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JANUARY 11, 1999
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 11, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------
PRISON REALTY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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MARYLAND 62-1763875
(STATE OR OTHER JURISDICTION OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
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10 BURTON HILLS BOULEVARD, SUITE 100
NASHVILLE, TENNESSEE 37215
(615) 263-0200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------
DOCTOR R. CRANTS
CHIEF EXECUTIVE OFFICER
PRISON REALTY CORPORATION
10 BURTON HILLS BOULEVARD, SUITE 100
NASHVILLE, TENNESSEE 37215
PHONE: (615) 263-0200
FACSIMILE: (615) 263-0212
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
-------------------------
COPIES TO:
ELIZABETH E. MOORE, ESQ.
STOKES & BARTHOLOMEW, P.A.
424 CHURCH STREET, SUITE 2800
NASHVILLE, TENNESSEE 37215
PHONE: (615) 259-1425
FACSIMILE: (615) 259-1470
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: From time to time
after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please 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(c) 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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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TITLE OF PROPOSED MAXIMUM
EACH CLASS PROPOSED MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED PER UNIT(1) PRICE(2) FEE(3)
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Common Stock, $0.01 par
value........................ (4) (5) (5)
Preferred Stock, $0.01 par
value........................ (6) (5) (5)
Common Stock Purchase Rights... (7) (5) (5)
Debt Securities................ (8) (5) (5)
Warrants....................... (9) (5) (5)
Total.......................... $1,500,000,000(10) $1,500,000,000 $417,000(3)
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(1) The proposed maximum offering price per unit will be determined from time
to time by the Registrant in connection with the issuance of such
securities.
(2) The proposed maximum aggregate offering price has been estimated solely for
purposes of calculating the registration fee as provided in General
Instruction II.D to Form S-3.
(3) Calculated pursuant to Rule 457(o) of the rules and regulations under the
Securities Act of 1933, as amended.
(4) Subject to the limitations set forth in Note 10, an indeterminate number of
shares of Common Stock is registered to be sold from time to time by the
Registrant at indeterminate prices. In addition, an indeterminate number of
shares of Common Stock as may be issuable at indeterminate prices upon the
exercise of any Common Stock Purchase Rights or Warrants or on the
conversion of any Preferred Stock or Debt Securities registered hereunder.
(5) Omitted pursuant to General Instruction II.D. of Form S-3.
(6) Subject to the limitations set forth in Note 10, an indeterminate number of
shares of Preferred Stock is registered to be sold from time to time by the
Registrant at indeterminate prices or issuable upon conversion of Debt
Securities.
(7) Subject to the limitations set forth in Note 10, an indeterminate number of
Common Stock Purchase Rights is registered to be sold from time to time by
the Registrant.
(8) Subject to the limitations set forth in Note 10, an indeterminate principal
amount of Debt Securities is registered to be sold from time to time by the
Registrant.
(9) Subject to the limitations set forth in Note 10, an indeterminate number of
Warrants representing rights to purchase shares of Preferred Stock, Common
Stock or Debt Securities is registered to be sold by the Registrant.
Warrants may be sold separately or with shares of Common Stock, shares of
Preferred Stock or Debt Securities.
(10) The aggregate initial offering price of all securities issued from time to
time pursuant to this Registration Statement, calculated in accordance with
Rule 457 of the rules and regulations under the Securities Act of 1933, as
amended, will not exceed $1,500,000,000. The securities registered
hereunder may be sold separately or in units with other securities
registered hereunder.
-------------------------
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 THIS REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
<PAGE> 3
SUBJECT TO COMPLETION, DATED , 1999
PROSPECTUS
$1,500,000,000
PRISON REALTY CORPORATION
COMMON STOCK
PREFERRED STOCK
COMMON STOCK PURCHASE RIGHTS
DEBT SECURITIES AND
WARRANTS
This is a prospectus for the offering of up to a total amount of $1,500,000,000
of:
- shares of common stock;
- shares of preferred stock;
- rights to purchase shares of common stock;
- one or more series of debt securities, which may be either senior debt
securities or subordinated debt securities; and
- warrants to purchase shares of common stock, preferred stock or debt
securities.
The amounts, prices, and terms of the common stock, preferred stock, common
stock purchase rights, debt securities, and warrants to be offered
(collectively, the "Offered Securities") will be determined by the company at
the time of an offering and the terms of any offering will be described in
supplements to this prospectus. You should read this prospectus and any
prospectus supplements carefully before you invest.
The specific terms of the Offered Securities will be stated in a prospectus
supplement and will include, where applicable: (i) in the case of common stock,
any offering price; (ii) in the case of preferred stock, the specific title and
stated value, any distribution, any return of capital, liquidation, redemption,
conversion, voting and other rights and any initial offering price; (iii) in the
case of common stock purchase rights, the duration, offering price, exercise
price and any reallocation of common stock purchase rights not initially
subscribed; (iv) in the case of debt securities, the title, total principal
amount, denominations, maturity, rate (which may be fixed or variable) or method
of calculation thereof, time of payment of any interest, any terms for
redemption at the option of the holder or the company, any terms for sinking
fund payments, rank, any conversion or exchange rights, any listing on a
securities exchange, the initial offering price and any other terms in
connection with the offering and sale of any debt securities; and (v) in the
case of warrants, the duration, offering price, exercise price and
detachability.
The common stock of the company is listed on the New York Stock Exchange under
the symbol "PZN". The shares of common stock sold pursuant to any supplement to
this prospectus will be listed on the New York Stock Exchange, subject to
official notice of issuance. On January 8, 1999, the last reported sales price
of the company's common stock on the New York Stock Exchange was $22.31 per
share.
INVESTING IN THE OFFERED SECURITIES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 7 OF THIS PROSPECTUS FOR INFORMATION THAT YOU SHOULD CONSIDER.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is , 1999
The information in this prospectus is not complete and may be changed. The
securities described in this prospectus may not be sold 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.
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TABLE OF CONTENTS
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Where You Can Find More Information......................... i
Incorporation of Certain Documents by Reference............. i
The Company............................................... i
Corrections Corporation of America........................ ii
CCA Prison Realty Trust................................... ii
Cautionary Statement Concerning Forward-Looking
Information............................................... iii
The Company................................................. 1
Selected Unaudited Pro Forma Combined Financial
Information............................................... 2
Company Selected Pro Forma Combined Financial
Information............................................. 3
CCA Selected Historical Consolidated Financial
Information............................................... 4
Prison Realty Selected Historical Consolidated Financial
Information............................................... 5
Risk Factors................................................ 7
The Company is Dependent on Operating Company, as Primary
Lessee of the Company's Facilities, for its Revenues and
Ability to Make Distributions to Its Stockholders....... 7
Existing Conflicts of Interest May Have an Effect on the
Company................................................. 7
The Company is Dependent on Outside Financing to Support
its Growth; Dilutive Effect of Such Financing........... 9
Ownership of Shares of the Capital Stock of the Company
Involves Risks Inherent in the Corrections and Detention
Industry................................................ 10
General................................................. 10
Short-Term Nature of Government Contracts............... 10
Dependence on Government Appropriations................. 11
Dependence on Government Agencies for Inmates........... 11
Dependence on Ability to Develop New Prisons and
Contracts; Opposition of Organized Labor.............. 11
Options to Purchase..................................... 11
Legal Proceedings....................................... 11
Ownership of Shares of the Capital Stock of the Company
Involves Tax Related Risks.............................. 12
Dependence on Qualification as a REIT................... 12
Adverse Effects of REIT Minimum Distribution
Requirements.......................................... 12
Requirement to Distribute Accumulated Earnings and
Profits............................................... 13
Tax Legislation......................................... 13
Ownership of Shares of the Capital Stock of the Company
Involves Risks Inherent in the Investment in Real Estate
Properties.............................................. 13
General................................................. 13
Environmental Matters................................... 14
Uninsured Loss.......................................... 14
The Company is Dependent on Certain Individuals for Its
Management.............................................. 15
The Company Lacks Control Over Day-to-Day Operations and
Management of Its Facilities............................ 15
The Company Imposes Limits on the Ownership of its Capital
Stock to Maintain Qualification as a REIT............... 15
Certain Provisions of the Company's Governing Documents
May Limit Changes in Control of the Company............. 16
Year 2000 Compliance Issues May Have an Effect on the
Company................................................. 17
A Fluctuation in Market Interest Rates May Affect the
Price of the Company's Capital Stock.................... 18
Certain Agreements Relating to the Operating Company
Credit Facility May Limit Operating Company's Ability to
Satisfy Obligations to the Company...................... 18
Factors to be Considered by ERISA Plan Fiduciaries........ 18
Information About the Company............................... 19
General................................................... 19
Relationship with Operating Company....................... 19
Relationship with Service Company A....................... 27
Relationship with Service Company B....................... 28
Relationship Between Operating Company and the Service
Companies............................................... 28
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Certain Information Incorporated by Reference............. 29
Recent Financings and Related Agreements.................... 29
The Company............................................... 29
Operating Company......................................... 30
Use of Proceeds............................................. 31
Description of Capital Stock................................ 31
General................................................... 31
Common Stock.............................................. 32
Preferred Stock........................................... 32
Restrictions on Ownership of Capital Stock................ 35
Certain Other Provisions of Maryland Law and Charter
Documents............................................... 37
Description of Common Stock Purchase Rights................. 39
Description of Debt Securities.............................. 39
General................................................... 39
Payment, Registration, Transfer and Exchange.............. 42
Description of Warrants..................................... 42
Plan of Distribution........................................ 43
Material Federal Income Tax Consequences.................... 44
Taxation of the Company................................... 45
Taxation of Stockholders.................................. 54
Other Tax Consequences...................................... 59
ERISA Considerations........................................ 59
Legal Matters............................................... 60
Experts..................................................... 60
Index to Financial Statements............................... F-1
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WHERE YOU CAN FIND MORE INFORMATION
Prison Realty Corporation (the "Company") has filed with the Securities and
Exchange Commission (the "Commission") a Registration Statement on Form S-3
under the Securities Act of 1933, as amended (the "Securities Act"), that
registers the Offered Securities. This Prospectus is part of that Registration
Statement and does not contain all of the information set forth in the
Registration Statement and its exhibits. You may obtain further information with
respect to the Company and the Offered Securities by reviewing the Registration
Statement and the attached exhibits, which you may read and copy at the
following locations of the Commission:
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Public Reference Room New York Regional Office Chicago Regional Office
Judiciary Plaza Seven World Trade Center Citicorp Center
450 Fifth Street, N.W. 13th Floor 500 West Madison Street
Room 1024 New York, New York 10048 Suite 1400
Washington, D.C. 20549 Chicago, Illinois
60661-2511
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The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the locations described above. Copies of such materials
can be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a Web site that contains reports, proxy and information statements and
other information regarding the Company at http://www.sec.gov. In addition, the
Company's common stock and the Company's 8% Series A Cumulative Preferred Stock
are listed on the New York Stock Exchange ("NYSE") and similar information
concerning the Company can be inspected at the offices of the NYSE, 20 Broad
Street, New York, New York 10005.
