
termination, cancellation or acceleration of any obligation under, or the
creation of a Lien pursuant to, (i) any provision of the charter (or
similar organizational documents) or bylaws of the Company or any of its
Subsidiaries or (ii) subject to obtaining or making the consents,
approvals, orders, authorizations, registrations, declarations and filings
referred to in the following sentence, any loan or credit agreement, note,
mortgage, indenture, lease, Company Benefit Plan (as defined in Section
3.01(m)) or other agreement, obligation, instrument, permit, concession,
franchise, license, judgment, order, decree, statute, law, ordinance, rule
or regulation applicable to the Company or any of its Subsidiaries or their
respective properties or assets, in any case under this clause (ii) which
would, individually or in the aggregate, have a material adverse effect on
the Company. No consent, approval, order or authorization of, or
registration, declaration or filing with, any court, administrative agency
or commission or other governmental authority or instrumentality (a
"Governmental Entity") is required by or with respect to the Company or any
of its Subsidiaries in connection with the execution and delivery of this
Agreement by the Company or the consummation by the Company of the
transactions contemplated hereby, the failure of which to be obtained or
made would, individually or in the aggregate, have a material adverse
effect on the Company or would prevent or materially delay the consummation
of the transactions contemplated hereby, except for (A) the filing with the
SEC of (i) a proxy statement relating to the consideration of the Company
Shareholder Approval at a meeting of the shareholders of the Company (the
"Company Shareholders Meeting") duly called and convened to consider the
approval of this Agreement (such proxy statement, which shall also relate
to the consideration of the Prison Realty Shareholder Approval at a meeting
of the shareholders of Prison Realty (the "Prison Realty Shareholders
Meeting") duly called and convened to consider the approval of this
Agreement and a prospectus with regard to the issuance of Prison Realty
Common Shares in the Merger, as amended or supplemented from time to time,
the "Joint Proxy Statement/Prospectus") and (ii) such reports under the
Securities Exchange Act of 1934, as amended, and the rules
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and regulations promulgated thereunder (the "Exchange Act"), as may be
required in connection with this Agreement and the Merger and the other
transactions contemplated hereby, (B) the filing of the Articles of Merger
with the Tennessee Secretary of State and the Maryland Department and
appropriate documents with the relevant authorities of other states in
which the Company is qualified to do business, (C) filings required
pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the rules and regulations promulgated thereunder (the "HSR
Act"), (D) filings necessary to satisfy the applicable requirements of
state securities or "blue sky" laws, (E) those required under the rules and
regulations of the NYSE and (F) those required pursuant to the Company's
leases, management agreements and related agreements with Governmental
Entities, which are set forth on the Company Disclosure Schedule
(collectively, the "Required Filings").
(d) SEC Documents; Financial Statements. The Company has filed and
made available to Prison Realty a true and complete copy of each report,
schedule, registration statement and definitive proxy statement required to
be filed by the Company with the SEC since January 1, 1995 (the "Company
SEC Documents"). As of their respective dates, the Company SEC Documents
complied in all material respects with the requirements of the Securities
Act of 1933, as amended, and the rules and regulations promulgated
thereunder (the "Securities Act") or the Exchange Act, as the case may be,
applicable to such Company SEC Documents. None of the Company SEC Documents
when filed contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which
they were made, not misleading. The financial statements of the Company
included in the Company SEC Documents comply as to form in all material
respects with applicable accounting requirements and with the published
rules and regulations of the SEC with respect thereto, have been prepared
in accordance with generally accepted accounting principles applied on a
consistent basis ("GAAP") during the periods involved (except as may be
indicated in the notes thereto or, in the case of the unaudited statements,
as permitted by Form 10-Q of the SEC, or for normal year-end adjustments)
and fairly present in all material respects the consolidated financial
position of the Company and its consolidated Subsidiaries as at the dates
thereof and the consolidated results of their operations and cash flows for
the periods then ended. Except as set forth in the Company Filed SEC
Documents (including any item accounted for in the financial statements
contained in the Company Filed SEC Documents or set forth in the notes
thereto), as of December 31, 1997, neither the Company nor any of its
Subsidiaries had, and since such date neither the Company nor any of its
Subsidiaries has incurred, any claims, liabilities or obligations of any
nature (whether accrued, absolute, contingent or otherwise) which,
individually or in the aggregate, would have a material adverse effect on
the Company (other than claims, liabilities or obligations contemplated by
this Agreement or expressly permitted to be incurred pursuant to this
Agreement).
(e) Information Supplied. None of the information supplied or to be
supplied by the Company for inclusion or incorporation by reference in (i)
the Joint Proxy Statement-Prospectus will, at the date it is first mailed
to shareholders of the Company or Prison Realty or at the time of the
Company Shareholders Meeting or the Prison Realty Shareholders Meeting,
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading, except that in each case no representation or
warranty is made by the Company with respect to statements made or
incorporated by reference therein based on information supplied by Prison
Realty specifically for inclusion or incorporation by reference therein.
The Joint Proxy Statement-Prospectus will comply as to form in all material
respects with the requirements of the Exchange Act and the Securities Act,
except that in each case no representation or warranty is made by the
Company with respect to statements made or incorporated by reference
therein based on information supplied by Prison Realty for inclusion or
incorporation by reference therein.
(f) Absence of Certain Changes or Events. Subsequent to December 31,
1997, neither the Company nor any Subsidiary has sustained any material
loss or interference with its business or properties from fire, flood,
hurricane, accident or other calamity, whether or not covered by insurance,
or from any labor dispute or court or governmental action, order or decree,
which is not disclosed; and subsequent to the respective dates as of which
information is given in the Company Filed SEC Documents, (i) neither
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the Company nor any Subsidiary has incurred any material liabilities or
obligations, direct or contingent, or entered into any transactions not in
the ordinary course of business consistent with past practice, and (ii)
there has not been any issuance of options, warrants or rights to purchase
interests in, or the Capital Shares of, the Company, or any adverse change,
or any development involving a prospective adverse change, in the general
affairs, management, business, prospects, financial position, net worth or
results of operations of the Company or any Subsidiary.
(g) Compliance with Laws; Litigation. Except as described in the
Company Disclosure Schedule or the Company Filed SEC Documents, there is
not pending, or to the knowledge of the Company threatened, any legal or
governmental action, suit, proceeding, inquiry or investigation, to which
the Company or any Subsidiary or any of their respective officers,
directors or trustees is a party, or to which the property of the Company
or any Subsidiary is subject, before or brought by any Governmental Entity,
wherein an unfavorable decision, ruling or finding could prevent or
materially hinder the consummation of this Agreement or result in a
material adverse effect on the Company. Each of the Company and each
Subsidiary has at all times operated and currently operates its business in
conformity in all material respects with all applicable statutes, common
laws, ordinances, decrees, orders, rules and regulations of Governmental
Entities. Each of the Company and each Subsidiary has all licenses,
approvals or consents to operate its businesses in all locations in which
such businesses are currently being operated, and the Company is not aware
of any existing or imminent matter which may materially adversely impact
its operations or business prospects other than as specifically disclosed
in the Company Filed SEC Documents or the Company Disclosure Schedule. None
of the Company or any Subsidiary have failed to file with the applicable
regulatory authorities any material statements, reports, information or
forms required by all applicable laws, regulations or orders; all such
filings or submissions were in material compliance with applicable laws
when filed, and no material deficiencies have been asserted by any
regulatory commission, agency or authority with respect to such filings or
submissions. None of the Company or any Subsidiary have failed to maintain
in full force and effect any material licenses, registrations or permits
necessary or proper for the conduct of its business, or received any
notification that any revocation or limitation thereof is threatened or
pending, and there is not to the knowledge of the Company pending any
change under any law, regulation, license or permit which would materially
adversely affect the business, operations, property or business prospects
of the Company. None of the Company or any Subsidiary have received any
notice of violation of or been threatened with a charge of violating or are
under investigation with respect to a possible violation of any provision
of any law, regulation or order.
(h) Taxes. (i)(A) The Company and its Subsidiaries have filed, or
have caused to be filed on their behalf, all tax returns required to be
filed by them (collectively, the "Company Returns"), and as of the time of
filing, all the Company Returns were complete and accurate except to the
extent that any failure to file or any inaccuracies in any filed Company
Returns would not have a material adverse effect on the Company, (B) the
Company and its Subsidiaries have paid or the Company has made adequate
reserves in its financial statements included in the Company Filed SEC
Documents (other than reserves for deferred income taxes established to
reflect differences between book basis and tax basis of assets and
liabilities) for all taxes payable by the Company and its Subsidiaries
except to the extent that any failure to pay or reserve would not have a
material adverse effect on the Company, (C) the Company and its
Subsidiaries have made or the Company will make provision in its financial
statements for all taxes payable for any periods that end before the
Effective Time for which no Company Returns have yet been filed and for any
periods that begin before the Effective Time and end after the Effective
Time to the extent such taxes are attributable to the portion of any such
period ending at the Effective Time except to the extent that any failure
to make such provision would not have a material adverse effect on the
Company, (D) neither the Company nor any Subsidiary has requested any
extension of time within which to file or send any Company Return, which
Company Return has not since been filed or sent, except to the extent that
any such request for an extension would not have a material adverse effect
on the Company, (E) no deficiency for any taxes has been proposed, asserted
or assessed in writing against the Company or any of its Subsidiaries
except to the extent that any such deficiency would not have a material
adverse effect on the Company, (F) no claim for unpaid taxes has become a
Lien of any kind
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against the property of the Company or any of its Subsidiaries or is being
asserted against the Company or any of its Subsidiaries except to the
extent that any such Lien would not have, individually or in the aggregate,
a material adverse effect on the Company, (G) neither the Company nor any
of its Subsidiaries is a party to or is otherwise bound by (or has any
assets bound by) any tax sharing agreement, tax indemnity obligation or
similar agreement or arrangement, and (H) each of the Company and its
Subsidiaries has duly and timely withheld from employee salaries, wages and
other compensation and paid over to the appropriate tax authorities all
taxes required to be so withheld and paid over for all periods for which
the statutory period of limitations for the assessment of tax has not yet
expired except to the extent that any failure to so withhold and pay over
would not have a material adverse effect on the Company.
(ii) For the purpose of this Agreement, the term (A) "tax" (including,
with correlative meaning, the terms "taxes" and "taxable") shall include,
except where the context otherwise requires, all Federal, state, local,
provincial and foreign income, profits, franchise, gross receipts, payroll,
sales, use, property, withholding, excise, occupancy and other taxes of any
nature whatsoever, together with all interest, penalties and additions
imposed with respect to such amounts and (B) "tax return" shall mean all
Federal, state, local, provincial and foreign tax returns, declarations,
statements, reports, schedules, forms and information returns and any
amended tax return relating to taxes.
(i) Certain Agreements. Neither the Company nor any of its
Subsidiaries is in default under any material agreement, commitment, lease
or other instrument to which it or any of its properties is subject, and
there has not occurred any event that, with the giving of notice or the
lapse of time or both, would constitute such a default by the Company or
any of its Subsidiaries or, to the knowledge of the executive officers of
the Company, a default thereunder by any other party thereto, except in all
cases where such defaults, individually or in the aggregate, would not have
a material adverse effect on the Company. Neither the Company nor any of
its Subsidiaries is a party to any contract (other than leases) containing
any covenant restricting its ability to conduct its business as currently
conducted except for any such covenants that would not, individually or in
the aggregate, have a material adverse effect on the Company. Neither the
Company nor any of its Subsidiaries is in breach in any material respect
under its charter, bylaws or other organizational documents.
(j) Properties. (i) Company Owned Real Property. The Company Filed
SEC Documents describe all material real property owned by the Company or
any of its Subsidiaries (collectively, the Company Owned Real Property).
Except as disclosed therein, or in the title insurance policies relating to
the Company Owned Real Property or in the Company Disclosure Schedule, each
of the Company and its Subsidiaries has good, valid and marketable title to
the Company Owned Real Property free of all Liens, in each case except,
individually or in the aggregate, as would not have a material adverse
effect on the Company. Except as set forth in Section 3.01(j)(i) of the
Company Disclosure Schedule and as contemplated with respect to the
properties designated the "Option Facilities" in the Company Filed SEC
Documents, there are no outstanding contracts for the sale of any of the
Company Owned Real Property, except those contracts relating to property
the value in respect of which does not exceed $5,000,000 individually or
$15,000,000 in the aggregate.
(ii) Company Leased Real Property. The Company Filed SEC Documents
describe all leases and subleases (the "Company Real Property Leases") of
the Company with respect to all material real property which is leased or
subleased by the Company or its Subsidiaries (the Company Leased Real
Property; the Company Owned Real Property and the Company Leased Real
Property are collectively defined as the "Company Real Property"). Except
as disclosed in the Company Filed SEC Documents or in the title insurance
policies relating to the Company Leased Real Property, pursuant to the
Company Real Property Leases, the Company and its Subsidiaries hold good
and valid leasehold title to the Company Leased Real Property, in each case
in accordance with the provisions of the applicable Company Real Property
Lease and free of all Liens, in each case except, individually or in the
aggregate, as would not have a material adverse effect on the Company. Each
of the Company Real Property Leases is enforceable against the Company and,
to the knowledge of the Company, against the other party thereto, in
accordance with its terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to
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general equity principles and except for such failures to be enforceable as
would not, individually or in the aggregate, have a material adverse effect
on the Company. Other than as disclosed in the title insurance policies
relating to the Company Leased Real Property or such exceptions which would
not have a material adverse effect on the Company, all Company Real
Property Leases are in full force and effect and grant in all respects the
leasehold estates or rights of occupancy or use they purport to grant.
(iii) Improvements Under Construction. With respect to those
Improvements being constructed as set forth in the Company Disclosure
Schedule, to the knowledge of the Company, (a) the budget for the
construction of the Improvements fairly and accurately reflects the
Company's good faith estimate of the costs and expenses shown thereon
reasonably necessary to develop and construct the Improvements in
accordance with the plans and specifications therefor, and the Company has
strictly adhered to said budget and has permitted no deviations from said
budget or the plans and specifications for the Improvements; (b) the plans
and specifications for the Improvements have been approved by all
applicable Governmental Entities having jurisdiction over the Company Real
Property, the development and construction of the Improvements and the use
and occupancy thereof for its intended purposes, and/or any utility
services to the Company Real Property; (c) all utility services necessary
for the development and construction of the Improvements and the use and
occupancy thereof for its intended purposes are available through public or
private easements or rights-of-way at the boundaries of the Company Real
Property, including, without limitation, sanitary sewer, electricity, gas,
water, telephone, and storm water drainage; (d) all roads necessary for
ingress and egress to the Company Real Property, and for the full
utilization of the Company Real Property for its intended purposes, have
either been completed pursuant to public or private easements, or the
necessary rights-of-way therefore have been dedicated to public use and
accepted by the appropriate Governmental Entity; (e) all building permits,
curb cuts, sewer and water taps, and other permits, licenses, approvals,
authorizations and consents required for the development and construction
of the Improvements have been obtained; (f) the plans and specifications
for the Improvements, the development and construction of the Improvements
pursuant thereto, and the use and occupancy of the Improvements for its
intended purposes comply and will comply with all applicable zoning
ordinances, building regulations, restrictive covenants and governmental
laws, rules, regulations and ordinances, and comply and will comply with
all applicable requirements, standards and regulations of appropriate
supervising boards of fire underwriters and similar agencies, authorities
or boards; (g) the Company has: (i) diligently pursued the development,
construction and installation of the Improvements; and (ii) performed such
duties as may be necessary to complete the development, construction and
installation of the Improvements in accordance with the plans and
specifications and without liens, claims or assessments, actual or
contingent, asserted against the Company Real Property for any material,
labor or other items furnished in connection therewith, and all in full
compliance with all construction, use, building, zoning and other similar
laws, ordinances, rules, regulations, codes and restrictions of any
applicable Governmental Entities or authorities or otherwise applicable
thereto; (h) the Company has complied with all laws, ordinances, rules,
regulations, judgments, orders, injunctions, writs and decrees of any
government or political subdivision or agency thereof, or any court or
similar entity established by any of them, applicable to the construction
of the Improvements, and has paid when due all taxes and assessments upon
the Improvements or Company Real Property, and all claims for labor or
materials, rents, and other obligations that, if unpaid, will or might
become a Lien against the Improvements or the Company Real Property; (i)
the Company has maintained, in sufficient amount, and in satisfactory form
and substance, and with satisfactory insurers: (i) builder's risk
insurance, all-risk nonreporting completed value form, insuring the
Improvements against fire, theft, extended coverage, vandalism, and such
other hazards in full force and effect at all times until the completion of
construction of all of the Improvements; and (ii) such other insurance, in
such amounts and for such terms, as may from time to time be reasonably
required insuring against such other casualties or losses which at the time
are commonly insured against in the case of premises similarly situated;
and (j) the Improvements have been constructed in accordance with the plans
and specifications therefor, and in compliance with all laws, ordinances,
rules and regulations applicable thereto, and in a good and workmanlike
manner. For the purposes of this Agreement "Improvements" shall mean all
buildings, improvements, structures and fixtures now or on the Closing Date
located on the Company
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Real Property, including, without limitation, landscaping, parking lots and
structures, roads, drainage and all above ground and underground utility
structures, equipment systems and other so-called "infrastructure"
improvements.
(k) Environmental Matters. (i) To the knowledge of the Company, the
Company Real Property and the Improvements thereon (the "Company
Facilities") are presently operated in compliance in all material respects
with all Environmental Laws (as defined below).
(ii) There are no Environmental Laws requiring any material
remediation, clean up, repairs, constructions or capital expenditures
(other than normal maintenance) with respect to the Company Facilities.
(iii) There are no (A) notices of any violation or alleged violation
of any Environmental Laws relating to the Company Facilities or their uses
that have been received by the Company, or (B) writs, injunctions, decrees,
orders or judgments outstanding, or any actions, suits, claims, proceedings
or investigations pending, or to the knowledge of the Company threatened,
relating to the ownership, use, maintenance or operation of the Company
Facilities.
(iv) All material permits and licenses required under any
Environmental Laws in respect of the operations of the Company Facilities
have been obtained, and the Company Facilities and the Company are in
compliance, in all material respects, with the terms and conditions of such
permits and licenses.
(v) "Environmental Laws" mean all applicable statutes, regulations,
rules, ordinances, codes, licenses, permits, orders, demands, approvals,
authorizations and similar items of all governmental agencies, departments,
commissions, boards, bureaus or instrumentalities of the United States,
states and political subdivisions thereof and all applicable judicial,
administrative and regulatory decrees, judgments and orders relating to the
protection of human health, the environment, or worker or public health and
safety as in effect as of the date hereof, including but not limited to
those pertaining to reporting, licensing, permitting, investigation and
remediation of emissions, discharges, releases or threatened releases of
"Hazardous Materials," substances, pollutants, contaminants or hazardous or
toxic substances, materials or wastes whether solid, liquid or gaseous in
nature, into the air, surface water, ground water or land, or relating to
the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of substances, pollutants, contaminants or
hazardous or toxic substances, materials or wastes, whether solid, liquid
or gaseous in nature, including by way of illustration and not by way of
limitation, (x) the Comprehensive Environmental Response, Compensation and
Liability Act (42 U.S.C. sec.sec. 960111 et seq.), the Resource
Conservation and Recovery Act (42 U.S.C. sec.sec. 69011 et seq.), the Clean
Air Act (42 U.S.C. sec.sec. 7401 et seq.), the Federal Water Pollution
Control Act (33 U.S.C. sec.sec. 1251), the Safe Drinking Water Act (42
U.S.C. sec.sec. 300f et seq.), the Toxic Substances Control Act (15 U.S.C.
sec.sec. 2601 et seq.), the Endangered Species Act (16 U.S.C. sec.sec. 1531
et seq.), the Emergency Planning and Community Right-to-Know Act of 1986
(42 U.S.C. sec.sec. 11001 et seq.) and (y) analogous state and local
provisions.
(vi) "Hazardous Material" means any chemical substance:
(A) the presence of which requires investigation or remediation
under any federal, state or local statute, regulation, ordinance, order,
action or policy, administrative request or civil complaint under any of
the foregoing or under common law; or
(B) which is defined as a "hazardous waste" or "hazardous
substance" under any federal, state or local statute, regulation or
ordinance or amendments thereto as in effect as of the date hereof, or
as hereafter amended, including, without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act (42 U.S.C.
Section 9601 et seq.) and or the Resource Conservation and Recovery Act
(42 U.S.C. Section 6901 et seq.); or
(C) which is toxic, explosive, corrosive, flammable, infectious,
radioactive, carcinogenic, mutagenic or otherwise hazardous and is
regulated by any governmental authority, agency, department, commission,
board, agency or instrumentality of the United States, or any state or
any political subdivision thereof having or asserting jurisdiction over
any of the Company Facilities; or
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(D) the presence of which on any of the Company Facilities causes a
nuisance upon such facilities or to adjacent properties or poses a
hazard to the health or safety of persons on or about any of the Company
Facilities; or
(E) the presence of which on adjacent properties constitutes a
trespass by any owner or operator of the Company Facilities; or
(F) which contains gasoline, diesel fuel or other petroleum
hydrocarbons, polychlorinated biphenyls (PCBs) or asbestos or
asbestos-containing materials or urea formaldehyde foam insulation, or
lead-based paint, solder or other building materials; or
(G) radon gas.
(l) Labor Matters. As of the date hereof, (i) to the knowledge of the
Company there are no representation or certification proceedings, or
petitions seeking a representation proceeding pending or threatened to be
brought or filed with the National Labor Relations Board or any other labor
relations tribunal or authority and (ii) to the knowledge of the Company
there are no organizing activities or strikes involving the Company or any
of its Subsidiaries with respect to any group of employees of the Company
or any of its Subsidiaries, in each case that would be expected,
individually or in the aggregate, to have a material adverse effect on the
Company.
(m) Benefit Plans. (i) All "employee benefit plans" (as defined in
Section 3(3) of ERISA) and all other compensation, bonus, pension, profit
sharing, deferred compensation, stock ownership, stock purchase, stock
option, phantom stock, retirement, employment, change-in-control, welfare,
collective bargaining, severance, disability, death benefit,
hospitalization and medical plans, agreements, arrangements or
understandings that are maintained or contributed to (or previously
contributed to) for the benefit of any current or former employee, officer
or director of the Company or any of its Subsidiaries and with respect to
which the Company or any of its Subsidiaries would reasonably be expected
to have direct or contingent liability are defined as the "Company Benefit
Plans". The Company has heretofore delivered or made available to Prison
Realty true and complete copies of all Company Benefit Plans and, with
respect to each Company Benefit Plan, true and complete copies of the
following documents: the most recent actuarial report, if any; the most
recent annual report, if any; any related trust agreement, annuity contract
or other funding instrument, if any; the most recent determination letter,
if any; and the most recent summary plan description, if any.
(ii) Except as disclosed in Section 3.01(m) of the Company
Disclosure Schedule: (A) none of the Company Benefit Plans is a
"multiemployer plan" within the meaning of Section 3(37) of ERISA or is
otherwise subject to Title IV of ERISA; (B) none of the Company Benefit
Plans promises or provides retiree medical or life insurance benefits to
any person; (C) neither the Company nor any of its Subsidiaries has any
obligation to adopt or has taken any corporate action to adopt, any new
Company Benefit Plan or, except as required by law, to amend any
existing Company Benefit Plan; (D) each Company Benefit Plan has been
administered in compliance with its terms and the applicable provisions
of ERISA, the Code and all other applicable laws, rules and regulations
except for any failures to so administer any Company Benefit Plan as
would not have a material adverse effect on the Company; (E) each
Company Benefit Plan that is intended to be qualified within the meaning
of Section 401(a) of the Code is, to the Company's knowledge, so
qualified; (F) neither the Company nor any entity required to be treated
as a single employer with the Company under Section 414 of the Code has
any unsatisfied liability under Title IV of ERISA that would have a
material adverse effect on the Company; (G) other than funding
obligations and benefits claims payable in the ordinary course, to the
Company's knowledge, no event has occurred and no circumstance exists
with respect to any Company Benefit Plan that could give rise to any
liability that would have a material adverse effect on the Company,
whether directly or by reason of its affiliation with any entity
required to be treated as a single employer with the Company under
Section 414 of the Code; (H) as of the date hereof there are no pending
or, to the knowledge of the executive officers of the Company,
threatened investigations, claims or lawsuits in respect of any Company
Benefit Plan that would have a material adverse effect on the Company;
(I) no amount
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payable pursuant to a Company Benefit Plan or any other plan, contract
or arrangement of the Company would be considered an "excess parachute
payment" under Section 280G of the Code; and (J) except as provided in
Section 5.06 of this Agreement, no Company Benefit Plan exists that
could result in the payment to any current or former employee, officer
or director of the Company of any money or other property or accelerate
or provide any other rights or benefits as a result of the transactions
contemplated by this Agreement which would constitute an excess
parachute payment within the meaning of Section 280G of the Code.
(n) Material Contracts. There are no contracts or other documents
required by the Securities Act to be described in or to be filed as
exhibits to the Company Filed SEC Documents which have not been described
or filed as required. All such contracts to which the Company or any of its
Subsidiaries is a party have been duly authorized, executed and delivered
by the Company or any of its Subsidiaries, constitute valid and binding
agreements of the Company or such Subsidiary and are enforceable against
the Company or such Subsidiary in accordance with the terms thereof. Each
of the Company and each Subsidiary has performed all material obligations
required to be performed by it, and is neither in default in any material
respect nor has it received notice of any default or dispute under, any
such contract or other material instrument to which it is a party or by
which its property is bound or affected. To the best knowledge of the
Company, no other party under any such contract or other material
instrument to which it is a party is in default in any material respect
thereunder.
(o) Accounting. The Company's system of internal accounting controls
is sufficient to meet the broad objectives of internal accounting controls
insofar as those objectives pertain to the prevention or detection of
errors or irregularities in amounts that would be material in relation to
the Company's financial statements.
(p) Vote Required. The Company Shareholder Approval is the only vote
of the holders of any class or series of the Company's securities necessary
to approve this Agreement and the transactions contemplated hereby
(assuming for purposes of this representation the accuracy of the
representations contained in Section 3.02(w)).
(q) Board Recommendation. On the date hereof with respect to this
Agreement and on April 17, 1998 with respect to the Agreement and Plan of
Merger dated April 18, 1998, the Board of Directors of the Company, at a
meeting duly called and held, by the unanimous vote of the directors
present at such meeting and voting (with Doctor R. Crants and Jean-Pierre
Cuny abstaining), (i) determined that such agreement and the Merger and the
other transactions contemplated hereby or thereby are fair to and in the
best interests of the shareholders of the Company, (ii) adopted such
agreement and approved the Merger and (iii) resolved to recommend that the
holders of shares of Company Capital Stock approve such agreement.
(r) Tennessee Business Combination Act. Assuming the accuracy of the
representation and warranty of Prison Realty contained in Section 3.02(v),
the approval of the Merger by the Board of Directors of the Company
referred to in Section 3.01(q) constitutes approval of the Merger for
purposes of the TBCA and represents all the actions necessary to ensure
that Sections 48-103-201 et seq. of the TBCA do not apply to the Merger.
(s) Brokers. No broker, investment banker, financial advisor or other
person, other than Stephens Inc., the fees and expenses of which will be
paid by the Company, are entitled to any broker's, finder's, financial
advisor's or other similar fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by
or on behalf of the Company. The Company's arrangement with Stephens Inc.
has been disclosed to Prison Realty prior to the date hereof.
(t) Opinion of Financial Advisor. The Company has received the
opinion of Stephens Inc., dated as of the date hereof, to the effect that
the consideration to be received by holders of Company Common Stock in the
Merger is fair to such holders from a financial point of view (the
"Stephens Opinion").
(u) Share Ownership. The Company does not, directly or indirectly,
own any Prison Realty Common Shares other than Common Shares, if any, held
in Company Benefit Plans.
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SECTION 3.02. Representations and Warranties of Prison Realty. Except as
set forth in the Prison Realty SEC Documents (as defined in Section 3.02(d))
filed and publicly available prior to the date hereof (the "Prison Realty Filed
SEC Documents") or on the Disclosure Schedule delivered by Prison Realty to the
Company prior to the execution of this Agreement (the "Prison Realty Disclosure
Schedule"), which Prison Realty Disclosure Schedule constitutes a part hereof
and is true and correct in all material respects, Prison Realty represents and
warrants to the Company as follows:
(a) Organization and Authority. Prison Realty is duly formed and
validly existing and in good standing under the laws of the State of
Maryland with full power and authority to own its properties and conduct
its business as now conducted and is duly qualified or authorized to do
business and is in good standing in all jurisdictions where the failure to
so qualify could have a material adverse effect on Prison Realty (as
defined in Section 8.03(a)). Prison Realty does not have a direct or
indirect ownership interest in any subsidiary corporation, joint venture,
partnership or other entity, except those entities set forth in the Prison
Realty Disclosure Schedule, each of which is duly incorporated and in good
standing under the laws of its jurisdiction of organization, with corporate
power and authority to own its properties and conduct its business as now
conducted, and is duly qualified or authorized to do business and is in
good standing in all jurisdictions where the failure to so qualify could
have a material adverse effect upon the conduct of business or the
ownership or leasing of property by Prison Realty in such jurisdiction.
Each Subsidiary of Prison Realty holds all licenses, certificates, permits,
franchises and authorizations from governmental authorities necessary for
the conduct of its business. Except as set forth in the Prison Realty
Disclosure Schedule, Prison Realty owns all the outstanding capital stock
or ownership interests of each Subsidiary free and clear of any Liens, and
there are no rights to subscribe for or purchase any shares of capital
stock or ownership interests of such Subsidiary. Prison Realty has made
available to the Company complete and correct copies of its declaration of
trust and bylaws and the charter and bylaws (or other organizational
documents) of each Subsidiary, in each case as amended to the date of this
Agreement.
(b) Capital Structure. The authorized capital stock of Prison Realty
consists of 90,000,000 Prison Realty Common Shares and 10,000,000 preferred
shares, $0.01 par value per share, of which 4,600,000 are designated Prison
Realty Series A Preferred Shares. At the close of business on September 10,
1998, (A) 21,576,000 Prison Realty Common Shares were outstanding, (B)
4,300,000 Prison Realty Series A Preferred Shares were outstanding, and (C)
Prison Realty Options to acquire 1,178,000 Prison Realty Common Shares from
Prison Realty pursuant to the 1997 Employee Share Incentive Plan and the
Non-Employee Trustees' Share Option Plan (the "Prison Realty Equity Plans")
were outstanding. Other than as set forth above, at the close of business
on April 17, 1998, there were outstanding no Prison Realty Capital Shares
or options, warrants or other rights to acquire Prison Realty Capital
Shares from Prison Realty. Since April 17, 1998, (x) there have been no
issuances by Prison Realty of Prison Realty Capital Shares other than
issuances of Prison Realty Common Shares pursuant to the exercise of Prison
Realty Options outstanding as of April 17, 1998 and (y) there have been no
issuances by Prison Realty of options, warrants or other rights to acquire
Capital Shares from Prison Realty except as expressly permitted by this
Agreement. No bonds, debentures, notes or other indebtedness having the
right to vote (or convertible into or exchangeable for securities having
the right to vote) on any matters on which shareholders of Prison Realty
may vote are issued or outstanding. All outstanding Prison Realty Capital
Shares are, and any Prison Realty Common Shares which may be issued upon
the exercise of Prison Realty Options when issued will be, duly authorized,
validly issued, fully paid and nonassessable, and will be delivered free
and clear of Liens and not subject to preemptive rights. Other than as set
forth above, and except for this Agreement, the Prison Realty Equity Plans
and the Prison Realty Options, and the Employee Savings and the Prison
Realty ESOP, there are no outstanding securities, options, warrants, calls,
rights, commitments, agreements or undertakings of any kind to which Prison
Realty or any Subsidiary of Prison Realty is a party or by which Prison
Realty or any Subsidiary of Prison Realty is bound obligating Prison Realty
or any Subsidiary of Prison Realty to issue, deliver or sell, or cause to
be issued, delivered or sold, additional Prison Realty Capital Shares or
other equity or voting securities of Prison Realty or of any Subsidiary of
Prison Realty or obligating Prison Realty or any Subsidiary of Prison
Realty to issue, grant, extend or enter into any such security, option,
warrant, call, right,
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commitment, agreement or undertaking. There are no outstanding obligations
of Prison Realty or any of its Subsidiaries to repurchase, redeem or
otherwise acquire any Capital Shares of Prison Realty or any of its
Subsidiaries and, to the knowledge of the executive officers of Prison
Realty, as of the date hereof, no irrevocable proxies have been granted
with respect to Prison Realty Capital Shares or equity of Subsidiaries of
Prison Realty.
(c) Authorization. Prison Realty has all requisite power and
authority to enter into this Agreement and, subject to obtaining the Prison
Realty Shareholder Approval with respect to the Merger, to consummate the
transactions contemplated hereby. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have
been duly authorized by all necessary action on the part of Prison Realty,
subject to obtaining Prison Realty Shareholder Approval with respect to the
Merger. This Agreement has been duly executed and delivered by Prison
Realty and constitutes a valid and binding obligation of Prison Realty,
enforceable against Prison Realty in accordance with its terms, subject to
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance, fraudulent transfer and other similar laws from time to time in
effect. The execution and delivery of this Agreement does not, and the
consummation of the transactions contemplated hereby will not, conflict
with, or result in any breach or violation of, or default (with or without
notice or lapse of time or both) under, or result in the termination of, or
accelerate the performance required by, or give rise to a right of
termination, cancellation or acceleration of any obligation under, or the
creation of a Lien pursuant to, (i) any provision of the declaration of
trust (or similar organizational documents) or bylaws of Prison Realty or
any Subsidiary of Prison Realty or (ii) subject to obtaining or making the
consents, approvals, orders, authorizations, registrations, declarations
and filings referred to in the following sentence, any loan or credit
agreement, note, mortgage, indenture, lease, Prison Realty Benefit Plan (as
defined in Section 3.02(n)) or other agreement, obligation, instrument,
permit, concession, franchise, license, judgment, order, decree, statute,
law, ordinance, rule or regulation applicable to Prison Realty or any
Subsidiary of Prison Realty or their respective properties or assets, in
any case under this clause (ii) which would, individually or in the
aggregate, have a material adverse effect on Prison Realty. No consent,
approval, order or authorization of, or registration, declaration or filing
with, any Governmental Entity is required by or with respect to Prison
Realty or any Subsidiary of Prison Realty in connection with the execution
and delivery of this Agreement by Prison Realty or the consummation by
Prison Realty of the transactions contemplated hereby, the failure of which
to be obtained or made would, individually or in the aggregate, have a
material adverse effect on Prison Realty or would prevent or materially
delay the consummation of the transactions contemplated hereby, except for
(A) the filing with the SEC of (i) the Joint Proxy Statement-Prospectus;
(ii) the Registration Statement (as hereinafter defined), and (iii) such
reports under the Exchange Act as may be required in connection with this
Agreement and the Merger and the other transactions contemplated hereby,
(B) the filing of the Articles of Merger with the Maryland Department and
appropriate documents with the relevant authorities of other states in
which Prison Realty is qualified to do business, (C) filings required
pursuant to the HSR Act, (D) filings necessary to satisfy the applicable
requirements of state securities or "blue sky" laws, (E) those required
under the rules and regulations of the NYSE and those required pursuant to
Prison Realty's or the Company's agreements with Governmental Entities
relating to the Prison Realty Facilities (as hereinafter defined), each of
which is listed on the Prison Realty Disclosure Schedule (collectively, the
"Prison Realty Required Filings").
(d) SEC Documents; Financial Statements. Prison Realty has filed and
made available to the Company a true and complete copy of each report,
schedule, registration statement and definitive proxy statement required to
be filed by Prison Realty with the SEC since April 24, 1997 (the "Prison
Realty SEC Documents"). As of their respective dates, the Prison Realty SEC
Documents complied in all material respects with the requirements of the
Securities Act or the Exchange Act, as the case may be, applicable to such
Prison Realty SEC Documents. None of the Prison Realty SEC Documents when
filed contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading. The financial statements of Prison Realty included in
the Prison Realty SEC Documents comply as to form in all material respects
with applicable accounting
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requirements and with the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP during the
periods involved (except as may be indicated in the notes thereto or, in
the case of the unaudited statements, as permitted by Form 10-Q of the SEC,
or for normal year-end adjustments) and fairly present in all material
respects the consolidated financial position of the Company and its
consolidated Subsidiaries as at the dates thereof and the consolidated
results of their operations and cash flows for the periods then ended.
Except as set forth in the Prison Realty Filed SEC Documents (including any
item accounted for in the financial statements contained in the Prison
Realty Filed SEC Documents or set forth in the notes thereto), as of
December 31, 1997, neither Prison Realty nor any of its Subsidiaries had,
and since such date neither Prison Realty nor any of such Subsidiaries has
incurred, any claims, liabilities or obligations of any nature (whether
accrued, absolute, contingent or otherwise) which, individually or in the
aggregate, would have a material adverse effect on Prison Realty (other
than claims, liabilities or obligations contemplated by this Agreement or
expressly permitted to be incurred pursuant to this Agreement).
(e) Information Supplied. None of the information supplied or to be
supplied by Prison Realty for inclusion or incorporation by reference in
(i) the Joint Proxy Statement-Prospectus will, at the date it is first
mailed to shareholders of Prison Realty or the Company or at the time of
the Prison Realty Shareholders Meeting or the Company Shareholders meeting,
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading, except that in each case no representation or
warranty is made by Prison Realty with respect to statements made or
incorporated by reference therein based on information supplied by the
Company specifically for inclusion or incorporation by reference therein.
The Joint Proxy Statement-Prospectus will comply as to form in all material
respects with the requirements of the Exchange Act and the Securities Act,
except that in each case no representation or warranty is made by Prison
Realty with respect to statements made or incorporated by reference therein
based on information supplied by the Company specifically for inclusion or
incorporation by reference therein.
(f) Registration Statement. The registration statement of the
Surviving Company to be filed with the SEC with respect to the offering of
Surviving Company Capital Stock in connection with the Merger (the
"Registration Statement") and any amendments or supplements thereto will,
when filed, comply as to form in all material respects with the applicable
requirements of the Securities Act. At the time the Registration Statement
or any amendment or supplement thereto becomes effective and at the
Effective Time, the Registration Statement, as amended or supplemented, if
applicable, shall not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements contained therein not misleading. The
foregoing representations and warranties will not apply to statements or
omissions included in the Registration Statement or any amendment or
supplement thereto based upon information furnished by the Company for use
therein.
(g) Absence of Certain Changes or Events. Subsequent to December 31,
1997, neither Prison Realty nor any Subsidiary has sustained any material
loss or interference with its business or properties from fire, flood,
hurricane, accident or other calamity, whether or not covered by insurance,
or from any labor dispute or court or governmental action, order or decree,
which is not disclosed; and subsequent to the respective dates as of which
information is given in the Prison Realty Filed SEC Documents, (i) neither
Prison Realty nor any Subsidiary has incurred any material liabilities or
obligations, direct or contingent, or entered into any transactions not in
the ordinary course of business consistent with past practice, and (ii)
there has not been any issuance of options, warrants or rights to purchase
interests in, or the Capital Shares of, Prison Realty, or any adverse
change, or any development involving a prospective adverse change, in the
general affairs, management, business, prospects, financial position, net
worth or results of operations of Prison Realty or any Subsidiary.
(h) Compliance with Laws; Litigation. Except as described in the
Prison Realty Disclosure Schedule or the Prison Realty Filed SEC Documents,
there is not pending, or to the knowledge of Prison Realty threatened, any
legal or governmental action, suit, proceeding, inquiry or investigation,
to which
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Prison Realty or each Subsidiary or any of their respective officers,
directors or trustees is a party, or to which the property of Prison Realty
or each Subsidiary is subject, before or brought by any Governmental
Entity, wherein an unfavorable decision, ruling or finding could prevent or
materially hinder the consummation of this Agreement or result in a
material adverse effect on Prison Realty. Each of Prison Realty and each
Subsidiary has at all times operated and currently operates its business in
conformity in all material respects with all applicable statutes, common
laws, ordinances, decrees, orders, rules and regulations of Governmental
Entities. Each of Prison Realty and each Subsidiary has all licenses,
approvals or consents to operate its businesses in all locations in which
such businesses are currently being operated, and Prison Realty is not
aware of any existing or imminent matter which may materially adversely
impact its operations or business prospects other than as specifically
disclosed in the Prison Realty Filed SEC Documents or the Prison Realty
Disclosure Schedule. Prison Realty and each Subsidiary have not failed to
file with the applicable regulatory authorities any material statements,
reports, information or forms required by all applicable laws, regulations
or orders; all such filings or submissions were in material compliance with
applicable laws when filed, and no material deficiencies have been asserted
by any regulatory commission, agency or authority with respect to such
filings or submissions. Prison Realty and each Subsidiary have not failed
to maintain in full force and effect any material licenses, registrations
or permits necessary or proper for the conduct of its business, or received
any notification that any revocation or limitation thereof is threatened or
pending, and there is not to the knowledge of Prison Realty pending any
change under any law, regulation, license or permit which would materially
adversely affect the business, operations, property or business prospects
of Prison Realty. Prison Realty and each Subsidiary have not received any
notice of violation of or been threatened with a charge of violating and
are not under investigation with respect to a possible violation of any
provision of any law, regulation or order.
(i) Taxes. (A) Prison Realty is organized in conformity with the
requirements for qualification as a real estate investment trust ("REIT")
under Sections 856 through 860 of the Code, has duly elected to be taxed as
a REIT commencing with the taxable year ending December 31, 1997, and such
election has not been terminated or revoked, (B) Prison Realty is operated
in such a manner that it continues to qualify as a REIT and is taxed as a
REIT, (C) each Subsidiary constitutes a "qualified REIT subsidiary" within
the meaning of Section 856(i) of the Code, (D) Prison Realty has not
received any net income from prohibited transactions within the meaning of
Section 852(b)(6)(B) of the Code, (E) Prison Realty and each Subsidiary
have filed, or have caused to be filed on their behalf, all tax returns
required to be filed by them (collectively, "Prison Realty Returns"), and
as of the time of filing, all the Prison Realty Returns were complete and
accurate except to the extent that any failure to file or any inaccuracies
in any filed Prison Realty Returns would not have a material adverse effect
on Prison Realty, (F) Prison Realty and each Subsidiary have paid or Prison
Realty has made adequate reserves in its financial statements included in
the Prison Realty Filed SEC Documents (other than reserves for deferred
income taxes established to reflect differences between book basis and tax
basis of assets and liabilities) for all taxes payable by Prison Realty and
each Subsidiary except to the extent that any failure to pay or reserve
would not have a material adverse effect on Prison Realty, (G) Prison
Realty and each Subsidiary have made or Prison Realty will make provision
in its financial statements for all taxes payable for any periods that end
before the Effective Time for which no Prison Realty Returns have yet been
filed and for any periods that begin before the Effective Time and end
after the Effective Time to the extent such taxes are attributable to the
portion of any such period ending at the Effective Time except to the
extent that any failure to make such provision would not have a material
adverse effect on Prison Realty, (H) neither Prison Realty nor any
Subsidiary has requested any extension of time within which to file or send
any Prison Realty Return, which Prison Realty Return has not since been
filed or sent, except to the extent that any such request for an extension
would not have a material adverse effect on Prison Realty, (I) no
deficiency for any taxes has been proposed, asserted or assessed in writing
against Prison Realty or any Subsidiary except to the extent that any such
deficiency would not have a material adverse effect on Prison Realty, (J)
no claim for unpaid taxes has become a Lien of any kind against the
property of Prison Realty or any Subsidiary or is being asserted against
Prison Realty or any Subsidiaries except to the extent that any such Lien
would not have, individually or in the aggregate, a material adverse effect
on
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Prison Realty, (K) neither Prison Realty nor any Subsidiary is a party to
or is otherwise bound by (or has any assets bound by) any tax sharing
agreement, tax indemnity obligation or similar agreement or arrangement,
(L) each of Prison Realty and each Subsidiary has duly and timely withheld
from employee salaries, wages and other compensation and paid over to the
appropriate tax authorities all taxes required to be so withheld and paid
over for all periods for which the statutory period of limitations for the
assessment of tax has not yet expired except to the extent that any failure
to so withhold and pay over would not have a material adverse effect on
Prison Realty, and (M) Prison Realty represents that after the Effective
Time, the Surviving Company will be operated in such a manner that it will
continue to qualify as a REIT.
(j) Certain Agreements. Neither Prison Realty nor any Subsidiary is
in default under any material agreement, commitment, lease or other
instrument to which it or any of its properties is subject, and there has
not occurred any event that, with the giving of notice or the lapse of time
or both, would constitute such a default by Prison Realty or any Subsidiary
or, to the knowledge of the executive officers of Prison Realty, a default
thereunder by any other party thereto, except in all cases where such
defaults, individually or in the aggregate, would not have a material
adverse effect on Prison Realty. Neither Prison Realty nor any Subsidiary
is a party to any contract (other than leases) containing any covenant
restricting its ability to conduct its business as currently conducted
except for any such covenants that would not, individually or in the
aggregate, have a material adverse effect on Prison Realty. Neither Prison
Realty nor any Subsidiary is in breach in any material respect under its
declaration of trust, charter, bylaws or other organizational documents.
(k) Properties. (i) Prison Realty Owned Real Property. The Prison
Realty Filed SEC Documents describe all material real property owned by
Prison Realty or any Subsidiary (collectively, the "Prison Realty Owned
Real Property"). Except as disclosed therein, in the title insurance
policies relating to the Prison Realty Owned Real Property or in the Prison
Realty Disclosure Schedule, each of Prison Realty and each Subsidiary has
good, valid and marketable title to the Prison Realty Owned Real Property
free of all Liens, in each case except, individually or in the aggregate,
as would not have a material adverse effect on Prison Realty. Except as set
forth in Section 3.02(k)(i) of the Prison Realty Disclosure Schedule, there
are no outstanding contracts for the sale of any of the Prison Realty Owned
Real Property, except those contracts relating to property the value in
respect of which does not exceed $5,000,000 individually or $15,000,000 in
the aggregate.
(ii) Prison Realty Leased Real Property. The Prison Realty Filed SEC
Documents describe all leases and subleases (the "Prison Realty Real
Property Leases") with respect to all material real property which is
leased or subleased by the Company or its Subsidiaries (the "Prison Realty
Leased Real Property"; the Prison Realty Owned Real Property and the Prison
Realty Leased Real Property are collectively defined as the "Prison Realty
Real Property"). Except as disclosed in the Prison Realty Filed SEC
Documents, or in the title insurance policies relating to the Prison Realty
Leased Real Property, copies of which have been provided to the Company,
pursuant to the Prison Realty Real Property Leases, Prison Realty and its
Subsidiaries hold good and valid leasehold title to the Prison Realty
Leased Real Property, in each case in accordance with the provisions of the
applicable Prison Realty Real Property Lease and free of all Liens, in each
case except, individually or in the aggregate, as would not have a material
adverse effect on Prison Realty. Each of the Prison Realty Real Property
Leases is enforceable against Prison Realty and, to the knowledge of Prison
Realty, against the other party thereto, in accordance with its terms,
subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or
affecting creditor's rights and to general equity principles and except for
such failures to be enforceable as would not, individually or in the
aggregate, have a material adverse effect on Prison Realty. Other than as
disclosed in the title insurance policies relating to the Prison Realty
Leased Real Property or such exceptions which would not have a material
adverse effect on Prison Realty, all Prison Realty Real Property Leases are
in full force and effect and grant in all respects the leasehold estates or
rights of occupancy or use they purport to grant.
(iii) Improvements Under Construction. With respect to those
Improvements being constructed as set forth in the Prison Realty Disclosure
Schedule, to the knowledge of Prison Realty, (a) the budget
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for the construction of the Improvements fairly and accurately reflects
Prison Realty's good faith estimate of the costs and expenses shown thereon
reasonably necessary to develop and construct the Improvements in
accordance with the plans and specifications therefor, and Prison Realty
has strictly adhered to said budget and has permitted no deviations from
said budget or the plans and specifications for the Improvements; (b) the
plans and specifications for the Improvements have been approved by all
applicable Governmental Entities having jurisdiction over the Prison Realty
Real Property, the development and construction of the Improvements and the
use and occupancy thereof for its intended purposes, and/or any utility
services to the Prison Realty Real Property; (c) all utility services
necessary for the development and construction of the Improvements and the
use and occupancy thereof for its intended purposes are available through
public or private easements or rights-of-way at the boundaries of the
Prison Realty Real Property, including, without limitation, sanitary sewer,
electricity, gas, water, telephone, and storm water drainage; (d) all roads
necessary for ingress and egress to the Prison Realty Real Property, and
for the full utilization of the Prison Realty Real Property for its
intended purposes, have either been completed pursuant to public or private
easements, or the necessary rights-of-way therefore have been dedicated to
public use and accepted by the appropriate Governmental Entity; (e) all
building permits, curb cuts, sewer and water taps, and other permits,
licenses, approvals, authorizations and consents required for the
development and construction of the Improvements have been obtained; (f)
the plans and specifications for the Improvements, the development and
construction of the Improvements pursuant thereto, and the use and
occupancy of the Improvements for its intended purposes comply and will
comply with all applicable zoning ordinances, building regulations,
restrictive covenants and governmental laws, rules, regulations and
ordinances, and comply and will comply with all applicable requirements,
standards and regulations of appropriate supervising boards of fire
underwriters and similar agencies, authorities or boards; (g) Prison Realty
has: (i) diligently pursued the development, construction and installation
of the Improvements; and (ii) performed such duties as may be necessary to
complete the development, construction and installation of the Improvements
in accordance with the plans and specifications and without liens, claims
or assessments, actual or contingent, asserted against the Prison Realty
Real Property for any material, labor or other items furnished in
connection therewith, and all in full compliance with all construction,
use, building, zoning and other similar laws, ordinances, rules,
regulations, codes and restrictions of any applicable Governmental Entities
or authorities or otherwise applicable thereto; (h) Prison Realty has
complied with all laws, ordinances, rules, regulations, judgments, orders,
injunctions, writs and decrees of any government or political subdivision
or agency thereof, or any court or similar entity established by any of
them, applicable to the construction of the Improvements, and has paid when
due all taxes and assessments upon the Improvements or Prison Realty Real
Property, and all claims for labor or materials, rents, and other
obligations that, if unpaid, will or might become a Lien against the
Improvements or the Prison Realty Real Property; (i) Prison Realty has
maintained, in sufficient amount, and in satisfactory form and substance,
and with satisfactory insurers: (i) builder's risk insurance, all-risk
nonreporting completed value form, insuring the Improvements against fire,
theft, extended coverage, vandalism, and such other hazards in full force
and effect at all times until the completion of construction of all of the
Improvements; and (ii) such other insurance, in such amounts and for such
terms, as may from time to time be reasonably required insuring against
such other casualties or losses which at the time are commonly insured
against in the case of premises similarly situated; and (j) the
Improvements have been constructed in accordance with the plans and
specifications therefor, and in compliance with all laws, ordinances, rules
and regulations applicable thereto, and in a good and workmanlike manner.
For the purposes of this Agreement "Improvements" shall mean all buildings,
improvements, structures and fixtures now or on the Closing Date located on
Prison Realty Real Property, including, without limitation, landscaping,
parking lots and structures, roads, drainage and all above ground and
underground utility structures, equipment systems and other so-called
"infrastructure" improvements.
(l) Environmental Matters. (i) To the knowledge of Prison Realty, the
Prison Realty Real Property and the Improvements thereon (the "Prison
Realty Facilities") are presently operated in compliance in all material
respects with all Environmental Laws.
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(ii) There are no Environmental Laws requiring any material
remediation, clean up, repairs, constructions or capital expenditures
(other than normal maintenance) with respect to the Prison Realty
Facilities.
(iii) There are no (A) notices of any violation or alleged violation
of any Environmental Laws relating to the Prison Realty Facilities or their
uses that have been received by Prison Realty, or (B) writs, injunctions,
decrees, orders or judgments outstanding, or any actions, suits, claims,
proceedings or investigations pending, or to the knowledge of Prison Realty
threatened, relating to the ownership, use, maintenance or operation of the
Prison Realty Facilities.
(iv) All material permits and licenses required under any
Environmental Laws in respect of the operations of the Prison Realty
Facilities have been obtained, and the Prison Realty Facilities are in
compliance, in all material respects, with the terms and conditions of such
permits and licenses.
(m) Labor Matters. As of the date hereof, (i) to the knowledge of
Prison Realty there are no representation or certification proceedings, or
petitions seeking a representation proceeding pending or threatened to be
brought or filed with the National Labor Relations Board or any other labor
relations tribunal or authority and (ii) to the knowledge of Prison Realty
there are no organizing activities or strikes involving Prison Realty or
any of its Subsidiaries with respect to any group of employees of Prison
Realty or its Subsidiaries, in each case that would be expected,
individually or in the aggregate, to have a material adverse effect on
Prison Realty.
(n) Benefit Plans. (i) All "employee benefit plans" (as defined in
Section 3(3) of ERISA) and all other compensation, bonus, pension, profit
sharing, deferred compensation, stock ownership, stock purchase, stock
option, phantom stock, retirement, employment, change-in-control, welfare,
collective bargaining, severance, disability, death benefit,
hospitalization and medical plans, agreements, arrangements or
understandings that are maintained or contributed to (or previously
contributed to) for the benefit of any current or former employee, officer
or director of Prison Realty or any of its Subsidiaries and with respect to
which the Company or any of its Subsidiaries would reasonably be expected
to have direct or contingent liability are defined herein as the "Prison
Realty Benefit Plans". Prison Realty has heretofore delivered or made
available to the Company true and complete copies of all Prison Realty
Benefit Plans and, with respect to each Prison Realty Benefit Plan, true
and complete copies of the following documents: the most recent actuarial
report, if any; the most recent annual report, if any; any related trust
agreement, annuity contract or other funding instrument, if any; the most
recent determination letter, if any; and the most recent summary plan
description, if any.
(ii) Except as disclosed in Section 3.02(n) of the Prison Realty
Disclosure Schedule: (A) none of the Prison Realty Benefit Plans is a
"multiemployer plan" within the meaning of Section 3(37) of ERISA or is
otherwise subject to Title IV of ERISA; (B) none of the Prison Realty
Benefit Plans promises or provides retiree medical or life insurance
benefits to any person; (C) neither Prison Realty nor any of its
Subsidiaries has any obligation to adopt or has taken any corporate action
to adopt, any new Prison Realty Benefit Plan or, except as required by law,
to amend any existing Prison Realty Benefit Plan; (D) each Prison Realty
Benefit Plan has been administered in compliance with its terms and the
applicable provisions of ERISA, the Code and all other applicable laws,
rules and regulations except for any failures to so administer any Prison
Realty Benefit Plan as would not have a material adverse effect on Prison
Realty; (E) each Prison Realty Benefit Plan that is intended to be
qualified within the meaning of Section 401(a) of the Code is so qualified
and has received a favorable determination letter as to its qualification
and, to Prison Realty's knowledge, nothing has occurred that would be
reasonably likely to cause the loss of such qualification; (F) neither
Prison Realty nor any entity required to be treated as a single employer
with Prison Realty under Section 414 of the Code has any unsatisfied
liability under Title IV of ERISA that would have a material adverse effect
on Prison Realty, (G) other than funding obligations and benefits claims
payable in the ordinary course, to the knowledge of Prison Realty, no event
has occurred and no circumstance exists with respect to any Prison Realty
Benefit Plan that could give rise to any liability that would have a
material adverse effect on Prison Realty, whether directly or by reason of
its affiliation with any entity required to be treated as a single employer
with Prison Realty
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under Section 414 of the Code; (H) as of the date hereof there are no
pending or, to the knowledge of the executive officers of Prison Realty,
threatened investigations, claims or lawsuits in respect of any Prison
Realty Benefit Plan that would have a material adverse effect on Prison
Realty; (I) no amount payable pursuant to a Prison Realty Benefit Plan or
any other plan, contract or arrangement of Prison Realty would be
considered an "excess parachute payment" under Section 280G of the Code;
(J) no Prison Realty Benefit Plan exists that could result in the payment
to any current or former employee, officer or director of Prison Realty of
any money or other property or accelerate or provide any other rights or
benefits as a result of the transactions contemplated by this Agreement
whether or not such payment would constitute an excess parachute payment
within the meaning of Section 280G of the Code; and (K) none of the assets
of Prison Realty or its Subsidiaries constitute "plan assets" under ERISA.
(o) Material Contracts. There are no contracts or other documents
required by the Securities Act to be described in or to be filed as
exhibits to the Prison Realty Filed SEC Documents which have not been
described or filed as required. All such contracts to which Prison Realty
or any Subsidiary is a party have been duly authorized, executed and
delivered by Prison Realty or any Subsidiary, constitute valid and binding
agreements of Prison Realty or any Subsidiary and are enforceable against
Prison Realty or any Subsidiary in accordance with the terms thereof. Each
of Prison Realty and each Subsidiary has performed all material obligations
required to be performed by it, and is neither in default in any material
respect nor has it received notice of any default or dispute under, any
such contract or other material instrument to which it is a party or by
which its property is bound or affected. To the best knowledge of Prison
Realty, no other party under any such contract or other material instrument
to which it is a party is in default in any material respect thereunder.
(p) Accounting. Prison Realty's system of internal accounting
controls is sufficient to meet the broad objectives of internal accounting
controls insofar as those objectives pertain to the prevention or detection
of errors or irregularities in amounts that would be material in relation
to Prison Realty's financial statements.
(q) Vote Required. Assuming the accuracy of the representation and
warranty of the Company contained in Section 3.01(u), the Prison Realty
Shareholder Approval is the only vote of the holders of any class or series
of Prison Realty's securities necessary to approve this Agreement and the
transactions contemplated hereby.
(r) Board Recommendation. On the date hereof with respect to this
Agreement and on April 18, 1998 with respect to the Agreement and Plan of
Merger dated as of April 18, 1998, the Board of Trustees of Prison Realty,
at a meeting duly called and held, by the unanimous vote of the Independent
Trustees (as defined in Prison Realty's declaration of trust) present at
such meeting, (i) determined that such agreement and the Merger and the
other transactions contemplated hereby and thereby are fair to and in the
best interests of the shareholders of Prison Realty, (ii) adopted such
agreement and approved the Merger and (iii) resolved to recommend that the
holders of Prison Realty Common Shares approve such agreement.
(s) Maryland Law on Business Combinations. Assuming the accuracy of
the representation and warranty of the Company contained in Section
3.01(u), the approval of the Merger by the Board of Trustees of Prison
Realty referred to in Section 3.02(r) constitutes approval of the Merger
for purposes of the MRL and represents all the actions necessary to ensure
that Section 3-602 of the MGCL does not apply to the Merger.
(t) Brokers. No broker, investment banker, financial advisor or other
person, other than J.C. Bradford & Co., L.L.C. ("Bradford"), the fees and
expenses of which will be paid by Prison Realty, is entitled to any
broker's, finder's, financial advisor's or other similar fee or commission
in connection with the transactions contemplated by this Agreement based
upon arrangements made by or on behalf of Prison Realty. Prison Realty's
arrangement with Bradford has been disclosed to the Company prior to the
date hereof.
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(u) Opinion of Financial Advisor. Prison Realty has received the
opinion of Bradford, dated as of the date hereof, to the effect that the
Merger Consideration to be paid by Prison Realty is fair to Prison Realty
and the holders of its Common Shares from a financial point of view (the
"Bradford Opinion").
(v) Stock Ownership. Prison Realty does not, directly or indirectly,
own any shares of Company Capital Stock other than shares, if any, held in
Prison Realty Benefit Plans.
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
SECTION 4.01. Covenants of the Company. During the period from the date
of this Agreement until the Effective Time, the Company agrees as to itself and
its Subsidiaries that (except as expressly contemplated, required or permitted
by this Agreement or as set forth in the Company Disclosure Schedule):
(a) Ordinary Course. The Company and its Subsidiaries shall carry on
their respective businesses only in the usual, regular and ordinary course
consistent with past practice in all material respects and use their
reasonable best efforts to preserve intact their present business
organizations, maintain their rights and franchises, keep available the
services of their current officers and employees and preserve their
relationships with customers, suppliers and others having business dealings
with them to the end that their goodwill and ongoing businesses shall not
be impaired at the Effective Time. The Company shall not, nor shall it
permit any of its Subsidiaries to, enter into any new line of business, or
incur or commit to any capital expenditures, or any obligations or
liabilities in connection with any capital expenditures, other than capital
expenditures and obligations or liabilities incurred or committed to in the
ordinary course of business.
(b) Dividends; Changes in Stock. The Company shall not, nor shall it
permit any of its Subsidiaries to, nor shall it propose to, (i) declare,
set aside or pay any dividends on or make other distributions in respect of
any capital stock, (ii) adjust, split, combine or reclassify any capital
stock or issue or authorize or propose the issuance of any other securities
in respect of, in lieu of or in substitution for capital stock or (iii)
subject to Section 5.06 hereof, repurchase, redeem or otherwise acquire, or
permit any Subsidiary to purchase or otherwise acquire, any shares of
capital stock or any debt securities, warrants or options, in each case
issued by the Company or any of its Subsidiaries.
(c) Issuance of Securities. The Company shall not, nor shall it
permit any of its Subsidiaries to, issue, deliver or sell, or authorize or
propose the issuance, delivery or sale of, any shares of its or any of its
Subsidiaries' capital stock of any class or any securities convertible into
or exchangeable for, or any rights, warrants or options to acquire, any of
the foregoing, or any other securities or equity equivalents (including
stock appreciation rights), or enter into any agreement with respect to any
of the foregoing, other than the issuance of Company Common Stock (i) upon
the exercise of Company Options or Company Warrants that are outstanding on
the date of this Agreement, (ii) consistent with past practice under the
Company Benefit Plans, (iii) upon the conversion of the Series B
Convertible Preferred Stock or the Company Notes, (iv) pursuant to
Sodexho's participation rights, if any, pursuant to Section 9 of the
Sodexho Stockholders Agreement for participation in issuances permitted
hereunder.
(d) Governing Documents. The Company shall not amend or propose to
amend, nor shall it permit any of its Subsidiaries to amend, the charter
(or similar constitutive documents) or bylaws of the Company or any of its
Subsidiaries.
(e) No Acquisitions. The Company shall not, nor shall it permit any
of its Subsidiaries to, merge or consolidate with, or purchase an equity
interest in or a substantial portion of the assets of, any corporation,
partnership, association or other business organization or any division or
business thereof, except transactions pursuant to its International Joint
Venture Agreement with Sodexho.
(f) No Dispositions. The Company shall not, nor shall it permit any
of its Subsidiaries to, sell, lease, mortgage, encumber or otherwise
dispose of, any material assets (including capital stock of any
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Subsidiaries), except the sale to Prison Realty of properties that are
described as "Option Facilities" in the Prison Realty SEC Documents.
(g) Indebtedness. Except for an increase in its revolving credit
agreement, the Company shall not, nor shall it permit any of its
Subsidiaries to, incur any indebtedness for borrowed money or guarantee any
such indebtedness or issue or sell any debt securities or warrants or
rights to acquire any debt securities of the Company or any of its
Subsidiaries or guarantee any debt securities of others or enter into any
"keepwell" or similar arrangement, other than revolving credit borrowings
or borrowings to fund capital expenditures contemplated by Section 4.01(a),
in each case under the Company's existing credit agreement.
(h) Other Actions. The Company shall not, nor shall it permit any of
its Subsidiaries to, take any action that would result in any of the
representations and warranties of the Company set forth in this Agreement
that are qualified as to materiality being untrue, any of such
representations and warranties that are not so qualified being untrue in
any material respect or any of the conditions to the Merger set forth in
Article VI not being satisfied.
(i) Advice of Changes; Filings. The Company shall advise Prison
Realty of any change or event which would cause or constitute a material
breach of any of the representations or warranties of the Company contained
herein. The Company shall file all reports required to be filed by it with
the SEC or the NYSE between the date of this Agreement and the Effective
Time and shall deliver to Prison Realty copies of all such reports promptly
after the same are filed.
(j) Accounting Methods. The Company shall not change its fiscal year
or its methods, principles or practices of accounting in effect at December
31, 1997, except as required by changes in GAAP, or alter or change in any
material respect its practices and policies relating to the payment of
accrued liabilities or accounts payable.
(k) Compensation; Benefit Plans. Neither the Company nor any of its
Subsidiaries will (i) enter into, adopt, amend or terminate any Company
Benefit Plan or any other employee benefit plan or any agreement,
arrangement, plan or policy between such party and one or more of its
directors, officers or employees, except for any such actions taken in the
ordinary course of business consistent with past practice, (ii) increase in
any manner the compensation or fringe benefits of any of its directors,
officers or employees or provide any other benefit not required by any plan
and arrangement as in effect as of the date hereof, except for normal
salary compensation increases, benefit changes or cash bonus awards made in
the ordinary course of business consistent with past practice or (iii)
create or amend any Company Stock Plan (except a deferred compensation plan
for non-employee directors) or grant any equity based award pursuant to any
Company Stock Plan or otherwise.
(l) Discharges or Waivers of Claims. The Company shall not, nor shall
it permit any of its Subsidiaries to, (i) except as set forth in clause
(iii) below, pay, discharge or satisfy any claims (including claims of
shareholders), liabilities or obligations (absolute, accrued, asserted or
unasserted, contingent or otherwise), except for the payment, discharge or
satisfaction of liabilities or obligations in the ordinary course of
business consistent with past practice or in accordance with their terms as
in effect on the date hereof, (ii) waive, release, grant, or transfer any
rights of material value or modify or change in any material respect any
existing license, lease, contract or other document, other than in the
ordinary course of business consistent with past practice, (iii) settle or
compromise any litigation (whether or not commenced prior to the date of
this Agreement) other than settlements or compromises of litigation where
the amount paid (after giving effect to insurance proceeds actually
received) in settlement or compromise does not exceed $1,000,000, provided
that the aggregate amount paid in connection with the settlement or
compromise of all such litigation matters shall not exceed $5,000,000.
(m) Leases and Lease Commitments. The Company shall not, nor shall it
permit any of its Subsidiaries to, enter into or commit to enter into, or
assume, any operating or capital lease, other than (i) any such lease
contemplated by the Company Capital Budget or the Company's operating
budget, a
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copy of which has been provided to Prison Realty prior to the date hereof
or (ii) any such operating lease which is not material to the Company and
its Subsidiaries, taken as a whole.
(n) Liquidation Plan, Etc. The Company shall not, nor shall it permit
any of its Subsidiaries to, adopt a plan of complete or partial liquidation
or resolutions providing for or authorizing such a liquidation or a
dissolution, consolidation, recapitalization or bankruptcy reorganization.
(o) Affiliate Transactions. The Company shall not, nor shall it
permit any of its Subsidiaries to, engage in any transaction with, or enter
into any agreement, arrangement, or understanding with, directly or
indirectly, any of the Company's affiliates, including, without limitation,
any transactions, agreements, arrangements or understandings with any
affiliate or other person covered under Item 404 of SEC Regulation S-K that
would be required to be disclosed under such Item 404 other than such
transactions of the same general nature, scope and magnitude as are
disclosed in the Company Filed SEC Documents.
(p) Tax Matters. The Company and its Subsidiaries shall not make any
material income tax election, amend any material tax return or settle or
compromise any material tax liability.
(q) No General Authorization, Etc. The Company shall not, nor shall
it permit any of its Subsidiaries to, authorize any of, or commit or agree
to take any of, the foregoing actions.
SECTION 4.02. Covenants of Prison Realty. During the period from the date
of this Agreement until the Effective Time, Prison Realty agrees that:
(a) Ordinary Course. Prison Realty and its Subsidiaries shall carry
on their respective businesses only in the usual, regular and ordinary
course consistent with past practice in all material respects and use their
reasonable best efforts to preserve intact their present business
organizations, maintain their rights and franchises, keep available the
services of their current officers and employees and preserve their
relationships with customers, suppliers and others having business dealings
with them to the end that their goodwill and ongoing businesses shall not
be impaired at the Effective Time.
(b) Distributions. Prison Realty shall not make any distributions
other than at its current rate, provided that the rate may be increased by
the greater of fifteen percent or up to the minimum amounts as may be
required to comply with Section 857(a) of the Code.
(c) Prison Realty shall conduct its operations in a manner so as to
continue to qualify as a REIT under the Code.
(d) Other Actions. Prison Realty shall not take any action that would
result in any of its representations and warranties set forth in this
Agreement that are qualified as to materiality being untrue, any of such
representations and warranties that are not so qualified being untrue in
any material respect or any of the conditions to the Merger set forth in
Article VI not being satisfied.
(e) Structure of Transactions. Prison Realty shall advise the Company
from time to time of the proposed structure of Prison Realty and its
subsidiaries and affiliated entities at and after the Effective Time for
purposes of the Company's evaluation of the Merger and description of the
Merger and related transactions in the Joint Proxy Statement-Prospectus.
(f) Advice of Changes; Filings. Prison Realty shall advise the
Company of any change or event which would cause or constitute a material
breach of any of its representations or warranties contained herein. Prison
Realty shall file all reports required to be filed by it with the SEC or
the NYSE between the date of this Agreement and the Effective Time and
shall deliver to the Company copies of all such reports promptly after the
same are filed.
SECTION 4.03. No Solicitation. (a) The Company shall not, nor shall it
permit any of its Subsidiaries to, nor shall it authorize or permit any officer,
director or employee of, or any investment banker, attorney or other advisor or
representative of, the Company or any of its Subsidiaries to, directly or
indirectly, (i) solicit, initiate, encourage or knowingly facilitate the
submission of any takeover proposal or (ii) enter into or participate in any
discussions or negotiations regarding, or furnish to any person any information
with respect to, any takeover proposal; provided, however, that prior to the
receipt of the Company Shareholder
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Approval the Company may, in response to a bona fide takeover proposal that
constitutes a superior proposal (as defined in Section 4.03(b)) and that was
made after the date hereof (and not solicited by the Company after the date
hereof) by any person, and subject to compliance with Section 4.03(c), (A)
furnish information with respect to the Company and its Subsidiaries to such
person and its representatives pursuant to a customary confidentiality agreement
and discuss such information with such person and its representatives and (B)
participate in negotiations regarding such takeover proposal. For purposes of
this Agreement (except as set forth in Section 5.07(b)), the term "takeover
proposal" means any inquiry, proposal or offer from any person relating to any
direct or indirect acquisition or purchase of 20% or more of the assets (based
on the fair market value thereof) of the Company and its Subsidiaries, taken as
a whole, other than the transactions contemplated by this Agreement, or of 20%
or more of any class of equity securities of the Company or any of its
Subsidiaries or any tender offer or exchange offer (including by the Company or
any of its Subsidiaries) that if consummated would result in any person
beneficially owning 20% or more of any class of equity securities of the Company
or any of its Subsidiaries, or any merger, consolidation, business combination,
sale of substantially all assets, recapitalization, liquidation, dissolution or
similar transaction involving the Company or any of its Subsidiaries other than
the transactions contemplated by this Agreement.
(b) Except as set forth in this Section 4.03, the Board of Directors of the
Company shall not (i) withdraw or modify, or publicly propose to withdraw or
modify, in a manner adverse to Prison Realty, the approval or recommendation by
such Board of Directors of the Merger or this Agreement, (ii) approve or
recommend, or propose publicly to approve or recommend, any takeover proposal or
(iii) cause or agree to cause the Company to enter into any letter of intent,
agreement in principle, acquisition agreement or similar agreement related to
any takeover proposal. Notwithstanding the foregoing, if the Board of Directors
of the Company receives a superior proposal, such Board of Directors may, prior
to the receipt of the Company Shareholder Approval and subject to compliance
with Section 5.07(b), withdraw or modify its approval or recommendation of the
Merger and this Agreement, approve or recommend a superior proposal or terminate
this Agreement, but in each case only at a time that is at least five business
days after receipt by Prison Realty of written notice advising it that the Board
of Directors of the Company has resolved to accept a superior proposal if it
continues to be a superior proposal at the end of such five business day period.
For purposes of this Agreement, the term "superior proposal" means any bona fide
takeover proposal (which, for purposes of Section 4.03(a) only, may be subject
to a due diligence condition), which proposal was not solicited by the Company
after April 18, 1998, made by a third party to acquire, directly or indirectly,
for consideration consisting of cash and/or securities, more than 50% of the
shares of Company Common Stock then outstanding or all or substantially all the
assets of the Company and its Subsidiaries and otherwise on terms which the
Board of Directors of the Company determines in good faith (after consultation
with a financial advisor of nationally recognized reputation) to be more
favorable to the Company's shareholders than the Merger and for which financing,
to the extent required, is then committed or which, in the good faith judgment
of such Board of Directors, is reasonably capable of being financed by such
third party.
(c) In addition to the obligations of the Company set forth in paragraphs
(a) and (b) above, the Company promptly shall advise Prison Realty orally and in
writing of any request for information or of any takeover proposal, the material
terms and conditions of such request or takeover proposal and the identity of
the person making any such request or takeover proposal and any determination by
the Board of Directors of the Company that a takeover proposal is or may be a
superior proposal. The Company will keep Prison Realty informed as to the status
and material details (including amendments or proposed amendments) of any such
request or takeover proposal.
(d) Nothing contained in this Section 4.03 shall prohibit the Company from
taking and disclosing to its shareholders a position contemplated by Rule
14e-2(a) promulgated under the Exchange Act or from making any disclosure to the
Company's shareholders if, in the good faith judgment of the Board of Directors
of the Company after consultation with outside counsel, failure to do so would
be inconsistent with its obligations under applicable law.
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ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.01. Preparation of the Joint Proxy Statement-Prospectus. As
soon as practicable following the date of this Agreement, Prison Realty and the
Company shall prepare and file with the SEC the Joint Proxy
Statement-Prospectus. Each party hereto will cooperate with the other party in
connection with the preparation of the Joint Proxy Statement-Prospectus,
including furnishing all information as may be required to be disclosed therein.
Each of the Company and Prison Realty will use its reasonable best efforts to
cause the Joint Proxy Statement-Prospectus to be mailed to its shareholders as
promptly as practicable after the date hereof. No filing of, or amendment or
supplement to, the Joint Proxy Statement-Prospectus will be made by the Company
or Prison Realty without providing the other party and its Board of Directors or
Trustees the opportunity to review and comment thereon and to approve the same,
provided that such approvals shall not be unreasonably withheld. Each of the
Company and Prison Realty will advise the other party, promptly after it
receives notice thereof, of any request by the SEC for amendment of the Joint
Proxy Statement-Prospectus or comments thereon and responses thereto or requests
by the SEC for additional information. If at any time prior to the Effective
Time any information relating to the Company or Prison Realty, or any of their
respective affiliates, officers, trustees or directors, should be discovered by
the Company or Prison Realty which should be set forth in an amendment or
supplement to the Joint Proxy Statement/Prospectus, so that the Joint Proxy
Statement-Prospectus would not include any misstatement of a material fact or
omit to state any material fact necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, the party
which discovers such information shall promptly notify the other parties hereto
and an appropriate amendment or supplement describing such information shall be
promptly filed with the SEC and, to the extent required by law, disseminated to
the shareholders of the Company and Prison Realty.
SECTION 5.02. Access to Information. Each party shall, and shall cause
each of its Subsidiaries to, afford to the other party hereto and to its
officers, employees, accountants, counsel and other representatives (including
environmental consultants), reasonable access, during normal business hours
during the period prior to the Effective Time, to their respective properties,
books, records and personnel and, during such period, each party hereto shall,
and shall cause each of its Subsidiaries to, furnish promptly to the other party
hereto (a) a copy of each report, schedule, registration statement and other
document filed or received by it during such period pursuant to the requirements
of Federal or state securities laws and (b) such other information concerning
its business, properties and personnel as the other party may reasonably
request. With respect to matters disclosed in the Company Disclosure Schedule or
the Prison Realty Disclosure Schedule, respectively, each party agrees to
supplement from time to time the information set forth therein.
SECTION 5.03. Shareholders Meeting. Each party hereto shall, as promptly
as practicable after the date hereof, (a) duly call, give notice of, convene and
hold a Shareholders Meeting for the purpose of obtaining the Company Shareholder
Approval or the Prison Realty Shareholder Approval, as the case may be, and (b)
subject in the case of the Company to Section 4.03, through its Board of
Directors or Board of Trustees, recommend to its shareholders that they grant
the Company Shareholder Approval or the Prison Realty Shareholder Approval, as
the case may be.
SECTION 5.04. Reasonable Best Efforts. Subject to the terms and
conditions of this Agreement, each of the Company and Prison Realty shall, and
shall cause its Subsidiaries to, use all reasonable best efforts to take, or
cause to be taken, all actions, and to do, or cause to be done, and to assist
and cooperate with the other parties in doing, all things necessary, proper or
advisable to consummate and make effective, in the most expeditious manner
practicable, the Merger and the other transactions contemplated by this
Agreement, including (i) the obtaining of any necessary consent, authorization,
order or approval of, or any exemption by, any Governmental Entity and/or any
other public or private third party which is required to be obtained by such
party or any of its Subsidiaries in connection with the Merger and the other
transactions contemplated by this Agreement (provided that the Company shall not
pay or agree to pay any material amount to obtain a consent without the prior
approval of Prison Realty, which approval shall not be unreasonably withheld or
delayed), and the making or obtaining of all necessary filings and registrations
with respect thereto, (ii) the
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defending of any lawsuits or other legal proceedings challenging this Agreement,
and (iii) the execution and delivery of any additional instruments necessary to
consummate the transactions contemplated by, and to fully carry out the purposes
of, this Agreement.
SECTION 5.05. Benefits Matters. Except as otherwise provided herein,
following the Effective Time, the Surviving Company shall honor, or cause to be
honored, all obligations under employment agreements, Company Benefit Plans and
Prison Realty Benefit Plans and all other employee benefit plans, programs,
policies and arrangements of the Company or Prison Realty in accordance with the
terms thereof. Nothing herein shall be construed to prohibit the Surviving
Company from amending or terminating such agreements, programs, policies and
arrangements in accordance with the terms thereof and with applicable law.
SECTION 5.06. Stock-Based Compensation. (a) As soon as practicable
following the date of this Agreement, the Board of Directors of the Company (or,
if appropriate, any committee administering the Company Stock Plans) shall adopt
such resolutions or take other actions with respect to all outstanding options
granted pursuant to the Company Stock Plans so that unless otherwise required by
the terms of the applicable Company Stock Plan (and then in such case, to the
extent agreed by the applicable holder of a Company Option) all options granted
under the Company Stock Plans shall be converted into an option to purchase
shares of the Surviving Company (a "Company Rollover Option") with the same
conditions, including vesting and continued employment, as the Company Option to
which it relates. The obligation of the Surviving Company pursuant to this
Section 5.06(a) to issue shares of Surviving Company Common Stock or options to
purchase such shares shall be subject to the Surviving Company's determination
that it will be in compliance with applicable REIT statutes and regulations. In
the event that the Surviving Company determines that the treatment of options in
this Section 5.06 (a) will not so comply, the Surviving Company may cause any or
all (i) Company Rollover Options to be cashed out in exchange for a cash payment
equal to the following: the product of (x) the excess of 0.875 times the closing
price of one Prison Realty Common Share on the NYSE on the date that is five
days prior to the Closing Date over the exercise price per share of the Company
Common Stock subject to the Company Rollover Option and (y) the number of shares
of Company Common Stock subject to such CCA Rollover Option. All amounts payable
pursuant to this paragraph shall be subject to any required withholding of taxes
and shall be paid without interest.
(b) As soon as practicable following the date of this Agreement, the Board
of Trustees of Prison Realty (or, if appropriate, any committee administering
the Prison Realty Equity Plans) shall adopt such resolutions or take other
actions with respect to all outstanding options granted pursuant to the Prison
Realty Equity Plans so that all Prison Realty Options granted under the Prison
Realty Equity Plans shall be converted into options to purchase shares of
Surviving Company Common Stock (a "Prison Realty Rollover Option") with the same
conditions, including vesting and continued employment, as the Prison Realty
Option to which it relates and shall obtain the agreement of each holder of
Prison Realty Options that the Merger and the consummation of the transactions
contemplated hereby do not constitute a change in control under the Prison
Realty Equity Plans or otherwise affect the vesting or other terms of the Prison
Realty Options.
(c) As soon as practicable following the date of this Agreement, the Board
of Directors of the Company shall adopt such resolutions or take other actions
with respect to all outstanding shares of deferred stock granted pursuant to the
Company's Amended and Restated 1989 Stock Bonus Plan (the "Stock Bonus Plan") so
that all shares of deferred stock granted under the Stock Bonus Plan shall be
converted into shares of deferred stock of the Surviving Company with similar
vesting conditions as the Company Deferred Stock and shall obtain the agreement
of each holder of the Company Deferred Stock that the Merger and the
consummation of the transactions contemplated hereby do not constitute a change
in control under the Stock Bonus Plan or otherwise affect the vesting or other
terms of the Company Deferred Stock.