The Company furnishes its stockholders with annual reports containing audited
financial statements with a report thereon by its independent public
accountants, Arthur Andersen LLP.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Commission allows the Company to "incorporate by reference" certain
information into this Prospectus. This means that the Company 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 Prospectus, except for any information that is
superseded by other information that is set forth directly in this document.
The following documents that the Company, Corrections Corporation of America,
and CCA Prison Realty Trust have previously filed with the Commission pursuant
to the Exchange Act are hereby incorporated by reference into the Prospectus:
THE COMPANY
(1) The Company's Prospectus filed with the Commission on October 30, 1998
pursuant to Rule 424(b)(4) promulgated under the Securities Act of 1933, as
amended, as supplemented on November 20, 1998, included in its Registration
Statement on
i
<PAGE> 7
Form S-4, filed with the Commission on September 30, 1998, as subsequently
amended (File no. 333-65017).
(2) The Company's Current Report on Form 8-K, filed with the Commission on
January 6, 1999 (File no. 25245).
CORRECTIONS CORPORATION OF AMERICA
(1) Corrections Corporation of America's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 1997, as filed on March 30, 1998 and amended on
September 16, 1998 and September 25, 1998.
(2) Corrections Corporation of America's Quarterly Reports on Form 10-Q/A for
the period ended March 31, 1998, as filed on May 15, 1998 and amended on June 5,
1998 and September 28, 1998; for the period ended June 30, 1998, as filed on
August 14, 1998 and amended on September 28, 1998; and Form 10-Q for the period
ended September 30, 1998, as filed on November 16, 1998.
CCA PRISON REALTY TRUST
(1) CCA Prison Realty Trust's Annual Report on Form 10-K/A for the fiscal year
ended December 31, 1997, as filed on March 18, 1998, and amended on March 30,
1998.
(2) CCA Prison Realty Trust's Quarterly Reports on Form 10-Q for the period
ended March 31, 1998, as filed on May 15, 1998; for the period ended June 30,
1998, as filed on August 14, 1998; and for the period ended September 30, 1998,
as filed on November 17, 1998.
All other documents and reports filed with the Commission by the Company
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act from the date
of this Prospectus and prior to the termination of the offering of the Offered
Securities shall be deemed to be incorporated by reference herein and shall be
deemed to be a part hereof from the date of the filing of such reports and
documents (provided, however, that the information referred to in Item 402(a)(8)
of Regulation S-K of the Commission shall not be deemed specifically
incorporated by reference herein).
Any statement contained in a document incorporated or deemed to be incorporated
by reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of this
Prospectus is delivered, on written or oral request of such person, a copy of
any or all documents which are incorporated herein by reference (not including
the exhibits to such documents, unless such exhibits are specifically
incorporated by reference in the applicable document). Requests should be
directed to the following:
Prison Realty Corporation
10 Burton Hills Boulevard, Suite 100
Nashville, Tennessee 37215
Telephone: (615) 263-0200
Attn: Vida H. Carroll
ii
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CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING INFORMATION
This Prospectus contains or incorporates by reference certain forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act which are intended to be covered by the safe harbors
created thereby. Those statements include, but may not be limited to, the
discussions of the Company's expectations concerning its future profitability,
its operating and growth strategies, including strategic acquisitions, both
pending and potential, and its assumptions regarding certain matters. Also, when
any of the words "believes," "expects," "anticipates," "intends," "estimates,"
"plans," or similar terms or expressions are used in this Prospectus,
forward-looking statements are being made. Investors are cautioned that all
forward-looking statements involve risks and uncertainties, including, without
limitation, the factors set forth under the caption "Risk Factors" in this
Prospectus, which could cause the future results and shareholder values to
differ materially from those expressed in the forward-looking statements.
Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate and, therefore, there can be no assurance that
the forward-looking statements included or incorporated by reference in this
Prospectus will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statements included or incorporated by reference
herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved. In addition, the Company does not intend to,
and is not obligated to, update these forward-looking statements after it
distributes this Prospectus, even if new information, future events or other
circumstances have made them incorrect or misleading as of any future date.
iii
<PAGE> 9
THE COMPANY
The Company is the largest self-administered and self-managed real estate
investment trust, or REIT, specializing in the acquisition, development and
ownership of correctional and detention facilities. As of January 8, 1999, the
Company owned 44 correctional and detention facilities, of which seven new
facilities were under construction, in 16 states, the District of Columbia and
the United Kingdom with a total design capacity in excess of 40,000 beds. As of
January 8, 1999, approximately 30,000 beds were leased under 37 operating
leases. The Company is currently developing 10,000 beds through the construction
of the seven new facilities and the expansion of five currently operating
facilities. The unaudited depreciated book value of the Company's properties at
January 1, 1999, including those under construction or expansion, was in excess
of $2.0 billion, and the appraised value of such properties was approximately
$3.0 billion.
The Company is the successor to each of Corrections Corporation of America, a
Tennessee corporation ("CCA"), and CCA Prison Realty Trust, a Maryland real
estate investment trust ("Prison Realty"). CCA merged with and into the Company
on December 31, 1998, and Prison Realty merged with and into the Company on
January 1, 1999, all pursuant to an Amended and Restated Agreement and Plan of
Merger by and among CCA, Prison Realty and the Company, dated as of September
29, 1998 (the "Merger Agreement") (the mergers of CCA and Prison Realty with and
into the Company are collectively referred to herein as the "Merger").
The Company's principal business strategy is to design, build, finance and/or
acquire and develop correctional and detention facilities from and for both
government entities and private prison operators, to expand the design capacity
of its existing facilities and to lease these facilities under long-term "triple
net" leases to government entities and qualified third-party operators. The
Company intends to be taxed as a REIT under the requirements of the Internal
Revenue Code of 1986, as amended (the "Code"). In accordance with the
requirements of the Code relating to REITs, substantially all of the Company's
income will be derived from rent payments from leases of the Company's
correctional and detention facilities. As of January 8, 1999, Correctional
Management Services Corporation, a privately held Tennessee corporation formed
in connection with the Merger ("Operating Company"), leased 29 of the Company's
44 facilities. The Company also leases three of its facilities to private
operators other than Operating Company and leases six of its facilities to
government entities. It is currently anticipated that Operating Company will
additionally lease six of the facilities currently under construction by the
Company. Operating Company has contracts to manage and operate 40 correctional
and detention facilities, 34 of which are currently being managed and operated
by Operating Company, pursuant to management contracts acquired by Operating
Company from CCA. The Company owns approximately 9.5% of the outstanding capital
stock, representing 9.5% of the economic value, of Operating Company. In
addition, the Company owns all of the non-voting common stock of each of two
companies formed in connection with the Merger, Prison Management Services,
Inc., a privately held Tennessee corporation ("Service Company A"), and Juvenile
and Jail Facility Management Services, Inc., a privately held Tennessee
corporation ("Service Company B") (Service Company A and Service Company B are
each referred to herein individually as a "Service Company," and collectively as
the "Service Companies"), which obligates each Service Company to distribute 95%
of its net income, determined in accordance with generally accepted accounting
principles ("GAAP"), to the Company. Service Company A has contracts to manage
and operate 11 government-owned adult prison facilities pursuant to management
contracts acquired by Service Company A from CCA. Service Company B has
contracts to manage and operate 19 government-owned jail or juvenile detention
facilities pursuant to management contracts acquired by Service Company B from
CCA. The Company's relationships with Operating Company and each of the Service
Companies are more fully described below under "Information About the Company".
The Company was incorporated as a Maryland corporation in September 1998. The
Company's principal executive offices are located at 10 Burton Hills Boulevard,
Suite 100, Nashville, Tennessee, and its telephone number is (615) 263-0200.
1
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SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
On December 31, 1998, CCA merged with and into the Company, with the Company as
the surviving entity, and on January 1, 1999, Prison Realty merged with and into
the Company, with the Company as the surviving entity. 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 the
Company at historical cost and the purchase of Prison Realty by the Company. 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 of the Company 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 Registration Statement.
The following financial data represents the unaudited pro forma financial
results for the Company as of and for the nine months ended September 30, 1998
and for 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 September 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 the Company'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 the Company's financial
position or results of operations at any future date or for any future period.
2
<PAGE> 11
PRISON REALTY CORPORATION
(THE COMPANY)
SELECTED PRO FORMA COMBINED FINANCIAL INFORMATION
(UNAUDITED)
<TABLE>
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PERIOD FROM NINE MONTH
JANUARY 1, 1997 TO PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
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OPERATING DATA:
Revenues:
Rental.............................................. $ 82,028 $104,059
Expenses:
Depreciation and amortization....................... 24,867 27,381
General and administrative.......................... 2,981 3,225
-------- --------
27,848 30,606
-------- --------
Operating income...................................... 54,180 73,453
Equity in earnings of subsidiaries.................... 13,252 22,542
Licensing fees........................................ 2,051 2,601
Interest income....................................... 14,119 2,292
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Net income............................................ 83,602 100,888
Dividends to Preferred Stockholders................... -- 5,719
-------- --------
Net Income available for shares of Common Stock....... $ 83,602 $ 95,169
======== ========
Net income available per share of Common Stock:
Basic............................................... $ 0.94 $ 1.04
======== ========
Diluted............................................. $ 0.83 $ 0.95
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Weighted average number of shares outstanding,
basic............................................... 89,144 91,510
======== ========
Weighted average number of shares outstanding,
diluted............................................. 100,966 100,441
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</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
1998
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BALANCE SHEET DATA:
Real estate, net of accumulated depreciation................ $1,649,072
Total assets................................................ 2,052,339
Line of credit and current portion of long-term debt........ 237,908
Long-term debt, net of current portion...................... 292,832
Total liabilities, excluding deferred gain.................. 957,436
Total stockholders' equity.................................. 949,863
</TABLE>
3
<PAGE> 12
CCA SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table sets forth certain selected consolidated historical
financial information concerning CCA and its subsidiaries for the nine months
ended September 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 nine
months ended September 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 Registration Statement.
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 Registration Statement. 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 "Where You Can Find
More Information" and "Incorporation of Certain Documents by Reference."