SECTION 5.07. Fees and Expenses. (a) Whether or not the Merger is
consummated, all costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby shall be paid by the party incurring
such costs or expenses, except as provided in this Section 5.07.
(b) In the event that (i) this Agreement is terminated by Prison Realty
pursuant to Section 7.01(c); (ii) this Agreement is terminated by the Company
pursuant to Section 7.01(d)(i); or (iii)(x) any person shall have made a bona
fide takeover proposal with respect to the Company after the date hereof and
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thereafter this Agreement is terminated by the Company pursuant to Section
7.01(b)(iii) or by either party pursuant to Section 7.01(b)(iv) and (y) within
12 months after such termination a takeover agreement (as defined below) is
executed by the Company or a takeover transaction (as defined below) is
consummated, then the Company shall reimburse Prison Realty for the documented
out-of-pocket fees and expenses reasonably incurred thereby in connection with
this Agreement and the transactions contemplated hereby (including those which
may be incurred in connection with enforcing the terms of this Section 5.07) in
an aggregate amount not in excess of $7,000,000 (the "Expenses"). The Company
shall pay reimbursement amounts to Prison Realty promptly (and in any event
within ten business days) following a termination referred to in clause (i) or
(ii) or promptly (and in any event within ten business days) after the first to
occur of the execution of a takeover agreement or the consummation of a takeover
transaction referred to in clause (iii) above. For purposes of this Section
5.07(b), the term "takeover transaction" shall mean any transaction if a
proposal to consummate such transaction would constitute a takeover proposal,
the term "takeover agreement" shall mean any letter of intent, agreement in
principle, acquisition agreement or similar agreement to consummate a takeover
transaction and the term "takeover proposal" shall have the meaning assigned to
such term in Section 4.03 except that (1) references to "20%" in the definition
of such term contained in Section 4.03 shall be deemed to be references to "50%"
and (2) the term "takeover proposal" shall only be deemed to refer to a
transaction involving the Company, or with respect to assets (including the
shares of any Subsidiaries), the Company and its Subsidiaries taken as a whole.
Notwithstanding the immediately preceding sentence, if any bona fide takeover
proposal (as defined in this Section 5.07(b) but without regard to clause (1)
above) made by a person with respect to the Company is made after the date
hereof and the Company accepts such proposal or any other takeover proposal (as
defined in this Section 5.07(b) but without regard to clause (1) above) made by
such person after the termination of this Agreement, then such accepted proposal
shall constitute a "takeover proposal" for purposes of Section 5.07(b)(iii). The
reimbursement for Expenses required pursuant to this paragraph shall be reduced
by one-half of any amount previously paid by CCA to Prison Realty in accordance
with Section 5.06(c).
(c) The Company agrees to reimburse Prison Realty upon request for the cost
of certain valuation and consulting services that will benefit the Surviving
Company, which reimbursement will not exceed $5.4 million.
SECTION 5.08. Indemnification, Exculpation and Insurance. (a) New Prison
Realty, Prison Realty and the Company agree that all rights to indemnification
and exculpation from liability for acts or omissions occurring at or prior to
the Effective Time and rights to advancement of expenses relating thereto now
existing in favor of the current or former directors or officers of the Company,
Prison Realty or their Subsidiaries (such persons, "Indemnified Persons") as
provided in their respective charter (or similar constitutive documents) or
bylaws and any existing indemnification agreements or arrangements of the
Company or Prison Realty shall survive the Merger and shall not be amended,
repealed or otherwise modified in any manner that would in any manner adversely
affect the rights thereunder of any such Indemnified Persons. The parties hereto
agree that the Surviving Company shall maintain, for a period of six years from
the Effective Time, the Company's current directors' and officers' insurance and
indemnification policy to the extent that it provides coverage for events
occurring at or prior to the Effective Time (the "D&O Insurance") for all
Indemnified Persons; provided, however, that the Surviving Company may, in lieu
of maintaining such existing D&O Insurance as provided above, cause comparable
coverage to be provided under any policy issued by an insurer substantially
comparable to the insurer with respect to the existing D&O Insurance, so long as
the terms thereof are no less advantageous to the Indemnified Parties than the
existing D&O Insurance. If the existing D&O Insurance expires, is terminated or
canceled during such six-year period, the Surviving Entity will use its
reasonable best efforts to cause to be obtained as much D&O Insurance as can be
obtained for the remainder of such period for an annualized premium not in
excess of the Maximum Premium, on terms and conditions no less advantageous in
any material respect than the existing D&O Insurance.
(b) The parties hereto agree that the provisions of this Section 5.08 are
(i) intended to be for the benefit of, and shall be enforceable by, each
Indemnified Person and each Indemnified Person's heirs and representatives and
(ii) in addition to, and not in substitution for, any other rights to
indemnification or contribution that any such person may have by contract or
otherwise.
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(c) The parties hereto agree that in the event that the Surviving Company
or any of its successors or assigns (i) consolidates with or merges into any
other person and is not the continuing or Surviving Company or entity of such
consolidation or merger or (ii) transfers or conveys all or substantially all of
its properties and assets to any person, then, and in each such case, proper
provision will be made by such person so that the successors and assigns of the
Surviving Company assume the obligations of the parties hereto and the Surviving
Company set forth in this Section 5.08.
SECTION 5.09. Transfer Taxes. All state, local, foreign or provincial
sales, use, real property transfer, stock transfer or similar taxes (including
any interest or penalties with respect thereto, but not including any
shareholder-level taxes based upon net income) attributable to the Merger shall
be timely paid by the Surviving Company.
SECTION 5.10. Resignation of Directors. Prior to the CCA Effective Time,
the Company shall deliver to Prison Realty evidence satisfactory to Prison
Realty of the resignation of all directors of the Company, effective at the CCA
Effective Time.
SECTION 5.11. Stock Exchange Listing. The Surviving Company, Prison
Realty and CCA shall each use its reasonable best efforts to cause the Surviving
Company Common Stock to be issued in connection with the Merger to be listed on
the NYSE, subject to official notice of issuance.
SECTION 5.12. Tax-Free Reorganization. Prior to the Effective Time, each
party shall use its reasonable best efforts to cause the Merger to qualify as a
reorganization qualifying under the provisions of Section 368(a) of the Code.
SECTION 5.13. Rule 145 Affiliates. Within 45 days following the date of
this Agreement, each of the Company and Prison Realty shall deliver to the other
a letter identifying all known persons who may be deemed affiliates of the
Company or Prison Realty under Rule 145 of the Securities Act and shall use its
reasonable best efforts to obtain prior to the Effective Time a written
agreement from each person who may be so deemed, substantially in the form of
Exhibit A hereto.
ARTICLE VI
CONDITIONS PRECEDENT
SECTION 6.01. Conditions to Each Party's Obligation To Effect the
Merger. The respective obligations of each party to effect the Merger shall be
subject to the satisfaction or waiver at or prior to the Effective Time of the
following conditions:
(a) Shareholder Approval. The Company Shareholder Approval and the
Prison Realty Shareholder Approval shall have been obtained.
(b) HSR Act. Any waiting period applicable to the Merger under the
HSR Act shall have expired or been terminated.
(c) No Injunctions or Restraints; Illegality. No temporary
restraining order, preliminary or permanent injunction or other order or
decree issued by any Governmental Entity of competent jurisdiction
enjoining or otherwise preventing the consummation of the Merger shall be
in effect; provided, however, that each of the parties shall use reasonable
best efforts to prevent the entry of any such injunction or other order or
decree and to cause any such injunction or other order or decree that may
be entered to be vacated or otherwise rendered of no effect.
(d) Prison Realty shall have obtained the opinions of either Stokes &
Bartholomew, P.A., or Arthur Andersen LLP that upon, and after, the
Effective Time of the Merger and the consummation of the transactions
contemplated hereby, the Surviving Company will be in compliance with the
requirements for qualification as a REIT under the Code, and the proposed
method of operation of the Surviving Company as described in the Joint
Proxy Statement-Prospectus will enable the Surviving Company to meet the
requirements for taxation as a real estate investment trust under the Code
beginning with the year ending December 31, 1999.
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(e) The Surviving Company Capital Stock to be issued in the Merger
shall have been approved for listing on the NYSE, subject to official
notice of issuance, if applicable.
(f) The Registration Statement shall be satisfactory in all material
respects to the Company and Prison Realty and shall have been declared
effective, and no stop order suspending the effectiveness of the
Registration Statement shall be in effect and no proceedings for such
purpose shall be pending before or threatened by the SEC.
(g) Prison Realty shall have obtained financing sufficient to fund the
operations of the Surviving Company's business as described in the Joint
Proxy Statement-Prospectus after the Effective Time of the Merger and the
consummation of the transactions contemplated hereby.
(h) The Company shall have conveyed substantially all its non-real
estate assets to Correctional Management Services Corporation, Prison
Management Services, LLC or Juvenile and Jail Facility Management Services,
LLC on substantially the same terms and conditions described in the
Registration Statement.
SECTION 6.02. Conditions to Obligation of Prison Realty To Effect the
Merger. The obligation of Prison Realty to effect the Merger is subject to the
satisfaction of the following conditions unless waived by Prison Realty:
(a) Representations and Warranties. The representations and
warranties of the Company set forth in this Agreement (i) to the extent
qualified by material adverse effect shall be true and correct, and (ii) to
the extent not qualified by material adverse effect shall be true and
correct, except that this clause (ii) shall be deemed satisfied so long as
any failures of such representations and warranties to be true and correct
do not individually or in the aggregate have a material adverse effect on
the Company, in each of cases (i) and (ii), as of the date of this
Agreement and as of the Closing Date as though made on and as of the
Closing Date, except as otherwise contemplated by this Agreement, and
Prison Realty shall have received a certificate to such effect signed on
behalf of the Company by its Chief Executive Officer or its Chief Financial
Officer.
(b) Performance of Obligations of the Company. The Company shall have
performed in all material respects all material obligations required to be
performed by it under this Agreement at or prior to the Closing Date, and
Prison Realty shall have received a certificate to such effect signed on
behalf of the Company by its Chief Executive Officer or Chief Financial
Officer.
(c) Consents, etc. Prison Realty shall have received evidence, in
form and substance reasonably satisfactory to it, that such consents,
approvals, authorizations, qualifications and orders of Governmental
Entities and other third parties as are necessary in connection with the
transactions contemplated hereby have been obtained, other than those the
failure of which to be obtained, individually or in the aggregate, would
not have a material adverse effect on the Company.
(d) No Litigation. There shall not be pending any suit, action or
proceeding brought by any Governmental Entity seeking to prohibit or limit
in any material respect the ownership or operation by the Company, Prison
Realty, the Surviving Company or any of their respective affiliates of a
substantial portion of the business or assets of the Company and its
Subsidiaries, taken as a whole, or to require any such person to dispose of
or hold separate any material portion of the business or assets of the
Company and its Subsidiaries, taken as a whole, as a result of the Merger
or any of the other transactions contemplated by this Agreement or seeking
to impose limitations on the ability of the Surviving Company or any of its
affiliates to acquire or hold, or exercise full rights of ownership of, any
shares of Company Common Stock, including, without limitation, the right to
vote the Company Common Stock on all matters properly presented to the
shareholders of the Company or seeking to prohibit the Surviving Company or
any of its affiliates from effectively controlling in any material respect
a substantial portion of the business or operations of the Company or its
Subsidiaries, in each case after giving effect to any actions required to
be taken pursuant to Section 5.04.
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(e) Prison Realty shall have obtained the opinion of its tax adviser
with respect to the status of the Prison Realty Merger as a tax-free
reorganization pursuant to Section 368(a) of the Code.
(f) Prison Realty shall have received a bring-down of the Bradford
opinion on each of the date of mailing of the Joint Proxy
Statement-Prospectus to the Shareholders of Prison Realty and on the date
of Closing (each, a "Bradford Bring-down Opinion").
SECTION 6.03. Conditions to Obligation of the Company To Effect the
Merger. The obligation of the Company to effect the Merger is subject to the
satisfaction of the following conditions unless waived by the Company:
(a) Representations and Warranties. The representations and
warranties of Prison Realty set forth in this Agreement (i) to the extent
qualified by material adverse effect shall be true and correct, and (ii) to
the extent not qualified by material adverse effect shall be true and
correct, except that this clause (ii) shall be deemed satisfied so long as
any failures of such representations and warranties to be true and correct
do not individually or in the aggregate have a material adverse effect on
Prison Realty, in each of cases (i) and (ii), as of the date of this
Agreement and as of the Closing Date as though made on and as of the
Closing Date, except as otherwise contemplated by this Agreement, and the
Company shall have received a certificate to such effect signed on behalf
of Prison Realty by the Chief Executive Officer or President.
(b) Performance of Obligations of Prison Realty. Prison Realty shall
have performed in all material respects all material obligations required
to be performed by it under this Agreement at or prior to the Closing Date,
and the Company shall have received a certificate to such effect signed on
behalf of Prison Realty by the Chief Executive Officer or President.
(c) Consents, etc. The Company shall have received evidence, in form
and substance reasonably satisfactory to it, that such consents, approvals,
authorizations, qualifications and orders of Governmental Entities and
other third parties as are necessary in connection with the transactions
contemplated hereby have been obtained, other than those the failure of
which to be obtained, individually or in the aggregate, would not have a
material adverse effect on Prison Realty.
(d) Tax Opinion. The Company shall have received the opinion of Bass,
Berry & Sims PLC or Arthur Anderson LLP with respect to the status of the
CCA Merger as a tax-free reorganization pursuant to Section 368(a) of the
Code.
(e) The Company shall have received a bring-down of the Stephens
Opinion on each of the date of mailing of the Joint Proxy
Statement-Prospectus to the shareholders of the Company and on the date of
Closing (each, a "Stephens Bring-down Opinion").
(f) Prison Realty shall have received commitments for a credit
agreement and other financing arrangements sufficient, in the reasonable
judgment of the Company's Board of Directors, to fund the operations of the
Surviving Company as described in the Joint Proxy Statement-Prospectus and
shall have provided such commitments to the Company no later than the date
the Joint Proxy Statement-Prospectus is mailed to the Company's
shareholders.
(g) Prison Realty and each holder of Prison Realty Options shall have
agreed that the Merger and the consummation of the transactions
contemplated hereby shall not constitute a change in control under the
Prison Realty Equity Plans or otherwise affect the vesting or other terms
of the Prison Realty Options.
SECTION 6.04. Frustration of Closing Conditions. Neither Prison Realty
nor the Company may rely on the failure of any condition set forth in Section
6.01, 6.02 or 6.03, as the case may be, to be satisfied if such failure was
caused by such party's failure to use all reasonable best efforts to consummate
the Merger and the other transactions contemplated by this Agreement.
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ARTICLE VII
TERMINATION AND AMENDMENT
SECTION 7.01. Termination. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after the Prison Realty
Shareholder Approval and the Company Shareholder Approval are received:
(a) by mutual written consent of Prison Realty and the Company;
(b) by Prison Realty or the Company upon written notice to the other
party:
(i) if any Governmental Entity of competent jurisdiction shall have
issued a permanent injunction or other order or decree enjoining or
otherwise preventing the consummation of the Merger and such injunction
or other order or decree shall have become final and nonappealable;
provided that the party seeking to terminate this Agreement pursuant to
this clause (i) shall have used its reasonable best efforts to prevent
or contest the imposition of, or seek the lifting or stay of, such
injunction, order or decree;
(ii) unless the party seeking to terminate this Agreement is in
material breach of its obligations hereunder, if the Company or Prison
Realty breaches or fails to perform any of its representations,
warranties, covenants or other agreements hereunder, which breach or
failure to perform (A) would give rise to the failure of a condition set
forth in Section 6.02(a) or 6.02(b) in the case of such a breach or
failure to perform on the part of the Company or 6.03(a) or 6.03(b) in
the case of such a breach or failure to perform on the part of Prison
Realty and (B) is incapable of being cured by the party so breaching or
failing to perform or is not cured within 30 days after the terminating
party gives written notice of such breach to the other party and such a
cure is not effected during such period;
(iii) if the Merger shall not have been consummated on or before
March 31, 1999, unless the failure to consummate the Merger is the
result of a material breach of this Agreement by the party seeking to
terminate this Agreement;
(iv) if, upon a vote at a duly held Company Shareholders Meeting or
any adjournment thereof, the Company Shareholder Approval shall not have
been obtained; or
(v) if, upon a vote at a duly held Prison Realty Shareholders
Meeting or any adjournment thereof, the Prison Realty Shareholder
Approval shall not have been obtained;
(c) by Prison Realty upon written notice to the Company:
(i) if the Board of Directors of the Company or any committee
thereof shall have withdrawn or modified in a manner adverse to Prison
Realty its approval or recommendation of the Merger or this Agreement,
approved or recommended any takeover proposal or resolved to do any of
the foregoing; or
(ii) if the Company shall have entered into any agreement (other
than a confidentiality agreement in accordance with Section 4.03(a))
with respect to a superior proposal or shall have resolved to do so; or
(d) by the Company:
(i) pursuant to Section 4.03(b) prior to the receipt of the Company
Shareholder Approval; or
(ii) upon written notice to Prison Realty if the Board of Trustees
of Prison Realty or any committee thereof shall have withdrawn or
modified in a manner adverse to the Company its approval or
recommendation of the Merger or this Agreement or resolved to do so.
SECTION 7.02. Effect of Termination. In the event of termination of this
Agreement by either the Company or Prison Realty as provided in Section 7.01,
this Agreement shall forthwith become void and have no effect, and, except to
the extent that such termination results from the wilful and material breach by
a party
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of any of its representations, warranties, covenants or agreements set forth in
this Agreement, there shall be no liability or obligation on the part of Prison
Realty or the Company, except with respect to Section 3.01(t), Section 3.02(v),
Section 5.07, this Section 7.02 and Article VIII, which provisions shall survive
such termination.
SECTION 7.03. Amendment. This Agreement may be amended by the parties
hereto at any time before or after the Company Shareholder Approval or the
Prison Realty Shareholder Approval is received, provided that after receipt of
the Company Shareholder Approval or the Prison Realty Shareholder Approval, no
amendment shall be made which by law requires further approval by such
shareholders without such further approval. This Agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties
hereto.
SECTION 7.04. Extension; Waiver. At any time prior to the Effective Time,
the parties hereto may, to the extent legally allowed, (a) extend the time for
the performance of any of the obligations or other acts of the other party
hereto, (b) waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant hereto and (c) subject to
the proviso of Section 7.03, waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in a written
instrument signed on behalf of such party. The failure of any party to this
Agreement to assert any of its rights under this Agreement or otherwise shall
not constitute a waiver of those rights.
SECTION 7.05. Procedure for Termination, Amendment, Extension or
Waiver. A termination of this Agreement pursuant to Section 7.01, an amendment
of this Agreement pursuant to Section 7.03 or an extension or waiver pursuant to
Section 7.04 shall, in order to be effective, require, in the case of the
Company or Prison Realty, action by its Board of Directors or Board of Trustees,
respectively, or the duly authorized committee of such Board to the extent
permitted by law.
ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.01. Nonsurvival of Representations and Warranties. None of the
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Effective Time. This Section 8.01
shall not limit any covenant or agreement of the parties which by its terms
contemplates performance after the Effective Time.
SECTION 8.02. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally,
telecopied (with confirmation) or sent by overnight or same-day courier
(providing proof of delivery) to the parties at the following addresses (or at
such other address for a party as shall be specified by like notice):
(a) if to the Company, to:
Corrections Corporation of America
10 Burton Hills Boulevard
Nashville, Tennessee 37215
Attention: Doctor R. Crants, Chairman, President
and Chief Executive Officer
Facsimile: (615) 263-3010
with a copy to:
Bass, Berry & Sims PLC
2700 First American Center
Nashville, Tennessee 37238
Attention: F. Mitchell Walker, Jr., Esq.
Facsimile: (615) 742-2775; and
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(b) if to Prison Realty, to:
CCA Prison Realty Trust
10 Burton Hills Boulevard
Suite 100
Nashville, Tennessee 37215
Attention: Michael W. Quinlan, Chief Executive Officer
Facsimile: (615) 263-0212
with a copy to:
Stokes & Bartholomew, P.A.
424 Church Street
Suite 2800
Nashville, Tennessee 37219-2323
Attention: Elizabeth Enoch Moore
Facsimile: (615) 259-1470
SECTION 8.03. Definitions; Interpretation. (a) As used in this Agreement:
(i) unless otherwise expressly provided herein, an "affiliate" of any
person means another person that directly or indirectly, through one or
more intermediaries, controls, is controlled by, or is under common control
with, such first person, where "control" means the possession, directly or
indirectly, of the power to direct or cause the direction of the management
policies of a person, whether through the ownership of voting securities,
by contract or otherwise;
(ii) "business day" means any day on which banks are not required or
authorized to close in the City of New York;
(iii) "material adverse effect" means, when used in connection with
the Company, any change, effect, event, occurrence or development that is,
or is reasonably likely to be, materially adverse to the business, results
of operations or financial condition of the Company and its Subsidiaries,
taken as a whole, other than any change, effect, event or occurrence
relating to or arising out of (A) the economy or securities markets in
general, (B) this Agreement or the transactions contemplated hereby or the
announcement thereof or (C) private corrections industry in general, and
not specifically relating to the Company or its Subsidiaries; "material
adverse effect" means, when used in connection with Prison Realty, any
change, effect, event, occurrence or development that is, or is reasonably
likely to be, materially adverse to the business, results of operations or
financial condition of the Prison Realty and its Subsidiaries, taken as a
whole, other than any change, effect, event or occurrence relating to or
arising out of (A) the economy or securities markets in general, (B) this
Agreement or the transactions contemplated hereby or the announcement
thereof or (C) private corrections industry in general, and not
specifically relating to Prison Realty or its Subsidiaries;
(iv) "person" means an individual, corporation, partnership, limited
liability company, joint venture, association, trust, unincorporated
organization or other entity; and
(v) "Subsidiary" of any person means another person, an amount of the
voting securities, other voting ownership or voting partnership interests
of which is sufficient to elect at least a majority of its Board of
Directors or other governing body (or, if there are not such voting
interests, more than 50% of the equity interests of which) is owned
directly or indirectly by such first person.
(b) When a reference is made in this Agreement to Articles, Sections,
Exhibits or Schedules, such reference shall be to an Article, Section of or
Exhibit or Schedule to this Agreement unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include", "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation". The words "hereof", "herein" and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not to any particular provision of this Agreement. The term "or" when used in
this Agreement is not exclusive. All terms defined in this Agreement
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shall have the defined meanings when used in any certificate or other document
made or delivered pursuant hereto unless otherwise defined therein. The
definitions contained in this Agreement are applicable to the singular as well
as the plural forms of such terms. Any agreement, instrument or statute defined
or referred to herein or in any agreement or instrument that is referred to
herein means such agreement, instrument or statute as from time to time amended,
modified or supplemented, including (in the case of agreements or instruments)
by waiver or consent and (in the case of statutes) by succession of comparable
successor statutes and references to all attachments thereto and instruments
incorporated therein. References to a person are also to its permitted
successors and assigns.
SECTION 8.04. Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each of
the parties and delivered to the other party.
SECTION 8.05. Entire Agreement; No Third-Party Beneficiaries; Rights of
Ownership. This Agreement (a) constitutes the entire agreement and supersedes
all prior agreements and understandings, both written and oral, among the
parties with respect to the subject matter hereof, and (b) other than Section
5.08 of this Agreement, is not intended to confer upon any person other than the
parties hereto any rights or remedies hereunder.
SECTION 8.06. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Tennessee, without regard
to any principles of conflicts of law of such State.
SECTION 8.07. Publicity. Except as otherwise permitted by this Agreement
or required by law or the rules of the NYSE, so long as this Agreement is in
effect, neither the Company nor Prison Realty shall, or shall permit any of its
affiliates to, issue or cause the publication of any press release or other
public announcement or statement with respect to this Agreement or the
transactions contemplated hereby without first obtaining the consent of the
other parties hereto. The parties agree that the initial press release to be
issued with respect to the transactions contemplated by this Agreement shall be
in the form heretofore agreed to by the parties.
SECTION 8.08. Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned, in whole or in part, by
any of the parties hereto (whether by operation of law or otherwise) without the
prior written consent of the other parties, and any such assignment that is not
so consented to shall be null and void; provided that, if necessary or advisable
under applicable provisions of corporate or tax law, Prison Realty may assign
its rights hereunder to any of its Subsidiaries or affiliates to cause the
Company to merge with a Subsidiary or affiliate of Prison Realty, but no such
assignment shall relieve Prison Realty of its obligations hereunder including
the obligations to deliver the Merger Consideration. Subject to the preceding
sentence, this Agreement will be binding upon, inure to the benefit of and be
enforceable by the parties and their respective successors and assigns.
SECTION 8.09. Enforcement. The parties agree that irreparable damage
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any Federal court located in the
State of Tennessee or in any Tennessee state court, this being in addition to
any other remedy to which they are entitled at law or in equity. In addition,
each of the parties hereto (a) consents to submit itself to the personal
jurisdiction of any Federal court located in the State of Tennessee or any
Tennessee state court in the event any dispute arises out of this Agreement or
any of the transactions contemplated by this Agreement and (b) agrees that it
will not attempt to deny or defeat such personal jurisdiction by motion or other
request for leave from any such court.
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IN WITNESS WHEREOF, the Company, Prison Realty and Prison Realty
Corporation have caused this Agreement to be signed by their respective officers
thereunto duly authorized, all as of the date first above written.
CORRECTIONS CORPORATION OF AMERICA
By: /s/ DOCTOR R. CRANTS
------------------------------------
Name: Doctor R. Crants
Title: Chairman, Chief Executive
Officer and President
CCA PRISON REALTY TRUST
By: /s/ D. ROBERT CRANTS, III
------------------------------------
Name: D. Robert Crants, III
Title: President
PRISON REALTY CORPORATION
By: /s/ DOCTOR R. CRANTS
------------------------------------
Name: Doctor R. Crants
Title: Chairman and Chief Executive
Officer
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EXHIBIT A TO AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
, 1998
Prison Realty Corporation
10 Burton Hills Boulevard
Nashville, Tennessee 37215
Ladies and Gentlemen:
I have been advised that I may be considered an "affiliate" of either
Corrections Corporation of America ("CCA") or CCA Prison Realty Trust ("Prison
Realty") for purposes of Rule 145 of the General Rules and Regulations (the
"Rules and Regulations") of the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "1933 Act").
Pursuant to the Amended and Restated Agreement and Plan of Merger dated as of
September 29, 1998 (the "Merger Agreement"), by and between CCA, Prison Realty
and Prison Realty Corporation, at the effective time of the mergers described
therein (the "Merger"), I will receive in exchange for each share of common
stock of CCA or common or preferred shares of Prison Realty then owned by me a
number of shares ("Shares") of common stock of Prison Realty Corporation ("New
Prison Realty") or Series A Preferred Stock of New Prison Realty as specified in
the Merger Agreement. This agreement is hereinafter referred to as the
"Affiliate's Agreement."
Each of CCA and Prison Realty represents that it has filed, and New Prison
Realty agrees to file with the Commission on a timely basis for two years after
the effective date of the Merger, all reports required to be filed by it under
Section 13 of the Securities Exchange Act of 1934, as amended. New Prison Realty
shall also, upon request, furnish to me a written statement as to its compliance
with the reporting requirements of Rule 144 under the 1933 Act. In consideration
for such representation and agreements, I represent and warrant to, and agree
with, CCA, Prison Realty and New Prison Realty that:
(a) I shall not make any sale, transfer or other disposition of my
Shares in violation of the 1933 Act or the Rules and Regulations
promulgated thereunder.
(b) I have been advised that the offering, sale and delivery of the
Shares to me pursuant to the Merger have been registered under the 1933 Act
on a Registration Statement on Form S-4. I have also been advised, however,
that, since I may have been deemed to be an "affiliate" of either CCA or
Prison Realty at the time the Merger Agreement was submitted for a vote of
the shareholders of CCA or Prison Realty, as the case may be, any public
offering or sale by me of any of the Shares will, under current law,
require either (i) compliance with Rule 145 promulgated by the Commission
under the 1933 Act, (ii) the further registration under the 1933 Act of the
Shares to be offered and sold, or (iii) the availability of another
exemption from such registration under the 1933 Act.
(c) I have read this Affiliate's Agreement and the Merger Agreement
and have discussed their requirements and other applicable limitations upon
my ability to sell, transfer or otherwise dispose of the Shares, to the
extent I felt necessary, with my counsel or counsel for CCA or Prison
Realty.
(d) I understand that stop transfer instructions similar to the
limitations referred to in paragraph (b) above will be given to New Prison
Realty's transfer agent with respect to the Shares, and that there will be
placed on the certificates representing the Shares, or any substitutions
therefor, a legend stating in substance:
The shares represented by this certificate were issued in a transaction
to which Rule 145 promulgated under the Securities Act of 1933, as
amended (the "Act"), applies and may be sold or otherwise transferred
only in compliance with the limitations of such Rule 145, or upon
receipt by Prison Realty Corporation of an opinion of counsel acceptable
to it that some other exemption from registration under the Act is
available, or pursuant to a registration statement under the Act.
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<PAGE> 223
(e) I hereby agree that, for a period of two (2) years following the
effective date of the Merger, if I transfer the Shares received by me in
the Merger, I will obtain an agreement similar to this from each transferee
if such transfer is effected other than in a transaction involving a
registered public offering or as a sale pursuant to Rule 145. I further
agree that if I seek to transfer the Shares in accordance with the
provisions of Rule 145, I will deliver to New Prison Realty written notice
substantially in the form attached hereto as Exhibit A, and a broker's
representation substantially in the form attached hereto as Exhibit B. Upon
delivery of such notice and broker's representation, you agree that the
legend set forth in paragraph (d) above shall be promptly removed from the
certificates representing the Shares to be sold in accordance with the
provisions of Rule 145 and related stop transfer restrictions shall be
lifted.
(f) It is understood and agreed that this Affiliate's Agreement shall
terminate and be of no further force and effect and the legend set forth in
paragraph (d) above shall be removed by delivery of substitute certificates
without such legend, and the related stop transfer restrictions shall be
lifted forthwith if (i) my Shares shall have been registered under the 1933
Act for sale, transfer or other disposition by me or on my behalf, or (ii)
I am not at the time an affiliate of New Prison Realty and have held the
Shares for at least one (1) year (or such other period as may be prescribed
by the 1933 Act and the Rules and Regulations promulgated thereunder) and
New Prison Realty has filed with the Commission all of the reports it is
required to file under the Securities Exchange Act of 1934, as amended,
during the preceding twelve (12) months, or (iii) I am not at the time an
affiliate of New Prison Realty and have not been an affiliate of New Prison
Realty for at least three months and have held the Shares for at least two
(2) years (or such other period as may be prescribed by the 1933 Act and
the Rules and Regulations promulgated thereunder), or (iv) New Prison
Realty shall have received a letter from the staff of the Commission, or an
opinion of counsel reasonably acceptable to New Prison Realty, to the
effect that the stop transfer restrictions and the legend are not required,
or (v) the procedures specified in paragraph (e) above are followed.
(g) Assignment. Neither this Affiliate's Agreement nor any of the
rights or obligations hereunder may be assigned by any party hereto without
the prior written consent of the other party. Subject to the foregoing,
this Affiliate's Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective successors and assigns, and no
other person shall have any right, benefit or obligation hereunder. New
Prison Realty agrees that if I transfer my Shares to a transferee who
pursuant to the Rules and Regulations must hold such stock subject to the
legend required by paragraph (e) herein, then New Prison Realty covenants
and representations set forth herein shall inure to the benefit of such
transferee.
(h) Choice of Law. This Affiliate's Agreement shall be construed,
interpreted and the rights of the parties determined in accordance with the
laws of the State of Tennessee except with respect to matters of law
concerning the internal corporate or governance affairs of any corporate or
other legal entity which is a party to or the subject of this Affiliate's
Agreement, and as to those matters the law of the jurisdiction under which
the respective entity derives its powers shall govern.
(i) Entire Agreement; Amendments and Waivers. This Affiliate's
Agreement, together with the Merger Agreement and all exhibits and
schedules hereto, constitute the entire agreement among the parties
pertaining to the subject matter hereof and supersede all prior agreements,
understandings, negotiations and discussions, whether oral or written, of
the parties.
No failure or delay on the part of any party hereunder in the exercise
of any power, right or privilege hereunder shall impair such power, right
or privilege or be construed to be a waiver of any default or acquiescence
therein, nor shall any single or partial exercise thereof or any other
right, power or privilege preclude another or further exercise thereof or
of any other power, right or privilege. Except as otherwise specified, all
rights and remedies existing under this Affiliate's Agreement are
cumulative to and not exclusive of any rights or remedies otherwise
available.
No notice to or demand on a party in any case shall entitle such party
to any further notice or demand in similar or other circumstances unless
expressly provided herein.
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<PAGE> 224
(j) Counterparts. This Affiliate's Agreement may be executed in one
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
(k) Expenses. Each party hereunder shall bear its own expenses for
the preparation and negotiation of this Affiliate's Agreement. In the event
of any litigation, arbitration or claim by any party hereunder, the
prevailing party shall be reimbursed for all costs and expenses for such
litigation, arbitration or claim, including legal, accounting, and
investigative costs and the costs of enforcing this paragraph.
Very truly yours,
--------------------------------------
Name:
--------------------------------------
Accepted and agreed to this
day of , 1998.
CCA PRISON REALTY TRUST
By:
- --------------------------------------
Name:
- --------------------------------------
Title:
- --------------------------------------
CORRECTIONS CORPORATION OF AMERICA
By:
- --------------------------------------
Name:
- --------------------------------------
Title:
- --------------------------------------
PRISON REALTY CORPORATION
By:
- --------------------------------------
Name:
- --------------------------------------
Title:
- --------------------------------------
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<PAGE> 225
EXHIBIT A
Prison Realty Corporation
10 Burton Hills Boulevard
Nashville, Tennessee 37215
Attention:
Gentlemen:
I propose to sell shares of the common stock of Prison Realty
Corporation that I received in connection with the transactions contemplated by
the Amended and Restated Agreement and Plan of Merger dated as of September 29,
1998, by and between Corrections Corporation of America and CCA Prison Realty
Trust. I propose to effect such sale through , my broker, and
warrant that such sale will be made in accordance with the requirements relating
to sales by "affiliates" of Rule 145 of the Securities Act of 1933, as amended.
Very truly yours,
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<PAGE> 226
EXHIBIT B
Prison Realty Corporation
10 Burton Hills Boulevard
Nashville, Tennessee 37215
Attention:
Gentlemen:
We have been asked to sell shares (the "Shares") of Common Stock
of Prison Realty Corporation (the "Company") owned by ("Seller").
We understand that the Seller is an "affiliate" within the meaning of Rule 145
promulgated under the Securities Act of 1933, as amended, and that sales by him
of the Company's Common Stock must comply with certain provisions of Rule 144
under such Act.
We hereby represent and warrant as follows:
1. We have made reasonable inquiry as required by paragraph (g)(3) of
Rule 144 and, based upon such inquiry, we are not aware of circumstances
indicating that the Seller is an underwriter with respect to the Shares or
that the transaction is part of a distribution of the Shares.
2. The Shares for which we are acting as broker will be sold by us in
"brokers' transactions" as defined in paragraph (g) of Rule 144.
3. Neither the Seller nor we have solicited or arranged for the
solicitation, nor will we solicit or arrange for the solicitation, of
orders to buy the Shares, nor have we received nor will we receive any
payment in connection with the sale of the Shares other than usual and
customary brokerage commissions.
Very truly yours,
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<PAGE> 227
APPENDIX B
[J.C. Bradford & Co. letterhead]
October 15, 1998
Board of Trustees
Prison Realty Trust
10 Burton Hills Boulevard
Suite 100
Nashville, TN 37215
Gentlemen:
You have requested our opinion as to the fairness, from a financial point
of view, to Prison Realty Trust, a Maryland real estate investment trust (the
"Company"), and its shareholders, of the Merger Consideration (as such term is
defined in the hereinafter described Merger Agreement) proposed to be paid by
the Company pursuant to the Amended and Restated Agreement and Plan of Merger,
dated as of September 29, 1998 (the "Merger Agreement"), between the Company and
Corrections Corporation of America ("CCA"). In the Merger, CCA will be merged
with and into Prison Realty Corporation ("New Prison Realty") and each issued
and outstanding share of CCA common stock, $1.00 par value per share ("CCA
Common Stock"), will be converted into the right to receive 0.875 share of New
Prison Realty common stock, $0.01 par value per share ("New Prison Realty Common
Stock"), and the Company will be merged with and into New Prison Realty with
each shareholder of the Company receiving 1.0 share of New Prison Realty Common
Stock or 1.0 share of New Prison Realty Series A Cumulative Preferred Stock,
$0.01 par value per share ("New Prison Realty Preferred Stock"), for each
Company common share, $0.01 par value per share (the "Company Common Shares"),
or Company Series A Cumulative Preferred Share, $0.01 par value per share (the
"Company Preferred Shares") held by him (collectively, the "Merger"). The terms
and conditions of the Merger are more fully set forth in the Merger Agreement.
Capitalized terms used but not defined herein have the meanings ascribed to such
terms in the Merger Agreement and in the Joint Proxy Statement-Prospectus, as
hereinafter defined.
J.C. Bradford & Co., L.L.C., as part of its investment banking business,
engages in the valuation of businesses and securities in connection with mergers
and acquisitions, negotiated underwritings, secondary distributions of listed
and unlisted securities, private placements and valuations for estate, corporate
and other purposes. We will receive a fee from the Company for rendering this
opinion. In addition, the Company has agreed to indemnify us for certain
liabilities arising out of our engagement. We have, in the past, acted as a lead
underwriter of common stock offerings of the Company and CCA and provided
financial advisory services to the Company and CCA and may continue to do so and
have received, and may receive, fees for the rendering of such services.
In conducting our analysis and arriving at our opinion, we have considered
such financial and other information as we deemed appropriate including, among
other things, the following: (i) the Joint Proxy Statement-Prospectus of CCA and
the Company mailed to the shareholders of each company in connection with their
approval of the Merger and related transactions (the "Joint Proxy
Statement-Prospectus"); (ii) the Merger Agreement and its exhibits; (iii) the
historical financial position and results of operations of CCA and the Company
set forth in their respective periodic reports and proxy materials filed with
the Securities and Exchange Commission, including Form 10-K for fiscal year 1997
and Forms 10-Q for the quarterly periods ended March 31, 1998 and June 30, 1998,
respectively; (iv) certain internal operating data and financial analyses and
forecasts of CCA and the Company for the fiscal years beginning January 1, 1998
and ending December 31, 2003, prepared by their respective senior management;
(v) certain financial analysis and forecasts of New Prison Realty, the Service
Companies and Operating Company for the fiscal years beginning January 1, 1998
and ending December 31, 2003 prepared by senior managements of the Company and
CCA; (vi) reported stock price and trading data for the CCA Common Stock and
Company Common Shares and
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<PAGE> 228
the Company Preferred Shares; (vii) certain financial and securities trading
data of certain other companies, the securities of which are publicly traded,
that we believed to be comparable to or relevant to the transaction; and (viii)
the financial terms of certain other transactions that we believed to be
relevant. We also have held discussions with members of the senior management of
the Company and CCA regarding the past and current business operations,
financial condition and future prospects of CCA and the Company.
We have taken into account our assessment of general economic, market and
financial and other conditions and our experience in other transactions, as well
as our experience in securities valuation and our knowledge of the industry in
which CCA operates generally. Our opinion is necessarily based upon the
information made available to us and market, economic and other conditions as
they exist and can be evaluated as of the date hereof. We have assumed and
relied upon the accuracy and completeness of all of the financial and other
information reviewed by us for purposes of our opinion and have not assumed any
responsibility for, nor undertaken an independent verification of, such
information. With respect to the internal operating data and financial analyses
and forecasts (including those with respect to New Prison Realty, the Service
Companies, and Operating Company) supplied to us by the Company and CCA, we have
assumed that such data, analyses and forecasts were reasonably prepared on bases
reflecting the best currently available estimates and judgments of their
respective senior management as to the recent and likely future performance of
the Company and CCA. Accordingly, we express no opinion with respect to such
analyses or forecasts or the assumptions on which they are based. We have
assumed that certain financing required to complete the Merger and fund the
Company's expected capital requirements for fiscal 1999 will be irrevocably
obtained on terms consistent with those provided by management. We have assumed
that the transactions set forth in the Merger Agreement and Joint Proxy
Statement-Prospectus are consummated as set forth in the Merger Agreement and
Joint Proxy Statement-Prospectus and not in a manner adverse to the Company. We
have also assumed that in the course of obtaining the necessary regulatory or
other consents or approvals (contractual or otherwise) for the Merger, no
restrictions, including any divestiture requirements or amendments or
modifications, will be imposed that will have an adverse effect on New Prison
Realty. We were not asked to consider and our opinion does not address the
relative merits of the proposed Merger compared to any alternative business
strategies that might exist for the Company or the effect of any other
transaction in which the Company might engage. Furthermore, we have not made an
independent appraisal of the assets and liabilities of New Prison Realty or any
of its subsidiaries or affiliates. We have assumed that the Merger will qualify
as a tax-free reorganization for United States Federal income tax purposes.