<TABLE>
<CAPTION>
NINE MONTH
PERIOD ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 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 $325,931 $484,505
-------- -------- -------- -------- -------- -------- --------
Expenses:
Operating.............. 107,837 123,273 153,692 211,208 330,470 234,034 339,136
Lease.................. 742 741 5,904 2,786 18,684 9,123 40,638
General and
administrative....... 7,332 8,939 13,506 12,607 16,025 11,558 16,183
Depreciation and
amortization......... 5,759 5,753 6,524 11,339 14,093 10,941 11,673
-------- -------- -------- -------- -------- -------- --------
121,670 138,706 179,626 237,940 379,272 265,656 407,630
-------- -------- -------- -------- -------- -------- --------
Operating income......... 10,864 13,669 27,615 54,573 82,977 60,275 76,875
Interest expense
(income), net.......... 4,424 3,439 3,952 4,224 (4,119) (273) (5,323)
-------- -------- -------- -------- -------- -------- --------
Income before income
taxes.................. 6,440 10,230 23,663 50,349 87,096 60,548 82,198
Provision for income
taxes.................. 832 2,312 9,330 19,469 33,141 23,276 21,565
-------- -------- -------- -------- -------- -------- --------
Net income............... 5,608 7,918 14,333 30,880 53,955 37,272 60,633
Preferred stock
dividends.............. 425 204 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income allocable to
common stockholders.... $ 5,183 $ 7,714 $ 14,333 $ 30,880 $ 53,955 $ 37,272 $ 60,633
======== ======== ======== ======== ======== ======== ========
Net income per share:
Basic.................. $ .10 $ .14 $ .23 $ .43 $ .70 $ .49 $ .76
Diluted................ $ .10 $ .12 $ .18 $ .36 $ .61 $ .42 $ .68
Weighted average shares
outstanding:
Basic.................. 50,185 54,500 62,257 71,763 77,221 76,525 79,924
Diluted................ 52,155 62,384 81,595 87,040 90,239 89,897 89,728
BALANCE SHEET (END OF PERIOD):
Total assets........... $109,285 $141,792 $213,478 $468,888 $697,940 $618,710 $944,927
Long-term debt, less
current portion...... 50,558 47,984 74,865 117,535 127,075 77,887 292,832
Total liabilities
excluding deferred
gain................. 75,103 80,035 116,774 187,136 214,112 157,636 404,309
Stockholders' equity... 34,182 61,757 96,704 281,752 348,076 329,261 413,273
</TABLE>
4
<PAGE> 13
PRISON REALTY SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table sets forth certain selected consolidated historical
financial information concerning Prison Realty and its subsidiaries for the nine
months ended September 30, 1998 and for the period from July 18, 1997 to
December 31, 1997. The selected historical financial information as of and for
the nine months ended September 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 Registration Statement. 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 Registration
Statement. 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 "Where You Can Find More Information" and
"Incorporation of Certain Documents by Reference."
<TABLE>
<CAPTION>
PERIOD FROM NINE MONTH
JULY 18, 1997 TO PERIOD ENDED
DECEMBER 31, 1997 SEPTEMBER 30, 1998
----------------- ------------------
<S> <C> <C>
OPERATING DATA:
Revenues:
Rental...................................... $ 19,980 $ 48,727
Interest.................................... 600 660
-------- --------
20,580 49,387
-------- --------
Expenses:
Depreciation................................ 5,088 13,183
Interest.................................... 184 5,750
General and administrative.................. 981 1,725
-------- --------
6,253 20,658
-------- --------
Net income.................................... 14,327 28,729
Dividends to Preferred Shareholders........... -- 5,719
-------- --------
Net income available for Common Shares........ $ 14,327 $ 23,010
======== ========
Net income available per Common Share:
Basic....................................... $ 0.66 $ 1.07
======== ========
Diluted..................................... $ 0.65 $ 1.05
======== ========
Weighted average number of shares outstanding,
basic....................................... 21,576 21,577
======== ========
Weighted average number of shares outstanding,
diluted..................................... 22,007 21,929
======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, 1997 SEPTEMBER 30, 1998
----------------- ------------------
<S> <C> <C>
BALANCE SHEET DATA:
Net real estate properties.................. $453,272 $763,260
Total assets................................ 454,438 775,762
Line of credit.............................. 32,000 237,800
Total shareholders' equity.................. 412,749 510,263
</TABLE>
5
<PAGE> 14
<TABLE>
<CAPTION>
PERIOD FROM
JULY 18, 1997 NINE MONTH
TO PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------- -------------
<S> <C> <C>
OTHER DATA:
Funds from Operations(1).......................... $ 19,415 $ 36,193
Net cash provided by operating activities......... 19,835 45,664
Net cash used in investing activities............. (455,360) (323,171)
Net cash provided by financing activities......... 436,281 277,771
Distributions on Common Shares.................... 16,635 28,698
Distributions per Common Share.................... 0.77 1.33
Ratio of Earnings to Fixed Charges(2)............. 78.9 5.0
</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, NINE MONTH
1997 TO PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
Calculation of Funds from Operations:
Net income................................... $ 14,327 $ 23,010
Plus: Real estate depreciation............... 5,088 13,183
--------- ---------
Funds from Operations........................ $ 19,415 $ 36,193
========= =========
</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.
6
<PAGE> 15
RISK FACTORS
An investment in the Offered Securities involves various risks. Prospective
investors should carefully consider the following risk factors in conjunction
with the other information contained or incorporated by reference in this
Registration Statement in evaluating an investment in the Offered Securities.
THE COMPANY IS DEPENDENT ON OPERATING COMPANY, AS PRIMARY LESSEE OF THE
COMPANY'S FACILITIES, FOR ITS REVENUES AND ABILITY TO MAKE DISTRIBUTIONS TO ITS
STOCKHOLDERS
Operating Company is the lessee of a substantial majority of the Company's
facilities. Therefore, the Company is dependent for its revenues upon Operating
Company's ability to make the lease payments required under the leases for such
facilities. 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 are cross-defaulted so that the Company could terminate all the leases if
Operating Company fails to make required lease payments. If this were to happen,
however, the Company would be required to find other suitable lessees or risk
losing its ability to elect or maintain REIT status, as applicable. The Company
believes that Operating Company has sufficient assets and income to enable it to
satisfy its obligations under such lease agreements at this time; however, there
can be no assurance that Operating Company will have such assets or income in
the future. Moreover, while the Company has leases with tenants other than
Operating Company, there can be no assurance that the Company will be successful
in obtaining lease agreements with lessees other than Operating Company to an
extent such that the Company is not dependent on Operating Company as the
primary source of its revenues. Moreover, there can be no assurance that
Operating Company or the Company's other lessees will elect to renew leases upon
the expiration of their current terms, which would also require the Company to
find suitable replacement lessees. In either circumstance, due to the unique
nature of corrections and detention facilities, the Company may be unable to
locate suitable lessees or to attract such lessees, and may, therefore, be
required to reduce the amounts to be received by the Company under its lease
agreements, which would have the effect of reducing the Company's amounts
available for distribution to the Company's stockholders. See "-- Certain
Agreements Relating to the Operating Company Credit Facility May Limit Operating
Company's Ability to Satisfy Obligations to the Company."
EXISTING CONFLICTS OF INTEREST MAY HAVE AN EFFECT ON THE COMPANY
Several conflicts of interest currently exist on the part of the Company, its
directors, officers and stockholders. The following description sets forth the
principal conflicts of interest, including the relationships through which they
arise, and the policies and procedures implemented by the Company to address
those conflicts.
Some directors, officers and stockholders of the Company may have conflicts of
interest in connection with the operations of the Company, Operating Company and
the Service Companies. Doctor R. Crants serves as Chief Executive Officer of
both the Company and Operating Company and has received an employment agreement
from both companies. Doctor R. Crants is the Chairman of the Board of Directors
of the Company (the "Company Board") and a member of the Boards of Directors of
Operating Company and each of the Service Companies. D. Robert Crants, III, the
son of Doctor R. Crants, serves as President of the Company and as a member of
the Company Board and has received an
7
<PAGE> 16
employment agreement from the Company. D. Robert Crants, III and Michael W.
Devlin, Chief Operating Officer of the Company, as well as certain other
officers of the Company and officers of Operating Company, also own, directly or
indirectly, shares in the Company and Operating Company. J. Michael Quinlan,
Vice-Chairman of the Company Board, and Michael W. Devlin have also received
employment agreements from the Company.
In addition, D. Robert Crants, III and Michael W. Devlin are principals of DC
Investment Partners, LLC, a limited liability company which manages investment
limited partnerships. DC Investment Partners, LLC, together with an entity
controlled by R. Clayton McWhorter, a member of the Board of Directors of
Operating Company, serves as the general partner for a private investment
limited partnership. DC Investment Partners, LLC is owned by D. Robert Crants,
III, Michael W. Devlin, Stephens Group, Inc., an affiliate of Stephens Inc.,
which served as financial advisor to CCA in connection with the Merger, and
Lucius E. Burch, III, who is Chairman of the Board of Directors of Operating
Company. Doctor R. Crants and other directors of the Company, Operating Company
or one of the Service Companies are investors in one or more of the private
investment limited partnerships managed by DC Investment Partners, LLC. Samuel
W. Bartholomew, Jr., a director of Service Company B, is a principal in the law
firm of Stokes & Bartholomew, P.A., counsel to the Company. Rusty L. Moore, a
director of the Company, is the spouse of a shareholder of Stokes & Bartholomew,
P.A. Stokes & Bartholomew, P.A. also provides certain legal services to
Operating Company and the Service Companies. C. Ray Bell, a director of the
Company, is the principal of a construction company which has built correctional
and detention facilities for and on behalf of CCA and may, in the future, build
correctional and detention facilities for or on behalf of the Company and
Operating Company.
Some directors, officers and shareholders of the Company also have employment
and ownership interests in Operating Company which may create a conflict of
interest. Approximately 8% of the capital stock of Operating Company is owned by
management employees of the Company, with each of J. Michael Quinlan, D. Robert
Crants, III and Michael W. Devlin owning approximately 2% of the capital stock
of Operating Company. Sodexho Alliance S.A. ("Sodexho") and a mutual fund
sponsored by Baron Capital Group, Inc. (the "Baron Mutual Fund"), each of which
is a significant shareholder of the Company, each own approximately 16% of the
outstanding capital stock of Operating Company and have each designated a
representative to serve on the Board of Directors of Operating Company. Sodexho
has also designated a representative to serve on the Company Board. See
"Information About the Company -- Relationship with Operating
Company -- Ownership of Operating Company" and "Recent Financings and Related
Agreements -- The Company."
In addition, the significant contractual and other ongoing relationships between
the Company, Operating Company and the Service Companies may present conflicts
of interest. See "Information About the Company -- Relationship with Operating
Company," "-- Relationship with Service Company A" and "-- Relationship with
Service Company B."
Although the financial terms of the Operating Company Leases (as hereinafter
defined), the Trade Name Use Agreement (as hereinafter defined), the Operating
Company Note (as hereinafter defined), the Services Agreement (as hereinafter
defined), the Tenant Incentive Agreement (as hereinafter defined) and other
agreements entered into between the Company and Operating Company in connection
with the Merger were determined in a manner to accurately reflect fair value,
there were no arm's-length negotiations between the Company and Operating
Company regarding these financial terms. In addition,
8
<PAGE> 17
because of the ongoing relationship between the Company and Operating Company,
the companies may be in situations where they have differing interests.
Accordingly, the potential exists for disagreements regarding compliance with
the Operating Company Leases. The possible need by the Company, 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 the Company's ability to complete such financings or sale.
Because of the relationships described above, there exists the risk that the
Company will not achieve the same results in its dealings with Operating Company
that it might achieve if such relationships did not exist.
These conflicts impose a risk that these persons will favor their own interests
over the interests of the Company in connection with the operations of the
Company and Operating Company and their ongoing relationship. The Company has
adopted policies and procedures to address these conflicts of interest,
including requiring Doctor R. Crants to abstain from making management decisions
in his capacity as an officer of the Company 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 the Company's directors who are not employees of the Company or
affiliated with Operating Company (the "Independent Committee") has the sole
authority to approve actions of the Company 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.