Finally, we have also assumed that New Prison Realty will qualify after
consummation of the Merger as a REIT for federal income tax purposes.
This opinion is for the use and benefit of the Board of Directors of the
Company. Our opinion does not address the merits of the underlying decision by
the Company to engage in the Merger and does not constitute a recommendation to
any shareholder of the Company as to how such shareholder should vote on the
proposed Merger.
We are not expressing any opinion herein as to the prices at which the CCA
Common Stock or Company Common Shares or Company Preferred Share will trade
following the mailing of the Joint Proxy Statement-Prospectus or as to the
prices at which New Prison Realty Common Stock and New Prison Realty Preferred
Stock will trade following the consummation of the Merger.
Based upon and subject to the foregoing and based upon such other matters
as we consider relevant, it is our opinion that, as of the date hereof, the
Merger Consideration to be paid by the Company is fair to the Company and its
shareholders from a financial point of view.
Very truly yours,
J.C. Bradford & Co., L.L.C.
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<PAGE> 229
APPENDIX C
Stephens Inc.
October 15, 1998
Members of the Board of Directors
Corrections Corporation of America
10 Burton Hills Boulevard
Nashville, Tennessee 37215
Members of the Board:
We have acted as your financial advisor in connection with the proposed
merger of Corrections Corporation of America (the "Company"), with and into
Prison Realty Corporation ("New PZN") pursuant to which each outstanding share
of the Company's common stock, par value $1.00 per share (the "Company Shares"),
will be converted into the right to receive 0.875 share (the "Exchange Ratio")
of common stock of New PZN (the "New PZN Shares") and the merger of CCA Prison
Realty Trust ("PZN") with and into New PZN pursuant to which outstanding Prison
Realty Common Shares and Series A Preferred Shares will be converted into
similar securities of New PZN on a one-for-one basis (collectively referred to
as the "Transaction"). We are familiar with the structure of the proposed
Transaction, including the fact that the operations of the Company will be
reorganized so that they will ultimately be conducted by certain affiliates of
New PZN, and we are familiar with the proposed structure of those affiliates and
the proposed relationship between New PZN and those affiliates.
You requested our opinion as to whether the Exchange Ratio is fair from a
financial point of view to the Company and its shareholders.
In connection with rendering our opinion we have;
(i) analyzed certain publicly available financial statements and
reports regarding the Company and PZN;
(ii) analyzed certain internal financial statements and other
financial and operating data (including financial projections) concerning
the Company and PZN prepared by managements of the Company and PZN;
(iii) analyzed, on a pro forma basis, the financial effect of the
Transaction;
(iv) reviewed the reported prices and trading activity for the Company
Shares and PZN Shares;
(v) compared the financial performance of the Company and PZN and the
prices and trading activity of the Company Shares and PZN Shares with that
of certain other comparable publicly-traded companies and their securities;
(vi) reviewed the financial terms, to the extent publicly available,
of certain comparable transactions;
(vii) reviewed the Amended and Restated Agreement and Plan of Merger
between the Company and PZN and related documents, including the Joint
Proxy Statement-Prospectus; and
(viii) discussed with managements of the Company and PZN the
operations of and future business prospects for the Company and PZN and the
anticipated financial consequences of the Transaction.
We have relied on the accuracy and completeness of the information and
financial data provided to us by the Company and PZN, and our opinion is based
upon such information. We have inquired into the reliability of such information
and financial data only to the limited extent necessary to provide a reasonable
basis for our opinion, recognizing that we are rendering only an informed
opinion and not an appraisal or certification of value. With respect to the
financial projections prepared by managements of the Company and PZN we have
assumed that they have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of the managements of the Company
and PZN as to the future financial performance of the
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Company and PZN. In rendering our opinion herein, we have analyzed the
Transaction as a strategic business combination between CCA and PZN in which
Company shareholders will continue to own at least a majority of the outstanding
common shares of the combined entity after the Transaction, and have not been
requested by CCA or the Board of Directors of CCA to solicit any third-party
acquisition interest in CCA.
As part of our investment banking business, we regularly issue fairness
opinions and are continually engaged in the valuation of companies and their
securities in connection with business reorganizations, private placements,
negotiated underwritings, mergers and acquisitions and valuations for estate,
corporate and other purposes. We are familiar with the Company and PZN and
regularly provide investment banking services to the Company and issue periodic
research reports regarding its business activities and prospects. In the
ordinary course of business, Stephens Inc. and its affiliates at any time may
hold long or short positions, and may trade or otherwise effect transactions as
principal or for the accounts of customers, in debt or equity securities or
options on securities of the Company and PZN. Certain affiliates of our firm are
investors in, and provide management services to, two private investment funds
affiliated with D. Robert Crants, III and Michael W. Devlin, who serve as senior
management to PZN. Our firm also provides investment banking brokerage services
to these funds. We are acting as financial advisor to the Company in connection
with the Transaction and will receive a fee from the Company for our services, a
significant portion of which is contingent upon the consummation of the
Transaction. In addition, CCA has agreed to indemnify us for certain liabilities
arising out of our engagement.
We have assumed with your consent that the Transaction: (i) will qualify as
a tax-free reorganization under the Internal Revenue Code of 1986, as amended;
(ii) will be accounted for as a common control transfer at historical cost for
the merger of CCA into New PZN and the purchase of PZN by that entity for the
merger of PZN into New PZN; and (iii) that the surviving entity will qualify as
a REIT. We have also assumed with your consent that the status of the surviving
entity will not be changed as the result of the enactment of any federal
legislation or promulgation or enactment of any rules or regulations regarding
REITs.
Our opinion is necessarily based upon market, economic and other conditions
as they exist and can be evaluated on, and on the information made available to
us as of, the date hereof. We have assumed that in the course of obtaining the
necessary regulatory or other consents or approvals (contractual or otherwise)
for the Transaction, no restrictions, including any divestiture requirements or
amendments or modifications, will be imposed that will have a material adverse
effect on the contemplated benefits of the Transaction.
This opinion is for the use and benefit of the Board of Directors of the
Company, and neither this opinion nor any other advice or materials provided by
Stephens Inc. in connections with its engagement hereunder may be used for any
other purpose or be reproduced, disseminated, quoted or referred to at any time,
in any matter, or for any purpose, nor may any references to Stephens Inc., be
made by or on behalf of CCA without the prior written consent of Stephens Inc.;
provided, however, that a copy of this opinion may be included in the Joint
Proxy Statement-Prospectus delivered to the CCA and PZN shareholders to consider
the Transaction. Our opinion does not address the merits of the underlying
decision by the Company to engage in the Transaction and does not constitute a
recommendation to any shareholder of the Company as to how such shareholder
should vote on the proposed Transaction.
We are not expressing any opinion herein as to the prices at which the
Company Shares will trade following the date hereof or the New PZN Shares will
trade following consummation of the Transaction.
Based on the foregoing and our general experience as investment bankers,
and subject to the qualifications stated herein, we are of the opinion on the
date hereof that the Exchange Ratio is fair from a financial point of view to
the Company and its shareholders.
Very truly yours,
/S/ STEPHENS INC
STEPHENS INC.
C-2
<PAGE> 231
APPENDIX D
ADDITIONAL QUESTIONS AND ANSWERS ABOUT THE MERGER FOR CCA EMPLOYEES
Q: AFTER THE MERGER, WHICH COMPANY WILL EMPLOY
THE CURRENT EMPLOYEES OF CCA?
A: The operating company and the service companies will collectively operate
under the name "Corrections Corporation of America" or "CCA" pursuant to
trade name use agreements, and the CCA employees will still be referred to
as "CCA employees". All three companies will retain the CCA logo for
signage, stationery, uniform patches and other materials. The current CCA
facilities will continue to operate and be known as CCA institutions.
The CCA employees who are employed at current CCA facilities will become
employees of the service company to which the facility management contract
is assigned, i.e. the operating company or the service companies. CCA
employees at the corporate offices will become employees of the operating
company. The operating company will enter into administrative service
agreements with the two service companies to provide certain administrative
services. Employee programs will continue and CCA employees will continue to
receive communications and direction from operating company.
Q: WHAT WILL HAPPEN TO EMPLOYEE STOCK OPTIONS
HELD BY CCA EMPLOYEES?
A: All outstanding options granted under CCA stock plans will be converted into
options for shares of New Prison Realty common stock, at the same 0.875
exchange ratio that applies to CCA common stock, and will continue to vest
after the merger in accordance with existing vesting schedules. For each
share of CCA common stock which you have an option to purchase, you will
receive an option to purchase 0.875 share of New Prison Realty common stock,
which will become vested at the same time the option to acquire CCA stock
would have become vested. In addition, the exercise price per share will be
adjusted by dividing the current exercise price by 0.875.
Example:
An option to purchase 1,000 shares of CCA common stock at an exercise price
of $10.00 per share will convert to an option to purchase 875 shares of New
Prison Realty common stock (1,000 x 0.875) at an exercise price of $11.429
per share ($10.00/0.875).
Q: MAY I EXERCISE VESTED STOCK OPTIONS AND SELL
CCA COMMON STOCK BETWEEN NOW AND THE
COMPLETION OF THE MERGER?
A: Yes, subject to the timing limitations included in the CCA Corporate Policy
Statement Regarding Stock Trading Restrictions that was distributed to CCA
employees and to the additional limitations on trading by persons defined as
CCA "affiliates," as described on page 69.
Q: WHAT WILL HAPPEN IN THE MERGER TO CCA COMMON STOCK HELD IN THE CCA EMPLOYEE
STOCK OWNERSHIP PLAN ("CCA ESOP")?
A: In the merger, the shares of CCA common stock held in the CCA ESOP will be
exchanged for shares of New Prison Realty common stock. The shares of New
Prison Realty common stock will be allocated to individual participant
accounts. After completion of the merger, your CCA ESOP account will hold
shares of New Prison Realty common stock, subject to the same plan rules as
now apply to CCA common stock. The number of shares of New Prison Realty
common stock will be based on the same exchange ratio described throughout
this Joint Proxy Statement-Prospectus -- 0.875 share of New Prison Realty
common stock for each share of CCA common stock.
After the merger, the CCA ESOP will be merged into a 401(k) retirement plan
or plans which will be adopted by each of the operating company and the two
service companies. The new 401(k) plan(s) will allow CCA employees to make
investments in a variety of different alternatives, including shares of New
Prison Realty common stock.
D-1
<PAGE> 232
Q: HOW WILL SHARES OF CCA COMMON STOCK HELD IN
THE CCA ESOP BE VOTED?
A: In the vote on the merger, shares held in the CCA ESOP will be voted by the
CCA ESOP's trustee as the CCA ESOP participants direct. If you are a CCA
ESOP participant with CCA common stock allocated to your account, the ESOP
trustee will send you instructions on how to direct the trustee's vote on
these shares. If you fail to direct the ESOP trustee on how to vote shares
allocated to your account, these shares will be voted in favor of the merger
as directed by the ESOP trustee.
Q: WHAT ARE THE TAX CONSEQUENCES FOR CCA COMMON STOCK HELD IN THE CCA ESOP?
A: Neither the CCA ESOP nor CCA ESOP participants will be taxed upon the
exchange of shares held by the CCA ESOP nor will the CCA ESOP participants
be taxed on the merger of the CCA ESOP into the new 401(k) retirement plan.
In the future, when you receive a distribution from the CCA ESOP or from the
new 401(k) retirement plan, the distribution will be subject to tax in
accordance with the Internal Revenue Code provisions regarding taxation of
retirement plan distributions that are in effect at that time.
D-2
<PAGE> 233
CORRECTIONS CORPORATION OF AMERICA
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 1, 1998
The undersigned hereby appoints Doctor R. Crants and Darrell K. Massengale,
or either of them, with full power of substitution, as proxies, and hereby
authorizes them to represent and to vote, as designated, all of the voting
common stock of Corrections Corporation of America, a Tennessee corporation
("CCA"), held by the undersigned on October 14, 1998, at the Special Meeting of
Shareholders to be held at the Loews Vanderbilt Plaza Hotel, 2100 West End
Avenue, Nashville, Tennessee, on Tuesday, December 1, 1998 at 10:00 a.m., local
time, and any adjournment(s) or postponement(s) thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEM 1.
1. To approve and adopt the merger transactions between CCA and CCA Prison
Realty Trust, a Maryland real estate investment trust ("Prison Realty"), in
which CCA will be merged into Prison Realty Corporation, a newly formed
Maryland corporation, with Prison Realty Corporation as the surviving
company, and then Prison Realty will be merged into Prison Realty
Corporation, with Prison Realty Corporation as the surviving company ("New
Prison Realty"), and the issuance of 0.875 share of New Prison Realty common
stock in exchange for each outstanding share of CCA common stock and 1.0
share of New Prison Realty common stock or Series A Preferred Stock for each
outstanding Prison Realty common share or Prison Realty Series A Preferred
Share owned, pursuant to the terms of the Amended and Restated Agreement and
Plan of Merger dated as of September 29, 1998 among Prison Realty, CCA and
New Prison Realty, and the transactions related thereto. In addition, CCA's
non-real estate assets will be transferred to certain affiliated management
companies immediately prior to the merger.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
In their discretion, the proxies are authorized to vote upon such business
as may properly come before this meeting.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR ITEM 1.
Dated: , 1998
-------------------
Signature:
--------------------------------
Signature if Held Jointly:
--------------------------------
Please sign exactly as name
appears on your share
certificates. Each joint owner
must sign. When signing as
attorney, executor,
administrator, trustee or
guardian, please give full title
as such. If a corporation,
please sign in full corporate
name as authorized. If a
partnership, please sign in
partnership name by authorized
person.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY.
<PAGE> 234
CCA PRISON REALTY TRUST
PROXY SOLICITED BY THE BOARD OF TRUSTEES
FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 3, 1998
The undersigned hereby appoints D. Robert Crants, III and Vida H. Carroll,
or either of them, with full power of substitution, as proxies, and hereby
authorizes them to represent and to vote, as designated, all of the voting
common shares of CCA Prison Realty Trust, a Maryland real estate investment
trust ("Prison Realty"), held by the undersigned on October 14, 1998, at the
Special Meeting of Shareholders to be held at the Loews Vanderbilt Plaza Hotel,
2100 West End Avenue, Nashville, Tennessee, on Thursday, December 3, 1998 at
10:00 a.m., local time, and any adjournment(s) or postponement(s) thereof.
THE BOARD OF TRUSTEES RECOMMENDS A VOTE FOR ITEM 1.
1. To approve and adopt the merger transactions between Prison Realty and
Corrections Corporation of America, a Tennessee corporation ("CCA"), in
which CCA will be merged into Prison Realty Corporation, a newly formed
Maryland corporation, with Prison Realty Corporation as the surviving
company, and then Prison Realty will be merged into Prison Realty
Corporation, with Prison Realty Corporation as the surviving company ("New
Prison Realty"), and the issuance of 0.875 share of New Prison Realty common
stock in exchange for each outstanding share of CCA common stock and 1.0
share of New Prison Realty common stock or Series A Preferred Stock for each
outstanding Prison Realty common share or Prison Realty Series A Preferred
Share owned, pursuant to the terms of the Amended and Restated Agreement and
Plan of Merger dated as of September 29, 1998 among Prison Realty, CCA and
New Prison Realty, and the transactions related thereto.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
In their discretion, the proxies are authorized to vote upon such business
as may properly come before this meeting.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR ITEM 1.
Dated: , 1998
------------------------
Signature:
--------------------------------
Signature if Held Jointly:
--------------------------------
Please sign exactly as name
appears on your share
certificates. Each joint owner
must sign. When signing as
attorney, executor,
administrator, trustee or
guardian, please give full title
as such. If a corporation,
please sign in full corporate
name as authorized. If a
partnership, please sign in
partnership name by authorized
person.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY.
<PAGE> 235
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Charter of Prison Realty Corporation provides for indemnification of
directors and officers to the fullest extent permitted by the laws of the State
of Maryland.
Section 2-418 of the MGCL generally permits indemnification of any director
made a party to any proceedings by reason of service as a director unless it is
established that: (i) the act or omission of such person was material to the
matter giving rise to the proceedings and was committed in bad faith or was the
result of active and deliberate dishonesty; (ii) such person actually received
an improper personal benefit in money, property or services; or (iii) in the
case of any criminal proceedings, such person had reasonable cause to believe
that the act or omission was unlawful. The indemnity may include judgments,
penalties, fines, settlements and reasonable expenses (including attorneys'
fees) actually incurred by the director in connection with the proceeding; but,
if the proceeding is one by, or in the right of, the corporation,
indemnification is not permitted with respect to any proceeding in which the
director has been adjudged to be liable to the corporation, or if the proceeding
is one charging improper personal benefit to the director, whether or not
involving action in the director's official capacity, indemnification of the
director is not permitted if the director was adjudged to be liable on the basis
that personal benefit was improperly received. The termination of any proceeding
by conviction or upon a plea of nolo contendere or its equivalent, or an entry
of an order of probation prior to judgment, creates a rebuttable presumption
that the director did not meet the requisite standard of conduct required for
permitted indemnification. The termination of any proceeding by judgment, order
or settlement, however, does not create a presumption that the director failed
to meet the requisite standard of conduct for permitted indemnification.
Indemnification under the provisions of the MGCL is not deemed exclusive of
any other rights, by indemnification or otherwise, to which a director may be
entitled under the Charter, Bylaws, any resolution of stockholders or directors,
any agreement or otherwise.
The statute permits a Maryland corporation to indemnify its officers,
employees and agents to the same extent as its directors. Prison Realty
Corporation's Charter provides for indemnification of its officers, employees or
agents to the fullest extent permitted by law.
Prison Realty Corporation has entered into indemnification agreements ("the
Indemnification Agreements") with its directors and certain of its executive
officers. The Indemnification Agreements are intended to provide indemnification
to the maximum extent allowable by or not in violation of any law of the State
of Maryland. Each Indemnification Agreement provides that Prison Realty
Corporation shall indemnify a director or officer who is a party to the
agreement (the "Indemnitee"), if he or she was or is a party to or otherwise
involved in any proceeding (other than a derivative proceeding) by reason of the
fact that he or she was or is a director or officer of Prison Realty
Corporation, against losses incurred in connection with the defense or
settlement of such proceeding. The indemnification provided under each
Indemnification Agreement is limited to instances where the act or omission
giving rise to the claim for which indemnification is sought was not otherwise
indemnified by Prison Realty Corporation or insurance maintained by Prison
Realty Corporation, was not established to have been committed in bad faith or
the result of active and deliberate dishonesty, did not involve receipt of
improper personal benefit, did not result in a judgment of liability to Prison
Realty Corporation in a proceeding by or in the right of Prison Realty
Corporation, did not involve an accounting of profits pursuant to Section 16(b)
of the Exchange Act, and, with respect to any criminal proceeding, the
Indemnitee had no reasonable cause to believe his or her conduct was unlawful.
Prison Realty Corporation has obtained directors and officers liability
insurance.
II-1
<PAGE> 236
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE.
(a) The following exhibits are filed as a part of this Registration
Statement or incorporated herein by reference:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <C> <S>
2.1 -- Amended and Restated Agreement and Plan of Merger, dated as
of September 29, 1998, by and among Corrections Corporation
of America ("CCA"), CCA Prison Realty Trust ("Prison
Realty") and Prison Realty Corporation (the "Company")
(included as Appendix A to the Joint Proxy
Statement-Prospectus filed as part of this Registration
Statement) (as directed by Item 601(b)(1) of Regulation S-K,
certain schedules and exhibits to this document are omitted
from this filing, and the Registrant agrees to furnish
supplementally a copy of any omitted schedule or exhibit to
the Commission upon request).
3.1* -- Charter of the Company.
3.2* -- Bylaws of the Company
4.1* -- Provisions defining the rights of stockholders are found in
Sections SIXTH through SEVENTH and Article II in the Charter
and Bylaws, respectively, of the Company (included as
Exhibits 3.1 and 3.2 hereto).
4.2* -- Specimen of certificate representing the Company's Common
Stock.
4.3* -- Specimen of certificate representing the Company's 8.0%
Series A Cumulative Preferred Stock.
4.4 -- 8.5% Convertible, Subordinated Note due November 7, 1999
made payable to Sodexho Alliance, S.A. ("Sodexho") in the
aggregate principal amount of $7,000,000.00 (previously
filed as Exhibit 2 to CCA's Report on Form 8-K (filed on
June 30, 1994) and incorporated herein by reference).
4.5 -- Stock Purchase Warrant for the purchase of Common Stock of
CCA issued to Sodhexo on June 23, 1994 (previously filed as
Exhibit 2 to CCA's Report on Form 8-K (filed on June 30,
1994) and incorporated herein by reference).
4.6 -- Form of 7.5% Convertible, Subordinated Note due February 28,
2002 made payable to Sodexho in the aggregate principal
amount of $20,000,000.00 (previously filed as Exhibit 4(v)
to CCA's Annual Report on Form 10-K (filed on March 31,
1997) and incorporated herein by reference).
4.7 -- Form of 7.5% Convertible, Subordinated Note due February 28,
2002 made payable to PMI Mezzanine Fund, L.P. in the
aggregate principal amount of $30,000,000.00 (previously
filed as Exhibit 4(u) to CCA's Annual Report on Form 10-K
(filed on March 29, 1996) and incorporated herein by
reference).
5.1* -- Opinion of Stokes & Bartholomew, P.A. regarding the validity
of the Common Stock and the 8.0% Series A Cumulative
Preferred Stock being offered hereby.
5.2* -- Opinion of Miles & Stockbridge P.C. regarding the validity
of the Common Stock and the 8.0% Series A Cumulative
Preferred Stock being offered hereby.
8.1* -- Form of Opinion of Stokes & Bartholomew, P.A. regarding
certain federal income tax considerations concerning the
operation of the Company after the Merger.
8.2* -- Form of Opinion of Stokes & Bartholomew, P.A. regarding
certain federal income tax consequences of the Merger.
8.3* -- Form of Opinion of Bass, Berry & Sims PLC regarding certain
federal income tax consequences of the Merger.
10.1** -- Form of Master Agreement to Lease between the Company and
Correctional Management Services Corporation.
</TABLE>
II-2
<PAGE> 237
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <C> <S>
10.2* -- Form of Lease Agreement between the Company and Correctional
Management Services Corporation.
10.3* -- Form of Right to Purchase Agreement between the Company and
Correctional Management Services Corporation.
10.4* -- Form of Service Mark and Trade Name Use Agreement between
CCA and Correctional Management Services Corporation.
10.5* -- Form of Service Mark and Trade Name Use Agreement between
Correctional Management Services Corporation and Prison
Management Services, LLC.
10.6* -- Form of Service Mark and Trade Name Use Agreement between
Correctional Management Services Corporation and Juvenile
and Jail Facility Management Services, LLC.
10.7* -- Form of Promissory Note executed by Correctional Management
Services Corporation made payable to CCA.
10.8* -- Form of Guaranty Agreement executed and delivered by Doctor
R. Crants to CCA.
10.9 -- Intentionally omitted.
10.10** -- Form of Contribution Agreement between CCA and Correctional
Management Services Corporation.
10.11* -- Form of Contribution Agreement between CCA and Prison
Management Services, LLC.
10.12* -- Form of Contribution Agreement between CCA and Juvenile and
Jail Facility Management Services, LLC.
10.13* -- Agreement in Principle by and among Sodexho, CCA and Prison
Realty.
10.14** -- Agreement in Principle by and between Baron Asset Fund and
all series thereof, CCA, Prison Realty and Correctional
Management Services Corporation.
10.15* -- Form of Services Agreement by and between the Company and
Correctional Management Services Corporation.
10.16* -- Form of Tenant Incentive Agreement by and between the
Company and Correctional Management Services Corporation.
10.17 -- Securities Purchase Agreement, dated June 23, 1994, between
CCA and Sodexho, including form of 8.5% Note, form of
Warrant and form of 8.75% Notes (previously filed as Exhibit
2 to CCA's Report on Form 8-K (filed June 30, 1994) and
incorporated herein by reference).
10.18 -- Amendment No. 1 to Securities Purchase Agreement, dated as
of July 11, 1995, between Sodexho and CCA (previously filed
as Exhibit 10.145 to CCA's Annual Report on Form 10-K (filed
on March 29, 1996) and incorporated herein by reference).
10.19 -- Note Purchase Agreement, dated as of February 29, 1996, by
and between CCA and PMI Mezzanine Fund, L.P., including, as
Exhibit R-1 thereto, Registration Rights Agreement, dated as
of February 29, 1996, by and between CCA and PMI Mezzanine
Fund, L.P. (previously filed as Exhibit 10.155 to CCA's
Annual Report on Form 10-K (filed on March 29, 1996) and
incorporated herein by reference).
10.20 -- Note Purchase Agreement, dated as of April 5, 1996, by and
among Sodexho and CCA, relating to the issuance of 7.5%
Convertible, Subordinated Notes in the aggregate principal
amount of $20,000,000.00 (previously filed as Exhibit 4(w)
to CCA's Annual Report on Form 10-K (filed on March 31,
1997) and incorporated herein by reference).
10.21 -- Registration Rights Agreement with respect to Note Purchase
Agreement, dated as of April 5, 1996, by and between Sodexho
and CCA (previously filed as Exhibit 4(x) to CCA's Annual
Report on Form 10-K (filed on March 31, 1997) and
incorporated herein by reference).
</TABLE>
II-3
<PAGE> 238
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <C> <S>
10.22 -- Amendment No. 2, dated December 31, 1996, to Securities
Purchase Agreement, dated as of June 23, 1994, between
Sodexho and CCA (previously filed as Exhibit 10.162 to CCA's
Annual Report on Form 10-K (filed on March 31, 1997) and
incorporated herein by reference).
10.23 -- 1997 Amendment to 1994 Securities Purchase Agreement by and
between CCA and Sodexho, dated December 30, 1997 (previously
filed as Exhibit 4(bb) to CCA's Annual Report on Form 10-K
(filed on March 30, 1998) and incorporated herein by
reference).
10.24* -- Form of Administrative Services Agreement by and between
Correctional Management Services Corporation and Prison
Management Services, Inc.
10.25* -- Form of Administrative Services Agreement by and between
Correctional Management Services Corporation and Juvenile
and Jail Facility Management Services, Inc.
10.26 -- Prison Realty's 1997 Employee Share Incentive Option Plan
(previously filed as Exhibit 10.25 to Prison Realty's
Quarterly Report on Form 10-Q (filed on August 25, 1997) and
incorporated herein by reference).
10.27 -- Prison Realty's Non-Employee Trustees' Share Option Plan, as
amended (previously filed as Exhibit 10.26 to Prison
Realty's Quarterly Report on Form 10-Q (filed on August 25,
1997) and incorporated herein by reference).
10.28 -- Prison Realty's Non-Employee Trustees' Compensation Plan
(previously filed as Appendix A to Prison Realty's
definitive Proxy Statement (filed on March 23, 1998)
relating to the 1998 Annual Meeting of Shareholders and
incorporated herein by reference).
10.29 -- CCA's Option Plan, dated January 23, 1985, as amended by
First Amendment to CCA's Stock Option Plan, together with
forms of Incentive Stock Option Agreement and Non-Qualified
Stock Option Agreement (previously filed as Exhibit 10(c) to
CCA's Registration Statement on Form S-1, filed August 15,
1986 (Reg. No. 33-8052), and incorporated herein by
reference).
10.30 -- Non-Qualified Stock Option Plan of the Company, dated
January 16, 1986, and related form of Non-Qualified Stock
Option Agreement (previously filed as Exhibit 10(d) to CCA's
Registration Statement on Form S-1, filed August 15, 1986
(Reg. No. 33-8052), and incorporated herein by reference).
10.31 -- CCA's 1988 Flexible Stock Option Plan (previously filed as
Exhibit A to CCA's definitive Proxy Statement (File No.
0-15719) relating to the 1988 Annual Meeting of Stockholders
and incorporated herein by reference).
10.32 -- Second Amendment to CCA's Stock Option Plan, dated March 27,
1987, together with form of Incentive Stock Option Agreement
(previously filed as Exhibit 10(cc) to CCA's Annual Report
on Form 10-K with respect to the fiscal year ended December
31, 1986 (File No. 0-15719) and incorporated herein by
reference).
10.33 -- Third Amendment to CCA's Stock Option Plan, dated March 18,
1988 (previously filed as Exhibit B to CCA's definitive
Proxy Statement relating to the 1988 Annual Meeting of
Stockholders (File No. 0-15719) and incorporated herein by
reference).
10.34 -- CCA's 1989 Stock Bonus Plan (previously filed as Exhibit
10(zz) to CCA's Annual Report on Form 10-K with respect to
the fiscal year ended December 31, 1989 (File No. 0-15719)
and incorporated herein by reference).
10.35 -- First Amendment to CCA's 1988 Flexible Stock Option Plan,
dated June 8, 1989 (previously filed as Exhibit 10(mmm) to
CCA's Annual Report on Form 10-K with respect to the fiscal
year ended December 31, 1989 (File No. 0-15719) and
incorporated herein by reference).
</TABLE>
II-4
<PAGE> 239
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <C> <S>
10.36 -- First Amendment to CCA's Non-Qualified Stock Option Plan,
dated June 8, 1989 (previously filed as Exhibit 10(nnn) to
CCA's Annual Report on Form 10-K with respect to the fiscal
year ended December 31, 1989 (File No. 0-15719) and
incorporated herein by reference).
10.37 -- CCA's Non-Employee Director Stock Option Plan (previously
filed as Exhibit 10(yyyy) to CCA's Annual Report on Form
10-K with respect to the fiscal year ended December 31, 1993
(File No. 0-15719) and incorporated herein by reference).
10.38 -- First Amendment to CCA's 1991 Flexible Stock Option Plan,
dated March 11, 1994 (previously filed as Exhibit 10.102 to
CCA's Annual Report on Form 10-K with respect to the fiscal
year ended December 31, 1994 (File No. 1-13560) and
incorporated herein by reference).
10.39 -- Amended and Restated CCA 1989 Stock Bonus Plan, dated
February 20, 1995 (previously filed as Exhibit 10.138 to
CCA's Annual Report on Form 10-K with respect to the fiscal
year ended December 31, 1994 (File No. 1-13560) and
incorporated herein by reference).
10.40 -- CCA's 1995 Employee Stock Incentive Plan effective as of
March 20, 1995 (previously filed as Exhibit 4.3 to CCA's
Registration Statement on Form S-8, filed July 20, 1995
(Reg. No. 33-61173), and incorporated herein by reference).
10.41 -- First Amendment to Amended and Restated CCA 1989 Stock Bonus
Plan, dated November 3, 1995 (previously filed as Exhibit
10.153 to CCA's Annual Report on Form 10-K with respect to
the fiscal year ended December 31, 1995 (File No. 1-13560)
and incorporated herein by reference.
10.42 -- CCA's Non-Employee Directors' Compensation Plan (previously
filed as Appendix A to CCA's definitive Proxy Statement
relating to the 1998 Annual Meeting of Shareholders (filed
on March 31, 1998) and incorporated herein by reference).
10.43* -- Form of Employment Agreement between Doctor R. Crants and
the Company.
10.44* -- Form of Employment Agreement between Doctor R. Crants and
Correctional Management Services Corporation.
10.45* -- Form of Employment Agreement between J. Michael Quinlan and
the Company.
10.46 -- Employment Agreement between D. Robert Crants, III and
Prison Realty (previously filed as Exhibit 10.23 to Prison
Realty's Quarterly Report on Form 10-Q (filed on August 25,
1997) and incorporated herein by reference).
10.47 -- Employment Agreement between Michael W. Devlin and Prison
Realty (previously filed as Exhibit 10.24 to Prison Realty's
Quarterly Report on Form 10-Q (filed on August 25, 1997) and
incorporated herein by reference).
10.48* -- Form of Officer and Director Indemnification Agreement
between the Company and its officers and directors.
10.49* -- Form of Lockup Agreement between the Company and its
officers and directors.
10.50* -- Amended and Restated Charter of Correctional Management
Services Corporation.
10.51* -- Bylaws of Correctional Management Services Corporation.
10.52* -- Charter of Prison Management Services, Inc.
10.53* -- Bylaws of Prison Management Services, Inc.
10.54* -- Charter of Juvenile and Jail Facility Management Services,
Inc.
10.55* -- Bylaws of Juvenile and Jail Facility Management Services,
Inc.
10.56*** -- Commitment Letter from NationsBank, N.A. and Canadian
Imperial Bank of Commerce regarding the funding of a $750.0
million revolving credit facility for the Company.
</TABLE>
II-5
<PAGE> 240
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <C> <S>
10.57*** -- Commitment Letter from NationsBank N.A. and Canadian
Imperial Bank of Commerce regarding the funding of a
revolving credit facility for Correctional Management
Services Corporation.
10.58*** -- Commitment Letter from NationsBank N.A. and Canadian
Imperial Bank of Commerce regarding the funding of a
revolving credit facility for Prison Management Services,
Inc.
10.59*** -- Commitment Letter from NationsBank N.A. and Canadian
Imperial Bank of Commerce regarding the funding of a
revolving credit facility for Juvenile and Jail Facility
Management Services, Inc.
12* -- Statements re: computation of ratios (included in this Joint
Proxy Statement-Prospectus).
21* -- List of Subsidiaries.
23.1* -- Consent of Stokes & Bartholomew, P.A. (included in exhibit
5.1).
23.2* -- Consent of Miles & Stockbridge P.C. (included in exhibit
5.2).
23.3* -- Consent of Arthur Andersen LLP with respect to Prison
Realty.
23.4* -- Consent of Arthur Andersen LLP with respect to CCA.
23.5* -- Consent of Arthur Andersen LLP with respect to Correctional
Management Services Corporation.
23.6* -- Consent of J.C. Bradford & Co., L.L.C.
23.7* -- Consent of Stephens Inc.
24* -- Power of Attorney.
</TABLE>
- ---------------
* Previously filed.
** Filed herewith.
*** To be filed by amendment.
(b) All schedules for which provision is made in Regulation S-X and Item
14(e), Item 17(a) or Item 17(b)(9) of Form S-4 are either not required to be
included herein or the related information is included in the footnotes to the
applicable financial statements included or incorporated by reference in the
Joint Proxy Statement-Prospectus contained in this Registration Statement.
(c) The following opinions are included in the Joint Proxy
Statement-Prospectus contained in this Registration Statement as indicated:
<TABLE>
<CAPTION>
OPINION LOCATION
- ------- --------
<S> <C>
Opinion of J.C. Bradford & Co., L.L.C....................... Appendix B
Opinion of Stephens Inc..................................... Appendix C
</TABLE>
ITEM 22. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in this Registration Statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(b)(1) The undersigned Registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such offering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
II-6
<PAGE> 241
(2) The undersigned Registrant undertakes that every prospectus: (i) that
is filed pursuant to paragraph (1) immediately preceding; or (ii) that purports
to meet the requirements of Section 10(a)(3) of the Securities Act and is used
in connection with an offering of securities subject to Rule 415, will be filed
as a part of an amendment to this Registration Statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(d) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of this Registration Statement through
the date of responding to the request.
(e) The undersigned Registrant hereby undertakes to supply means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in this Registration Statement when it became effective.
II-7
<PAGE> 242
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment Number 3 to the Company's Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the city
of Nashville, state of Tennessee, on October 15, 1998.
PRISON REALTY CORPORATION
Registrant
By: /s/ DOCTOR R. CRANTS
------------------------------------
Doctor R. Crants
Chief Executive Officer
Pursuant to the requirements of the Securities Act, this Amendment Number 3
to the Company's Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DOCTOR R. CRANTS Chief Executive Officer October 15, 1998
- ----------------------------------------------------- (Principal Executive
Doctor R. Crants Officer), Chairman and
Director
* Vice Chairman October 15, 1998
- ----------------------------------------------------- and Director
J. Michael Quinlan
/s/ D. ROBERT CRANTS, III President and Director October 15, 1998
- -----------------------------------------------------
D. Robert Crants, III
* Chief Operating Officer October 15, 1998
- ----------------------------------------------------- and Director
Michael W. Devlin
* Chief Financial Officer October 15, 1998
- ----------------------------------------------------- (Principal Financial and
Vida H. Carroll Accounting Officer)
* Director October 15, 1998
- -----------------------------------------------------
C. Ray Bell
* Director October 15, 1998
- -----------------------------------------------------
Richard W. Cardin
Director October , 1998
- -----------------------------------------------------
Monroe J. Carell, Jr.
* Director October 15, 1998
- -----------------------------------------------------
John W. Eakin, Jr.
* Director October 15, 1998
- -----------------------------------------------------
Ted Feldman
</TABLE>
II-8
<PAGE> 243
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Director October 15, 1998
- -----------------------------------------------------
Jackson W. Moore
* Director October 15, 1998
- -----------------------------------------------------
Rusty L. Moore
Director October , 1998
- -----------------------------------------------------
Joseph V. Russell
* Director October 15, 1998
- -----------------------------------------------------
Charles W. Thomas, Ph.D.
By: /s/ D. ROBERT CRANTS, III October 15, 1998
-----------------------------------------------
D. Robert Crants, III,
Attorney-in-fact
</TABLE>
II-9
<PAGE> 244
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <C> <S>
2.1 -- Amended and Restated Agreement and Plan of Merger, dated as
of September 29, 1998, by and among Corrections Corporation
of America ("CCA"), CCA Prison Realty Trust ("Prison
Realty") and Prison Realty Corporation (the "Company")
(included as Appendix A to the Joint Proxy
Statement-Prospectus filed as part of this Registration
Statement) (as directed by Item 601(b)(1) of Regulation S-K,
certain schedules and exhibits to this document are omitted
from this filing, and the Registrant agrees to furnish
supplementally a copy of any omitted schedule or exhibit to
the Commission upon request).
3.1* -- Charter of the Company.
3.2* -- Bylaws of the Company.
4.1* -- Provisions defining the rights of stockholders are found in
Sections SIXTH through SEVENTH and Article II in the Charter
and Bylaws, respectively, of the Company (included as
Exhibits 3.1 and 3.2 hereto).
4.2* -- Specimen of certificate representing the Company's Common
Stock.
4.3* -- Specimen of certificate representing the Company's 8.0%
Series A Cumulative Preferred Stock.
4.4 -- 8.5% Convertible, Subordinated Note due November 7, 1999
made payable to Sodexho Alliance, S.A. ("Sodexho") in the
aggregate principal amount of $7,000,000.00 (previously
filed as Exhibit 2 to CCA's Report on Form 8-K (filed on
June 30, 1994) and incorporated herein by reference).
4.5 -- Stock Purchase Warrant for the purchase of Common Stock of
CCA issued to Sodhexo on June 23, 1994 (previously filed as
Exhibit 2 to CCA's Report on Form 8-K (filed on June 30,
1994) and incorporated herein by reference).
4.6 -- Form of 7.5% Convertible, Subordinated Note due February 28,
2002 made payable to Sodexho in the aggregate principal
amount of $20,000,000.00 (previously filed as Exhibit 4(v)
to CCA's Annual Report on Form 10-K (filed on March 31,
1997) and incorporated herein by reference).
4.7 -- Form of 7.5% Convertible, Subordinated Note due February 28,
2002 made payable to PMI Mezzanine Fund, L.P. in the
aggregate principal amount of $30,000,000.00 (previously
filed as Exhibit 4(u) to CCA's Annual Report on Form 10-K
(filed on March 29, 1996) and incorporated herein by
reference).
5.1* -- Opinion of Stokes & Bartholomew, P.A. regarding the validity
of the Common Stock and the 8.0% Series A Cumulative
Preferred Stock being offered hereby.
5.2* -- Opinion of Miles & Stockbridge P.C. regarding the validity
of the Common Stock and the 8.0% Series A Cumulative
Preferred Stock being offered hereby.
8.1* -- Form of Opinion of Stokes & Bartholomew, P.A. regarding
certain federal income tax considerations concerning the
operation of the Company after the Merger.