THE COMPANY IS DEPENDENT ON OUTSIDE FINANCING TO SUPPORT ITS GROWTH; DILUTIVE
EFFECT OF SUCH FINANCING
The Company has a $650.0 million credit facility consisting of a $400.0 million
revolving credit facility (the "Revolving Facility") and a $250.0 million term
loan facility (the "Term Loan Facility") (collectively, the "Company Credit
Facility"). The Company has approximately $340.0 million currently outstanding
under the Revolving Facility and $250.0 million currently outstanding under the
Term Loan Facility. The Company Credit Facility bears interest at a floating
rate calculated from the current London Interbank Offer Rate ("LIBOR") rate or a
base rate, as may be elected by the Company. See "Recent Financings and Related
Agreements -- The Company." Subsequently, the incurrence of the additional
indebtedness and the potential issuance of additional debt securities, may
result in increased interest expense for the Company and increase the Company's
exposure to the risks associated with debt financing. The Company Credit
Facility contains various restrictive covenants, including, among others,
provisions generally restricting the Company from incurring certain additional
indebtedness, engaging in transactions with stockholders 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. Moreover, these agreements
require the Company to maintain certain specified financial ratios and to
maintain a minimum net worth. These provisions may restrict the Company's
ability to obtain additional debt capital or limit its ability to engage in
certain transactions. Moreover, any breach of these limitations could result in
the acceleration of most of the Company's outstanding indebtedness. The Company
may not be able to refinance or repay this indebtedness in full under such
circumstances.
9
<PAGE> 18
The Company's growth strategy includes acquiring, developing and expanding
correctional and detention facilities as well as other properties. The Company
expects that it generally will not be able to fund its growth with cash from its
operating activities because the Company will be required to distribute to its
stockholders at least 95% of its taxable income each year to qualify as a REIT.
Consequently, the Company 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 the Company will continue to have access to the
capital or debt markets to fund future growth at an acceptable cost. In
addition, the Company Board has adopted a policy of limiting indebtedness to not
more than 50% of the Company's total capitalization, which could also limit the
Company's ability to incur additional indebtedness to fund its continued growth.
See "Information About the Company."
To assist in the financing of its growth, the Company is filing this
Registration Statement with the Commission to register up to $1.5 billion in
value of: (i) shares of its common stock, $0.01 par value per share (the "Common
Stock"); (ii) shares of its preferred stock, $0.01 par value per share (the
"Preferred Stock"); (iii) rights to purchase shares of its Common Stock (the
"Common Stock Purchase Rights"); (iv) one or more series of debt securities (the
"Debt Securities"), which may be either senior debt securities or subordinated
debt securities; and (v) warrants to purchase shares of Common Stock, Preferred
Stock or Debt Securities (the "Warrants"). The sale and issuance of any shares
of the Company's Common Stock under this Registration Statement or the issuance
of any shares of the Company's Common Stock upon the conversion of any
securities sold under this Registration Statement will have the effect of
diluting the ownership interest of the stockholders of the Company.
OWNERSHIP OF SHARES OF THE CAPITAL STOCK OF THE COMPANY INVOLVES RISKS INHERENT
IN THE CORRECTIONS AND DETENTION INDUSTRY
GENERAL. The Company owns correctional and detention facilities as well as
interests in Operating Company and the Service Companies, companies whose sole
business is the operation and management of these types of facilities. Under the
rules applicable to REITs, the Company cannot operate the facilities it owns,
thus its revenues and therefore its ability to make distributions are dependent
on the ability of its tenants to make rental payments and upon the ability of
Operating Company and each of Service Company A and Service Company B to make
payments to the Company, including dividends, and with respect to Operating
Company, payments under the Operating Company Note and the Trade Name Use
Agreement. Accordingly, the Company is 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 for terms of
up to five years, with one or more renewal options that may be exercised only by
the contracting government agency. No assurance can be given that any agency
will exercise a renewal option in the future. The contracting agency typically
may also terminate a facility contract at any time without cause by giving the
private prison manager written notice. There also exists the risk that a
facility owned by the Company may not be the subject of a contract between a
private manager and a government entity while it is leased to a private prison
manager because the Company'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 Company facility is terminated, or otherwise not renewed, such event
may adversely affect the ability of the contracting
10
<PAGE> 19
private prison manager to make the required rental payments to the Company.
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
the Company or adversely 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 payments to the Company, whether in
the form of lease payments or dividend or other payments. Further, a primary
part of the Company's business strategy is 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 to supply their facilities with a sufficient
number of inmates to meet the facility's design capacity. A government's 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 the Company.
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 the Company, 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,
has increasingly opposed the awarding of contracts to private prison managers.
Any of these occurrences or continued trends 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 the Company to
develop or purchase facilities and lease them to government or private entities,
all of which could have a material adverse effect on the Company's business.
OPTIONS TO PURCHASE. Eleven of the facilities currently owned or under
development by the Company are or will be subject to an option to purchase by
certain government agencies. If any of these options are exercised, there exists
the risk that the Company will not recoup its full investment from the
applicable facility 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.
LEGAL PROCEEDINGS. The Company'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 relating to
11
<PAGE> 20
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 the
Company. In addition, as an owner of real property, the Company may be subject
to certain proceedings relating to personal injuries of persons at such
facilities. The Company may be held responsible under state laws for claims
based on personal injury or property damage despite contractual provisions in
its leases with private prison managers providing for indemnity against such
claims. See "Information About the Company -- Relationship with Operating
Company -- Operating Company Leases." Moreover, such legal proceedings could
have a material adverse effect on Operating Company and the Service Companies,
which could adversely affect their ability to make lease payments or the other
required payments to the Company or the amounts of such payments.
OWNERSHIP OF SHARES OF THE CAPITAL STOCK OF THE COMPANY INVOLVES TAX RELATED
RISKS
DEPENDENCE ON QUALIFICATION AS A REIT. The Company operates so as to qualify as
a REIT for federal income tax purposes. However, no assurance can be made that
the Company will continue to qualify as a REIT. Qualification as a REIT involves
the application of highly technical and complex provisions of the Code, for
which there are only limited judicial or administrative interpretations.
Application of these provisions to the Company is even more difficult because of
certain aspects of the Company's organizational structure, 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 name "Corrections Corporation of America"
and any derivatives thereof and its distribution of earnings and profits
accumulated by CCA prior to the Merger. See "Information About the Company."
Qualification as a REIT also involves the determination of various factual
matters and circumstances not entirely within the Company's control. See
"Material Federal Income Tax Consequences -- Taxation of the Company."
If the Company 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, the Company 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 the Company
available for distribution to stockholders because of the additional tax
liability to the Company for the year or years involved. To the extent that
distributions to stockholders would have been made in reliance upon the
Company's qualifying as a REIT, the Company might be required to borrow funds or
to liquidate certain of its investments to pay the applicable tax. The failure
to qualify as a REIT would also constitute a default under the Company's
current, and potentially its future, debt obligations.
ADVERSE EFFECTS OF REIT MINIMUM DISTRIBUTION REQUIREMENTS. In order to qualify
as a REIT, the Company is generally required each year to distribute to its
stockholders at least 95% of its taxable income, excluding any net capital gain.
In addition, if the Company disposes of assets acquired from CCA in the Merger
during the ten-year period following the effective date of its election of REIT
status, the Company will be required to distribute at least 95% of the amount of
any "built-in gain" attributable to such assets that the Company 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
12
<PAGE> 21
Federal Income Tax Consequences -- Taxation of the Company -- Annual
Distribution Requirements." As a REIT, the Company generally is 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 the Company's income increases each year, it will be required
eventually to distribute all of its income to avoid paying the excise tax.
The Company 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 the Company to borrow funds on
a short-term basis to meet the 95% distribution requirement and to avoid the
nondeductible excise tax. If the Company must so borrow short-term funds it will
be further subject to the risks discussed above with respect to leverage. See
"-- The Company is Dependent on Outside Financing to Support its Growth;
Dilutive Effect of Such Financing."
Distributions by the Company are determined by the Company Board and depend on a
number of factors, including the amount of cash available for distribution, the
financial condition of the Company, any decision by the Company 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 Company 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.
REQUIREMENT TO DISTRIBUTE ACCUMULATED EARNINGS AND PROFITS. To qualify as a
REIT, the Company is required to distribute the accumulated earnings and profits
of CCA to which it succeeded pursuant to the Merger, as determined for federal
income tax purposes (the "Earnings and Profits Distribution"). The Earnings and
Profits Distribution will be taken into account by the Company'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. See "Material Federal Income Tax Consequences -- Taxation of
the Company -- Non-REIT Earnings and Profits."
TAX LEGISLATION. The REIT industry is subject to regulation by Congress.
Legislation affecting REITs could be introduced in Congress at any time.
Moreover, legislation, as well as administrative interpretations or court
decisions, 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 the Company.
OWNERSHIP OF SHARES OF THE CAPITAL STOCK OF THE COMPANY INVOLVES RISKS INHERENT
IN INVESTMENT IN REAL ESTATE PROPERTIES
GENERAL. Investments in correctional and detention facilities and any
additional properties in which the Company may invest in the future are subject
to risks typically associated with investments in real estate. Such risks
include the possibility that the 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
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many factors beyond the Company's control, including changes in government
regulation, general or local economic conditions, the available local supply of
prison beds and a decrease in the need for prison beds.
Equity investments in real estate are relatively illiquid and, therefore, the
ability of the Company to vary its portfolio promptly in response to changed
conditions will be limited. There are no limitations on the percentage of the
Company's assets that may be invested in any one property or venture; however,
the Company Board may establish limitations as it deems appropriate from time to
time. No limitations have been set on the number of properties in which the
Company will seek to invest or on the concentration of investments in any one
geographic region. See "Information About the Company."
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 the amount of cash available for distribution by the Company.
Phase I environmental assessments have been obtained on substantially all of the
facilities currently owned by the Company. 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 the Company believes would have a material adverse effect on the Company's
business, assets, results of operations or liquidity, nor is the Company aware
of any such liability. Nevertheless, it is possible that these reports do not
reveal all environmental liabilities or that there are material environmental
liabilities of which the Company is unaware. In addition, environmental
conditions on properties owned by the Company may affect the operation or
expansion of facilities located on the properties.
UNINSURED LOSS. The leases with Operating Company require Operating Company to
maintain insurance with respect to each of the facilities to be owned by the
Company and leased to Operating Company. Operating Company currently carries
comprehensive liability, fire, flood (for certain facilities) and extended
insurance coverage with respect to such properties with policy specifications
and insurance limits customarily carried for similar properties. There are,
however, certain types of losses, such as 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. The Company typically obtains new title insurance policies for
facilities when they are acquired, and the Company expects to obtain title
insurance policies on all facilities acquired by it in the future. Should an
uninsured loss occur, the Company could lose both its capital invested in, and
anticipated profits from, one or more of the facilities owned by the Company.
The Company's management believes its facilities are adequately insured in
accordance with industry standards.
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THE COMPANY IS DEPENDENT ON CERTAIN INDIVIDUALS FOR ITS MANAGEMENT
Doctor R. Crants serves as the Chief Executive Officer of the Company and as
Chairman of the Company Board. J. Michael Quinlan serves as the Vice-Chairman of
the Company Board. The loss of the services of either of these individuals could
have a material adverse effect on the Company as it would lose the benefit of
their extensive knowledge of, and experience in, the corrections industry. The
Company has entered into employment agreements with each of Doctor R. Crants and
J. Michael Quinlan. Under applicable Tennessee law, which governs 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, the Company 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.