8.2* -- Form of Opinion of Stokes & Bartholomew, P.A. regarding
certain federal income tax consequences of the Merger.
8.3* -- Form of Opinion of Bass, Berry & Sims PLC regarding certain
federal income tax consequences of the Merger.
10.1** -- Form of Master Agreement to Lease between the Company and
Correctional Management Services Corporation.
10.2* -- Form of Lease Agreement between the Company and Correctional
Management Services Corporation.
10.3* -- Form of Right to Purchase Agreement between the Company and
Correctional Management Services Corporation.
10.4* -- Form of Service Mark and Trade Name Use Agreement between
CCA and Correctional Management Services Corporation.
10.5* -- Form of Service Mark and Trade Name Use Agreement between
Correctional Management Services Corporation and Prison
Management Services, LLC.
</TABLE>
<PAGE> 245
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <C> <S>
10.6* -- Form of Service Mark and Trade Name Use Agreement between
Correctional Management Services Corporation and Juvenile
and Jail Facility Management Services, LLC.
10.7* -- Form of Promissory Note executed by Correctional Management
Services Corporation made payable to CCA.
10.8* -- Form of Guaranty Agreement executed and delivered by Doctor
R. Crants to CCA.
10.9* -- Intentionally omitted.
10.10** -- Form of Contribution Agreement between CCA and Correctional
Management Services Corporation.
10.11* -- Form of Contribution Agreement between CCA and Prison
Management Services, LLC.
10.12* -- Form of Contribution Agreement between CCA and Juvenile and
Jail Facility Management Services, LLC.
10.13* -- Agreement in Principle by and among Sodexho, CCA and Prison
Realty.
10.14** -- Agreement in Principle by and between Baron Asset Fund and
all series thereof, CCA, Prison Realty and Correctional
Management Services Corporation.
10.15* -- Form of Services Agreement by and between the Company and
Correctional Management Services Corporation.
10.16* -- Form of Tenant Incentive Agreement by and between the
Company and Correctional Management Services Corporation.
10.17 -- Securities Purchase Agreement, dated June 23, 1994, between
CCA and Sodexho, including form of 8.5% Note, form of
Warrant and form of 8.75% Notes (previously filed as Exhibit
2 to CCA's Report on Form 8-K (filed June 30, 1994) and
incorporated herein by reference).
10.18 -- Amendment No. 1 to Securities Purchase Agreement, dated as
of July 11, 1995, between Sodexho and CCA (previously filed
as Exhibit 10.145 to CCA's Annual Report on Form 10-K (filed
on March 29, 1996) and incorporated herein by reference).
10.19 -- Note Purchase Agreement, dated as of February 29, 1996, by
and between CCA and PMI Mezzanine Fund, L.P., including, as
Exhibit R-1 thereto, Registration Rights Agreement, dated as
of February 29, 1996, by and between CCA and PMI Mezzanine
Fund, L.P. (previously filed as Exhibit 10.155 to CCA's
Annual Report on Form 10-K (filed on March 29, 1996) and
incorporated herein by reference).
10.20 -- Note Purchase Agreement, dated as of April 5, 1996, by and
among Sodexho and CCA, relating to the issuance of 7.5%
Convertible, Subordinated Notes in the aggregate principal
amount of $20,000,000.00 (previously filed as Exhibit 4(w)
to CCA's Annual Report on Form 10-K (filed on March 31,
1997) and incorporated herein by reference).
10.21 -- Registration Rights Agreement with respect to Note Purchase
Agreement, dated as of April 5, 1996, by and between Sodexho
and CCA (previously filed as Exhibit 4(x) to CCA's Annual
Report on Form 10-K (filed on March 31, 1997) and
incorporated herein by reference).
10.22 -- Amendment No. 2, dated December 31, 1996, to Securities
Purchase Agreement, dated as of June 23, 1994, between
Sodexho and CCA (previously filed as Exhibit 10.162 to CCA's
Annual Report on Form 10-K (filed on March 31, 1997) and
incorporated herein by reference).
10.23 -- 1997 Amendment to 1994 Securities Purchase Agreement by and
between CCA and Sodexho, dated December 30, 1997 (previously
filed as Exhibit 4(bb) to CCA's Annual Report on Form 10-K
(filed on March 30, 1998) and incorporated herein by
reference).
10.24* -- Form of Administrative Services Agreement by and between
Correctional Management Services Corporation and Prison
Management Services, Inc.
10.25* -- Form of Administrative Services Agreement by and between
Correctional Management Services Corporation and Juvenile
and Jail Facility Management Services, Inc.
10.26 -- Prison Realty's 1997 Employee Share Incentive Option Plan
(previously filed as Exhibit 10.25 to Prison Realty's
Quarterly Report on Form 10-Q (filed on August 25, 1997) and
incorporated herein by reference).
</TABLE>
<PAGE> 246
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <C> <S>
10.27 -- Prison Realty's Non-Employee Trustees' Share Option Plan, as
amended (previously filed as Exhibit 10.26 to Prison
Realty's Quarterly Report on Form 10-Q (filed on August 25,
1997) and incorporated herein by reference).
10.28 -- Prison Realty's Non-Employee Trustees' Compensation Plan
(previously filed as Appendix A to Prison Realty's
definitive Proxy Statement (filed on March 23, 1998)
relating to the 1998 Annual Meeting of Shareholders and
incorporated herein by reference).
10.29 -- CCA's Option Plan, dated January 23, 1985, as amended by
First Amendment to CCA's Stock Option Plan, together with
forms of Incentive Stock Option Agreement and Non-Qualified
Stock Option Agreement (previously filed as Exhibit 10(c) to
CCA's Registration Statement on Form S-1, filed August 15,
1986 (Reg. No. 33-8052), and incorporated herein by
reference).
10.30 -- Non-Qualified Stock Option Plan of the Company, dated
January 16, 1986, and related form of Non-Qualified Stock
Option Agreement (previously filed as Exhibit 10(d) to CCA's
Registration Statement on Form S-1, filed August 15, 1986
(Reg. No. 33-8052), and incorporated herein by reference).
10.31 -- CCA's 1988 Flexible Stock Option Plan (previously filed as
Exhibit A to CCA's definitive Proxy Statement (File No.
0-15719) relating to the 1988 Annual Meeting of Stockholders
and incorporated herein by reference).
10.32 -- Second Amendment to CCA's Stock Option Plan, dated March 27,
1987, together with form of Incentive Stock Option Agreement
(previously filed as Exhibit 10(cc) to CCA's Annual Report
on Form 10-K with respect to the fiscal year ended December
31, 1986 (File No. 0-15719) and incorporated herein by
reference).
10.33 -- Third Amendment to CCA's Stock Option Plan, dated March 18,
1988 (previously filed as Exhibit B to CCA's definitive
Proxy Statement relating to the 1988 Annual Meeting of
Stockholders (File No. 0-15719) and incorporated herein by
reference).
10.34 -- CCA's 1989 Stock Bonus Plan (previously filed as Exhibit
10(zz) to CCA's Annual Report on Form 10-K with respect to
the fiscal year ended December 31, 1989 (File No. 0-15719)
and incorporated herein by reference).
10.35 -- First Amendment to CCA's 1988 Flexible Stock Option Plan,
dated June 8, 1989 (previously filed as Exhibit 10(mmm) to
CCA's Annual Report on Form 10-K with respect to the fiscal
year ended December 31, 1989 (File No. 0-15719) and
incorporated herein by reference).
10.36 -- First Amendment to CCA's Non-Qualified Stock Option Plan,
dated June 8, 1989 (previously filed as Exhibit 10(nnn) to
CCA's Annual Report on Form 10-K with respect to the fiscal
year ended December 31, 1989 (File No. 0-15719) and
incorporated herein by reference).
10.37 -- CCA's Non-Employee Director Stock Option Plan (previously
filed as Exhibit 10(yyyy) to CCA's Annual Report on Form
10-K with respect to the fiscal year ended December 31, 1993
(File No. 0-15719) and incorporated herein by reference).
10.38 -- First Amendment to CCA's 1991 Flexible Stock Option Plan,
dated March 11, 1994 (previously filed as Exhibit 10.102 to
CCA's Annual Report on Form 10-K with respect to the fiscal
year ended December 31, 1994 (File No. 1-13560) and
incorporated herein by reference).
10.39 -- Amended and Restated CCA 1989 Stock Bonus Plan, dated
February 20, 1995 (previously filed as Exhibit 10.138 to
CCA's Annual Report on Form 10-K with respect to the fiscal
year ended December 31, 1994 (File No. 1-13560) and
incorporated herein by reference).
10.40 -- CCA's 1995 Employee Stock Incentive Plan effective as of
March 20, 1995 (previously filed as Exhibit 4.3 to CCA's
Registration Statement on Form S-8, filed July 20, 1995
(Reg. No. 33-61173), and incorporated herein by reference).
10.41 -- First Amendment to Amended and Restated CCA 1989 Stock Bonus
Plan, dated November 3, 1995 (previously filed as Exhibit
10.153 to CCA's Annual Report on Form 10-K with respect to
the fiscal year ended December 31, 1995 (File No. 1-13560)
and incorporated herein by reference.
</TABLE>
<PAGE> 247
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <C> <S>
10.42 -- CCA's Non-Employee Directors' Compensation Plan (previously
filed as Appendix A to CCA's definitive Proxy Statement
relating to the 1998 Annual Meeting of Shareholders (filed
on March 31, 1998) and incorporated herein by reference).
10.43* -- Form of Employment Agreement between Doctor R. Crants and
the Company.
10.44* -- Form of Employment Agreement between Doctor R. Crants and
Correctional Management Services Corporation.
10.45* -- Form of Employment Agreement between J. Michael Quinlan and
the Company.
10.46 -- Employment Agreement between D. Robert Crants, III and
Prison Realty (previously filed as Exhibit 10.23 to Prison
Realty's Quarterly Report on Form 10-Q (filed on August 25,
1997) and incorporated herein by reference).
10.47 -- Employment Agreement between Michael W. Devlin and Prison
Realty (previously filed as Exhibit 10.24 to Prison Realty's
Quarterly Report on Form 10-Q (filed on August 25, 1997) and
incorporated herein by reference).
10.48* -- Form of Officer and Director Indemnification Agreement
between the Company and its officers and directors.
10.49* -- Form of Lockup Agreement between the Company and its
officers and directors.
10.50* -- Amended and Restated Charter of Correctional Management
Services Corporation.
10.51* -- Bylaws of Correctional Management Services Corporation.
10.52* -- Charter of Prison Management Services, Inc.
10.53* -- Bylaws of Prison Management Services, Inc.
10.54* -- Charter of Juvenile and Jail Facility Management Services,
Inc.
10.55* -- Bylaws of Juvenile and Jail Facility Management Services,
Inc.
10.56*** -- Commitment Letter from NationsBank N.A. and Canadian
Imperial Bank of Commerce regarding the funding of a $750.0
million revolving credit facility for the Company.
10.57*** -- Commitment Letter from NationsBank N.A. and Canadian
Imperial Bank of Commerce regarding the funding of a
revolving credit facility for Correctional Management
Services Corporation.
10.58*** -- Commitment Letter from NationsBank N.A. and Canadian
Imperial Bank of Commerce regarding the funding of a
revolving credit facility for Prison Management Services,
Inc.
10.59*** -- Commitment Letter from NationsBank N.A. and Canadian
Imperial Bank of Commerce regarding the funding of a
revolving credit facility for Juvenile and Jail Facility
Management Services, Inc.
12* -- Statements re: computation of ratios (included in this Joint
Proxy Statement-Prospectus).
21* -- List of Subsidiaries.
23.1* -- Consent of Stokes & Bartholomew, P.A. (included in exhibit
5.1).
23.2* -- Consent of Miles & Stockbridge P.C. (included in exhibit
5.2).
23.3* -- Consent of Arthur Andersen LLP with respect to Prison
Realty.
23.4* -- Consent of Arthur Andersen LLP with respect to CCA.
23.5* -- Consent of Arthur Andersen LLP with respect to Correctional
Management Services Corporation.
23.6* -- Consent of J.C. Bradford & Co., L.L.C.
23.7* -- Consent of Stephens Inc.
24* -- Power of Attorney (included on signature page).
</TABLE>
- ---------------
* Previously filed.
** Filed herewith.
*** To be filed by amendment.
<PAGE> 1
EXHIBIT 10.1
FORM OF MASTER AGREEMENT TO LEASE
BETWEEN
PRISON REALTY CORPORATION, LANDLORD
AND
CORRECTIONAL MANAGEMENT SERVICES CORPORATION, TENANT
DATED: JANUARY ___, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
ARTICLE I SEPARATE LEASE AGREEMENTS; PREMISES AND TERM....................................1
1.01 Separate Lease Agreements.......................................................1
1.02 Leased Property.................................................................1
1.03 Term............................................................................2
1.04 Holding Over....................................................................2
1.05 Surrender.......................................................................3
ARTICLE II RENT............................................................................3
2.01 Base Rent.......................................................................3
2.02 Additional Rent.................................................................3
2.02.01 Other Additional Rent...........................................................4
2.03 Place(s) of Payment of Rent; Direct Payment of Other Additional Rent............4
2.04 Net Lease.......................................................................4
2.05 No Termination, Abatement, Etc..................................................4
ARTICLE III IMPOSITIONS AND UTILITIES.......................................................5
3.01 Payment of Impositions..........................................................5
3.02 Definition of Impositions.......................................................6
3.03 Utilities.......................................................................6
3.04 Escrow of Impositions...........................................................7
3.05 Discontinuance of Utilities.....................................................7
ARTICLE IV INSURANCE.......................................................................7
4.01 Property Insurance..............................................................7
4.02 Liability Insurance.............................................................8
4.03 Insurance Requirements..........................................................9
4.04 Replacement Cost................................................................9
4.05 Blanket Policy.................................................................10
4.06 No Separate Insurance..........................................................10
4.07 Waiver of Subrogation..........................................................10
4.08 Mortgages......................................................................10
ARTICLE V INDEMNITY; HAZARDOUS SUBSTANCES................................................10
5.01 Tenant's Indemnification.......................................................10
5.02 Hazardous Substances or Materials..............................................11
5.03 Limitation of Landlord's Liability.............................................12
ARTICLE VI USE AND ACCEPTANCE OF PREMISES.................................................12
6.01 Use of Leased Property.........................................................12
6.02 Acceptance of Leased Property..................................................13
6.03 Conditions of Use and Occupancy................................................13
6.04 Financial Statements and Other Information.....................................13
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C> <C> <C>
ARTICLE VII REPAIRS, COMPLIANCE WITH LAWS, AND MECHANICS' LIENS............................14
7.01 Maintenance....................................................................14
7.02 Compliance with Laws...........................................................14
7.03 Required Alterations...........................................................14
7.04 Mechanics' Liens...............................................................15
7.05 Replacements of Fixtures.......................................................15
ARTICLE VIII ALTERATIONS AND SIGNS; TENANT'S PROPERTY; CAPITAL ADDITIONS TO THE
LEASED PROPERTY................................................................15
8.01 Tenant's Right to Construct....................................................15
8.02 Scope of Right.................................................................16
8.03 Cooperation of Landlord........................................................16
8.04 Commencement of Construction...................................................17
8.05 Rights in Tenant Improvements..................................................17
8.06 Personal Property..............................................................18
8.07 Requirements for Personal Property.............................................18
8.08 Signs..........................................................................19
8.09 Financings of Capital Additions to a Leased Property...........................19
ARTICLE IX DEFAULTS AND REMEDIES..........................................................21
9.01 Events of Default..............................................................21
9.02 Remedies.......................................................................23
9.03 Right of Set-Off...............................................................25
9.04 Performance of Tenant's Covenants..............................................25
9.05 Late Charge....................................................................26
9.06 Litigation; Attorneys' Fees....................................................26
9.07 Remedies Cumulative............................................................26
9.08 Escrows and Application of Payments............................................26
9.09 Power of Attorney..............................................................26
ARTICLE X DAMAGE AND DESTRUCTION.........................................................27
10.01 General........................................................................27
10.02 Landlord's Inspection..........................................................28
10.03 Landlord's Costs...............................................................28
10.04 Rent Abatement.................................................................28
10.05 Substantial Damage During Lease Term...........................................28
10.06 Damage Near End of Term........................................................29
ARTICLE XI CONDEMNATION...................................................................29
11.01 Total Taking...................................................................29
11.02 Partial Taking.................................................................29
11.03 Restoration....................................................................30
11.04 Landlord's Inspection..........................................................30
11.05 Award Distribution.............................................................30
11.06 Temporary Taking...............................................................31
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<S> <C> <C> <C>
ARTICLE XII ASSIGNMENT AND SUBLETTING; ATTORNMENT..........................................31
12.01 Prohibition Against Subletting and Assignment..................................31
12.02 Changes of Control.............................................................31
12.03 Operating/Service Agreements...................................................32
12.03.01 Permitted Agreements...........................................................32
12.03.02 Terms of Agreements............................................................32
12.03.03 Copies.........................................................................32
12.03.04 Assignment of Rights in Agreements.............................................32
12.03.05 Licenses, Etc..................................................................33
12.04 Assignment.....................................................................33
12.05 REIT Limitations...............................................................33
12.06 Attornment.....................................................................33
ARTICLE XIII ARBITRATION....................................................................34
13.01 Controversies..................................................................34
13.02 Appointment of Arbitrators.....................................................34
13.03 Arbitration Procedure..........................................................34
13.04 Expenses.......................................................................34
13.05 Enforcement of the Arbitration Award...........................................34
ARTICLE XIV QUIET ENJOYMENT, SUBORDINATION, ATTORNMENT, ESTOPPEL CERTIFICATES..............35
14.01 Quiet Enjoyment................................................................35
14.02 Landlord Mortgages; Subordination..............................................35
14.03 Attornment; Non-Disturbance....................................................35
14.04 Estoppel Certificates..........................................................36
ARTICLE XV MISCELLANEOUS..................................................................36
15.01 Notices........................................................................36
15.02 Advertisement of Leased Property...............................................37
15.03 Landlord's Access..............................................................37
15.04 Entire Agreement...............................................................37
15.05 Severability...................................................................37
15.06 Captions and Headings..........................................................38
15.07 Governing Law..................................................................38
15.08 Memorandum of Lease............................................................38
15.09 Waiver.........................................................................38
15.10 Binding Effect.................................................................38
15.11 Authority......................................................................38
15.12 Transfer of Permits, Etc.......................................................38
15.13 Modification...................................................................39
</TABLE>
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<TABLE>
<S> <C> <C> <C>
15.14 Incorporation by Reference.....................................................39
15.15 No Merger......................................................................39
15.16 Laches.........................................................................39
15.17 Waiver of Jury Trial...........................................................39
15.18 Permitted Contests.............................................................39
15.19 Construction of Lease..........................................................40
15.20 Counterparts...................................................................40
15.21 Relationship of Landlord and Tenant............................................40
15.22 Landlord's Status as a REIT....................................................40
15.23 Sale of Real Estate Assets.....................................................40
ARTICLE XVI NONDISCLOSURE AND RELATED MATTERS..............................................41
16.01 Covenant Not to Disclose.......................................................41
16.02 Non-Interference Covenant......................................................41
16.03 Business Materials and Property Disclosure.....................................41
16.04 Breach by Landlord.............................................................42
</TABLE>
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MASTER AGREEMENT TO LEASE
THIS MASTER AGREEMENT TO LEASE ("Agreement") dated as of the ____ day
of January, 1999 by and between PRISON REALTY CORPORATION, a Maryland
corporation ("Landlord"), and CORRECTIONAL MANAGEMENT SERVICES CORPORATION, a
Tennessee corporation ("Tenant").
RECITALS
WHEREAS, Landlord currently owns certain correctional and detention
facilities which Tenant desires to lease in order to engage in the business of
managing and operating correctional and detention facilities;
WHEREAS, Landlord may from time to time lease additional properties
that Landlord may acquire to Tenant;
WHEREAS, Landlord and Tenant desire that each of the properties listed
on Schedule A and each additional property that Landlord may lease to Tenant
shall be the subject of a separate and individual lease agreement describing
said property, the rent and various other terms of said lease (each such lease
agreement referred to individually as a "Lease," and the property that is the
subject of an individual Lease being referred to either individually or
collectively as "Leased Property"); and
WHEREAS, Landlord and Tenant desire to set forth in this Agreement
certain terms and conditions applicable to all Leases of all Leased Properties,
except as any individual Lease with respect to a particular Leased Property may
otherwise provide;
NOW, THEREFORE, in consideration of the premises and of their
respective agreements and undertakings herein and in each Lease, Landlord and
Tenant agree as follows:
ARTICLE I
SEPARATE LEASE AGREEMENTS; PREMISES AND TERM
1.01 Separate Lease Agreements. Landlord and Tenant are concurrently
entering into a separate Lease for each of the Leased Properties referred to in
Schedule A hereto, and may in the future enter into one or more additional
separate Leases for one or more additional Leased Properties. Except as
specifically set forth in a separate Lease, or any amendment, supplement,
schedule or exhibit thereto, all of the provisions of this Agreement shall be
deemed to be incorporated into and made a part of each such separate Lease made
between the Landlord as landlord (or Lessor) and the Tenant as tenant (or
Lessee) during the term of such separate Lease.
1.02 Leased Property. Except as set forth in an individual Lease
(including any schedule or exhibit thereto), the property that is the subject of
each Lease and that shall be considered as leased by the Landlord to the Tenant
thereunder shall consist of:
<PAGE> 7
(a) The land described in the Lease, together with all rights,
titles, appurtenant interests, covenants, licenses, privileges and
benefits thereto belonging, and any easements, rights-of-way, rights of
ingress or egress or other interests in, on, or to any land, highway,
street, road or avenue, open or proposed, in, on, across, in front of,
abutting or adjoining such real property including, without limitation,
any strips and gores adjacent to or lying between such real property
and any adjacent real property (the "Land");
(b) All buildings, improvements, structures and Fixtures now
located or to be located or to be constructed on the Land, including,
without limitation, landscaping, parking lots and structures, roads,
drainage and all above ground and underground utility structures,
equipment systems and other so-called "infrastructure" improvements
(the "Improvements");
(c) All equipment, machinery, fixtures, and other items of
real and/or personal property, including all components thereof,
located in, on or used in connection with, and permanently affixed to
or incorporated into, the Improvements, including, without limitation,
all furnaces, boilers, heaters, electrical equipment, heating,
plumbing, lighting, ventilating, refrigerating, incineration, air and
water pollution control, waste disposal, air-cooling and
air-conditioning systems and apparatus, sprinkler systems and fire and
theft protection equipment, and similar systems, all of which, to the
greatest extent permitted by law, are hereby deemed to constitute real
estate, together with all replacements, modifications, alterations and
additions thereto (collectively the "Fixtures");
(d) All furniture, equipment, inventory and other personal
property identified on Schedule B attached hereto and incorporated
herein by reference (the "Personal Property"). For purposes hereof,
(i) Personal Property shall include all items of property which Tenant
is obligated to install, place, use, maintain, repair and/or replace
pursuant to the provisions of Sections 8.06 and 8.07 hereof however,
such Personal Property is and shall remain the property of Tenant until
the expiration or termination of this Lease, and (ii) Personal
Property shall not include certain proprietary property of Tenant as
set forth on Schedule C.
The Land, Improvements, Fixtures and Personal Property are hereinafter referred
to as the "Leased Property."
SUBJECT, HOWEVER, to the easements, liens, encumbrances, restrictions,
agreements, and other title matters listed or specifically referred to in any
individual Lease ("Permitted Exceptions").
1.03 Term. The term of each Lease shall be as set forth in the
individual Lease for a particular Leased Property, and the date on which the
term of each lease commences is referred to as the Commencement Date.
1.04 Holding Over. Should Tenant, without the express consent of
Landlord, continue to hold and occupy the Leased Property after the expiration
of the Term, such holding over beyond the Term and the acceptance or collection
of Rent by the Landlord shall operate and be construed as creating a tenancy
from month-to-month and not for any other term whatsoever. During any such
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<PAGE> 8
holdover period Tenant shall pay to Landlord for each month (or portion thereof)
Tenant remains in the Leased Property one hundred fifty percent (150%) of the
Base Rent in effect on the expiration date. Said month-to-month tenancy may be
terminated by Landlord by giving Tenant ten (10) days written notice, and at any
time thereafter Landlord may re-enter and take possession of the Leased
Property.
1.05 Surrender. Except as a result of (i) Tenant Improvements and
Capital Additions (as such terms are defined in Section 8.01 hereof); (ii)
normal and reasonable wear and tear (subject to the obligation of Tenant to
maintain the Leased Property in good order and repair during the Term); and (ii)
casualty, taking or other damage and destruction not required to be repaired by
Tenant, Tenant shall surrender and deliver up the Leased Property, including all
Personal Property and replacements thereof required to be provided by Tenant
pursuant to the terms of Sections 8.06 and 8.07 hereof, at the expiration or
termination of the Term broom clean, free of all Tenant's personal property (but
not the Personal Property), and in as good order and condition as of the
Commencement Date.
ARTICLE II
RENT
2.01 Base Rent. Unless otherwise provided in an individual Lease,
Tenant shall pay Landlord annual base rent for each Leased Property that is the
subject of a Lease, without notice, demand, set-off or counterclaim, in advance,
in lawful money of the United States of America, in the amount specified therein
(the "Base Rent") for the Term in consecutive monthly installments payable in
advance on the Commencement Date of each Lease and thereafter on the first day
of each month during the Term, in accordance with the Base Rent Schedule set
forth in or attached to each individual Lease. The Base Rent for each Leased
Property shall be based on the fair market value of such property.
2.02 Additional Rent. Beginning on the first day of the month following
the first anniversary date of each Lease, the Tenant shall pay Landlord an
amount (the "Additional Rent") each year equal to a percentage of the prior year
Total Rent (for the purposes hereof, Total Rent is Base Rent plus Additional
Rent) under such Lease, such percentage being the greater of (i) four percent
(4%) or (ii) the percentage which is twenty-five percent (25%) of the percentage
increase in gross management revenues realized by Tenant from its operations at
the applicable Leased Property for such prior year exclusive of any such
increase as is attributable to an expansion in the size or number of beds in
such
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<PAGE> 9
Leased Property. The Additional Rent shall be payable monthly, in advance, along
with Base Rent, and otherwise in the manner as set forth in Section 2.01 above.
Tenant shall provide to Landlord, not later than thirty (30) days following each
anniversary date of each Lease, Tenant's statement, certified by Tenant's chief
financial officer, setting forth such percentage increase in gross management
revenues realized by Tenant for the applicable Leased Facility for the prior
year.
2.02.01 Other Additional Rent. In addition to Base Rent and Additional
Rent, Tenant shall pay to the party to whom they are owed all other amounts,
liabilities, obligations and Impositions (as hereinafter defined ) which Tenant
assumes or agrees to pay under this Agreement or any Lease and any fine,
penalty, interest, charge and cost which may be added for nonpayment or late
payment of such items (collectively the "Other Additional Rent").
2.03 Place(s) of Payment of Rent; Direct Payment of Other Additional
Rent. The Base Rent, Additional Rent and Other Additional Rent are hereinafter
referred to as "Rent." Landlord shall have all legal, equitable and contractual
rights, powers and remedies provided either in this Agreement, in any Lease or
by statute or otherwise in the case of nonpayment of the Rent. Tenant shall make
all payments of Base Rent and Additional Rent at Landlord's principal place of
business or as Landlord may otherwise from time to time direct in writing, and
all payments of Other Additional Rent directly to the person or persons to whom
such amount is owing at the time and times when such payments are due, and shall
give to Landlord such evidence of such direct payments as Landlord shall
reasonably request.
2.04 Net Lease. Each Lease shall be deemed and construed to be an
"absolute net lease" or "triple net lease," and Tenant shall pay all Rent,
Impositions, and other charges and expenses in connection with each Leased
Property throughout the Term, without abatement, deduction or set-off.
2.05 No Termination, Abatement, Etc. Except as otherwise specifically
provided in this Agreement or a particular Lease, Tenant shall remain bound by
this Agreement or such Lease in accordance with its terms. Except as otherwise
specifically provided in the Agreement or a particular Lease, Tenant shall not,
without the prior written consent of Landlord, modify, surrender or terminate
the Agreement or such Lease, nor seek nor be entitled to any abatement,
deduction, deferment or reduction of Rent, or set-off against the Rent. Except
as specifically provided in this Agreement or a particular Lease, the
obligations of Landlord and Tenant shall not be affected by reason of (i) the
lawful or unlawful prohibition of, or restriction upon, Tenant's use of the
Leased Property, or any part thereof, the interference with such use by any
person, corporation, partnership or other entity, or by reason of eviction by
paramount title; (ii) any claim which Tenant has or might have against Landlord
or by reason of any default or breach of any warranty by Landlord under this
Agreement or a particular Lease or any other agreement between Landlord and
Tenant, or to which Landlord and Tenant are parties; (iii) any bankruptcy,
insolvency, reorganization, composition, readjustment, liquidation, dissolution,
winding up or other proceeding affecting Landlord or any assignee or transferee
of Landlord; or (iv) any other cause, whether similar or dissimilar to any of
the foregoing, other than a discharge of Tenant from any such obligations as a
matter of law. Except as otherwise specifically provided in this Agreement or a
particular Lease, and to the maximum extent permitted by law, Tenant hereby
specifically waives all rights, including but not limited to any rights under
any statute relating to rights of tenants in any state in which any Leased
Property is located, arising from
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<PAGE> 10
any occurrence whatsoever, which may now or hereafter be conferred upon it by
law (a) to modify, surrender or terminate any Lease or quit or surrender the
Leased Property or any portion thereof; or (b) entitling Tenant to any
abatement, reduction, suspension or deferment of the Rent or other sums payable
by Tenant hereunder. The obligations of Landlord and Tenant hereunder shall be
separate agreements and the Rent and all other sums shall continue to be payable
in all events unless the obligations to pay the same shall be terminated
pursuant to the express provisions of this Agreement or a particular Lease or by
termination of this Agreement or a particular Lease other than by reason of an
Event of Default.
ARTICLE III
IMPOSITIONS AND UTILITIES
3.01 Payment of Impositions. Subject to the adjustments set forth
herein, Tenant shall pay, as Other Additional Rent, all Impositions (as
hereinafter defined) that may be levied or become a lien on the Leased Property
or any part thereof at any time (whether prior to or during the Term), without
regard to prior ownership of said Leased Property, on or before the date due.
Tenant shall furnish to Landlord on an annual basis copies of official receipts
or other satisfactory proof evidencing such payments. Tenant's obligation to pay
such Impositions shall be deemed absolutely fixed upon the date such Impositions
become a lien upon the Leased Property or any part thereof. Tenant, at its
expense, shall prepare and file all tax returns and reports in respect of any
Imposition as may be required by governmental authorities, provided, Landlord
shall be responsible for the preparation and filing of any such tax returns or
reports in respect of any real or personal property owned by Landlord. Tenant
shall be entitled to any refund due from any taxing authority if no Event of
Default (as hereinafter defined) shall have occurred hereunder and be
continuing. Landlord shall be entitled to any refund from any taxing authority
if an Event of Default has occurred and is continuing. Any refunds retained by
Landlord due to an Event of Default shall be applied as provided in Section
9.08. Landlord and Tenant shall, upon request of the other, provide such data as
is maintained by the party to whom the request is made with respect to the
Leased Property as may be necessary to prepare any required returns and reports.
In the event governmental authorities classify any property covered by this
Lease as personal property, Landlord and Tenant shall file all personal property
tax returns in such jurisdictions where they may legally so file. Landlord, to
the extent it possesses the same, and Tenant, to the extent it possess the same,
will provide the other party, upon request, with cost and depreciation records
necessary for filing returns for any property so classified as personal
property. Where Landlord is legally required to file personal property tax
returns, Tenant will be provided with copies of assessment notices indicating a
value in excess of the reported value in sufficient time for Tenant to file a
protest. Tenant may, upon notice to Landlord, at Tenant's option and at Tenant's
sole cost and expense, protest, appeal, or institute such other proceedings as
Tenant may deem appropriate to effect a reduction of real estate or personal
property assessments and Landlord, at Tenant's expense as aforesaid, shall fully
cooperate with Tenant in such protest, appeal, or other action. Tenant shall
provide Landlord copies of all materials filed or presented in connection with
any such proceeding. Tenant shall promptly reimburse Landlord for all personal
property taxes paid by Landlord upon receipt of billings accompanied by copies
of a bill therefor and payments thereof which identify the personal property
with respect to which such payments are made. Impositions imposed in respect to
5
<PAGE> 11
the tax-fiscal period during which the Term commences and terminates shall be
adjusted and prorated between Landlord and Tenant on a per diem basis, with
Tenant being obligated to pay its pro rata share from and including the
Commencement Date to and including the expiration or termination date of the
Term, whether or not such Imposition is imposed before or after such
commencement or termination, and Tenant's obligation to pay its prorated share
thereof shall survive such termination. Tenant shall also pay to Landlord a sum
equal to the amount which Landlord may be caused to pay of any privilege tax,
sales tax, gross receipts tax, rent tax, occupancy tax or like tax (excluding
any tax based on net income), hereinafter levied, assessed, or imposed by any
federal, state, county or municipal governmental authority, or any subdivision
thereof, upon or measured by rent or other consideration required to be paid by
Tenant under this Agreement.
3.02 Definition of Impositions. "Impositions" means, collectively, (i)
taxes (including without limitation, all real estate and personal property ad
valorem (whether assessed as part of the real estate or separately assessed as
unsecured personal property), sales and use, business or occupation, single
business, gross receipts, transaction, privilege, rent or similar taxes, but not
including income or franchise or excise taxes payable with respect to Landlord's
receipt of Rent); (ii) assessments (including without limitation, all
assessments for public improvements or benefits, whether or not commenced or
completed prior to the date hereof and whether or not to be completed within the
Term); (iii) ground rents, water, sewer or other rents and charges, excises, tax
levies, and fees (including without limitation, license, permit, inspection,
authorization and similar fees); (iv) to the extent they may become a lien on
the Leased Property all taxes imposed on Tenant's operations of the Leased
Property including without limitation, employee withholding taxes, income taxes
and intangible taxes; and (v) all other governmental charges, in each case
whether general or special, ordinary or extraordinary, or foreseen or unforseen,
of every character in respect of the Leased Property or any part thereof and/or
the Rent (including all interest and penalties thereon due to any failure in
payment by Tenant), which at any time prior to, during or in respect of the Term
hereof may be assessed or imposed on or in respect of or be a lien upon (a)
Landlord or Landlord's interest in the Leased Property or any part thereof; (b)
the Leased Property or any part thereof or any rent therefrom or any estate,
right, title or interest therein; or (c) any occupancy, operation, use or
possession of, or sales from, or activity conducted on, or in connection with
the Leased Property or the leasing or use of the Leased Property or any part
thereof. Tenant shall not, however, be required to pay (i) any tax based on net
income (whether denominated as a franchise or capital stock or other tax)
imposed on Landlord; or (ii) except as provided in Section 13.01, any tax
imposed with respect to the sale, exchange or other disposition by Landlord of
any Leased Property or the proceeds thereof; provided, however, that if any tax,
assessment, tax levy or charge which Tenant is obligated to pay pursuant to the
first sentence of this definition and which is in effect at any time during the
Term hereof is totally or partially repealed, and a tax, assessment, tax levy or
charge set forth in clause (i) or (ii) immediately above is levied, assessed or
imposed expressly in lieu thereof Tenant shall then pay such tax, levy, or
charge set forth in said clause (i) or (ii).
3.03 Utilities. Tenant shall contract for, in its own name, and will
pay, as Other Additional Rent all taxes, assessments, charges/deposits, and
bills for utilities, including without limitation charges for water, gas, oil,
sanitary and storm sewer, electricity, telephone service, trash collection, and
all other utilities which may be charged against the occupant of the
Improvements during the Term. Tenant shall at all times maintain that amount of
heat necessary to ensure against the freezing
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of water lines. Tenant hereby agrees to indemnify and hold Landlord harmless
from and against any liability or damages to the utility systems and the Leased
Property that may result from Tenant's failure to maintain sufficient heat in
the Improvements.
3.04 Escrow of Impositions. In the event Tenant persistently fails to
timely pay Impositions with respect to any Leased Facility, then, upon thirty
(30) days written notice from Landlord to Tenant, Tenant shall thereafter
deposit with Landlord, on the first day of each month during the remaining Term
hereof and any extended Term, a sum equal to one-twelfth (1/12th) of the
Impositions assessed against such Leased Property which sums shall be used by
Landlord toward payment of such Impositions. If, at the end of any applicable
tax year, any such funds held by Landlord are insufficient to make full payment
of taxes or other Impositions for which such funds are held, Tenant, on demand,
shall pay to Landlord any additional funds necessary to pay and discharge the
obligations of Tenant pursuant to the provisions of this section. If, however,
at the end of any applicable tax year, such funds held by Landlord are in excess
of the total payment required to satisfy taxes or other Impositions for which
such funds are held, Landlord shall apply such excess amounts to Tenant's tax
and Imposition escrow fund for the next tax year. If any such excess exists
following the expiration or earlier termination of any Lease, and subject to
Section 9.08 below, Landlord shall promptly refund such excess amounts to
Tenant. The receipt by Landlord of the payment of such Impositions by and from
Tenant shall only be as an accommodation to Tenant and the taxing authorities,
and shall not be construed as rent or income to Landlord, Landlord serving, if
at all, only as a conduit for delivery purposes. All such deposits by Tenant
shall be held in a non-interest-bearing account with one or more national banks
having total assets of not less than $1,000,000,000, with all interest thereon
accruing in favor of Tenant. In lieu of making escrow deposits as aforesaid,
Tenant may elect to provide Landlord with a letter of credit, or a payment bond,
in the face amount of one year's Impositions on the subject Leased Property,
issued by a national bank or reputable bonding or surety company, in all
respects reasonably acceptable to Landlord. Said letter of credit or payment
bond shall be drawable or callable, as the case may be, upon Tenant's failure to
timely pay any such Impositions, for the sole purpose of providing the funds
necessary to pay such Impositions, and shall otherwise be in form and substance
reasonably satisfactory to Landlord.
For purposes hereof, "persistently fails to timely pay Impositions"
shall mean failure to timely pay any Imposition with respect to any Leased
Premises for any two (2) Lease Years in any five (5) Lease Year Period,
notwithstanding Tenant's subsequent payment of such Impositions.
3.05 Discontinuance of Utilities. Landlord will not be liable for
damages to person or property or for injury to, or interruption of, business for
any discontinuance of utilities nor will such discontinuance in any way be
construed as an eviction of Tenant or cause an abatement of Rent or operate to
release Tenant from any of Tenant's obligations under this Lease.
ARTICLE IV
INSURANCE
4.01 Property Insurance. Tenant shall, at Tenant's expense, keep the
Improvements, Fixtures, and other components of the Leased Property insured
against the following risks:
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(a) Loss or damage by fire, vandalism and malicious mischief,
sprinkler leakage and all other physical loss perils commonly covered
by "All Risk" insurance in an amount not less than one hundred percent
(100%) of the then full replacement cost thereof (as hereinafter
defined). Such policy shall include an agreed amount endorsement if
available at a reasonable cost. Such policy shall also include
endorsements for contingent liability for operation of building laws,
demolition costs, and increased cost of construction.
(b) Loss or damage by explosion of steam boilers, pressure
vessels, or similar apparatus, now or hereafter installed on the Leased
Property, in commercially reasonable amounts acceptable to Landlord.
(c) Loss of rent under a rental value or business interruption
insurance policy covering risk of loss during the first six (6) months
of reconstruction necessitated by the occurrence of any hazards
described in Sections 4.01(a) or 4.01(b), above, and which causes an
abatement of Rent as provided in Article 8 hereof in an amount
sufficient to prevent Landlord or Tenant from becoming a co-insurer,
containing endorsements for extended period of indemnity and premium
adjustment, and written with an agreed amount clause, if the insurance
provided for in this clause (c) is available.
(d) If the Land is located in whole or in part within a
designated flood plain area, loss or damage caused by flood in
commercially reasonable amounts acceptable to Landlord.
(e) Loss or damage commonly covered by blanket crime insurance
including employee dishonesty, loss of money orders or paper currency,
depositor's forgery, and loss of property accepted by Tenant for
safekeeping, in commercially reasonable amounts acceptable to Landlord.
(f) In connection with any repairs or rebuilding by Tenant
under Article X hereof, Tenant shall maintain (or cause its contractor
to maintain) appropriate builder's risk insurance covering any loss or
casualty to the subject Improvements during the course of such repairs
or rebuilding.
4.02 Liability Insurance. Tenant shall, at Tenant's expense, maintain
liability insurance against the following:
(a) Claims for personal injury or property damage commonly
covered by comprehensive general liability insurance with endorsements
for blanket, contractual, personal injury, owner's protective
liability, real property, fire damage, legal liability, broad form
property damage, and extended bodily injury, with commercially
reasonable amounts for bodily injury and property damage acceptable to
Landlord, but with a combined single limit of not less than Five
Million Dollars ($5,000,000.00) per occurrence and Ten Million Dollars
($10,000,000.00) in the aggregate. At Landlord's request, such
$5,000,000.00 and $10,000,000.00 minimum requirements shall be
increased by up to four percent (4%) per year.
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(b) Claims commonly covered by worker's compensation insurance
for all persons employed by Tenant on the Leased Property. Such
worker's compensation insurance shall be in accordance with the
requirements of all applicable local, state, and federal law.
4.03 Insurance Requirements. The following provisions shall apply to
all insurance coverages required hereunder:
(a) The carriers of all policies shall have a Best's Rating of
"A-" or better and a Best's Financial Category of XII or larger and
shall be authorized to do insurance business in the state in which the
Leased Property is located.
(b) Tenant shall be the "named insured" and Landlord and any
mortgagee of Landlord shall be an "additional named insured" on each
policy.
(c) Tenant shall deliver to Landlord certificates or policies
showing the required coverages and endorsements. The policies of
insurance shall provide that the policy may not be canceled or not
renewed, and no material change or reduction in coverage may be made,
without at least thirty (30) days' prior written notice to Landlord.
(d) The policies shall contain a severability of interest
and/or cross-liability endorsement, provide that the acts or omissions
of Tenant will not invalidate the Landlord's coverage, and provide that
Landlord shall not be responsible for payment of premiums.
(e) All loss adjustment shall require the written consent of
Landlord and Tenant, as their interests may appear.
(f) At least thirty (30) days prior to the expiration of each
policy, Tenant shall deliver to Landlord a certificate showing renewal
of such policy and payment of the annual premium therefor.
Landlord shall have the right to review the insurance coverages
required hereunder with Tenant from time to time, to obtain the input of third
party professional insurance advisors (at Landlord's expense) with respect to
such insurance coverages, and to consult with Tenant in Tenant's annual review
and renewal of such insurance coverages. All insurance coverages hereunder shall
be in such form, substance and amounts as are customary or standard in Tenant's
industry.
4.04 Replacement Cost. The term "full replacement cost" means the
actual replacement cost thereof from time to time including increased cost of
construction, with no reductions or deductions. Tenant shall, not later than
thirty (30) days after the anniversary of each policy of insurance, of the Term,
increase the amount of the replacement cost endorsement for the Improvements. If
Tenant makes any Permitted Alterations (as hereinafter defined) to the Leased
Property, Landlord may have such full replacement cost redetermined at any time
after such Permitted Alterations are made, regardless of when the full
replacement cost was last determined.
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4.05 Blanket Policy. Tenant may carry the insurance required by this
Article under a blanket policy of insurance, provided that the coverage afforded
Tenant will not be reduced or diminished or otherwise be different from that
which would exist under a separate policy meeting all of the requirements of
this Agreement.
4.06 No Separate Insurance. Tenant shall not take out separate
insurance concurrent in form or contributing in the event of loss with that
required in this Article, or increase the amounts of any then existing insurance
by securing an additional policy or additional policies, unless all parties
having an insurable interest in the subject matter of the insurance, including
Landlord and any mortgagees, are included therein as additional named insureds
or loss payees, the loss is payable under said insurance in the same manner as
losses are payable under this Agreement, and such additional insurance is not
prohibited by the existing policies of insurance. Tenant shall immediately
notify Landlord of the taking out of such separate insurance or the increasing
of any of the amounts of the existing insurance by securing an additional policy
or additional policies. The term "mortgages" as used in this Agreement includes
Deeds of Trust and the term "mortgagees" includes trustees and beneficiaries
under a Deed of Trust.
4.07 Waiver of Subrogation. Each party hereto hereby waives any and
every claim which arises or may arise in its favor and against the other party
hereto during the Term or any extension or renewal thereof, for any and all loss
of, or damage to, any of its property located within or upon, or constituting a
part of, the Leased Property, which loss or damage is covered by valid and
collectible insurance policies, to the extent that such loss or damage is
recoverable under such policies. Said mutual waiver shall be in addition to, and
not in limitation or derogation of, any other waiver or release contained in
this Lease with respect to any loss or damage to property of the parties hereto.
Inasmuch as the said waivers will preclude the assignment of any aforesaid claim
by way of subrogation (or otherwise) to an insurance company (or any other
person), each party hereto agrees immediately to give each insurance company
which has issued to it policies of insurance, written notice of the terms of
said mutual waivers, and to have such insurance policies properly endorsed, if
necessary, to prevent the invalidation of said insurance coverage by reason of
said waivers, so long as such endorsement is available at a reasonable cost.
4.08 Mortgages. The following provisions shall apply if Landlord now or
hereafter places a mortgage on the Leased Property or any part thereof: (i)
Tenant shall obtain a standard form of mortgage clause insuring the interest of
the mortgagee; (ii) Tenant shall deliver evidence of insurance to such
mortgagee; (iii) loss adjustment shall require the consent of the mortgagee; and
(iv) Tenant shall obtain such other coverages and provide such other information
and documents as may be reasonably required by the mortgagee.
ARTICLE V
INDEMNITY; HAZARDOUS SUBSTANCES
5.01 Tenant's Indemnification. Subject to Section 4.07, Tenant hereby
agrees to indemnify and hold harmless Landlord, its agents, and employees from
and against any and all demands, claims, causes of action, fines, penalties,
damages (including consequential damages), losses, liabilities
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(including strict liability), judgments, and expenses (including, without
limitation, attorneys' fees, court costs, and the costs set forth in Section
9.06) incurred in connection with or arising from: (i) the use, condition,
operation or occupancy of each Leased Property; (ii) any activity, work, or
thing done, or permitted or suffered by Tenant in or about the Leased Property;
(iii) any acts, omissions, or negligence of Tenant or any person claiming under
Tenant, or the contractors, agents, employees, invitees, or visitors of Tenant
or any such person; (iv) any claim of any person incarcerated in the Leased
Premises, including claims alleging breach or violation of such person's civil
or legal rights; (v) any breach, violation, or nonperformance by Tenant or any
person claiming under Tenant or the employees, agents, contractors, invitees, or
visitors of Tenant or of any such person, of any term, covenant, or provision of
this Agreement or any Lease or any law, ordinance, or governmental requirement
of any kind; (vi) any injury or damage to the person, property or business of
Tenant, its employees, agents, contractors, invitees, visitors, or any other
person entering upon the Leased Property under the express or implied invitation
of Tenant; and (vii) and any accident, injury to or death of persons or loss or
damage to any item of property occurring at the Leased Property. If any action
or proceeding is brought against Landlord, its employees, or agents by reason of
any such claim, Tenant, upon notice from Landlord, will defend the claim at
Tenant's expense with counsel reasonably satisfactory to Landlord. In the event
Landlord reasonably determines that its interests and the interests of Tenant in
any such action or proceeding are not substantially the same and that Tenant's
counsel cannot adequately represent the interests of Landlord therein, Landlord
shall have the right to hire separate counsel in any such action or proceeding
and the reasonable costs thereof shall be paid for by Tenant.
5.02 Hazardous Substances or Materials. Tenant shall not, either with
or without negligence, injure, overload, deface, damage or otherwise harm any
Leased Property or any part or component thereof; commit any nuisance; permit
the emission of any hazardous agents or substances; allow the release or other
escape of any biologically or chemically active or other hazardous substances or
materials so as to impregnate, impair or in any manner affect, even temporarily,
any element or part of any Leased Property, or allow the storage or use of such
substances or materials in any manner not sanctioned by law or by the highest
standards prevailing in the industry for the storage and use of such substances
or materials; nor shall Tenant bring onto any Leased Property any such materials
or substances; permit the occurrence of objectionable noise or odors; or make,
allow or suffer any waste whatsoever to any Leased Property. Landlord may
inspect the Leased Property from time to time, and Tenant will cooperate with
such inspections. Without limitation, "hazardous substances" for the purpose of
this Section 5.02 shall include any substances regulated by any local, state or
federal law relating to environmental conditions and industrial hygiene,
including, without limitation, the Resource Conservation and Recovery Act of
1976 ("RCRA"), the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 ("CERCLA"), as amended by the Superfund Amendments and
Reauthorization Act of 1986 ("SARA"), the Hazardous Materials Transportation
Act, the Federal Water Pollution Control Act, the Clean Air Act, the Clean Water
Act, the Toxic Substances Control Act, the Safe Drinking Water Act, and all
similar federal, state and local environmental statutes, ordinances and the
regulations, orders, or decrees now or hereafter promulgated thereunder.
Notwithstanding the foregoing, Tenant anticipates using, storing and disposing
of certain hazardous substances in connection with operation of correctional or
detention facilities which are not in violation of the foregoing laws. Such
substances include, but are not limited to the following: medical wastes, diesel
fuel, maintenance and janitorial supplies, and waste
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from reprographic activities. Upon request by Landlord, Tenant shall submit to
Landlord annual reports regarding Tenant's use, storage, and disposal of any of
the foregoing materials, said reports to include information regarding continued
hazardous materials inspections, personal interviews, and federal, state and
local agency listings. In addition, Tenant shall execute affidavits,
representations and the like from time to time at Landlord's request concerning
Tenant's best knowledge and belief regarding the presence or absence of
hazardous materials on the Leased Property. Other than for circumstances
involving Landlord's gross negligence or intentional misconduct, Tenant shall
indemnify and hold harmless Landlord from and against all liabilities (including
punitive damages), costs and expenses (including reasonable attorneys' fees)
imposed upon or asserted against the Landlord or the Leased Property on account
of, among other things, any applicable federal, state or local law, ordinance,
regulation, order, permit, decree or similar items relating to hazardous
substances, human health or the environment (collectively, "Environmental Laws")
(irrespective of whether there has occurred any violation of any Environmental
Law ), in respect of the Leased Property, including (a) liability for response
costs and for costs of removal and remedial action incurred by the United States
Government, any state or local governmental unit to any other person or entity,
or damages from injury to or destruction or loss of natural resources, including
the reasonable costs of assessing such injury, destruction or loss, incurred
pursuant to any Environmental Law, (b) liability for costs and expenses of
abatement, investigation, removal, remediation, correction or clean-up, fines,
damages, response costs or penalties which arise from the provisions of any
Environmental Law, (c) liability for personal injury or property damage arising
under any statutory or common-law tort theory, including damages assessed for
the maintenance of a public or private nuisance or for carrying on of a
dangerous activity or (d) by reason of a breach of an environmental
representation or warranty by Tenant.
5.03 Limitation of Landlord's Liability. Landlord, its agents and
employees, will not be liable for any loss, injury, death, or damage (including
consequential damages) to persons, property, or Tenant's business occasioned by
theft, act of God, public enemy, injunction, riot, strike, insurrection, war,
court order, requisition, order of governmental body or authority, fire,
explosion, falling objects, steam, water, rain or snow, leak or flow of water
(including water from the elevator system), rain or snow from any Leased
Property or into any Leased Property or from the roof, street, subsurface or
from any other place, or by dampness or from the breakage, leakage, obstruction,
or other defects of the pipes, sprinklers, wires, appliances, plumbing, air
conditioning, or lighting fixtures of the Leased Property, or from construction,
repair, or alteration of the Leased Property or from any acts or omissions of
any other occupant or visitor of the Leased Property, or from the presence or
release of any hazardous substance or material on or from the Leased Property or
from any other cause beyond Landlord's control.
ARTICLE VI
USE AND ACCEPTANCE OF PREMISES; FINANCIAL INFORMATION
6.01 Use of Leased Property. Tenant shall use and occupy each Leased
Property exclusively as a correctional or detention facility or other purpose
for which the Leased Property is being used at the Commencement Date of the
Term, and for no other purpose without the prior written consent of the
Landlord. Tenant shall obtain and maintain all approvals, licenses, and consents
needed to use
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and operate each Leased Property for such purposes. Tenant shall promptly
deliver to Landlord complete copies of surveys, examinations, certification and
licensure inspections, compliance certificates, and other similar reports issued
to Tenant by any governmental agency.
6.02 Acceptance of Leased Property. Except as otherwise specifically
provided in this Agreement or in any individual Lease, Tenant acknowledges that
(i) Tenant and its agents have had an opportunity to inspect the Leased
Property; (ii) Tenant has found the Leased Property fit for Tenant's use; (iii)
delivery of the Leased Property to Tenant is in an "as-is" condition; (iv)
Landlord is not obligated to make any improvements or repairs to the Leased
Property; and (v) the roof, walls, foundation, heating, ventilating, air
conditioning, telephone, sewer, electrical, mechanical, utility, plumbing, and
other portions of the Leased Property are in good working order. Tenant waives
any claim or action against Landlord with respect to the condition of the Leased
Property. LANDLORD MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, IN
RESPECT OF THE LEASED PROPERTY OR ANY PART THEREOF, EITHER AS TO ITS FITNESS FOR
USE, DESIGN OR CONDITION FOR ANY PARTICULAR USE OR PURPOSE OR OTHERWISE, AS TO
QUALITY OR THE MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT, IT BEING
AGREED THAT ALL SUCH RISKS ARE TO BE BORNE BY TENANT.
6.03 Conditions of Use and Occupancy. Tenant agrees that during the
Term it shall use and keep the Leased Property in a careful, safe and proper
manner; not commit or suffer waste thereon; not use or occupy the Leased
Property for any unlawful purposes; not use or occupy the Leased Property or
permit the same to be used or occupied, for any purpose or business deemed extra
hazardous on account of fire or otherwise; keep the Leased Property in such
repair and condition as may be required by the local board of health, or other
city, state or federal authorities, free of all cost to Landlord; not permit any
acts to be done which will cause the cancellation, invalidation, or suspension
of any insurance policy; and permit Landlord and its agents to enter upon the
Leased Property at all reasonable times after notice to Tenant to examine the
condition thereof.
6.04 Financial Statements and Other Information. Tenant shall provide
Landlord certain financial information and other information as follows:
(a) As soon as practicable and in any event within forty-five
(45) days after the end of each fiscal quarter, an unaudited
consolidated balance sheet of the Tenant and its subsidiaries as of the
close of such fiscal quarter and unaudited consolidated statements of
income and cash flows for the fiscal quarter then ended and that
portion of the fiscal year then ended, including the notes thereto, all
in reasonable detail setting forth in comparative form the
corresponding figures for the preceding fiscal year and prepared by the
Tenant in accordance with generally accepted accounting principles
consistently applied ("GAAP") and, if applicable, containing disclosure
of the effect on the financial position or results of operations of any
change in the application of accounting principles and practices during
the period, and certified by the chief financial officer of Tenant to
present fairly in all material respects the financial condition of the
Tenant as of their respective dates and the results of operations of
the Tenant for the respective periods then ended, subject to normal
year-end adjustments.
(b) Additionally, as soon as practicable and in any event
within ninety (90) days after the end of each fiscal year, an audited
consolidated balance sheet of the Tenant and its subsidiaries as of the
close of such fiscal year and audited consolidated statements of
income, retained earnings and cash flows for the fiscal year then
ended, including the notes thereto, all in reasonable detail setting
forth in comparative form the corresponding figures for the preceding
fiscal year and prepared by an independent certified public
accounting firm acceptable to the Landlord in accordance with GAAP and,
if applicable, containing disclosure of the effect on the financial
position or results of operation of any change in the application of
accounting principles and practices during the year, and accompanied by
a report thereon by such certified public accountants that is not
qualified with respect to scope or limitations imposed by Tenant with
respect to accounting principles followed by Tenant not in accordance
with GAAP.
(c) Prompt (but in no event later than ten (10) days after an
officer of Tenant obtains knowledge thereof) telephonic and written
notice of:
(i) any notice of any violation relative to any
Leased Property received by Tenant or any
subsidiary of Tenant from any governmental
authority including, without limitation, any
notice of violation of Environmental Laws;
(ii) any attachment, judgment, lien, levy or
order relating to any Leased Property that
may be assessed against or threatened
against Tenant or any subsidiary thereof;
(iii) any Event of Default or any event which
constitutes or which with the passage of
time or giving of notice or both would
constitute an Event of Default; and
(iv) any event which makes any of the
representations or warranties of Tenant set
forth herein inaccurate in any material
respect.
(d) Prior to commencement of operations in each Leased
Property, a capital and operating budget for the Leased Property for
its first fiscal year (or portion thereof) of operations; and after
commencement of operations in the leased property:
(i) prior to the beginning of each fiscal year
of Borrower, a capital and operating budget
for the Leased Property; and
(ii) for each month (and for the fiscal year
through the end of that month) a statement
of all income and expenses in connection
with the Leased Property, all certified in
writing as true and correct by an authorized
officer of Tenant.
(e) Such other information regarding the operations, business
affairs and financial condition of the Tenant or any of its
subsidiaries as the Landlord or any lender for Landlord may reasonably
request.
(f) All written information, reports, statements and other
papers and data furnished by or on behalf of Tenant to the Landlord
whether pursuant to this Article VI or any other provision of this
Agreement, shall be, at the time the same is so furnished, complete and
correct in all material respects to the extent necessary to give the
Landlord or any lender for Landlord complete, true and accurate
knowledge of the subject matter based on the Tenant's knowledge
thereof.
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ARTICLE VII
REPAIRS, COMPLIANCE WITH LAWS, AND MECHANICS' LIENS
7.01 Maintenance. Tenant shall maintain each Leased Property in good
order, repair and appearance, and repair each Leased Property, including without
limitation, all interior and exterior, structural and nonstructural repairs and
replacements to the roof, foundations, exterior walls, building systems, HVAC
systems, parking areas, sidewalks, water, sewer and gas connections, pipes, and
mains. Tenant shall pay as Other Additional Rent the full cost of maintenance,
repairs, and replacements. Tenant shall maintain all drives, sidewalks, parking
areas, and lawns on or about the Leased Property in a clean and orderly
condition, free of accumulations of dirt, rubbish, snow and ice. Tenant shall
permit Landlord to inspect the Leased Property at all reasonable times, and
shall implement all reasonable suggestions of the Landlord as to the maintenance
and replacement of the Leased Property.
7.02 Compliance with Laws. Tenant shall comply with all laws,
ordinances, orders, rules, regulations, and other governmental requirements
relating to the use, condition, or occupancy of each Leased Property, whether
now or hereafter enacted and in force including without limitation, (i)
licensure requirements for operation as a correctional or detention facility,
(ii) requirements of any board of casualty insurance underwriters or insurance
service office for any other similar body having jurisdiction over the Leased
Property, and (iii) all zoning and building codes and Environmental Laws. At
Landlord's request, from time to time, Tenant shall deliver to Landlord copies
of certificates or permits evidencing compliance with such laws, including
without limitation, copies of the correctional or detention facility licenses,
certificates of occupancy and building permits. Tenant shall provide Landlord
with copies of any notice from any governmental authority alleging any
non-compliance by Tenant or any Leased Facility with any of the foregoing
requirements and such evidence as Landlord may reasonably require of Tenant's
remediation thereof. Tenant hereby agrees to defend, indemnify and hold Landlord
harmless from and against any loss, liability (including strict liability),
claim, damage (including consequential damages), cost and expense (including
attorneys' fees) resulting from any failure by Tenant to comply with any laws,
ordinances, rules, regulations, and other governmental requirements.
7.03 Required Alterations. Tenant shall, at Tenant's sole cost and
expense, make any additions, changes, improvements or alterations to each Leased
Property, including structural alterations, which may be required by any
governmental authorities, including those required to continue licensure
requirements as a correctional or detention facility, whether such changes are
required by Tenant's use, changes in the law, ordinances, or governmental
regulations, defects existing as of the date of this Lease, or any other cause
whatsoever. Tenant shall provide prior written notice to Landlord of any changes
to each Leased Property pursuant to this Section 7.03 which involve changes to
the structural integrity of such Leased Property or materially affect the
operational capabilities or rated capacity of the Leased Facility. All such
additions, changes, improvements or alterations shall be deemed to be a Tenant
Improvement and shall comply with all laws requiring such alterations and with
the provisions of Section 8.01.
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7.04 Mechanics' Liens. Tenant shall have no authority to permit or
create a lien against Landlord's interest in the Leased Property, and Tenant
shall post notices or file such documents as may be required to protect
Landlord's interest in the Leased property against liens. Tenant hereby agrees
to defend, indemnify, and hold Landlord harmless from and against any mechanics'
liens against the Leased Property by reason of work, labor services or materials
supplied or claimed to have been supplied on or to the Leased Property. Tenant
shall immediately remove, bond-off, or otherwise obtain the release of any
mechanics' lien filed against the Leased Property. Tenant shall pay all expenses
in connection therewith, including without limitation, damages, interest, court
costs and reasonable attorneys' fees.
7.05 Replacements of Fixtures. Tenant shall not remove Fixtures from
any Leased Property except to replace the Fixtures by other similar items of
equal quality and value. Items being replaced by Tenant may be removed and shall
become the property of Tenant and items replacing the same shall be and remain
the property of the Landlord. Tenant shall execute, upon written request from
Landlord, any and all documents necessary to evidence Landlord's ownership of
the Fixtures and replacements therefor. Tenant may finance replacements for the
Fixtures by equipment lease or by a security agreement and financing statement;
provided, however, that for any item of Fixtures or Personal Property having a
cost greater than or equal to Twenty Thousand Dollars ($20,000.00), Tenant may
not finance replacements by security agreement or equipment lease unless (i)
Landlord has consented to the terms and conditions of the equipment lease or
security agreement; (ii) the equipment lessor or lender has entered into a
nondisturbance agreement with the Landlord upon terms and conditions acceptable
to Landlord, including without limitation, the following: (a) Landlord shall
have the right (but not the obligation) to assume such security agreement or
equipment lease upon the occurrence of an Event of Default by Tenant under any
Lease; (b) the equipment lessor or lender shall notify Landlord of any default
by Tenant under the equipment lease or security agreement and give Landlord a
reasonable opportunity to cure such default; and (c) Landlord shall have the
right to assign its rights under the equipment lease, security agreement, or
nondisturbance agreement; and (iii) Tenant shall, within thirty (30) days after
receipt of an invoice from Landlord, reimburse Landlord for all costs and
expenses incurred in reviewing and approving the equipment lease, security
agreement, and nondisturbance agreement, including without limitation,
reasonable attorneys' fees and costs.
ARTICLE VIII
ALTERATIONS AND SIGNS; TENANT'S PROPERTY;
CAPITAL ADDITIONS TO THE LEASED PROPERTY
8.01 Tenant's Right to Construct. During the Term of this Agreement, so
long as no Event of Default shall have occurred and be continuing as to the
Leased Property that is the subject of such improvements, Tenant may make
Capital Additions (as defined herein), or other alterations, additions, changes
and/or improvements to any Leased Property as deemed necessary or useful to
operate the Leased Property as a correction or detention facility (the "Primary
Intended Use") (individually, a "Tenant Improvement," or collectively, "Tenant
Improvements") with the prior written consent of the Landlord, which will not be
unreasonably withheld or delayed, may be given or withheld in Landlord's
discretion. "Capital Additions" shall mean the construction of one or more new
buildings or one or more additional structures annexed to any portion
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of any of the Improvements on a particular Leased Property, which are
constructed on any parcel of land or portion of the Land of a particular Leased
Property during the Term of any individual Lease, including the construction of
a new floor, or the repair, replacement, restoration, remodeling or rebuilding
of the Improvements or any portion thereof on any Leased Property which are not
normal, ordinary or recurring to maintain the Leased Property. Except as
otherwise agreed to by Landlord in writing, any such Tenant Improvement shall be
made at Tenant's sole expense and shall become the property of Landlord upon
termination of this Lease. Unless made on an emergency basis to prevent injury
to person or property, Tenant will submit plans to Landlord for Landlord's prior
approval, such approval not to be unreasonably withheld or delayed, for any
Tenant Improvement which is not a Capital Addition and which has a cost of more
than $500,000 or a cost which, when aggregated with the costs of all such Tenant
Improvements for any individual Leased Facility in the same Lease Year, would
cause the total costs of all such Tenant Improvements to exceed $1,000,000. Such
$500,000 and $1,000,000 amounts shall be increased by four percent (4%) per
annum, cumulatively for each subsequent Lease Year. Additionally, in connection
with any Tenant Improvement, including any Capital Addition, Tenant shall
provide Landlord with copies of any plans and specification therefor, Tenant's
budget relating thereto, any required government permits or approvals, any
construction contracts or agreements relating thereto, and any other information
relating to such Tenant Improvement as Landlord shall reasonably request.
8.02 Scope of Right. Subject to Section 8.01 herein and Section 7.03
concerning required alterations, at Tenant's cost and expense, Tenant shall have
the right to:
(a) seek any governmental approvals, including building
permits, licenses, conditional use permits and any certificates of need
that Tenant requires to construct any Tenant Improvement;
(b) erect upon the Leased Property such Tenant Improvements as
Tenant deems desirable;
(c) make additions, alterations, changes and improvements in
any Tenant Improvement so erected; and
(d) engage in any other lawful activities that Tenant
determines are necessary or desirable for the development of the Leased
Property in accordance with its Primary Intended Use;
provided, however, Tenant shall not make any Tenant Improvement which would, in
Landlord's reasonable judgment, impair the value or Primary Intended Use of any
Leased Property without Landlord's prior written consent and provided, further
that Tenant shall not be permitted to create a mortgage, lien or any other
encumbrance on any individual Leased Property without Landlord's prior written
consent.
8.03 Cooperation of Landlord. Landlord shall cooperate with Tenant and
take such actions, including the execution and delivery to Tenant of any
applications or other documents, reasonably requested by Tenant in order to
obtain any governmental approvals sought by Tenant to construct any
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Tenant Improvement within ten (10) business days following the later of (a) the
date Landlord receives Tenant's request, or (b) the date of delivery of any such
application or document to Landlord, so long as the taking of such action,
including the execution of said applications or documents, shall be without cost
to Landlord (or if there is a cost to Landlord, such cost shall be reimbursed by
Tenant), and will not cause Landlord to be in violation of any law, ordinance or
regulation.
8.04 Commencement of Construction. Tenant agrees that:
(a) Tenant shall diligently seek all governmental approvals
relating to the construction of any Tenant Improvement;
(b) Once Tenant begins the construction of any Tenant
Improvement, Tenant shall diligently prosecute any such construction to
completion in accordance with applicable insurance requirements and the
laws, rules and regulations of all governmental bodies or agencies
having jurisdiction over the Leased Property;
(c) Landlord shall have the right at any time and from time to
time to post and maintain upon the Leased Property such notices as may
be necessary to protect Landlord's interest from mechanics' liens,
material men's liens or liens of a similar nature;
(d) Tenant shall not suffer or permit any mechanics' liens or
any other claims or demands arising from the work or construction of
any Tenant Improvement to be enforced against the Leased Property or
any part thereof, and Tenant agrees to hold Landlord and said Leased
Property free and harmless from all liability from any such liens,
claims or demands, together with all costs and expenses in connection
therewith;
(e) All work shall be performed in a good and workmanlike
manner consistent with standards in the industry; and
(f) Subject to Section 8.09 in the case of Capital Additions,
Tenant shall not secure any construction or other financing for the
Tenant Improvements which is secured by a portion of the Leased
Property without Landlord's prior written consent, and any such
financing (i) shall not exceed the cost of the Tenant Improvements,
(ii) shall be subordinate to any mortgage or encumbrance now existing
or hereinafter created with respect to the Leased Property, and (iii)
shall be limited solely to Tenant's interest in the Leased Property
that is the subject of the improvements.
8.05 Rights in Tenant Improvements. Notwithstanding anything to the
contrary in this Lease, all Tenant Improvements constructed pursuant to Section
8.01, any and all subsequent additions thereto and alterations and replacements
thereof, shall be the sole and absolute property of Tenant during the Term of
the particular Lease. Upon the expiration or early termination of any Lease, all
such Tenant Improvements shall become the property of Landlord. Without limiting
the generality of the foregoing, Tenant shall be entitled to all federal and
state income tax benefits associated with any Tenant Improvement during the Term
of this Agreement.
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8.06 Personal Property. Tenant shall install, place, and use on the
Leased Property such fixtures, furniture, equipment, inventory and other
personal property in addition to the Fixtures as may be required or as Tenant
may, from time to time, deem necessary or useful to operate the Leased Property
as a correctional or detention facility.
8.07 Requirements for Personal Property. Tenant shall comply with all
of the following requirements in connection with Personal Property:
(a) With respect to each Leased Property, Tenant shall notify
Landlord within one hundred twenty (120) days after each Lease Year of
any additions, substitutions, or replacements of an item of Personal
Property at such Leased Property which individually has a cost of more
than $25,000.00 and shall furnish Landlord with such other information
as Landlord may reasonably request from time to time.
(b) The Personal Property shall be installed in a good and
workmanlike manner, in compliance with all governmental laws,
ordinances, rules, and regulations and all insurance requirements, and
be installed free and clear of any mechanics' liens.
(c) Tenant shall, at Tenant's sole cost and expense, maintain,
repair, and replace the Personal Property.
(d) Tenant shall, at Tenant's sole cost and expense, keep
Personal Property insured against loss or damage by fire, vandalism and
malicious mischief, sprinkler leakage, and other physical loss perils
commonly covered by fire and extended coverage, boiler and machinery,
and difference in conditions insurance in an amount not less than
ninety percent (90%) of the then full replacement cost thereof. Tenant
shall use the proceeds from any such policy for the repair and
replacement of Personal Property. The insurance shall meet the
requirements of Section 4.03.
(e) Tenant shall pay all taxes applicable to Personal
Property.
(f) If Personal Property is damaged or destroyed by fire or
any other case, Tenant shall promptly repair or replace Personal
Property unless Tenant is entitled to and elects to terminate the Lease
pursuant to Section 10.05.
(g) Unless an Event of Default (or any event which, with the
giving of notice of lapse of time, or both, would constitute an Event
of Default) has occurred and remains uncured beyond any applicable
grace period, Tenant may remove Personal Property from the Leased
Property from time to time provided that (i) the items removed are not
required to operate the Leased Property as a licensed correctional or
detention facility (unless such items are being replaced by Tenant);
and (ii) Tenant repairs any damage to the Leased Property resulting
from the removal of Personal Property.
(h) Tenant shall remove any of Tenant's personal property
which does not constitute Personal Property hereunder, upon the
termination or expiration of the Lease and
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shall repair any damage to the Leased Property resulting from the
removal of Tenant's personal property. If Tenant fails to remove
Tenant's personal property within ninety (90) days after the
termination or expiration of the Lease, then Tenant shall be deemed to
have abandoned Tenant's personal property, Tenant's personal property
shall become the property of Landlord, and Landlord may remove, store
and dispose of Tenant's personal property. In such event, Tenant shall
have no claim or right against Landlord for such property or the value
thereof regardless of the disposition thereof by Landlord. Tenant shall
pay Landlord, upon demand, all expenses incurred by Landlord in
removing, storing, and disposing of Tenant's personal property and
repairing any damage caused by such removal. Tenant's obligations
hereunder shall survive the termination or expiration of the Lease.
Notwithstanding the foregoing, it is understood and agreed that all
property constituting Personal Property hereunder shall be and/or
become the sole and exclusive property of Landlord upon the expiration
or termination of the Lease.
(i) Tenant shall perform its obligations under any equipment
lease or security agreement for personal property.
8.08 Signs. Tenant may, at its own expense, erect and maintain
identification signs at the Leased Property, provided such signs comply with all
laws, ordinances, and regulations. Upon the occurrence of an Event of Default or
the termination or expiration of a Lease, Tenant shall, within thirty (30) days
after notice from Landlord, remove the signs and restore the applicable Leased
Property to its original condition.
8.09 Financings of Capital Additions to a Leased Property.
(a) Landlord may, but shall be under no obligation to, provide
or arrange construction, permanent or other financing for a Capital
Addition proposed to be made to any Leased Property by Tenant. Within
thirty (30) days of receipt of such a request by Tenant, Landlord shall
notify Tenant as to whether it will finance the proposed Capital
Addition and, if so, the terms and conditions upon which it would do
so, including the terms of any amendment to an individual Lease or a
new lease agreement for such proposed Capital Addition.
(b) If Landlord agrees to finance the proposed Capital
Addition of Tenant, Tenant shall provide Landlord with the following:
(i) all customary or other required loan
documentation which may be required by the Landlord;
(ii) any information, certificates, licenses, permits
or documents requested by either Landlord or any lender with
whom Landlord has agreed or may agree to provide financing
which are necessary to confirm that Tenant will be able to use
the Capital Addition upon completion thereof in accordance
with the Primary Intended Use (as defined in Section 8.01),
including all required federal, state or local government
licenses and approvals;
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(iii) a certificate from Tenant's architect, setting
forth in reasonable detail the projected (or actual, if
available) cost of the proposed Capital Addition;
(iv) an amendment to this Lease, or a new lease
agreement, duly executed and acknowledged, in form and
substance satisfactory to Landlord and Tenant, and containing
such provisions as may be necessary or appropriate, including
without limitation, any appropriate changes in the legal
description of the Land, the Rent, and other changes with
respect to the Capital Addition;
(v) a deed conveying title to Landlord to any land
acquired for the purpose of constructing the Capital Addition,
free and clear of any liens or encumbrances except those
approved by Landlord and, both prior to and following
completion of the Capital Addition, an as-built survey thereof
satisfactory to Landlord;
(vi) endorsements to any outstanding policy of title
insurance covering the Leased Property or a supplemental
policy of title insurance covering the Leased Property
satisfactory in form and substance to Landlord (a) updating
the same without any additional exceptions, except as may be
permitted by Landlord; and (b) increasing the coverage thereof
by an amount equal to the fair market value of the Capital
Addition;
(vii) if required by Landlord, (a) an owner's policy
of title insurance insuring fee simple title to any land
conveyed to Landlord pursuant to subparagraph (v), free and
clear of all liens and encumbrances except those approved by
Landlord and (b) a lender's policy of title insurance
satisfactory in form and substance to Landlord and any lending
institution advancing a portion of the cost of the Capital
Addition;
(viii) if required by Landlord, upon completion of
the Capital Addition, an M.A.I. appraisal of the Leased
Property indicating that the value of the Leased Property upon
completion of the Capital Addition exceeds the fair market
value of the Leased Property prior thereto by an amount not
less than ninety-five percent (95%) of the cost of such
Capital Addition; and
(ix) such other certificates (including, but not
limited to, endorsements, increasing the insurance coverage,
if any, at the time required), documents, opinions of counsel,
appraisals, surveys, certified copies of duly adopted
resolutions of the board of directors of Tenant authorizing
the execution and delivery of any amendment to an individual
Lease or new lease agreement and any other instruments as may
be reasonably required by Landlord and any lending institution
advancing any portion of the cost of the Capital Addition.
(c) Upon making a request to finance a Capital Addition,
whether or not such financing is actually consummated, Tenant shall pay
or agree to pay, upon demand, all reasonable costs and expenses of
Landlord and any lending institution which has committed to finance
such Capital Addition which have been paid or incurred by them in
connection with
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the financing of the Capital Addition, including, but not limited to,
(i) the fees and expenses of their respective counsel, (ii) all
printing expenses, (iii) the amount of any filing, registration and
recording taxes and fees, (iv) documentary stamp taxes, if any, (v)
title insurance charges, appraisal fees, if any, rating agency fees, if
any, (vi) commitment fees, if any, and (vii) costs of obtaining
regulatory and governmental approvals for the construction, operation,
use or occupancy of the Capital Addition.
(d) (i) If Landlord and Tenant are unable to agree on the
terms of the financing of a Capital Addition by Landlord, Tenant may
undertake the cost of any such Capital Addition and seek construction,
permanent or other financing from other sources.
(ii) In the event Tenant shall construct any Capital
Addition and shall have obtained construction, permanent or other
financing in connection therewith from sources other than Landlord, as
set forth in the foregoing Section 8.09(d)(i), Landlord shall have the
option to acquire such Capital Addition for a period of three (3) years
following the date Tenant first receives inmates in such Capital
Addition ("Service Commencement Date"). The price at which Landlord may
acquire such Capital Addition shall be the fair market value of the
Capital Addition, as reasonably and mutually determined by Landlord and
Tenant, provided, Landlord and Tenant agree that for the first two (2)
years following the Service Commencement Date the fair market value of
such Capital Addition shall be deemed to be equal to Tenant's actual
costs and expenses to acquire, develop, design, construct and equip
such Capital Addition ("Tenant's Cost"), as reflected on the books of
Tenant, plus five percent (5%) of Tenant's Cost. Landlord's exercise of
such option shall require Landlord to acquire such Capital Addition on
such terms and conditions as Landlord and Tenant shall reasonably
agree, which shall be generally consistent with the terms and
conditions of Landlord's initial acquisition of the related Leased
Property from Tenant. Upon such acquisition, Landlord shall lease such
Capital Addition to Tenant on the terms and conditions set forth
herein, and Landlord and Tenant shall execute a new Lease, or an
amendment to the existing Lease, with respect thereto. In such case,
for acquisitions of Capital Additions within five (5) years of the date
hereof, the annual Base Rent shall be the greater of (i) the fair
market rental value of the Capital Addition, as reasonably and mutually
determined by Landlord and Tenant and (ii) eleven percent (11%) of the
purchase price of such Capital Addition. For Capital Additions
thereafter, the Base Rent shall be the fair market rental value of the
Capital Addition, as reasonably and mutually determined by Landlord and
Tenant. Regardless of whether the foregoing option is exercised, all
Capital Additions shall become the property of Landlord upon the
expiration or termination of this Lease.
ARTICLE IX
DEFAULTS AND REMEDIES
9.01 Events of Default. The occurrence of any one or more of the
following shall be an event of default ("Event of Default") hereunder and under
each Lease:
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(a) Tenant fails to pay in full any installment of Rent, or
any other monetary obligation payable by Tenant to Landlord under a
Lease, within fifteen (15) days after notice of nonpayment from
Landlord;
(b) Tenant fails to observe and perform any other covenant,
condition or agreement under this Agreement or a Lease to be performed
by Tenant (except those described in Section 9.01(a) of this Agreement)
and such failure continues for a period of thirty (30) days after
written notice thereof is given to Tenant by Landlord; or if, by reason
of the nature of such default, the same cannot with due diligence be
remedied within said thirty (30) days, such failure will not be deemed
to continue if Tenant proceeds promptly and with due diligence to
remedy the failure and diligently completes the remedy thereof;
provided, however, said cure period will not extend beyond thirty (30)
days if the facts or circumstances giving rise to the default are
creating a further harm to Landlord or the Leased Property and Landlord
makes a good faith determination that Tenant is not undertaking
remedial steps that Landlord would cause to be taken if such Lease were
then to terminate;
(c) If Tenant (a) admits in writing its inability to pay its
debts generally as they become due, (b) files a petition in bankruptcy
or a petition to take advantage of any insolvency act, (c) makes an
assignment for the benefit of its creditors, (d) is unable to pay its
debts as they mature, (e) consents to the appointment of a receiver of
itself or of the whole or any substantial part of its property, or (f)
files a petition or answer seeking reorganization or arrangement under
the federal bankruptcy laws or any other applicable law or statute of
the United States of America or any state thereof;
(d) If Tenant, on a petition in bankruptcy filed against it,
is adjudicated as bankrupt or a court of competent jurisdiction enters
an order or decree appointing, without the consent of Tenant, a
receiver of Tenant of the whole or substantially all of its property,
or approving a petition filed against it seeking reorganization or
arrangement of Tenant under the federal bankruptcy laws or any other
applicable law or statute of the United States of America or any state
thereof, and such judgment, order or decree is not vacated or set aside
or stayed within ninety (90) days from the date of the entry thereof;
(e) If the estate or interest of Tenant in any Leased Property
or any part thereof is levied upon or attached in any proceeding and
the same is not vacated or discharged within the later of ninety (90)
days after commencement thereof or thirty (30) days after receipt by
Tenant of notice thereof from Landlord (unless Tenant is contesting
such lien or attachment in accordance with this Agreement);
(f) Any representation or warranty made by Tenant in the
Agreement or any Lease or in any certificate, demand or request made
pursuant to any Lease proves to be incorrect, in any material respect
and any adverse effect on Landlord of any such misrepresentation or
breach of warranty has not been corrected to Landlord's satisfaction
within thirty (30) days after Tenant becomes aware of, or is notified
by the Landlord of the fact of, such misrepresentation or breach of
warranty;
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(g) A default by Tenant in any payment of principal or
interest on any obligations for borrowed money having a principal
balance of Twenty-Five Million Dollars ($25,000,000) or more in the
aggregate (excluding obligations which are limited in recourse to
specific property of Tenant provided that such property is not a
substantial portion of the assets of Tenant and excluding any debt
which is denominated as "subordinated debt"), or in the performance of
any other provision contained in any instrument under which any such
obligation is created or secured (including the breach of any covenant
thereunder), if an effect of such default is that the holder(s) of such
obligation cause such obligation to become due prior to its stated
maturity; or
(h) A final, non-appealable judgment or judgments for the
payment of money in excess of Ten Million Dollars ($10,000,000) in the
aggregate not fully covered (excluding deductibles) by insurance is
rendered against Tenant and the same remains undischarged, unvacated,
unbonded or unstayed for a period of one hundred twenty (120)
consecutive days.