THE COMPANY LACKS CONTROL OVER DAY-TO-DAY OPERATIONS AND MANAGEMENT OF ITS
FACILITIES
To qualify as a REIT for federal income tax purposes, the Company cannot
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, the Company's lessees 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 the Company. See
"Information About the Company -- Relationship with Operating
Company -- Operating Company Leases." During the terms of the leases, the
Company does not have the authority to require lessees to operate the facilities
in a particular manner or to govern any particular aspect of their operation
except as set forth in the leases. Thus, even if the Company believes a lessee
is operating a facility inefficiently or in a manner adverse to the Company's
interests, the Company may not require a lessee to change its method of
operation. The Company is limited to seeking redress only if the lessee violates
the terms of a lease, in which case the Company's primary remedy is to terminate
the lease or, in certain circumstances, all of the leases with that particular
lessee, and seek to recover damages from the lessee. If a lease is terminated,
the Company is required to find another suitable lessee or risk losing its
ability to elect or maintain REIT status, as applicable. Moreover, the Service
Companies control the operations of the government-owned facilities managed and
operated by them, and Operating Company controls the operations of the
facilities managed and operated by it. The Company 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, the Company has no
control over the operations which will provide revenues to the Service Companies
or Operating Company and thus provide the basis for any dividends or other
payments to be made to the Company from the Service Companies or Operating
Company.
THE COMPANY IMPOSES LIMITS ON THE OWNERSHIP OF ITS CAPITAL STOCK TO MAINTAIN
QUALIFICATION AS A REIT
For the Company to qualify as a REIT, not more than 50% in value of its
outstanding shares of capital stock 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
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qualifying income for purposes of the gross income tests under the Code. See
"Material Federal Income Tax Consequences -- Taxation of the Company -- 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 the Company's REIT qualification, among other things, the
Company's Charter prohibits direct or constructive ownership by any person of
more than 9.8% of the shares of the Company's Common Stock or more than 9.8% of
the shares of the Company's Preferred Stock, (including the Company's 8% Series
A Cumulative Preferred Stock, $0.01 par value per share (the "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
Company's Common Stock or the Company's 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 the Company's Common Stock or
shares of the Company's Series A Preferred Stock or the acquisition of an
interest in an entity which owns shares of the Company's Common Stock or shares
of the Company's 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 the Company's Common Stock or shares of the
Company's Series A Preferred Stock, and thus subject such shares of the
Company's Common Stock or shares of the Company's Series A Preferred Stock to
the Ownership Limit. Direct or constructive ownership of shares of the Company's
Common Stock or shares of the Company's 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 the Company's Common Stock or
shares of the Company's 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 the Company, including certain acquisitions the
stockholders may deem to be in their best interests. See "-- Certain Provisions
of the Company's Governing Documents May Limit Changes in Control of the
Company." Also, there can be no assurance that such provisions will in fact
enable the Company to meet relevant REIT ownership requirements. See
"Description of Capital Stock -- Restrictions on Ownership of Capital Stock."
CERTAIN PROVISIONS OF THE COMPANY'S GOVERNING DOCUMENTS MAY LIMIT CHANGES IN
CONTROL OF THE COMPANY
Certain provisions of the Company's Charter and the Company's Bylaws, including
provisions imposing the Ownership Limit, authorizing the issuance of the
Company's Preferred Stock and requiring staggered terms for the Company Board,
and certain provisions of the Maryland General Corporation Law ("MGCL")
regarding business combinations and control share acquisitions could have the
effect of delaying, deferring or preventing a change in control of the Company
or the removal of existing management and, as a result, could prevent the
stockholders of the Company from being paid a premium for their shares of the
capital stock of the Company. The Company's Charter authorizes the Company Board
to issue shares of the Company's 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
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restrictions thereof, all without stockholder approval. The authorization of
shares of the Company's Preferred Stock may have an anti-takeover effect because
it gives the Company Board the power to issue the Company's Preferred Stock at
its sole discretion on such terms as it, in its sole discretion, deems proper,
which may have a dilutive effect on or otherwise deter any potential acquirer of
the Company. The Company's 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 Company's 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 Company's Charter further provides that the stockholders of
the Company may, at any time, remove any director, with or without cause, by an
affirmative vote of a majority of stockholders 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 Company Board due to
the existence of the classified board and will further be unable to remove
directors without majority stockholder approval.
YEAR 2000 COMPLIANCE ISSUES MAY HAVE AN EFFECT ON THE COMPANY
Prior to the Merger, Prison Realty completed an assessment of its information
technology hardware and software and informed the Company it believed that both
were Year 2000 compliant, although there can be no assurance that coding errors
or other defects will not be discovered in the future. The Company intends to
continue to test for Year 2000 compliance during the calendar year 1999. Because
Operating Company is the lessee of a substantial majority of the Company's
facilities, the Company may be vulnerable to Operating Company's failure to
remedy its Year 2000 issues. The Company has initiated, and will continue,
discussions with the management of Operating Company regarding its Year 2000
issues. Operating Company, which operates and manages facilities previously
operated and managed by CCA, became subject to CCA's Year 2000 issues upon
completion of the Merger. Prior to the Merger, CCA management advised management
of the Company that Year 2000 problems could arise in connection with CCA's
information technology hardware and software. CCA management also advised
management of the Company prior to the Merger that CCA was undertaking attempts
to remediate its Year 2000 problems. Additionally, CCA management advised the
management of the Company of the risk that the computer and non-information
technology systems of third parties, such as government agencies for which CCA
provided services, commercial banks and other lenders, could have Year 2000
problems that are not remedied.
The failure of Operating Company, or of these third parties, to remedy their
Year 2000 problems could result in the delayed collection of accounts receivable
by Operating Company, by the Company from Operating Company or from government
agencies for which Operating Company provides services, as the case may be, and
the disruption of capital flows from third party lenders, potentially resulting
in liquidity stress. Such liquidity stress could adversely affect Operating
Company's ability to make timely lease and other payments to the Company.
Although Operating Company cannot control its Year 2000 risks arising in
connection with third parties, Operating Company has initiated conversations
with those third parties with whom it has important relationships to determine
the extent of their Year 2000 compliance problems.
Additionally, the Company is vulnerable to the failure of the Service Companies
to remedy each of their Year 2000 issues. There is a risk that government
agencies, the sole customers of the Service Companies, have Year 2000 problems
that will not be remedied and which could result in delayed collection of
accounts receivable. Moreover, the Service Companies are vulnerable to the Year
2000 issues of Operating Company as a result of Operating
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Company's agreement to provide administrative services to each of the Service
Companies. Any Year 2000 problems which may arise in connection with Operating
Company's information technology, hardware and software could affect Operating
Company's ability to collect accounts receivable on behalf of the Service
Companies. Delayed collections arising from either of the above events could
adversely affect the ability of each of the Service Companies to make
distributions of its net income to the Company or the amount of such
distributions. Although the Service Companies cannot control their Year 2000
risks arising in connection with those third parties, the Service Companies
have, or Operating Company has on their behalf, initiated conversations with
those third parties to determine the extent of their Year 2000 compliance
problems.
A FLUCTUATION IN MARKET INTEREST RATES MAY AFFECT THE PRICE OF THE COMPANY'S
CAPITAL STOCK
One of the factors that may affect the price of the capital stock of the Company
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 the Company's capital stock.
CERTAIN AGREEMENTS RELATING TO THE OPERATING COMPANY CREDIT FACILITY MAY LIMIT
OPERATING COMPANY'S ABILITY TO SATISFY OBLIGATIONS TO THE COMPANY
In connection with the completion of the Merger, Operating Company obtained a
$30.0 million revolving credit facility (the "Operating Company Credit
Facility") from General Electric Capital Corporation ("GECC"). In connection
with the Operating Company Credit Facility, the Company and its lenders were
required to enter into certain agreements with Operating Company and GECC with
respect to Operating Company's obligations to the Company under the Operating
Company Note, as hereinafter defined, and the Operating Company Leases. These
agreements generally cause Operating Company's obligations to the Company under
the Operating Company Leases and the Operating Company Note to be subordinate
and junior in right of payment to all obligations and liabilities of Operating
Company to GECC. The agreements and restrictions also (i) require that a portion
of the rent due to the Company under the Operating Company Leases be deferred if
certain financial criteria are not met and (ii) limit the ability of Operating
Company to make cash interest payments to the Company under the Operating
Company Note if certain financial criteria are not met. See "Recent Financings
and Related Agreements -- Operating Company." Each of these events could result
in deferred cash payments to the Company from Operating Company and could cause
a reduction in amounts available for distribution to its stockholders.
FACTORS TO BE CONSIDERED BY ERISA PLAN FIDUCIARIES
Depending upon the particular circumstances of the plan, an investment in the
Offered Securities may not be an appropriate investment for an ERISA (as
hereinafter defined) plan, a qualified plan or individual retirement accounts
and individual retirement annuities (collectively, "IRAs"). 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. In deciding whether to purchase any of the Offered
Securities, a fiduciary of a pension, profit-sharing or other employee benefit
plan subject to ERISA (an "ERISA Plan"), in consultation with its advisors,
should carefully consider its fiduciary responsibilities under ERISA, the
prohibited transaction rules of ERISA and the Code, and the effect of the "plan
asset" regulations issued by the U.S. Department of Labor.
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INFORMATION ABOUT THE COMPANY
GENERAL
The Company is the largest self-administered and self-managed publicly-traded
REIT in the United States focused on acquiring, developing and owning
correctional and detention facilities. As of January 8, 1999, the Company owned
44 correctional and detention facilities, of which seven facilities were under
construction, in 16 states, the District of Columbia and the United Kingdom with
a total design capacity in excess of 40,000 beds. As of January 8, 1999,
approximately 30,000 beds were leased under 37 operating leases. The Company is
currently developing 10,000 beds through the construction of seven new
facilities and the expansion of five currently operating facilities. The
unaudited depreciated book value of the Company's properties, including those
under construction or expansion, at January 1, 1999 was in excess of $2.0
billion and the appraised value of such properties was approximately $3.0
billion.
The Company is the successor to each of CCA and Prison Realty. CCA merged with
and into the Company on December 31, 1998, and Prison Realty merged with and
into the Company on January 1, 1999, all pursuant to the terms and conditions of
the Merger Agreement.
The Company's principal business strategy is to design, build, finance and/or
acquire and develop correctional and detention facilities from and for both
government entities and private prison operators, to expand the design capacity
of its existing facilities and to lease these facilities under long-term "triple
net" leases to government entities or qualified third party operators. As of
January 8, 1999, the Company leased 29 of its 44 facilities to Operating
Company, which manages and operates the facilities pursuant to management
contracts acquired from CCA. It is currently anticipated that Operating Company
will additionally lease six of the facilities currently under construction by
the Company. The Company also leases three of its facilities to private
operators other than Operating Company and leases six of its facilities to
government entities. Operating Company manages five facilities leased from the
Company by government entities pursuant to management contracts acquired from
CCA.
The Company intends to elect to be taxed as a REIT under the Code and generally
will not be subject to federal income tax to the extent that it distributes its
earnings to its stockholders and maintains its qualification as a REIT. To
qualify as a REIT, the Company's income must be derived from certain sources,
including rents from real property (and generally excluding income from the
operation of a correctional and detention facility). See "Material Federal
Income Tax Consequences -- Taxation of the Company -- Income Tests."
Accordingly, the Company is precluded from managing and operating correctional
and detention facilities and, as a consequence, intends to lease such properties
pursuant to long-term non-cancellable leases.
The Company was incorporated as a Maryland corporation in September 1998. The
Company's principal executive offices are located at 10 Burton Hills Boulevard,
Suite 100, Nashville, Tennessee, and the Company's telephone number is (615)
263-0200.
RELATIONSHIP WITH OPERATING COMPANY
Currently, Operating Company leases 29 of the Company's 44 facilities. Operating
Company, formed in connection with the Merger, is a leading manager of
privatized correctional and detention facilities. As of January 8, 1999,
Operating Company had contracts to manage and operate 40 correctional and
detention facilities, 34 of which are currently being managed and operated by
Operating Company. All of these facilities were operated pursuant to management
contracts formerly held by CCA or its corporate
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subsidiaries prior to the Merger. Since the Company is precluded from managing
and operating correctional and detention facilities, these management contracts,
together with certain other non-real estate assets relating to the management
contracts, and all of the issued and outstanding capital stock of certain of
CCA's wholly-owned corporate subsidiaries, were sold to Operating Company
immediately prior to the Merger. In exchange, CCA received an installment note
in the principal amount of $137.0 million (the "Operating Company Note") and
100% of the non-voting common stock of Operating Company. CCA also entered into
a trade name use agreement with Operating Company (the "Trade Name Use
Agreement") granting Operating Company a license to use the name "Corrections
Corporation of America" and any derivative thereof. As a result of the Merger,
the Company, as the successor to CCA, became subject to all of CCA's rights and
obligations arising from this sale of management contracts and related assets to
Operating Company. Additionally, immediately after the Merger, all existing
leases between Prison Realty and CCA were cancelled, and the Company entered
into a master lease agreement and individual leases with respect to each
property owned by the Company and leased to Operating Company. The relationship
between the Company and Operating Company is more fully described below.
OWNERSHIP OF OPERATING COMPANY. The Company owns approximately 9.5% of the
capital stock of Operating Company, which consists of 100% of the non-voting
common stock of Operating Company and which represents approximately 9.5% of the
economic value of Operating Company. The remaining capital stock of Operating
Company, which consists of all of the voting common stock of Operating Company,
is owned as follows: (i) approximately 30%, valued at $15.0 million, is owned by
management employees of Operating Company other than Doctor R. Crants, who
serves as Chief Executive Officer of both the Company and Operating Company;
(ii) approximately 8%, valued at $4.0 million, is owned by management employees
of the Company; (iii) approximately 19.1%, valued at $9.5 million, is owned by
the wardens of the facilities operated by, and other employees of, Operating
Company; (iv) approximately 1.4%, valued at $700,000, is owned by certain
individuals who were key employees of Prison Realty prior to the Merger; (v)
approximately 16%, valued at $8.0 million, is owned by Sodexho; and (vi)
approximately 16%, valued at $8.0 million, is owned by the Baron Mutual Fund.
The shares held by the Operating Company wardens are restricted and will vest
if, and only if, they remain employed by Operating Company or one of the Service
Companies through December 31, 2003. Any shares that are forfeited by wardens
will remain outstanding and will be held by a trustee for the benefit of the
remaining wardens until December 31, 2003, whereupon they will vest and will be
distributed to wardens still employed by Operating Company. Additionally, the
Company has certain preemptive rights to maintain its 9.5% ownership interest in
the capital stock of Operating Company pursuant to an agreement with Operating
Company.
OPERATING COMPANY NOTE. In partial consideration for the sale by CCA and its
corporate subsidiaries of certain management contracts and other related assets
to Operating Company immediately prior to the Merger, CCA received the Operating
Company Note. As the surviving entity in the Merger, the Company succeeded to
CCA's rights under the Operating Company Note. The Operating Company Note is
payable over 10 years and bears interest at a rate of 12% per annum. Interest
only is payable for the first four years of the Operating Company Note, and the
principal amount of the Operating Company Note 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 its
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
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has guaranteed payment of 10% of the outstanding principal amount due under the
Operating Company Note. Pursuant to the terms of the Operating Company Credit
Agreement, as hereinafter defined, Operating Company's payment of principal and
interest due the Company under the Operating Company Note is restricted in
certain specified instances, and the Operating Company Credit Agreement further
provides that payments due the Company under the Operating Company Note are
subordinate and junior in right to the obligations and liabilities of Operating
Company to GECC. See "Recent Financings and Related Agreements -- Operating
Company."
TRADE NAME USE AGREEMENT. Prior to the Merger, and in connection with CCA's
sale to Operating Company of the management contracts and other related assets
described herein, CCA entered into the Trade Name Use Agreement with Operating
Company. Under the Trade Name Use Agreement, Operating Company was granted the
right to use the name "Corrections Corporation of America" and any derivative
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 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 any derivative thereof by Operating Company. In addition, Operating
Company acknowledged in the Trade Name Use Agreement that CCA owned all rights,
title and interest in and to the name "Corrections Corporation of America" and
any derivative thereof and agreed that it would do nothing inconsistent with
such ownership. In consideration for such right, Operating Company agreed to pay
a fee to CCA equal to the sum of (i) 2.75% of the gross revenues of Operating
Company for the first three years of the Trade Name Use Agreement, (ii) 3.25% of
the gross revenues of Operating Company for the fourth and fifth year of the
Trade Name Use Agreement, and (iii) 3.625% of Operating Company's gross revenues
for the remaining term of the Trade Name Use Agreement, provided that the amount
of such fee may not exceed (a) 2.75% of the gross revenues of the Company for
the first three years of the agreement, (b) 3.5% of the gross revenues of the
Company for the fourth and fifth year of the agreement, or (c) 3.875% of the
Company's gross revenues for the remaining term of the agreement. As the
surviving entity in the Merger, the Company succeeded to CCA's rights and
obligations arising under the Trade Name Use Agreement.
OPERATING COMPANY LEASES. Immediately after the Merger, all existing leases
between CCA and Prison Realty were cancelled, and the Company and Operating
Company entered into a master lease agreement (the "Operating Company Master
Agreement to Lease") with a primary term of 12 years (the "Fixed Term") and
individual leases with respect to each facility currently leased by Operating
Company (collectively, the "Operating Company Leases"). The Operating Company
Lease for each facility owned by the Company and leased to Operating Company
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 Company's proprietary property (the "Operating Company Leased
Property"). 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.
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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 Operating Company. The rent for the first year for each
facility under the Operating Company Leases was initially set at a fixed amount
(the "Annual Base Rent") and will be increased each year by an amount (the
"Additional Rent") equal to 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.
Annual Base Rent and Additional Rent for each Operating Company Leased Property
will be payable in monthly installments. Pursuant to the terms of the
Intercreditor and Subordination Agreement, as hereinafter defined, the
obligations of Operating Company to the Company under the Operating Company
Leases are subordinate and junior in right of payment to all obligations and
liabilities of Operating Company to GECC. In addition, pursuant to the terms of
the Operating Company Master Agreement to Lease, payment of a portion of the
rent due the Company under the Operating Company Leases will be deferred if
certain Operating Company financial criteria are not met. See "Recent Financings
and Related Agreements -- Operating Company."
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 the Company and Operating
Company. Fair market rates for Extended Terms will be determined mutually by the
Company 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 are 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 the Company, at its option, at
any time after the first five years of the Operating Company Lease, upon 18
months written notice to Operating Company.
Each Operating Company Lease 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 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.
Under each Operating Company Lease, Operating Company must, at its sole cost and
expense, maintain each Operating Company Leased Property in good order, repair
and appearance and must 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). The
Company will not be required to build or rebuild any improvements to any
Operating Company Leased Property, or to make any
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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 the Company, provided that the value and
primary intended use of such Operating Company Leased Property (determined in
the Company's reasonable judgment) is not impaired. All machinery, equipment,
furniture, furnishings and other personal property installed at the expense of
Operating Company 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,
the Company 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
a 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 the Company. In the case of a capital
addition not undertaken or financed by the Company, the Company will have an
option to acquire and 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 equal to the fair market value of such capital
addition and at an annual rental rate equal to fair market rental rates.
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 the Company and any holder of a mortgage, deed of
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 the Company 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 the Company.
The Operating Company Leases provide that Operating Company may not, without the
prior written consent of the Company, 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 the Company 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 issuance and/or
sale by Operating Company or the sale by any stockholder of
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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.
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 the Company. If any facility is damaged to such an
extent that 50% of the facility is rendered unsuitable for use as a correctional
or detention facility, and if 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 the Company with respect to such facility, together with an amount
equal to the difference, if any, between the amount of such insurance proceeds
and the net book value of the damaged facility, as reflected on the Company's
financial statements on the date of damage.
In the event of a condemnation or taking of any 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 the Company, 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 the Company is equal to the
net book value of the facility, as reflected on the Company's financial
statements on the date of the condemnation.
Under the Operating Company Lease, Operating Company indemnifies, and is
obligated to save harmless, the Company from and against all liabilities, costs
and expenses (including reasonable attorneys' fees and expenses) imposed upon or
asserted against the Company as owner of the applicable 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 acts,
omissions or negligence of Operating Company or any agent, employee, investor of
Operating Company or similar persons; and (vii) any liability the Company may
incur or suffer as a result of any permitted contest by Operating Company under
any Operating Company Lease.
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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 the Company 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.
An "event of default" will be deemed to have occurred under the Operating
Company Master Agreement to Lease and any individual Operating Company Lease if:
(i) Operating Company fails to perform any covenant and does not diligently
undertake to cure the same after 90 days' notice from the Company; (ii) 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; (iii) if
Operating Company ceases operations at an Operating Company Leased Property for
a period in excess of 45 days during the Fixed Term of the respective individual
Operating Company Lease; or (iv) if any representation or warranty of Operating
Company in the Operating Company Master Agreement to Lease is incorrect. An
"event of default" will be deemed to have occurred under the Operating Company
Master Agreement to Lease and all of the Operating Company Leases if (i) "events
of default" as described in the preceding sentence exist with respect to
Operating Company Leased Properties for which the aggregate monthly Base Rent
constitutes a specified percentage of the monthly Base Rent for all of the
Operating Company Leased Properties; (ii) if Operating Company fails to pay any
rent within 60 days after notice of non-payment from the Company; (iii) if any
bankruptcy proceedings are instituted by or against Operating Company and, if
against Operating Company, they are not dismissed within 90 days; (iv) 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; (v) the failure of the Company to
qualify as a REIT under the Code; (vi) 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; or (vii) if, at any time prior to January 1, 2004, Operating
Company completes a public offering of its common stock or securities
convertible into its common stock, transfers or sells an amount of its common
stock resulting in 20% or more of its common stock being held by persons other
than shareholders of Operating Company on the date of the Operating Company
Master Agreement to Lease, or transfers or sells all or substantially all of its
total assets.