(i) The failure of Landlord to qualify as a real estate
investment trust under the Internal Revenue Code of 1986, as amended.
(j) Tenant ceases operations at a Leased Property for a period
in excess of forty-five (45) days during the Term.
Notwithstanding the foregoing, an Event of Default under the foregoing
subsections (a), (c), (d), (g), (h) and (i) shall constitute an Event of Default
under all of the Leases and an Event of Default under the foregoing subsections
(b), (e), (f) and (j) shall constitute an Event of Default only with respect to
the specific Lease and Leased Property to which such Event of Default applies.
Provided, with respect to the Events of Default under the foregoing subsections
(b), (e) and (f), if such Events of Default shall at any time be applicable to
Leased Properties for which the monthly Base Rent constitutes, in the aggregate,
greater than twenty-five percent (25%) of the monthly Base Rent for all of the
Leased Properties, then such Events of Default shall constitute Events of
Default under all of the Leases.
9.02 Remedies. To the extent any Event of Default is applicable only to
a specific Lease or Leases, or a specific Leased Property or Leased Properties
(in accordance with Section 9.01 above), the remedies set forth herein shall be
exercisable solely with respect to such Lease or Leases, or Leased Property or
Leased Properties, and shall not be exercisable with respect to any other Leases
or Leased Property. To the extent any Event of Default constitutes an Event of
Default under all of the Leases (in accordance with Section 9.01 above), the
remedies set forth herein shall be exercisable with respect to all of the Leases
and all of the Leased Properties. Subject to the foregoing provisions, Landlord
may exercise any one or more of the following remedies upon the occurrence of an
Event of Default:
(a) Landlord may terminate the applicable Lease, exclude
Tenant from possession of the subject Leased Property and use
reasonable efforts to lease such Leased Property to others. If any
Lease is terminated pursuant to the provisions of this subparagraph
(a), Tenant will remain liable to Landlord for damages in an amount
equal to the Rent and other sums which would have been owing by Tenant
under such Lease for the balance of the Term if the Lease had not been
terminated, less the net proceeds, if any, of any re-letting of the
subject Leased Property by Landlord subsequent to such termination,
after deducting all Landlord's expenses in connection with such
re-letting, including without limitation, the expenses set forth in
Section 9.02(b)(2) below. Landlord will be entitled to collect such
damages from Tenant monthly on the days on which the Rent and other
amounts would have been payable
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under the subject Lease if such Lease had not been terminated, and
Landlord will be entitled to receive such damages from Tenant on each
such day. Alternatively, at the option of Landlord, if such Lease is
terminated, Landlord will be entitled to recover from Tenant (a) all
unpaid Rent then due and payable, and (b) the worth at the time of the
award (as hereafter defined) of the Rent which would have been due and
payable from the date of termination through the Expiration Date as if
the Lease had not been terminated. The "worth at the time of award" of
the amount referred to in clause (b) is computed at "present value"
using New York Prime Rate. For purposes of this Agreement, "New York
Prime Rate" shall mean that rate of interest identified as prime or
national prime by the Wall Street Journal, or if not published or
found, then the rate of interest charged by the American bank with the
greatest number of assets on ninety (90) day unsecured notes to its
preferred customers. For the purpose of determining unpaid Rent under
clause (b), the Rent reserved in the Lease will be deemed to be the sum
of the following: (i) the Base Rent computed pursuant to Section 2.01;
(ii) the Additional Rent computed pursuant to Section 2.02; and (iii)
the Other Additional Rent computed pursuant to Section 2.02.01. Such
computation of Other Additional Rent shall be based on the Other
Additional Rent paid for the Lease Year preceding the date of
termination, increased by 4% per year thereafter. Following payments by
Tenant of the foregoing amounts, Landlord shall deliver and pay over to
Tenant all rent, income, and other proceeds of any nature realized from
the sale, lease or other disposition or utilization of the Leased
Premises, if any, actually received by Landlord, up to the amounts so
paid by Tenant less Landlord's reasonably incurred costs and expenses
of maintaining and re-leasing or selling the Leased Premises.
(b) (1) Without demand or notice, Landlord may re-enter and
take possession of the Leased Property or any part of the Leased
Property; and repossess the Leased Property as of the Landlord's former
estate; and expel the Tenant and those claiming through or under Tenant
from the Leased Property; and, remove the effects of both or either,
without being deemed guilty of any manner of trespass and without
prejudice to any remedies for arrears of Rent or preceding breach of
covenants or conditions. If Landlord elects to re-enter, as provided in
this paragraph (b), or if Landlord takes possession of the Leased
Property pursuant to legal proceedings or pursuant to any notice
provided by law, Landlord may, from time to time, without terminating
the subject Lease, re-let the Leased Property or any part of the Leased
Property, either alone or in conjunction with other portions of the
Improvements of which the Leased Property are a part, in Landlord's
name but for the account of Tenant, for such term or terms (which may
be greater or less than the period which would otherwise have
constituted the balance of the Term of this Lease) and on such terms
and conditions (which may include concessions of free rent, and the
alteration and repair of the Leased Property) as Landlord, in its
uncontrolled discretion, may determine. Landlord may collect and
receive the Rents for Leased Property. Landlord will not be responsible
or liable for any failure to re-let the Leased Property, or any part of
the Leased Property, or for any failure to collect any Rent due upon
such re-letting. No such re-entry or taking possession of the Leased
Property by Landlord will be construed as an election on Landlord's
part to terminate this Lease unless a written notice of such intention
is given to Tenant. No notice from Landlord under this Lease or under a
forcible entry and detainer statute or similar law will constitute an
election by Landlord to terminate this Lease unless such notice
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specifically says so. Landlord reserves the right following any such
re-entry or re-letting, or both, to exercise its right to terminate
this Lease by giving Tenant such written notice, and, in that event
the Lease will terminate as specified in such notice.
(2) If Landlord elects to take possession of the
Leased Property according to this subparagraph (b) without terminating
the Lease, Tenant will pay Landlord (i) the Rent, Additional Rent and
other sums which would be payable under the Lease if such repossession
had not occurred, less (ii) the net proceeds, if any, of any re-letting
of the Leased Property after deducting all of Landlord's expenses
incurred in connection with such re-letting, including without
limitation, all repossession costs, brokerage commissions, legal
expense, attorneys' fees, expense of employees, alteration, remodeling,
repair costs, and expense of preparation for such re-letting. If, in
connection with any re-letting, the new Lease term extends beyond the
existing Term or the Leased Property covered by such re-letting
includes areas which are not part of the Leased Property, a fair
apportionment of the Rent received from such re-letting and the
expenses incurred in connection with such re-letting will be made in
determining the net proceeds received from such re-letting. In
addition, in determining the net proceeds from such re-letting, any
rent concessions will be apportioned over the term of the new Lease.
Tenant will pay such amounts to Landlord monthly on the days on which
the Rent and all other amounts owing under this Agreement or the Lease
would have been payable if possession had not been retaken, and
Landlord will be entitled to receive the rent and other amounts from
Tenant on each such day.
(c) Landlord may re-enter the Leased Property and have,
repossess and enjoy the Leased Property as if the Lease had not been
made, and in such event, Tenant and its successors and assigns shall
remain liable for any contingent or unliquidated obligations or sums
owing at the time of such repossession.
(d) Landlord may take whatever action at law or in equity as
may appear necessary or desirable to collect the Rent and other amounts
payable under the applicable Lease then due and thereafter to become
due, or to enforce performance and observance of any obligations,
agreements or covenants of Tenant under the Lease.
9.03 Right of Set-Off. Landlord may, and is hereby authorized by
Tenant, at any time and from time to time, after advance notice to Tenant, to
set-off and apply any and all sums held by Landlord, including all sums held in
any escrow for Impositions, any indebtedness of Landlord to Tenant, and any
claims by Tenant against Landlord, against any obligations of Tenant under this
Agreement or the Lease and against any claims by Landlord against Tenant,
whether or not Landlord has exercised any other remedies hereunder. The rights
of Landlord under this Section are in addition to any other rights and remedies
Landlord may have against Tenant.
9.04 Performance of Tenant's Covenants. Landlord may perform any
obligation of Tenant which Tenant has failed to perform within two (2) days
after Landlord has sent a written notice to Tenant informing it of its specific
failure (provided no such notice shall be required if Landlord has previously
notified Tenant of such failure under provisions of Section 9.01). Tenant shall
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reimburse Landlord on demand, as Other Additional Rent, for any expenditures
thus incurred by Landlord and shall pay interest thereon at the New York Prime
Rate (as herein defined).
9.05 Late Charge. Any payment not made by Tenant for more than ten (10)
days after the due date shall be subject to a late charge payable by Tenant as
Rent of three percent (3%) of the amount of such overdue payment.
9.06 Litigation; Attorneys' Fees. Within ten (10) days after Tenant has
knowledge of any litigation or other proceeding that may be instituted against
Tenant, against the Leased Property to secure or recover possession thereof, or
that may affect the title to or the interest of Landlord in the Leased
Property, Tenant shall give written notice thereof to Landlord. Within thirty
(30) days of Landlord's presentation of an invoice, Tenant shall pay all
reasonable costs and expenses incurred by Landlord in enforcing or preserving
Landlord's rights under this Agreement and each Lease, whether or not an Event
of Default has actually occurred or has been declared and thereafter cured,
including without limitation, (i) the fees, expenses, and costs of any
litigation, receivership, administrative, bankruptcy, insolvency or other
similar proceeding; (ii) reasonable attorney, paralegal, consulting and witness
fees and disbursements; and (iii) the expenses, including without limitation,
lodging, meals, and transportation, of Landlord and its employees, agents,
attorneys, and witnesses in preparing for litigation, administrative,
bankruptcy, insolvency or other similar proceedings and attendance at hearings,
depositions, and trials in connection therewith. All such costs, charges and
fees as incurred shall be deemed to be Other Additional Rent under this
Agreement.
9.07 Remedies Cumulative. The remedies of Landlord herein are
cumulative to and not in lieu of any other remedies available to Landlord at law
or in equity. The use of any one remedy shall not be taken to exclude or waive
the right to use any other remedy.
9.08 Escrows and Application of Payments. As security for the
performance of its obligations hereunder, Tenant hereby assigns to Landlord all
its right, title and interest in and to all monies escrowed with Landlord under
this Agreement or under any Lease and all deposits with utility companies,
taxing authorities, and insurance companies; provided, however, that Landlord
shall not exercise its rights hereunder until an Event of Default has occurred.
Any payments received by Landlord under any provisions of this Agreement or
under any Lease during the existence, or continuance of an Event of Default
shall be applied to Tenant's obligations in the order which Landlord may
determine.
9.09 Power of Attorney. Tenant hereby irrevocably and unconditionally
appoints Landlord, or Landlord's authorized officer, agent, employee or
designee, as Tenant's true and lawful attorney-in-fact, to act, after an Event
of Default, for Tenant in Tenant's name, place, and stead, and for Tenant's and
Landlord's use and benefit, to execute, deliver and file all applications and
any and all other necessary documents or things, to effect a transfer,
reinstatement, renewal and/or extension of any and all licenses and other
governmental authorizations issued to Tenant in connection with Tenant's
operation of the Leased Property, and to do any and all other acts incidental to
any of the foregoing. Tenant irrevocably and unconditionally grants to Landlord
as its attorney-in-fact full power and authority to do and perform, after an
Event of Default, every act necessary and proper to be done in the exercise of
any of the foregoing powers as fully as Tenant might or could do if personally
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present or acting, with full power of substitution, hereby ratifying and
confirming all that said attorney shall lawfully do or cause to be done by
virtue hereof. This power of attorney is coupled with an interest and is
irrevocable prior to the full performance of the Tenant's obligations under this
Agreement and each Lease.
ARTICLE X
DAMAGE AND DESTRUCTION
10.01 General. Tenant shall notify Landlord if any of the Leased
Property is damaged or destroyed by reason of fire or any other cause. Tenant
shall promptly repair, rebuild, or restore the Leased Property, at Tenant's
expense, so as to make the Leased Property at least equal in value to the Leased
Property existing immediately prior to such occurrence and as nearly similar to
it in character as is practicable and reasonable. Before beginning such repairs
or rebuilding, or letting any contracts in connection with such repairs or
rebuilding, Tenant will submit for Landlord's approval, which approval Landlord
will not unreasonably withhold or delay, complete and detailed plans and
specifications for such repairs or rebuilding. Promptly after receiving
Landlord's approval of the plans and specifications, Tenant will begin such
repairs or rebuilding and will prosecute the repairs and rebuilding to
completion with diligence, subject, however, to strikes, lockouts, acts of God,
embargoes, governmental restrictions, and other causes beyond Tenant's
reasonable control. Landlord will make available to Tenant the net proceeds of
any fire or other casualty insurance paid to Landlord for such repair or
rebuilding as the same progresses, after deduction of any costs of collection,
including attorneys' fees. Payment will be made against properly certified
vouchers of a competent architect in charge of the work and approved by
Landlord. Prior to commencing the repairing or rebuilding, Tenant shall deliver
to Landlord for Landlord's approval a schedule setting forth the estimated
monthly draws for such work. Landlord will contribute to such payments out of
the insurance proceeds an amount equal to the proportion that the total net
amount received by Landlord from insurers bears to the total estimated cost of
the rebuilding or repairing, multiplied by the payment by Tenant on account of
such work. Landlord may, however, withhold ten percent (10%) from each payment
until (i) the work of repairing or rebuilding is completed and proof has been
furnished to Landlord that no lien or liability has attached or will attach to
the Leased Property or to Landlord in connection with such repairing or
rebuilding, (ii) Tenant has obtained a certificate of use and occupancy (or its
functional equivalent) for the portion of the Leased Premises repaired or
rebuilt and (iii) if Tenant has an agreement with any governmental authority
which requires such governmental authority to approve such repairs or
rebuilding, such approval shall have been obtained. Upon the completion of
rebuilding or repairing and the furnishing of such proof, the balance of the net
proceeds of such insurance payable to Tenant on account of such repairing or
rebuilding will be paid to Tenant. Tenant will obtain and deliver to Landlord a
temporary or final certificate of occupancy before the Leased Property is
reoccupied for any purpose. Tenant shall complete such repairs or rebuilding
free and clear of mechanic's or other liens, and in accordance with the building
codes and all applicable laws, ordinances, regulations, or orders of any state,
municipal, or other public authority affecting the repairs or rebuilding, and
also in accordance with all requirements of the insurance rating organization,
or similar body. Any remaining proceeds of insurance after such restoration will
be Tenant's property.
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10.02 Landlord's Inspection. During the progress of such repairs or
rebuilding, Landlord and its architects and engineers may, from time to time,
inspect the Leased Property and will be furnished, if required by them, with
copies of all plans, shop drawings, and specifications relating to such repairs
or rebuilding. Tenant will keep all plans, shop drawings, and specifications
available, and Landlord and its architects and engineers may examine them at all
reasonable times. If, during such repairs or rebuilding, Landlord and its
architects and engineers determine that the repairs or rebuilding are not being
done in accordance with the approved plans and specifications, Landlord will
give prompt notice in writing to Tenant, specifying in detail the particular
deficiency, omission, or other respect in which Landlord claims such repairs or
rebuilding do not accord with the approved plans and specifications. Upon the
receipt of any such notice, Tenant will cause corrections to be made to any
deficiencies, omissions, or such other respect. Tenant's obligations to supply
insurance, according to Article IV, will be applicable to any repairs or
rebuilding under this Section.
10.03 Landlord's Costs. Tenant shall, within thirty (30) days after
receipt of an invoice from Landlord, pay the reasonable costs, expenses, and
fees of any architect or engineer employed by Landlord to review any plans and
specifications and to supervise and approve any construction, or for any
services rendered by such architect or engineer to Landlord as contemplated by
any of the provisions of this Agreement, or for any services performed by
Landlord's attorneys in connection therewith; provided, however, that Landlord
will consult with Tenant and notify Tenant of the estimated amount of such
expenses.
10.04 Rent Abatement. In the event that the provisions of Section 10.01
above shall become applicable, the Rent, real estate taxes and other Impositions
may be abated or reduced proportionately during any period in which, by reason
of such damage or destruction, there is substantial interference with the
operation of the business of Tenant in the Leased Property, having regard to the
extent to which Tenant may be required to discontinue its business in the Leased
Property, and such abatement or reduction shall continue for the period
commencing with such destruction or damage and ending with the substantial
completion (defined below) by Tenant of such work or repair and/or
reconstruction. In the event that only a portion of any Leased Property is
rendered untenantable or incapable of such use, the Base Rent and all real
estate taxes and other Impositions payable hereunder may be abated or reduced on
a pro rata basis for the amount that the correctional or detention facility at a
particular Leased Property is rendered incapable of occupancy because of such
damage or destruction in proportion to the total size of the Leased Property
prior to such damage or destruction. For purposes of this paragraph, substantial
completion shall occur upon the earlier of (i) nine (9) months from the date of
the first disbursement of insurance proceeds, or (ii) the issuance of a
certificate of occupancy for the Leased Property. Notwithstanding any other
provision hereof, any such rental abatement shall be limited to the amount of
any rental or business interruption insurance proceeds actually received by
Landlord.
10.05 Substantial Damage During Lease Term. Provided Tenant has fully
complied with Section 4.01 hereof (including actually maintaining in effect
rental value insurance or business interruption insurance provided for in clause
(c) thereof) and has satisfied the conditions of the last sentence of this
Section 10.05, if, at any time during the Term of the particular Lease, the
Leased Property is so damaged by fire or otherwise that more than fifty percent
(50%) of the correctional or detention facility at the Leased Property is
rendered unusable, Tenant may, within thirty (30) days
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after such damage, give notice of its election to terminate the Lease subject to
the particular Leased Property and, subject to the further provisions of this
Section, such Lease will cease on the tenth (10th) day after the delivery of
such notice. If the Lease is so terminated, Tenant will have no obligation to
repair, rebuild or replace the Leased Property, and the entire insurance
proceeds will belong to Landlord. If the Lease is not so terminated, Tenant
shall rebuild the Leased Property in accordance with Section 10.01. If Tenant
elects to terminate any Lease pursuant to this Section 10.05, Tenant will pay
(or cause to be paid) to Landlord, an amount equal to the difference between the
amount of all insurance proceeds received by Landlord, and the net book value of
such Leased Property as shown in Landlord's financial statements as of the date
of such termination.
10.06 Damage Near End of Term. Notwithstanding any provisions of
Section 10.01 to the contrary, if damage to or destruction of the Leased
Property occurs during the last twenty-four (24) months of the Term, and if such
damage or destruction cannot be fully repaired and restored within six (6)
months immediately following the date of loss, either party shall have the right
to terminate this Lease by giving notice to the other within thirty (30) days
after the date of damage or destruction, in which event Landlord shall be
entitled to retain the insurance proceeds and Tenant shall pay to Landlord on
demand the amount of any deductible or uninsured loss arising in connection
therewith; provided, however, that any such notice given by Landlord shall be
void and of no force and effect if Tenant exercises an available option to
extend the Term pursuant to provisions of the Lease for such Leased Property
within thirty (30) days following receipt of such termination notice.
ARTICLE XI
CONDEMNATION
11.01 Total Taking. If at any time during the Term any Leased Property
is totally and permanently taken by right of eminent domain or by conveyance
made in response to the threat of the exercise of such right ("Condemnation"),
the applicable Lease shall terminate on the Date of Taking (which shall mean the
date the condemning authority has the right to possession of the property being
condemned), and Tenant shall promptly pay all outstanding Rent and other charges
through the date of termination, provided, however the applicable Lease shall
not so terminate if the Condemnation occurred due to the failure of Tenant to
maintain the Leased Property as required by Article VII of this Agreement or
other applicable provision of this Agreement, whether or not such failure on the
part of Tenant constituted an Event of Default hereunder at the time of the
Condemnation.
11.02 Partial Taking. If a portion of any Leased Property is taken by
Condemnation, the subject Lease shall remain in effect if such Leased Property
is not thereby rendered Unsuitable for its Primary Intended Use (which shall
mean that such Leased Property is in such a state or condition such that in the
good faith judgment of Tenant, reasonably exercised, such Leased Property
cannot be operated on a commercially practicable basis as a correctional or
detention facility), but if such Leased Property is thereby rendered Unsuitable
for its Primary Intended Use, such Lease shall terminate on the Date of Taking,
provided such Condemnation was not as a result of Tenant's failure to maintain
the Leased Property as provided for in Section 11.01.
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11.03 Restoration. If there is a partial taking of any Leased Property
and the subject Lease remains in full force and effect pursuant to Section
11.02, Landlord shall furnish to Tenant the amount of the Award payable to
Landlord, as provided herein, in order for Tenant to accomplish all necessary
restoration. If Tenant receives an Award under Section 11.05, Tenant shall
repair or restore any Tenant Improvements up to but not exceeding the amount of
the Award payable to Tenant therefor. Before beginning such restoration, or
letting any contracts in connection with such restoration, Tenant will submit
for Landlord's approval, which approval Landlord will not unreasonably withhold
or delay, complete and detailed plans and specifications for such restoration.
Promptly after receiving Landlord's approval of the plans and specifications,
Tenant will begin such restoration and will prosecute the repairs and rebuilding
to completion with diligence, subject, however, to strikes, lockouts, acts of
God, embargoes, governmental restrictions, and other causes beyond Tenant's
reasonable control. Landlord will make available to Tenant the net proceeds of
any Award paid to Landlord for such restoration, after deduction of any costs of
collection, including attorneys' fees. Payment will be made against properly
certified vouchers of a competent architect in charge of the work and approved
by Landlord. Prior to commencing the restoration, Tenant shall deliver to
Landlord for Landlord's approval a schedule setting forth the estimated monthly
draws for such work. Landlord may, however, withhold ten percent (10%) from each
payment until the work of restoration is completed and proof has been furnished
to Landlord that no lien or liability has attached or will attach to the Leased
Property or to Landlord in connection with such restoration. Upon the completion
of restoration and the furnishing of such proof, the balance of the Award will
be paid to Tenant. Tenant will obtain and deliver to Landlord a temporary or
final certificate of occupancy before the Leased Property is reoccupied for any
purpose. Tenant shall complete such restoration free and clear of mechanic's or
other liens, and in accordance with the building codes and all applicable laws,
ordinances, regulations, or orders of any state, municipal, or other public
authority affecting the restoration, and also in accordance with all
requirements of the insurance rating organization, or similar body. Any
remaining proceeds of the Award after such restoration will be Tenant's
property.
11.04 Landlord's Inspection. During the progress of such restoration,
Landlord and its architects and engineers may, from time to time, inspect the
Leased Property and will be furnished, if required by them, with copies of all
plans, shop drawings, and specifications relating to such restoration. Tenant
will keep all plans, shop drawings, and specifications available, and Landlord
and its architects and engineers may examine them at all reasonable times. If,
during such restoration, Landlord and its architects and engineers determine
that the restoration is not being done in accordance with the approved plans and
specifications, Landlord will give prompt notice in writing to Tenant,
specifying in detail the particular deficiency, omission, or other respect in
which Landlord claims such restoration does not accord with the approved plans
and specifications. Upon the receipt of any such notice, Tenant will cause
corrections to be made to any deficiencies, omissions, or such other respect.
Tenant's obligations to supply insurance, according to Article IV, will be
applicable to any restoration under this Section.
11.05 Award Distribution. The entire compensation, sums or anything of
value awarded, paid or received on a total or partial Condemnation (the "Award")
shall belong to and be paid to Landlord, except that, subject to the rights of
any mortgagee of Tenant, Tenant shall be entitled to receive from the Award, if
and to the extent such Award specifically includes such items, a sum
attributable to the
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value, if any, of: (i) any Tenant Improvements, and (ii) the leasehold interest
of Tenant under the subject Lease; provided, however, that if the amount
received by Landlord and said mortgagee is less than the Condemnation Threshold
(which shall mean, as of any given date, an amount equal to the net book value
of such Leased Property as shown on the financial statements of Landlord as of
the date of the Condemnation), then the amount of the Award otherwise payable to
Tenant for the value of its leasehold interest under this Lease (and not any
other funds of Tenant) shall instead be paid over to Landlord up to the amount
of the shortfall.
11.06 Temporary Taking. The taking of any Leased Property, or any part
thereof, by military or other public authority shall constitute a taking by
Condemnation only when the use and occupancy by the taking authority has
continued for longer than six (6) months. During any such six (6) month period,
which shall be a temporary taking, all the provisions of the subject Lease shall
remain in full force and effect with no abatement of rent payable by Tenant
hereunder. In the event of any such temporary taking, the entire amount of any
such Award made for such temporary taking allocable to the Term of such Lease,
whether paid by way of damages, rent or otherwise, shall be paid to Tenant.
ARTICLE XII
ASSIGNMENT AND SUBLETTING; ATTORNMENT
12.01 Prohibition Against Subletting and Assignment. Subject to Section
12.03, Tenant shall not, without the prior written consent of Landlord (which
consent Landlord may grant or withhold in its sole and absolute discretion),
assign, mortgage, pledge, hypothecate, encumber or otherwise transfer (except to
an Affiliate of Tenant) (as defined) this Agreement or any Lease or any interest
herein or therein, or all or any part of the Leased Property, or suffer or
permit any Lease or the leasehold estate created thereby or any other rights
arising under any Lease to be assigned, transferred, mortgaged, pledged,
hypothecated or encumbered, in whole or in part, whether voluntarily,
involuntarily or by operation of law (except to an Affiliate of Tenant). For
purposes of this Section 12.01, an assignment of any Lease shall be deemed to
include any Change of Control of Tenant, as if such Change of Control were an
assignment of the Lease. No assignment shall in any way impair the continuing
primary liability of Tenant hereunder.
An "Affiliate" shall mean any Person directly or indirectly
controlling, controlled by, or under common control with that Person.
A "Person" shall mean and include natural persons, corporations,
limited partnerships, general partnerships, joint stock companies, joint
ventures, associations, companies, trusts, banks, trust companies, land trusts,
business trusts, Indian tribes or other organizations, whether or not legal
entities, and governments and agencies and political subdivisions thereof.
12.02 Changes of Control. A Change of Control requiring the consent of
Landlord shall mean:
(a) the issuance and/or sale by Tenant or the sale by
any stockholder of Tenant of a Controlling (which shall mean,
as applied to any Person, the possession,
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directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person,
whether through the ownership of voting securities, by
contract or otherwise) interest in Tenant to a Person other
than an Affiliate of Tenant, other than in either case a
distribution to the public pursuant to an effective
registration statement under the Securities Act of 1933, as
amended (a "Registered Offering");
(b) the sale, conveyance or other transfer of all or
substantially all of the assets of Tenant (whether by
operation of law or otherwise); or
(c) any transaction pursuant to which Tenant is
merged with or consolidated into another entity (other than an
entity owned and Controlled by an Affiliate of Tenant), and
Tenant is not the surviving entity.
12.03 Operating/Service Agreements.
12.03.01 Permitted Agreements. Tenant shall, without Landlord's prior
approval, be permitted to enter into certain operating/service agreements for
portions of any Leased Property to various licensees in connection with Tenant's
operation of correctional or detention facilities as is customarily associated
with or incidental to the operation of such Leased Property, which agreements
may be in the nature of a sublease agreement.
12.03.02 Terms of Agreements. Each operating/service agreement
concerning any of the Leased Property shall be subject and subordinate to the
provisions of the applicable Lease. No agreement made as permitted by Section
13.03.01 shall affect or reduce any of the obligations of Tenant hereunder, and
all such obligations shall continue in full force and effect as if no agreement
had been made. No agreement shall impose any additional obligations on Landlord
under the applicable Lease.
12.03.03 Copies. Tenant shall, within ten (10) days after the execution
and delivery of any operating/service agreement permitted by Section 12.03.01,
deliver a duplicate original thereof to Landlord.
12.03.04 Assignment of Rights in Agreements. As security for
performance of its obligations under each Lease, Tenant hereby grants, conveys
and assigns to Landlord all right, title and interest of Tenant in and to all
operating/service agreements now in existence or hereinafter entered into for
any or all of the Leased Property, and all extensions, modifications and
renewals thereof and all rents, issues and profits therefrom, to the extent the
same are assignable by Tenant. Landlord hereby grants to Tenant a license to
collect and enjoy all rents and other sums of money payable under any such
agreement concerning the Leased Property; provided, however, that Landlord shall
have the absolute right at any time after the occurrence and continuance of an
Event of Default upon notice to Tenant and any vendors or licensees to revoke
said license and to collect such rents and sums of money and to retain the same.
Tenant shall not (i) after the occurrence and continuance of an Event of
Default, consent to, cause or allow any material modification or alteration of
any of the terms, conditions or covenants of any of the agreements or the
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termination thereof, without the prior written approval of Landlord nor (ii)
accept any rents (other than customary security deposits) more than ninety (90)
days in advance of the accrual thereof nor permit anything to be done, the doing
of which, nor omit or refrain from doing anything, the omission of which, will
or could be a breach of or default in the terms of any of the agreements.
12.03.05 Licenses, Etc. For purposes of Section 12.03, the
operating/service agreements shall mean any licenses, concession arrangements,
or other arrangements relating to the possession or use of all or any part of
any Leased Property but specifically excluding any management agreement,
facility operating agreement or other agreement for the housing or detention of
inmates.
12.04 Assignment. No assignment shall in any way impair the continuing
primary liability of Tenant hereunder, and no consent to any assignment in a
particular instance shall be deemed to be a waiver of the prohibition set forth
in Article XII. Any assignment shall be solely of Tenant's entire interest in
the subject Lease. Any assignment or other transfer of all or any portion of
Tenant's interest in any Lease in contravention of Article XII shall be voidable
at Landlord's option.
12.05 REIT Limitations. Anything contained in this Agreement to the
contrary notwithstanding, Tenant shall not (i) sublet or assign any Leased
Property or any Lease on any basis such that the rental or other amounts to be
paid by the sublessee or assignee thereunder would be based, in whole or in
part, on the income or profits derived by the business activities of the
sublessee or assignee; (ii) sublet or assign any Leased Property or any Lease to
any person that Landlord owns, directly or indirectly (by applying constructive
ownership rules set forth in Section 856(d) (5) of the Code), a ten percent
(10%) or greater interest; or (iii) sublet or assign any Leased Property or any
Lease in any other manner or otherwise derive any income which could cause any
portion of the amounts received by Landlord pursuant to any Lease or any
sublease to fail to qualify as "rents from real property" within the meaning of
Section 856(d) of the Code, or which could cause any other income received by
Landlord to fail to qualify as income described in Section 856(c) (2) of the
Code. The requirements of this Section 12.05 shall likewise apply to any further
subleasing by any subtenant.
12.06 Attornment. Tenant shall insert in each sublease permitted
hereunder provisions to the effect that (a) such sublease is subject and
subordinate to all of the terms and provisions of the applicable Lease
(including this Agreement) and to the rights of Landlord hereunder, (b) in the
event such Lease shall terminate before the expiration of such sublease, the
sublessee thereunder will, at Landlords' option, attorn to Landlord and waive
any right the sublessee may have to terminate the sublease or to surrender
possession thereunder, as a result of the termination of such Lease, and (c) in
the event the sublessee receives a written notice from Landlord or Landlord's
assignees, if any, stating that Tenant is in default under such Lease, the
sublessee shall thereafter be obligated to pay all rentals accruing under said
sublease directly to the party giving such notice, or as such party may direct.
All rentals received from the sublessee by Landlord or Landlord's assignees, if
any, as the case may be, shall be credit against the amounts owing by Tenant
under such Lease.
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ARTICLE XIII
ARBITRATION
13.01 Controversies. Except with respect to the payment of Rent
hereunder, which shall be subject to the provisions of Section 9.02, in the case
a controversy arises between the parties as to any of the requirements of this
Agreement or of any individual Lease or the performance thereunder which the
parties are unable to resolve, the parties agree to waive the remedy of
litigation (except for extraordinary relief in an emergency situation) and agree
that such controversy or controversies shall be determined by arbitration as
hereafter provided in this Article.
13.02 Appointment of Arbitrators. The party or parties requesting
arbitration shall serve upon the other a demand therefor, in writing, specifying
in detail the controversy and matter(s) to be submitted to arbitration. The
selection of arbitrators shall be conducted pursuant to the rules for resolution
of commercial disputes promulgated by the American Arbitration Association. The
party or parties giving notice shall request a listing of available arbitrators
from the American Arbitration Association, and each party shall respond in the
selection process within fifteen (15) days after each receipt of such listings
until a panel of three (3) arbitrators has been designated. If either party
fails to respond within fifteen (15) days, it is agreed that the American
Arbitration Association may make such selections as are necessary to complete
the panel of three (3) arbitrators.
13.03 Arbitration Procedure. Within fifteen (15) days after the
selection of the arbitration panel, the arbitrators shall give written notice to
each party as to the time and the place of each meeting, which shall be held in
Nashville, Tennessee, at which the parties may appear and be heard, which shall
be no later than sixty (60) days after certification of the arbitration panel.
The parties specifically waive discovery, and further waive the applicability of
rules of evidence or rules of procedure in the proceedings. The applicable rules
shall be those in effect at the time for the resolution of commercial disputes
promulgated by the American Arbitration Association. Notwithstanding the
foregoing, the substantive law governing the arbitration shall be the laws of
the State of Tennessee. The arbitrators shall take such testimony and make such
examination and investigations as the arbitrators reasonably deem necessary. The
decision of the arbitrators shall be in writing signed by a majority of the
panel which decision shall be final and binding upon the parties to the
controversy. Provided, however, in rendering their decisions and making awards,
the arbitrators shall not add to, subtract from or otherwise modify the
provisions of this Agreement.
13.04 Expenses. The expenses of the arbitration shall be assessed by
the arbitrators and specified in the written decision. In the absence of a
determination or assessment of expenses of the arbitration procedure in the
award, all of the expenses of such arbitration shall be divided equally between
Landlord and Tenant. Each party in interest shall be responsible for and pay the
fees, costs and expenses of its own counsel, unless the arbitration award
provides for an assessment of reasonable attorneys' fees and costs.
13.05 Enforcement of the Arbitration Award. There shall be no appeal
from the decision of the arbitrators, and upon the rendering of an award, any
party thereto may file the arbitrators' decision
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in the United States District Court for the Middle District of Tennessee for
enforcement as provided by applicable law.
ARTICLE XIV
QUIET ENJOYMENT, SUBORDINATION,
ATTORNMENT, ESTOPPEL CERTIFICATES
14.01 Quiet Enjoyment. So long as Tenant performs all of its
obligations under this Agreement and each Lease, Tenant's possession of the
Leased Property will not be disturbed by or through Landlord.
14.02 Landlord Mortgages; Subordination. Subject to Section 14.03,
without the consent of Tenant, Landlord may, from time to time, directly or
indirectly, create or otherwise cause to exist any lien, encumbrances or title
retention agreement on the Leased Properties, or any portion thereof or any
interest therein, whether to secure any borrowing or other means of financing or
refinancing. This Agreement and each Lease and Tenant's rights under this
Agreement and each Lease are subordinate to any ground lease or underlying
lease, first mortgage, first deed of trust, or other first lien against any
Leased Property, together with any renewal, consolidation, extension,
modification or replacement thereof, which now or at any subsequent time affects
any Leased Property or any interest of Landlord in any Leased Property, except
to the extent that any such instrument expressly provides that this Agreement
and each Lease is superior. This provision will be self-operative, and no
further instrument or subordination will be required in order to effect it.
However, Tenant shall execute, acknowledge and deliver to Landlord, at any time
and from time to time upon demand by Landlord, such documents as may be
requested by Landlord or any mortgagee or any holder of any mortgage or other
instrument described in this Section, to confirm or effect any such
subordination. If Tenant fails or refuses to execute, acknowledge, and deliver
any such document within twenty (20) days after written demand, Landlord may
execute, acknowledge and deliver any such document on behalf of Tenant as
Tenant's attorney-in-fact. Tenant hereby constitutes and irrevocably appoints
Landlord, its successors and assigns, as Tenant's attorney-in-fact to execute,
acknowledge, and deliver on behalf of Tenant any documents described in this
Section. This power of attorney is coupled with an interest and is irrevocable.
14.03 Attornment; Non-Disturbance. If any holder of any mortgage,
indenture, deed of trust, or other similar instrument described in Section 14.02
succeeds to Landlord's interest in any Leased Property, Tenant will pay to such
holder all Rent subsequently payable under the subject Lease. Tenant shall, upon
request of anyone succeeding to the interest of Landlord, automatically become
the tenant of, and attorn to, such successor in interest without changing such
Lease. The successor in interest will not be bound by (i) any payment of Rent
for more than one (1) month in advance; (ii) any amendment or modification of
such Lease made without its written consent; (iii) any claim against Landlord
arising prior to the date on which the successor succeeded to Landlord's
interest; or (iv) any claim or offset of Rent against the Landlord. Upon request
by Landlord or such successor in interest and without cost to Landlord or such
successor in interest, Tenant will execute, acknowledge and deliver an
instrument or instruments confirming the attornment. If Tenant fails or refuses
to execute, acknowledge and deliver any such instrument within twenty (20) days
after written demand, then
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Landlord or such successor in interest will be entitled to execute, acknowledge,
and deliver any document on behalf of Tenant as Tenant's attorney-in-fact.
Tenant hereby constitutes and irrevocably appoints Landlord, its successors and
assigns, as Tenant's attorney-in-fact to execute, acknowledge, and deliver on
behalf of Tenant any such document. This power of attorney is coupled with an
interest and is irrevocable.
Landlord shall use reasonable efforts to obtain a non-disturbance
agreement from any such party referred to above which provides that in the event
such party succeeds to Landlord's interest under the Lease and provided that no
Event of Default by Tenant exists, such party will not disturb Tenant's
possession, use or occupancy of the Leased Property.
14.04 Estoppel Certificates. At the request of Landlord or any
mortgagee or purchaser of any Leased Property, Tenant shall execute,
acknowledge, and deliver an estoppel certificate, in recordable form, in favor
of Landlord or any mortgagee or purchaser of such Leased Property certifying the
following: (i) that the subject Lease is unmodified and in full force and
effect, or if there have been modifications that the same is in full force and
effect as modified and stating the modifications; (ii) the date to which Rent
and other charges have been paid; (iii) that neither Tenant nor Landlord is in
default nor is there any fact or condition which, with notice or lapse of time,
or both, would constitute a default, if that be the case, or specifying any
existing default; (iv) that Tenant has accepted and occupies such Leased
Property; (v) that Tenant has no defenses, set-offs, deductions, credits, or
counterclaims against Landlord, if that be the case, or specifying such that
exist; (vi) that the Landlord has no outstanding construction or repair
obligations; and (vii) such other information as may reasonably be requested by
Landlord or any mortgagee or purchaser. Any purchaser or mortgagee may rely on
this estoppel certificate. If Tenant fails to deliver the estoppel certificates
to Landlord within ten (10) days after the request of the Landlord, then Tenant
shall be deemed to have certified that (a) such Lease is in full force and
effect and has not been modified, or that such Lease has been modified as set
forth in the certificate delivered to Tenant; (b) Tenant has not prepaid any
Rent or other charges except for the current month; (c) Tenant has accepted and
occupies such Leased Property; (d) neither Tenant nor Landlord is in default nor
is there any fact or condition which, with notice or lapse of time, or both,
would constitute a default; (e) Landlord has no outstanding construction or
repair obligation; and (f) Tenant has no defenses, set-offs, deductions,
credits, or counterclaims against Landlord. Tenant hereby irrevocably appoints
Landlord as Tenant's attorney-in-fact to execute, acknowledge and deliver on
Tenant's behalf any estoppel certificate which Tenant does not object to within
twenty (20) days after Landlord sends the certificate to Tenant. This power of
attorney is coupled with an interest and is irrevocable.
ARTICLE XV
MISCELLANEOUS
15.01 Notices. Landlord and Tenant hereby agree that all notices,
demands, requests, and consents (hereinafter "Notices") required to be given
pursuant to the terms of this Lease shall be in writing and shall be addressed
as follows:
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If to Tenant: Correctional Management Services Corporation
10 Burton Hills Boulevard
Nashville, Tennessee 37215
Attention: Darrell K. Massengale, Chief Financial
Officer
If to Landlord: Prison Realty Corporation
10 Burton Hills Boulevard
Nashville, Tennessee 37215
Attention: Michael W. Devlin
With a copy to: Stokes & Bartholomew, P.A.
424 Church Street, Suite 2800
Nashville, Tennessee 37219
Attention: Elizabeth E. Moore
and shall be served by (i) personal delivery, (ii) certified mail, return
receipt requested, postage prepaid, or (iii) nationally recognized overnight
courier. All notices shall be deemed to be given upon the earlier of actual
receipt or three (3) days after mailing, or one (1) business day after deposit
with the overnight courier. Any Notices meeting the requirements of this Section
shall be effective, regardless of whether or not actually received. Landlord or
Tenant may change its notice address at any time by giving the other party
Notice of such change.
15.02 Advertisement of Leased Property. In the event the parties hereto
have not executed a renewal lease of any Leased Property within one (1) year
prior to the expiration of the Term, then Landlord or its agent shall have the
right to enter such Leased Property at all reasonable times for the purpose of
exhibiting such Leased Property to others and to place upon such Leased Property
for and during the period commencing two hundred ten (210) days prior to the
expiration of the Term "for sale" or "for rent" notices or signs.
15.03 Landlord's Access. Landlord shall have the right to enter upon
the Leased Property, upon reasonable prior notice to Tenant, for purposes of
inspecting the same and assuring Tenant's compliance with this Agreement
provided, any such entry by Landlord shall be subject to all rules, guidelines
and procedures prescribed by Tenant in connection therewith. Landlord shall not
be allowed entry to the Leased Premises unless accompanied by such of Tenant's
personnel as Tenant shall require.
15.04 Entire Agreement. This Agreement and the individual Leases
contain the entire agreement between Landlord and Tenant with respect to the
subject matter hereof and thereof. No representations, warranties, and
agreements have been made by Landlord except as set forth in this Agreement and
the Leases.
15.05 Severability. If any term or provision of this Agreement or any
Lease is held or deemed by Landlord to be invalid or unenforceable, such holding
shall not affect the remainder of this Agreement or any Lease and the same shall
remain in full force and effect, unless such holding
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substantially deprives Tenant of the use of the Leased Property or Landlord of
the Rents therefor, in which event the Lease for such Leased Property shall
forthwith terminate as if by expiration of the Term.
15.06 Captions and Headings. The captions and headings are inserted
only as a matter of convenience and for reference and in no way define, limit or
describe the scope of this Agreement or the intent of any provision hereof.
15.07 Governing Law. This Agreement and each of the Leases shall be
construed under the laws of the State of Tennessee.
15.08 Memorandum of Lease. Landlord and Tenant agree that a record of
this Agreement or any Lease may be recorded by either party in a memorandum of
lease approved by Landlord and Tenant with respect to each Leased Property.
15.09 Waiver. No waiver by Landlord of any condition or covenant herein
contained, or of any breach of any such condition or covenant, shall be held or
take to be a waiver of any subsequent breach of such covenant or condition, or
to permit or excuse its continuance or any future breach thereof or of any
condition or covenant, nor shall the acceptance of Rent by Landlord at any time
when Tenant is in default in the performance or observance of any condition or
covenant herein be construed as a waiver of such default, or of Landlord's right
to terminate this Agreement or any Lease or exercise any other remedy granted
herein on account of such existing default.
15.10 Binding Effect. This Agreement and each Lease will be binding
upon and inure to the benefit of the heirs, successors, personal
representatives, and permitted assigns of Landlord and Tenant.
15.11 Authority. The persons executing this Agreement or any Lease on
behalf of Tenant warrant that (i) Tenant has the power and authority to enter
into this Agreement or such Lease; (ii) Tenant is qualified to do business in
the state in which the Leased Property is located; and (iii) they are authorized
to execute this Agreement and each Lease on behalf of Tenant. Tenant shall, at
the request of Landlord, provide evidence satisfactory to Landlord confirming
these representation.
15.12 Transfer of Permits, Etc. Upon the expiration or earlier
termination of the Term of any Lease (whether pursuant to the provisions of this
Agreement or of such Lease), Tenant shall, at the option of Landlord, transfer
to and relinquish to Landlord or Landlord's nominee and to cooperate with
Landlord or Landlords' nominee in connection with the processing by Landlord or
such nominee of all licenses, operating permits, and other governmental
authorization and all contracts, including without limitation, the correctional
or detention facility license, and any other contracts with governmental or
quasi-governmental entities which may be necessary or appropriate for the
operation by Landlord or such nominee of the subject Leased Property for the
purposes of operating a correctional or detention facility; provided that the
costs and expenses of any such transfer or the processing of any such
application shall be paid by Landlord or Landlord's nominee; and provided
further that any management agreement, facility operating agreement or other
agreement for the housing or detention of inmates shall be expressly excluded.
Any such permits, licenses, certificates
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and contracts which are held in Landlord's name now or at the termination of
such Lease shall remain the property of Landlord. To the extent permitted by
law, Tenant hereby irrevocably appoints Landlord, its successors and assigns and
any nominee or nominees specifically designated by Landlord or any successor or
assign as Tenant's attorney-in-fact to execute, acknowledge, deliver and file
all documents appropriate to such transfer or processing of any such application
on behalf of Tenant; this power of attorney is coupled with an interest and is
irrevocable.
15.13 Modification. This Agreement and any Lease may only be modified
by a writing signed by both Landlord and Tenant.
15.14 Incorporation by Reference. All schedules and exhibits referred
to in this Agreement are incorporated into this Agreement, and all schedules and
exhibits referred to in any Lease (as well as the provisions of this Agreement,
except to the extent specifically excluded from or inconsistent with the terms
of such Lease) are incorporated into such Lease.
15.15 No Merger. The surrender of this Agreement or of any Lease by
Tenant or the cancellation of this Agreement or of any Lease by agreement of
Tenant and Landlord or the termination of this Agreement or of any Lease on
account of Tenant's default will not work a merger, and will, at Landlord's
option, terminate any subleases or operate as an assignment to Landlord of any
subleases. Landlord's option under this paragraph will be exercised by notice to
Tenant and all known subtenants of any applicable Leased Property.
15.16 Laches. No delay or omission by either party hereto to exercise
any right or power accruing upon any noncompliance or default by the other party
with respect to any of the terms hereof shall impair any such right or power or
be construed to be a waiver thereof.
15.17 Waiver of Jury Trial. To the extent that there is any claim by
one party against the other that is not to be settled by arbitration as provided
in Article XIII hereof, Landlord and Tenant waive trial by jury in any action,
proceeding or counterclaim brought by either of them against the other on all
matters arising out of this Agreement or the use and occupancy of the Leased
Property (except claims for personal injury or property damage). If Landlord
commences any summary proceeding for nonpayment of Rent, Tenant will not
interpose, and waives the right to interpose, any counterclaim in any such
proceeding.
15.18 Permitted Contests. Tenant, on its own or on Landlord's behalf
(or in Landlord's name), but at Tenant's expense, may contest, by appropriate
legal proceedings conducted in good faith and with due diligence, the amount or
validity or application, in whole or in part, of any Imposition or any legal
requirement or insurance requirement or any lien, attachment, levy, encumbrance,
charge or claim provided that (i) in the case of an unpaid Imposition, lien,
attachment, levy, encumbrance, charge or claim, the commencement and
continuation of such proceedings shall suspend the collection thereof from
Landlord and from the Leased Property; (ii) neither the Leased Property nor any
Rent therefrom nor any part thereof or interest therein would be in any
immediate danger of being sold, forfeited, attached or lost; (iii) in the case
of a legal requirement, Landlord would not be in any immediate danger of civil
or criminal liability for failure to comply therewith pending the outcome of
such proceedings; (iv) in the event that any such contest shall involve a sum of
money or potential
39
<PAGE> 45
loss in excess of Fifty Thousand Dollars ($50,000.00), Tenant shall deliver to
Landlord and its counsel an opinion of Tenant's counsel to the effect set forth
in clauses (i), (ii) and (iii), to the extent applicable; (v) in the case of a
legal requirement and/or an Imposition, lien, encumbrance, or charge, Tenant
shall give such reasonable security as may be demanded by Landlord to insure
ultimate payment of the same and to prevent any sale or forfeiture of the
affected Leased Property or the Rent by reason of such nonpayment or
noncompliance; provided, however, the provisions of this Section shall not be
construed to permit Tenant to contest the payment of Rent (except as to contests
concerning the method of computation or the basis of levy of any Imposition or
the basis for the assertion of any other claim) or any other sums payable by
Tenant to Landlord hereunder; (vi) in the case of an insurance requirement, the
coverage required by Article IV shall be maintained; and (vii) if such contest
be finally resolved against Landlord or Tenant, Tenant shall, as Other
Additional Rent due hereunder, promptly pay the amount required to be paid,
together with all interest and penalties accrued thereon, or comply with the
applicable legal requirement or insurance requirement. Landlord, at Tenant's
expense, shall execute and deliver to Tenant such authorizations and other
documents as may be reasonably required in any such contest, and, if reasonably
requested by Tenant or if Landlord so desires, Landlord shall join as a party
therein. Tenant hereby agrees to indemnify and save Landlord harmless from and
against any liability, cost or expense of any kind that may be imposed upon
Landlord in connection with any such contest and any loss resulting therefrom.
15.19 Construction of Lease. This Agreement and each of the Leases for
Leased Properties have been reviewed by Landlord and Tenant and their respective
professional advisors. Landlord, Tenant, and their advisors believe that this
Agreement and such Leases are the product of all their efforts, that they
express their agreement, and agree that they shall not be interpreted in favor
of either Landlord or Tenant or against either Landlord or Tenant merely because
of any party's efforts in preparing such documents.
15.20 Counterparts. This Agreement and each Lease may be executed in
duplicate counterparts, each of which shall be deemed an original hereof or
thereof.
15.21 Relationship of Landlord and Tenant. The relationship of Landlord
and Tenant is the relationship of lessor and lessee. Landlord and Tenant are not
partners, joint venturers, or associates.
15.22 Landlord's Status as a REIT. Tenant acknowledges that Landlord
intends to elect to be taxed as a real estate investment trust ("REIT") under
the Code. Tenant shall not do anything which would adversely affect Landlord's
status as a REIT. Tenant hereby agrees to modifications of this Agreement which
do not materially adversely affect Tenant's rights and liabilities if such
modifications are required to retain or clarify Landlord's status as a REIT.
15.23 Sale of Real Estate Assets. Notwithstanding any other provision
of this Agreement or of any Lease, Landlord shall not be required to sell or
transfer Leased Property, or any portion thereof, which is a real estate asset
as defined in Section 856(c)(6) of the Code, to Tenant if Landlord's counsel
advises Landlord that such sale or transfer may not be a sale of property
described in Section 857(b)(6)(C) of the Code. If Landlord determines not to
sell such property pursuant to the above sentence, Tenant's right, if any, to
purchase the Leased Property shall continue and be exercisable at
40
<PAGE> 46
such time as the transaction, upon the advice of Landlord's counsel, would be a
sale of property described in Section 857(b)(6)(C) of the Code.
ARTICLE XVI
NONDISCLOSURE AND RELATED MATTERS
16.01 Covenant Not to Disclose. Landlord agrees that, by virtue of the
relationship of trust and confidence between Landlord and Tenant, it possesses
and will possess certain data and knowledge of operations of the Tenant which
are proprietary in nature and confidential. Landlord covenants and agrees that
it will not knowingly, at any time, directly or indirectly, for whatever reason,
without Tenant's prior written consent, which may be given or withheld in
Tenant's sole discretion, reveal, divulge or make known to any person or entity,
any confidential or proprietary record, data, trade secret, pricing policy, bid
amount, pricing strategy, personnel policy, method or practice of obtaining or
doing business, or any other confidential or proprietary information whatever
(the "Confidential Information"), whether or not obtained with the knowledge and
permission of the Tenant and whether or not developed, devised or otherwise
created in whole or in part by the efforts of Landlord, nor shall Landlord use
such Confidential Information for its own account. Confidential Information
shall not include any information generally available to the public other than
as a result of a disclosure of such information by Landlord. Notwithstanding
anything to the contrary provided herein, a disclosure of Confidential
Information by Landlord will not be considered a violation of this Article XVI
in the event such disclosure is involuntarily compelled by a final,
non-appealable, order from a court of competent jurisdiction.
16.02 Non-Interference Covenant. Landlord covenants and agrees that it
will not, at any time, directly or indirectly, for whatever reason, whether for
its own account or for the account of any other person, firm, corporation or
other organization, without Tenant's prior written consent, which may be given
or withheld in Tenant's sole discretion: (i) solicit, employ, deal with or
otherwise interfere with any of the Tenant's contracts or relationships with any
employee, officer, director or any independent contractor, whether the person is
employed by or associated with the Tenant on the date of this Agreement or at
any time hereafter; or (ii) solicit, accept, deal with or otherwise interfere
with any of the Tenant's contracts or relationships with any independent
contractor, customer, client or supplier. Notwithstanding the foregoing, (i)
Landlord may offer employment to the current employees of the Tenant who are
terminated by the Tenant subsequent to the date hereof, (ii) Landlord shall in
no way be liable for any actions by any entity leasing or managing any facility
owned by Landlord, and (iii) nothing provided herein shall prevent Landlord from
soliciting relationships with an entity or entities to lease, license, manage or
otherwise use any facility leased to the Tenant subsequent to the termination of
such lease with the Tenant.
16.03 Business Materials and Property Disclosure. All written
materials, records and documents made by Landlord or coming into its possession
concerning the business or affairs of the Tenant shall be the sole property of
the Tenant and, upon request by the Tenant, Landlord shall deliver the same to
the Tenant and shall retain no copies. The foregoing restrictions shall not be
applicable to any written materials, records and documents generally available
to the public other than as a result of a disclosure of such written materials,
records and documents by Landlord.
41
<PAGE> 47
16.04 Breach by Landlord. It is expressly understood, acknowledged and
agreed by Landlord that: (i) the restrictions contained in this Article XVI
represent a reasonable and necessary protection of the legitimate interests of
the Tenant and that its failure to observe and comply with its covenants and
agreements in this Article XVI will cause irreparable harm to the Tenant; (ii)
it is and will continue to be difficult to ascertain the nature, scope and
extent of the harm; and (iii) a remedy at law for such failure by Landlord will
be inadequate. Accordingly, it is the intention of the parties that, in addition
to any other rights and remedies which the Tenant may have in the event of any
breach by Landlord of this Article XVI, the Tenant shall be entitled, and is
expressly and irrevocably authorized by Landlord, to demand and obtain specific
performance, including, without limitation, temporary and permanent injunctive
relief, and all other appropriate equitable relief against Landlord in order to
enforce against Landlord any of the covenants and agreements contained in this
Article XVI, and/or to prevent any breach or any threatened breach by Landlord
of the covenants and agreements of Landlord contained in this Article XVI.
Should the Tenant prevail in any action to enforce this Article XVI, the Tenant
shall be entitled to recover all of its costs and expenses relating thereto,
including reasonable attorney's fees and expenses.
IN WITNESS WHEREOF, the parties hereto have executed this Lease or
caused the same to be executed by their respective duly authorized officers as
of the date first set forth above.
LANDLORD:
PRISON REALTY CORPORATION
By:
---------------------------------------
Title:
------------------------------------
TENANT:
CORRECTIONAL MANAGEMENT SERVICES
CORPORATION
By:
---------------------------------------
Title:
------------------------------------
42
<PAGE> 48
SCHEDULE A
THE FACILITIES
<TABLE>
<CAPTION>
LOCATION
FACILITY NAME (CITY, STATE)
- ------------- -------------
<S> <C>
Bent County Correctional Facility Las Animas, Colorado
Bridgeport Pre-Parole Transfer Facility Bridgeport, Texas
California City Correctional Facility California City, California
Central Arizona Detention Center Florence, Arizona
Cibola County Corrections Center Milan, New Mexico
Cimarron Correctional Facility Cushing, Oklahoma
Coffee Correctional Facility Nicholls, Georgia
Davis Correctional Facility Holdenville, Oklahoma
Diamondback Correctional Facility Watonga, Oklahoma
Eden Detention Center Eden, Texas
Eloy Detention Center Eloy, Arizona
Houston Processing Center Houston, Texas
Huerfano County Correctional Facility Walsenburg, Colorado
Kit Carson Correctional Center Burlington, Colorado
Laredo Processing Center Laredo, Texas
Leavenworth Detention Center Leavenworth, Kansas
Lee Adjustment Center Beatyville, Kentucky
Marion Adjustment Center St. Mary, Kentucky
Maurice Sigler Detention Facility Frostproof, Florida
Mendota Correctional Facility Mendota, California
Mineral Wells Pre-Parole Transfer Facility Mineral Wells, Texas
Montana Correctional Facility Shelby, Montana
New Mexico Women's Correctional Facility Grants, New Mexico
</TABLE>
<PAGE> 49
<TABLE>
<S> <C>
North Fork Correctional Center Sayre, Oklahoma
Northeast Ohio Correction Center Youngstown, Ohio
Otter Creek Correctional Center Wheelwright, Kentucky
Prairie Correctional Facility Appleton, Minnesota
River City Correctional Center Louisville, Kentucky
San Diego Correctional Facility San Diego, California
Shelby Training Center Memphis, Tennessee
T. Don Hutto Correctional Center Taylor, Texas
Torrance County Detention Facility Estancia, New Mexico
West Tennessee Detention Center Mason, Tennessee
Wheeler Correctional Facility Alamo, Georgia
Whiteville Correctional Facility Whiteville, Tennessee
</TABLE>
<PAGE> 50
SCHEDULE B
PERSONAL PROPERTY
<PAGE> 51
SCHEDULE C
EXCLUDED PERSONAL PROPERTY
<PAGE> 1
Exhibit 10.10
FORM OF CONTRIBUTION AGREEMENT
THIS CONTRIBUTION AGREEMENT (the "Agreement"), dated as of the __ day
of December, 1998, is by and among Corrections Corporation of America, a
Tennessee corporation, and certain of its subsidiaries listed on the signature
pages hereto, located at 10 Burton Hills Boulevard, Nashville, Tennessee 37215
(collectively, "CCA"), and Correctional Management Services Corporation, a
Tennessee corporation located at 10 Burton Hills Boulevard, Nashville,
Tennessee 37215 ("Correctional Management").
WHEREAS, CCA is a party to that certain Amended and Restated Agreement
and Plan of Merger, dated as of September 29, 1998 (the "Merger Agreement"), by
and among Prison Realty Corporation, a Maryland corporation ("New Prison
Realty"), CCA and CCA Prison Realty Trust, a Maryland real estate investment
trust ("Prison Realty"), pursuant to which CCA will merge with and into New
Prison Realty, with New Prison Realty being the surviving corporation, and
Prison Realty will merge with and into New Prison Realty with New Prison Realty
being the surviving corporation (collectively, the "Merger");
WHEREAS, pursuant to the terms of the Merger and in order that New
Prison Realty may comply with the rules and regulations governing the
qualification and operation of a real estate investment trust (a "REIT"), at the
Closing (as hereinafter defined), prior to the consummation of the Merger, CCA
desires to (i) sell to Correctional Management all of the issued and outstanding
shares of capital stock of certain of its wholly-owned corporate subsidiaries,
and (ii) transfer, convey, and assign all right, title and interest in and to
certain contracts with government entities related to the management and
operation of correction and detention facilities by CCA together with certain
accounts receivable and accounts payable related thereto and certain other net
assets used in connection therewith to Correctional Management in exchange for
the consideration described herein, and will enter into certain other agreements
and undertake certain other actions all related thereto;
WHEREAS, the parties now wish to confirm certain of the transactions
contemplated by the Merger and described herein and certain other matters.
NOW, THEREFORE, in consideration of these premises and the mutual
promises set forth herein, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, each of the parties
hereto hereby agrees as follows:
1. Transfer of Assets.
1.1. Sale of Capital Stock. CCA shall, at the Closing (as
hereinafter defined), sell all of the issued and outstanding shares of capital
stock of each of the wholly owned corporate subsidiaries of CCA listed on
Exhibit A attached hereto and incorporated herein by this reference
(collectively, the "Purchased Subsidiaries").
<PAGE> 2
1.2. Transfer and Assignment of Management Contracts and Related
Assets. Subject to the terms and conditions of this Agreement, at the Closing
(as hereinafter defined), CCA shall transfer, convey, and assign to Correctional
Management all of CCA's right, title and interest in and to those certain
management contracts (the "Management Contracts") and those certain accounts
receivable and accounts payable and other net assets exclusively related to the
management and operation of the correction and detention facilities listed on
Exhibit B attached hereto and incorporated herein by this reference (the
Management Contracts, together with the accounts receivable and accounts payable
and other net assets are defined, collectively, as the "Management Contract
Assets").
2. Rights to Trade Name Use. At the Closing, CCA shall grant to
Correctional Management a non-exclusive, non-transferrable license to use the
name "Corrections Corporation of America," the initials "CCA" and all
derivatives thereof (collectively, the "Trade Name") in conformance with
standards reasonably set by CCA. The terms and conditions of such license shall
be set forth in a Trade Name Use Agreement between CCA and Correctional
Management (the "Trade Name Use Agreement"). Under the Trade Name Use Agreement,
Correctional Management will pay to CCA a fee equal to (i) 2.5% of Correctional
Management's gross revenues for the first three years of the agreement, and (ii)
3.0% of Correctional Management's gross revenues for the remaining term of the
agreement, provided that after completion of the Merger the amount of such fee
may not exceed (iii) 2.5% of the gross revenues of New Prison Realty for the
first three years of the agreement, or (iv) 3.25% of the gross revenues of New
Prison Realty for the remaining term of the agreement.
3. Consideration. As consideration for sale of the Purchased
Subsidiaries and for the transfer, conveyance and assignment of the Management
Contract Assets to Correctional Management and the grant of the right to use the
Trade Name, CCA shall receive from Correctional Management (i) an installment
note in the principal amount of $137.0 million (the "Note"), and (ii) one
hundred percent (100%) of the non-voting common stock of Correctional Management
(the "Common Stock"). The terms of the Note shall be substantially as follows:
a. Term. The Note shall be payable over ten (10) years.
b. Interest and Payments. The Note shall bear interest at the rate of
twelve percent (12%) per annum. Interest only shall be payable
for the first four (4) years of the Note, with the principal being
amortized over the following six (6) year period.
c. Pre-Payment. To the extent Correctional Management generates
available cash flow from operations in excess of amounts required to
make payments under any Correctional Management credit facility
or other similar financing arrangement, such funds shall be used
to prepay the principal due under the Note.
2
<PAGE> 3
d. Security. Doctor R. Crants, the Chief Executive Officer of
Correctional Management, shall guarantee payment of ten percent
(10%) of the outstanding principal amount due under the Note.
4. Liabilities to be Assumed by Correctional Management. Correctional
Management shall assume at the Closing (as hereinafter defined) all liabilities
related to the Management Contract Assets, including the related accounts
payable, as additional consideration to CCA hereunder.
5. Closing. The closing of the transactions contemplated hereby (the
"Closing") shall occur prior to the Merger on a date designated by CCA
acceptable to Correctional Management. At the Closing, CCA shall deliver the
Management Contract Assets and the rights set forth in paragraph 2 hereof shall
take effect. Correctional Management shall deliver the Common Stock to CCA.
6. Conditions to Closing. The following shall be a condition of CCA's
obligation to close the transactions contemplated hereby:
The fulfillment or waiver of all conditions to CCA's and Prison
Realty's obligations under the Merger Agreement (except section 6.01(h)
of the Merger Agreement).
7. Accounts Receivable. If CCA shall receive payment for accounts
billed before the Closing or otherwise, then CCA shall pay the same to
Correctional Management by check endorsement to Correctional Management,
delivered in three business days after the receipt by CCA. If an endorsement is
not possible, CCA shall pay appropriate sums to Correctional Management promptly
after receipt.
8. Further Assurances. The parties agree that this Agreement should be
supplemented by such further documents in form and substance reasonably
satisfactory to the parties and as may be reasonably requested by the parties or
their counsel to give effect to the foregoing and the general intent thereof.
Such agreements will contain, in addition to the terms and conditions set forth
in this Agreement, such terms and conditions deemed necessary to effectuate the
transactions contemplated thereby. The parties hereto hereby agree to act in
good faith and use reasonable efforts to consummate the transactions
contemplated herein and to take such other actions as may be required to
facilitate the consummation of the Merger and to ensure that New Prison Realty
shall continue to qualify and operate as a REIT after the Merger.
9. Termination. This Agreement shall cease to be effective if the
Merger is not consummated on or before December 31, 1999. This Agreement may be
terminated at any time prior to the Closing by mutual agreement of CCA and
Correctional Management.
10. Confidentiality. Except as required by applicable law or legal
process or as approved by CCA, Correctional Management and its representatives
shall maintain in confidence and not disclose to any third party any information
related to CCA, its subsidiaries, or Correctional Management or its
representatives obtained in the course of the transaction. The above
restrictions
3
<PAGE> 4
shall not apply to information that (i) is or becomes public (other than by
reason of this paragraph) or (ii) was known or available to Correctional
Management or its representatives from a third party having a lawful right to
disclose such information.
11. Successors. This Agreement shall be binding upon each of the
parties and shall also be binding upon their respective successors or assigns,
including a transferee of all or substantially all its assets.
12. Governing Law. This Agreement shall be governed by the laws of the
State of Tennessee as to interpretation, construction and performance,
regardless of the choice of law provisions of Tennessee or any other
jurisdiction.
13. Amendments. This Agreement may not be modified or amended except by
a duly executed instrument in writing signed by CCA and Correctional Management.
14. Severability. If any provision of this Agreement shall be held
illegal, invalid or unenforceable, such illegality, invalidity or
unenforceability shall attach only to such provision and shall not in any manner
affect or render illegal, invalid or unenforceable any other provision of this
Agreement, and this Agreement shall be carried out as if any such illegal,
invalid or unenforceable provision were not contained herein.
15. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument. Delivery of an executed
counterpart of this Agreement by facsimile shall be equally effective as
delivery of a manually executed counterpart. Any party delivering an unexecuted
counterpart of this Agreement by facsimile shall also deliver a manually
executed counterpart, but the failure to deliver a manually executed counterpart
shall not affect the validity, enforceability and binding effect of this
Agreement.
16. Interpretation. The provisions of this Agreement shall be
interpreted in a reasonable manner to effect the intentions of the parties and
this Agreement.
[the remaining part of this page intentionally left blank]
4
<PAGE> 5
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed by its duly authorized officer on the day first above written.
CCA:
CORRECTIONS CORPORATION OF AMERICA,
a Tennessee corporation
By:
-----------------------------------------
Its:
----------------------------------------
LEE ADJUSTMENT CENTER, INC., a Kentucky
corporation
By:
------------------------------------------
Its:
-----------------------------------------
MARION ADJUSTMENT CENTER, INC., a Kentucky
corporation
By:
------------------------------------------
Its:
-----------------------------------------
OTTER CREEK CORRECTIONAL CENTER, INC., a
Kentucky corporation
By:
------------------------------------------
Its:
-----------------------------------------
RIVER CITY CORRECTIONAL CENTER, INC., a
Kentucky corporation
By:
------------------------------------------
Its:
-----------------------------------------
[signatures continue on following page]
5
<PAGE> 6
USCC AVERY/MITCHELL MANAGEMENT COMPANY,
INC., a North Carolina corporation
By:
----------------------------------------
Its:
---------------------------------------
USCC PAMLICO MANAGEMENT COMPANY, INC., a
North Carolina corporation
By:
----------------------------------------
Its:
---------------------------------------
CORRECTIONAL MANAGEMENT:
CORRECTIONAL MANAGEMENT SERVICES
CORPORATION, a Tennessee corporation
By:
----------------------------------------
Its:
---------------------------------------
6
<PAGE> 7
EXHIBIT A
Domestic
CCA International, Inc., a Delaware corporation
Concept Incorporated, a Delaware corporation
Corrections Partners, Inc., a Delaware corporation
Diboll Correctional Center, Inc., a Kentucky corporation
Gadsden Correctional Institution, Inc., a Kentucky corporation
Lee Adjustment Center, Inc., a Kentucky corporation
Marion Adjustment Center, Inc., a Kentucky corporation
Otter Creek Correctional Center, Inc., a Kentucky corporation
River City Correctional Center, Inc., a Kentucky corporation
Correctional Services Group, Inc. , a Missouri corporation
USCC Avery/Mitchell Management Company, Inc., a North Carolina corporation
USCC Pamlico Management Company, Inc., a North Carolina corporation
Technical and Business Institute of America, Inc., a Tennessee corporation
TransCor America, Inc., a Tennessee corporation
Agecroft Property, Inc., a Tennessee corporation
International
Corrections Corporation of Australia, PTY. LTD., a Queensland, Australian
corporation
Viccor Investments PTY. LTD., a Victoria, Australian corporation
Corrections Corporation of Canada, a Canadian corporation
7
<PAGE> 8
EXHIBIT B
Bent County Correctional Facility
Bridgeport Pre-Parole Transfer Facility
California City Correctional Facility
Central Arizona Detention Center
Cibola County Corrections Center
Cimarron Correctional Facility
Coffee Correctional Facility
Davis Correctional Facility
DC Correctional Treatment Facility
Diamondback Correctional Facility
Eden Detention Center
Eloy Detention Center
Houston Processing Center
Huerfano County Correctional Facility
Kit Carson Correctional Center
Laredo Processing Center
Leavenworth Detention Center
Lee Adjustment Center
Marion Adjustment Center
Maurice Sigler Detention Facility
Mendota Correctional Facility
Mineral Wells Pre-Parole Transfer Facility
Montana Correctional Facility
Mountainview Correctional Institution
New Mexico Women's Correctional Facility
North Fork Correctional Center
Northeast Ohio Correctional Center
Otter Creek Correctional Center
Pamlico Correctional Institution
Prairie Correctional Facility
River City Correctional Center
San Diego Correctional Facility
San Diego Jail
Shelby Training Center
Southern Nevada Women's Correctional Facility
T. Don Hutto Correctional Center
Torrance County Detention Facility
West Tennessee Detention Center
Wheeler Correctional Facility
Whiteville Correctional Facility
8
<PAGE> 1
EXHIBIT 10.14
AGREEMENT IN PRINCIPLE
This AGREEMENT IN PRINCIPLE (the "Agreement"), dated as of October 15,
1998, is by and between Baron Asset Fund, a Massachusetts business trust, and
all series thereof, on behalf of itself and one or more mutual funds managed by
it, or its affiliates (collectively, "Baron"), Corrections Corporation of
America, a Tennessee corporation ("CCA"), CCA Prison Realty Trust, a Maryland
real estate investment trust ("Prison Realty") and Correctional Management
Services Corporation, a Tennessee corporation (the "Company").
WITNESSETH:
WHEREAS, Baron, with its affiliates, currently owns approximately 10.3%
of the issued and outstanding common shares, $0.01 par value per share, of
Prison Realty;
WHEREAS, it is contemplated that each of CCA and Prison Realty will
merge (the "Merger") with and into Prison Realty Corporation, a newly formed
Maryland corporation ("Prison Realty Corporation"), which will own the
correction and detention facilities to be operated and managed by the Company
after the Merger;
WHEREAS, Baron wishes to purchase, and the Company wishes to sell to
Baron under certain terms and conditions, 1,600,000 shares of the Company's
voting common stock, $0.01 par value per share (the "Shares"), representing
16.0% of the Company's capital stock on a fully-diluted basis at the time of the
Merger; and
WHEREAS, the parties now wish to confirm the transactions contemplated
and described herein and related to the purchase of the Shares, the Merger, and
certain other matters.
NOW, THEREFORE, in consideration of these premises and the mutual
promises set forth herein, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, each of the parties
hereto hereby agree as follows:
1. Investment in the Company.
(a) Purchase of Shares. Baron shall purchase the Shares at a
purchase price of $8,000,000, subject to adjustment as described herein (the
"Purchase Price"). The Purchase Price shall be no higher than the purchase price
to be paid by persons other than current Prison Realty or Corrections
Corporation of America, a Tennessee corporation ("CCA"), employees, provided
that the Purchase Price shall be reduced, prior to payment by Baron or
thereafter by a partial refund, by the appropriate amount if any person other
than active management of the Company (as set forth on Schedule 1(a) hereto)
purchases an interest in the Company at a lower price per share than paid by
Baron for the Shares prior to 36 months after completion of the Merger. Sodexho
Alliance S.A. has agreed to make a similar investment in the Company.
<PAGE> 2
(b) Representation in Company's Board of Directors. In
connection with the purchase of the Shares by Baron, Baron shall have the right
to designate one member of the Board of Directors of the Company. The Board of
Directors of the Company shall recommend a Baron designee for election to the
Company's Board of Directors (the "Baron Designee") and the Company and active
management of the Company (as defined in Schedule 1(a) hereto) shall vote their
respective shares in favor of the Baron Designee and use their best efforts to
have the Baron Designee elected at each annual meeting of Company shareholders.
Baron shall provide the Company with notice of the Baron Designee at the same
time the shareholders' proposals are due each year for the annual meeting. In
the absence of timely designation from Baron, the Baron Designee then serving
shall be re-nominated if still eligible to serve as provide herein. Baron shall
be entitled to fill any vacancy on the Board of Directors created by the
resignation, removal, incapacity or death of the Baron Designee. The Board of
Directors shall vote to fill such vacancy with the new Baron Designee (to the
extent it can fill such vacancy). Any such vacancy shall not be filled in the
absence of the new designation by Baron.
(c) Restrictions on Transfers, Tag-A-Long Rights. The parties
agree that the Charter of the Company shall provide that the Company shall not
be merged with or sold to another entity without the prior consent of Baron. In
addition, the parties agree that the shares issued to current Prison Realty or
CCA management employees or Company employees will be restricted to provide that
such shares may not be transferred to a third party without the consent of the
Company Board of Directors. Notwithstanding any provision of this Agreement to
the contrary, Baron may transfer the Shares to a third party without the consent
of the Company's Board of Directors or shareholders. In the event of a transfer
or series of transfers, however occurring, by any shareholders of the Company
other than Baron to a third party (including a transfer of shares owned by any
then current or former employee of CCA, Prison Realty or the Company), which, in
the aggregate, constitute more than the majority of the outstanding capital
stock of the Company, Baron shall have "tag-a-long" rights with respect to the
sale of stock of the Company owned by Baron in connection with such transfers;
provided, however, that this right shall not apply to a transfer by a Company
employee to a trust for the benefit of all the Company's employees provided the
trust agrees to be bound by these provisions with respect with to any subsequent
transfers.
(d) Preemptive Rights. Baron shall have the right to purchase
additional shares of the Company's common stock or securities convertible into
or exchangeable for common stock (including without limitation, warrants,
options or convertible stock or debt) in any issuance of securities by the
Company in a pro-rata amount and on the same terms and conditions as are called
for by each future issuance (or as nearly as may be practicable in the event
that Baron cannot comply with such terms and conditions). The intent of this
provision is that Baron may maintain an ownership interest of not less than 16%
of the Company's capital stock.
2. Indemnification of Baron. (a) CCA and Prison Realty, jointly and
severally, shall defend, indemnify and hold harmless Baron, its affiliates, and
each of their respective affiliates, officers, directors, trustees,
shareholders, employees, agents, consultants, successors and permitted assigns
(individually, an "Indemnified Person" and collectively, the "Indemnified
Persons") and shall
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reimburse the Indemnified Persons for, from and against each claim, loss,
liability, cost and expense (including without limitation, interest, penalties,
costs of preparation and investigation, and the reasonable fees, disbursements
and expenses of attorneys and accountants) (collectively, "Losses"), directly or
indirectly relating to, or resulting from (i) the activities, conduct, business
or operation of CCA or Prison Realty prior to the Merger or (ii) the Merger or
arising out of Baron's status as a party to this Agreement, the purchase of the
Shares hereunder, or any of the agreements among the parties hereunder. There
shall be no limit to the indemnification for Losses, except that no
indemnification shall be required for Losses incurred by an Indemnified Person
as a result of such Indemnified Person's gross negligence, bad faith, or willful
misconduct.
(b) Any matter as to which a claim has been specifically
asserted in writing that is pending or unresolved upon termination of this
Agreement shall continue to be covered by this Section 2 until such matter is
finally terminated or otherwise resolved in accordance with this Agreement and
any amounts payable hereunder are finally determined and paid.
3. Condition to Company's Obligations. The obligations of the Company
hereunder are subject to Baron's favorable vote on the Merger. Baron agrees that
in their public statements and documents disseminated regarding the Merger that
each of CCA and Prison Realty may state that the obligations of the Company
hereunder are subject to Baron's favorable vote on the Merger.
4. Further Assurances. The parties agree that this Agreement should be
supplemented by such further documents in form and substance reasonably
satisfactory to the parties and as may be reasonably requested by the parties or
their counsel to give effect to the foregoing and the general intent thereof.
Such agreements will contain, in addition to the terms and conditions set forth
in this Agreement, such representations, warranties, covenants, indemnifications
and other terms and conditions deemed necessary to effectuate the transactions
contemplated thereby, including but not limited to representations by the
Company in the appropriate agreement to provide Baron with (i) demand
registration rights or (ii) in the event the Company is unable to honor such
demand registration rights or commence a public offering within a reasonable
time frame from the exercise of such demand registration rights by Baron, a put
option on the Shares. The parties hereto hereby agree to act in good faith and
use reasonable efforts to consummate the transactions contemplate herein and to
take such other actions as may be required to facilitate the consummation of the
Merger.
5. Termination. This Agreement shall cease to be effective if the
Merger is not consummated on or before December 31, 1999.
6. Confidentiality. Except as required by applicable law or legal
process or as approved by the Company, Baron and its representatives shall
maintain in confidence and not disclose to any third party any information
related to the Company or the Merger obtained in the course of the transaction.
The above restrictions shall not apply to information that (i) is or becomes
public (other than by reason of this paragraph), or (ii) was known or available
to Baron or its representatives from a third party having a lawful right to
disclose such information.
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7. Successors. This Agreement shall be binding upon each of the parties
and shall also be binding upon their respective successors or assigns, including
a transferee of all or substantially all its assets.
8. Governing Law. This Agreement shall be governed by laws of the State
of New York as to interpretation, construction and performance, regardless of
the choice of law provisions of New York or any other jurisdiction.
9. Amendments. This Agreement may not be modified or amended except by
a duly executed instrument in writing signed by the Company and Baron.
10. Severability. If any provision of this Agreement shall be held
illegal, invalid or unenforceable, such illegality, invalidity or
unenforceability shall attach only to such provision and shall not in any manner
affect or render illegal, invalid or unenforceable any other provision of this
Agreement, and this Agreement shall be carried out as if any such illegal,
invalid or unenforceable provision were not contained herein.
11. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument. Delivery of an executed
counterpart of this Agreement by facsimile shall be equally effective as
delivery of a manually executed counterpart. Any party delivering an unexecuted
counterpart of this Agreement by facsimile shall also deliver a manually
executed counterpart, but the failure to deliver a manually executed counterpart
shall not affect the validity, enforceability and binding effect of this
Agreement.
12. Interpretation. The provisions of this Agreement shall be
interpreted in a reasonable manner to effect the intentions of the parties and
this Agreement.
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IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed by its duly authorized officer on the day first above written.
BARON:
BARON ASSET FUND,
a Massachusetts business trust
By: /s/ Marty Shzi
------------------------------------
Its: Chief Operating Officer
------------------------------------
COMPANY:
CORRECTIONS MANAGEMENT SERVICES
CORPORATION, a Tennessee corporation
By: /s/ Doctor R. Crants
------------------------------------
Its: Chief Executive Officer
------------------------------------
CCA:
CORRECTIONS CORPORATION OF AMERICA,
a Tennessee corporation
By: /s/ Doctor R. Crants
------------------------------------
Its: Chairman and Chief Executive Officer
------------------------------------
PRISON REALTY:
CCA PRISON REALTY TRUST, a Maryland real
estate investment trust
By: /s/ Doctor R. Crants
------------------------------------
Its: Chairman of the Board
------------------------------------
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