Upon any event of default in connection with a specific Operating Company Leased
Property, the Company 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 the
Company from any successor occupant. In addition, the Company may exercise any
other rights that it may have under law. In the event the Company evicts
Operating Company from an Operating Company Leased Property, the Operating
Company Master Agreement to 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 Agreement to Lease which are not
referable to a specific Operating Company Leased Property (including
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Operating Company's failure to timely pay rent), the Company 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 Agreement
to Lease nor any of the other agreements entered into between Operating Company
and the Company prohibits or otherwise restricts the Company's ability to lease
properties to parties other than 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, the Company and Operating Company entered
into a right to purchase agreement (the "Right to Purchase Agreement") whereby
the Company has 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 the
Company and Operating Company. Additionally, the Company has 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 owned by Operating Company or
which is acquired or developed by Operating Company 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 the Company or have the Company finance
such facility, as applicable, on the same terms and conditions contained in such
third party offer. With respect to a sale of any such facility, if the Company
declines to purchase such facility at a price or on terms set forth in such
third party offer, 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 the
Company, and on terms and conditions substantially consistent with those offered
to the Company. With respect to a first mortgage financing of 90% of the cost of
any such facility, if the Company declines to provide such financing on the
terms set forth in such third party offer, 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.
SERVICES AGREEMENT. Immediately after the Merger, Operating Company entered
into a services agreement (the "Services Agreement") with the Company pursuant
to which Operating Company will serve as a facilitator of the construction and
development of additional facilities on behalf of the Company for a term of five
years from the date of the Services Agreement. In such capacity, Operating
Company will perform, at the direction of the Company, 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
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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, the Company 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%.
TENANT INCENTIVE AGREEMENT. Immediately after the Merger, Operating Company
entered into a tenant incentive agreement (the "Tenant Incentive Agreement")
with the Company pursuant to which the Company will pay to Operating Company an
incentive fee to induce Operating Company to enter into the 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,
the Company 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%. No fee will be payable with respect to
additions to a facility.
RELATIONSHIP WITH SERVICE COMPANY A
As of January 8, 1999, Service Company A had contracts to manage and operate 11
government-owned adult prison facilities, all of which were formerly operated by
CCA pursuant to management contracts held by CCA or its corporate subsidiaries
prior to the Merger. Since the Company is precluded from managing and operating
correctional and detention facilities, these management contracts, together with
certain other non-real estate assets relating to the management contracts, were
sold to a newly-created limited liability company, Prison Management Services,
LLC, immediately prior to the Merger. In exchange, CCA received 100% of the
non-voting membership interest in Prison Management Services, LLC. This interest
obligated Prison Management Services, LLC to make distributions to CCA equal to
95% of its net income, as determined in accordance with GAAP. The Company, as
the surviving entity in the Merger, succeeded to CCA's interest in Prison
Management Services, LLC. Immediately after the Merger, Prison Management
Services, LLC was merged with and into Service Company A, with Service Company A
as the surviving company. As a result of this merger, the Company received 100%
of the non-voting common stock of Service Company A. The non-voting common stock
obligates Service Company A to pay dividends to the Company equal to 95% of its
net income, as determined in accordance with GAAP.
The remaining outstanding capital stock of Service Company A consists of voting
common stock. An unaffiliated privately held investment Tennessee limited
liability company, Privatized Management Services Investors, LLC, owns 85% of
the outstanding voting common stock of Service Company A. None of the members or
managers of Privatized Management Services Investors, LLC are employees or
directors of the Company or shareholders of Operating Company or Service Company
B, and no employee or director of the Company or shareholder or director of
Operating Company or Service Company B has any direct or indirect interest in
Privatized Management Services Investors, LLC. The remaining 15% of the voting
common stock of Service Company A is owned by the wardens of facilities operated
by Service Company A. The shares held by the Service Company A wardens are
restricted and will vest if, and only if, they remain employed by Service
Company A through December 31, 2003. Any shares that are forfeited by the
Service Company A wardens will remain outstanding and will be held by a trustee
for the
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benefit of the remaining Service Company A wardens until December 31, 2003,
whereupon they will vest and will be distributed to wardens still employed by
Service Company A.
RELATIONSHIP WITH SERVICE COMPANY B
As of January 8, 1999, Service Company B had contracts to manage and operate 19
government-owned jails and juvenile detention facilities, all of which were
formerly operated by CCA pursuant to management contracts held by CCA or its
corporate subsidiaries prior to the Merger. Since the Company is precluded from
managing and operating correctional and detention facilities, these management
contracts, together with certain other non-real estate assets relating to the
management contracts, were sold to a newly-created limited liability company,
Juvenile and Jail Facility Management Services, LLC, immediately prior to the
Merger. In exchange, CCA received 100% of the non-voting membership interest in
Juvenile and Jail Facility Management Services, LLC. This interest obligated
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. The
Company, as the surviving entity in the Merger, succeeded to CCA's interest in
Juvenile and Jail Facility Management Services, LLC. Immediately after the
Merger, Juvenile and Jail Facility Management Services, LLC was merged with and
into Service Company B, with Service Company B as the surviving company. As a
result of this merger, the Company received 100% of the non-voting common stock
of Service Company B. The non-voting common stock obligates Service Company B to
pay dividends to the Company equal to 95% of its net income, as determined in
accordance with GAAP.
The remaining outstanding capital stock of Service Company B consists of voting
common stock. An unaffiliated privately held investment Tennessee limited
liability company, Correctional Services Investors, LLC, owns 85% of the
outstanding voting common stock of Service Company B. None of the members or
managers of Correctional Services Investors, LLC are employees or directors of
the Company or shareholders of Operating Company or Service Company A, and no
employee or director of the Company or shareholder or director of Operating
Company or Service Company A has any direct or indirect interest in Correctional
Services Investors, LLC. The remaining 15% of the voting common stock of Service
Company B is owned by the wardens of facilities operated by Service Company B.
The shares held by the Service Company B wardens are restricted and will vest
if, and only if, they remain employed by Service Company B through December 31,
2003. Any shares that are forfeited by the Service Company B wardens will remain
outstanding and will be held by a trustee for the benefit of the remaining
Service Company B wardens until December 31, 2003, whereupon they will vest and
will be distributed to wardens still employed by Service Company B.
RELATIONSHIP BETWEEN OPERATING COMPANY AND THE SERVICE COMPANIES
Immediately after the Merger, each of Service Company A and Service Company B
entered into an administrative services agreement (the "Administrative Services
Agreement") with Operating Company, pursuant to which employees of Operating
Company's administrative departments perform extensive administrative services
(including but not limited to legal, finance, management information systems and
government relations services), as needed, for each of the Service Companies. As
consideration for the foregoing, each Service Company pays Operating Company a
management fee of $250,000 per month. This management fee will be increased
annually at the rate of 4% per year. In addition, immediately after the Merger,
Operating Company entered into a trade name use agreement with each of the
Service Companies under which Operating Company granted
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to each of the Service Companies the right to use the name "Corrections
Corporation of America" and any derivative thereof, subject to specified terms
and conditions therein.
CERTAIN INFORMATION INCORPORATED BY REFERENCE
Certain information relating to the policies and objectives regarding growth,
investment, financing, working capital and other policies and objectives of the
Company is set forth in the Company's Prospectus filed with the Commission
pursuant to Rule 424(b)(4) promulgated under the Securities Act, dated October
30, 1998, and which is a part of the Company's Registration Statement on Form
S-4 (File no. 333-65017), under the heading "Information About the Policies and
Objectives of New Prison Realty", incorporated herein by reference.
RECENT FINANCINGS AND RELATED AGREEMENTS
THE COMPANY
In connection with the completion of the Merger, the Company obtained the $650.0
million Company Credit Facility pursuant to the terms of a Credit Agreement
dated as of January 1, 1999, by and among the Company and certain of its
subsidiaries and NationsBank, N.A. as Administrative Agent, Lehman Commercial
Paper, Inc., as Documentation Agent, and the Bank of Nova Scotia, as Syndication
Agent (the "Company Credit Agreement"). The Credit Facility is comprised of the
Revolving Facility and the Term Loan Facility. The Revolving Facility matures
January 1, 2002 and the Term Loan Facility matures January 1, 2003. The Credit
Facility is secured by substantially all the assets of the Company. The
Revolving Facility bears interest at variable rates of interest based on a
spread over the base rate or LIBOR (as elected by the Company), which spread is
determined by reference to the Company's credit rating. The spread ranges from
.25% to 1.25% for base rate loans and from 1.375% to 2.75% for LIBOR rate loans.
The Company is currently not rated. As such, under the terms of the Company
Credit Agreement, the initial interest rate spreads will be 1.00% for base rate
loans and 2.5% for LIBOR rate loans. The Term Loan Facility bears interest at a
variable base rate equal to 3.25% in excess of LIBOR. The Revolving Facility
also allows for a $150.0 million letter of credit sub-facility, enabling the
Company to obtain letters of credit for general corporate purposes. Upon the
initial funding of the Company Credit Facility, the Company has $340.0 million
currently outstanding under the Revolving Facility and $250.0 million currently
outstanding under the Term Loan Facility. Amounts drawn under the Revolving
Credit Facility included $114.0 million required to temporarily cash
collateralize outstanding Letters of Credit which are not yet reissued under the
Company Credit Facility. Approximately $502.0 million of the amounts currently
outstanding under the Company Credit Facility were used to repay outstanding
indebtedness under Prison Realty's and CCA's credit facilities prior to the
Merger.
The Company also agreed to sell $40.0 million principal amount of Convertible
Subordinated Notes (the "Subordinated Notes") to MDP Ventures IV LLC, a New York
limited liability company ("MDP"), pursuant to the terms of a Note Purchase
Agreement dated December 31, 1998 by and between the Company and MDP (the "Note
Purchase Agreement"). The first $20.0 million tranche closed on December 31,
1998, and the second $20.0 million tranche is expected to close on January 29,
1999. The Subordinated Notes bear or will bear interest at 9.5% per annum and
are due December 31, 2008 and January 29, 2009, respectively. The Subordinated
Notes are convertible into shares of the Company's Common Stock at a conversion
price of approximately $28.00 per share, as
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may be adjusted under the terms of the Note Purchase Agreement. The Company also
entered into a Registration Rights Agreement with MDP regarding the registration
of the shares of the Company's Common Stock to be issued to MDP upon conversion
of the Subordinated Notes.
In connection with the Merger, the Company assumed or issued in exchange for
similar current outstanding securities: (i) $7.0 million 8.5% Convertible
Subordinated Notes due November 7, 1999, originally issued to Sodexho by CCA on
June 23, 1994, which are convertible into 1,709,699 shares of the Company's
Common Stock at a conversion price of $4.094 per share; (ii) $20.0 million 7.5%
Convertible Subordinated Notes due February 28, 2002, originally issued to
Sodexho by CCA on February 28, 1996, which are convertible into 701,135 shares
of the Company's Common Stock at a conversion price of $28.525 per share; (iii)
$30.0 million 7.5% Convertible Subordinated Notes due February 28, 2005, issued
by the Company to PMI Mezzanine Fund, L.P. ("PMI"), which are convertible into
1,094,120 shares of the Company's Common Stock at a conversion price of $27.419
per share and which replace the convertible subordinated notes originally issued
by CCA to PMI on February 29, 1996; and (iv) the forward contract of CCA whereby
CCA agreed to sell to Sodexho up to $20.0 million of convertible subordinated
notes at any time prior to December 1999. The notes which may be purchased
pursuant to the forward contract will bear interest at LIBOR plus 1.35% and will
be convertible into shares of the Company's Common Stock at a conversion price
of $7.80 per share.
OPERATING COMPANY
In connection with the completion of the Merger, Operating Company obtained the
Operating Company Credit Facility pursuant to the terms of a Credit Agreement,
dated as of December 31, 1998 (the "Operating Company Credit Agreement"), with
GECC for itself, as lender, and as agent for other lenders signatory thereto. No
amounts are currently outstanding under the Operating Company Credit Facility.
In order to facilitate the Operating Company Credit Facility, the Company
executed in favor of GECC a Standstill Agreement (the "Standstill Agreement")
and an Intercreditor and Subordination Agreement (the "Intercreditor and
Subordination Agreement").
The Standstill Agreement provides, among other things, that the Company will not
terminate any of the Operating Company Leases or the Trade Name Use Agreement
between the Company and Operating Company until all obligations of Operating
Company to GECC under the Operating Company Credit Agreement have been paid in
full, and, upon the occurrence of certain events of default, the Company will
not take any other remedial action under such agreements. In addition, the
Operating Company Master Agreement to Lease provides that 10% of the Base Rent
and the Additional Rent under each Lease will be deferred if Operating Company's
EBITDA as of the end of any trailing four quarter period is $5.0 million or more
less than Operating Company's projected Management Case (as defined in the
Operating Company Master Agreement to Lease) as provided to GECC with respect to
such period, and such deferral will continue until Operating Company's EBITDA as
of the end of any subsequent trailing four quarter period is equal to or greater
than such Management Case. Once such deferral ceases, the deferred rent is due
and payable by Operating Company on a quarterly basis within sixty (60) days
after the end of each quarter following the termination of the deferral.
The Intercreditor and Subordination Agreement provides that the Operating
Company Note and all other obligations of Operating Company to the Company are
subordinate and
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junior in right of payment to all obligations and liabilities of Operating
Company to GECC under the Operating Company Credit Agreement. The Operating
Company Credit Agreement provides that Operating Company shall make scheduled
payments of interest with respect to the Operating Company Note in cash only if,
among other things, Operating Company achieves on a trailing four quarter basis
at least $10.0 million more of EBITDA than 100% of Operating Company's projected
Management Case (as defined in the Operating Company Credit Agreement) as
provided to GECC. Even if the cash payment of interest is deferred, the
Operating Company Credit Agreement permits Operating Company to make scheduled
payments of interest on the Operating Company Note by making payments in kind.
Based upon (i) the Company's current view of its anticipated results of
operations, (ii) the view of Operating Company as to when it will need to make
borrowings under the Operating Company Credit Facility and (iii) Operating
Company's view that, if necessary, it can refinance the Operating Company Credit
Facility to include terms more favorable than those currently contained in the
Standstill Agreement and the Intercreditor and Subordination Agreement, the
Company does not believe that the provisions of the Standstill Agreement and the
Intercreditor and Subordination Agreement will have a material effect on its
liquidity or results of operations.
USE OF PROCEEDS
Unless otherwise specified in the applicable Prospectus Supplement, the Company
intends to use the net proceeds from the sale of the Offered Securities for the
general corporate purposes of the Company. These general corporate purposes may
include, without limitation, repayment of maturing obligations, redemption of
outstanding indebtedness, financing (in whole or part) for future acquisitions
(including acquisitions of companies and/or other real estate properties in
accordance with the Company's business objectives and strategy), capital
expenditures and working capital. Pending any such uses, the Company may invest
the net proceeds from the sale of any of the Offered Securities in short-term
investment grade instruments, interest bearing bank accounts, certificates of
deposit, money market securities, U.S. Government securities or mortgage-backed
securities guaranteed by federal agencies or may use them to reduce short-term
indebtedness.
DESCRIPTION OF CAPITAL STOCK
GENERAL
Under the Company's Charter, the authorized capital stock of the Company
consists of 300,000,000 shares of Common Stock and 20,000,000 shares of
Preferred Stock. 4,300,000 shares of the Preferred Stock are designated as
Series A Preferred Stock and are currently issued and outstanding. The following
summary description of the Common Stock, the Preferred Stock, the Common Stock
Purchase Rights, the Debt Securities and the Warrants sets forth certain general
terms and conditions of the capital stock of the Company to which any Prospectus
Supplement may relate. The descriptions below do not purport to be complete and
are qualified entirely by reference to the Company's Charter, as amended, any
certificate of designations with respect to Preferred Stock and any applicable
Prospectus Supplement. For a more complete description of the capital stock of
the Company, including the Series A Preferred Stock, see the Company's
Prospectus filed with the Commission pursuant to Rule 424(b)(4) promulgated
under the Securities Act, dated October 30, 1998, which is a part of the
Company's Registration Statement on
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Form S-4 (File No. 333-65017), under the heading "New Prison Realty Capital
Stock" which is incorporated herein by reference.
COMMON STOCK
The holders of shares of Common Stock are entitled to one vote per share on all
matters voted on by holders of shares of Common Stock, including the election of
directors, and, except as otherwise required by law or provided in any
resolution adopted by the Company Board with respect to any series of Preferred
Stock establishing the powers, designations, preferences and relative,
participating, option or other special rights of such series, the holders of
such Common Stock exclusively possess all voting power. The Company's Charter
does not provide for cumulative voting in the election of directors. Subject to
any preferential rights of holders of shares of the Series A Preferred Stock or
of any other outstanding series of Preferred Stock, the holders of shares of
Common Stock are entitled to such distributions as may be declared from time to
time by the Company Board from funds available therefor, and upon liquidation
are entitled to receive pro rata all assets of the Company available for
distribution to such holders. All shares of Common Stock and Series A Preferred
Stock are fully paid and nonassessable and the holders thereof do not have
preemptive rights.
PREFERRED STOCK
The following is a description of certain general terms and provisions of the
Preferred Stock. The particular terms of any series of Preferred Stock offered
hereunder will be described in the applicable Prospectus Supplement. This
summary does not purport to be complete and is subject to, and qualified in its
entirety by, the provisions of the Charter and the articles supplementary
relating to each series of the Preferred Stock, which will be filed as an
exhibit to or incorporated by reference in the Registration Statement of which
this Prospectus is a part at or prior to the time of issuance of such series of
the Preferred Stock (the "Articles Supplementary").
The Preferred Stock authorized by the Charter may be issued from time to time in
one or more series in such amounts and with such designations, preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption as may be fixed
by the Company Board. Under certain circumstances, the issuance of Preferred
Stock could have the effect of delaying, deferring or preventing a change of
control of the Company and may adversely affect the voting and other rights of
the holders of Common Stock. The Charter authorizes the Company Board to
classify or reclassify any unissued shares of Preferred Stock by setting or
changing the designations, preferences, conversion or other rights, voting
powers, restrictions, limitations as to distributions, qualifications and terms
and conditions of redemption of such Preferred Stock.
The Preferred Stock shall have the dividend, liquidation, redemption and voting
rights set forth below unless otherwise described in a Prospectus Supplement
relating to a particular series of the Preferred Stock. The applicable
Prospectus Supplement will describe the following terms of the series of
Preferred Stock in respect of which this Prospectus is being delivered: (1) the
title of such Preferred Stock and the number of shares offered; (2) the amount
of liquidation preference per share; (3) the initial offering price at which
such Preferred Stock will be issued; (4) the dividend rate (or method of
calculation), the dates on which dividends shall be payable and the dates from
which dividends shall commence to cumulate, if any; (5) any redemption or
sinking fund provisions; (6) any conversion or
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exchange rights; (7) any additional voting, dividend, liquidation, redemption,
sinking fund and other rights, preferences, privileges, limitations and
restrictions; (8) any listing of such Preferred Stock on any securities
exchange; (9) a discussion of United States federal income tax considerations
applicable to such Preferred Stock; (10) the relative ranking and preferences of
such Preferred Stock as to dividend rights and rights upon liquidation,
dissolution or winding up of the affairs of the Company; (11) any limitations on
issuance of any series of Preferred Stock ranking senior to or on a parity with
such series of Preferred Stock as to dividend rights and rights upon
liquidation, dissolution or winding up of the affairs of the Company; and (12)
any limitations on direct or beneficial ownership and restrictions on transfer,
in each case as may be appropriate to preserve the status of the Company as a
REIT.
GENERAL. The Preferred Stock offered hereby will be issued in one or more
series. The Preferred Stock, upon issuance against full payment of the purchase
price therefor, will be fully paid and nonassessable. The liquidation preference
is not indicative of the price at which the Preferred Stock will actually trade
on or after the date of issuance.
RANK. The Preferred Stock shall, with respect to dividend rights and rights
upon liquidation, dissolution and winding up of the Company, rank prior to the
Common Stock and to all other classes and series of equity securities of the
Company now or hereafter authorized, issued or outstanding (the Common Stock and
such other classes and series of equity securities collectively may be referred
to herein as the "Junior Stock"), other than any classes or series of equity
securities of the Company which by their terms specifically provide for a
ranking on a parity with (the "Parity Stock") or senior to (the "Senior Stock")
the Preferred Stock as to dividend rights and rights upon liquidation,
dissolution or winding up of the Company. The Preferred Stock shall be junior to
all outstanding debt of the Company. The Preferred Stock shall be subject to
creation of Senior Stock, Parity Stock and Junior Stock to the extent not
expressly prohibited by the Charter.
DIVIDENDS. Holders of Preferred Stock shall be entitled to receive, when, as
and if declared by the Company Board out of assets of the Company legally
available for payment, dividends, or distributions in cash, property or other
assets of the Company or in Securities of the Company or from any other source
as the Company Board in their discretion shall determine and at such dates and
at such rates per share per annum as described in the applicable Prospectus
Supplement. Such rate may be fixed or variable or both. Each declared dividend
shall be payable to holders of record as they appear at the close of business on
the books of the Company on such record dates, not more than 90 calendar days
preceding the payment dates therefor, as are determined by the Company Board
(each of such dates, a "Record Date").
Such dividends may be cumulative or noncumulative, as described in the
applicable Prospectus Supplement. If dividends on a series of Preferred Stock
are noncumulative and if the Company Board fails to declare a dividend in
respect of a dividend period with respect to such series, then holders of such
Preferred Stock will have no right to receive a dividend in respect of such
dividend period, and the Company will have no obligation to pay the dividend for
such period, whether or not dividends are declared payable on any future
dividend payment dates. If dividends of a series of Preferred Stock are
cumulative, the dividends on such shares will accrue from and after the date set
forth in the applicable Prospectus Supplement.
No full dividends shall be declared or paid or set apart for payment on
Preferred Stock of any series ranking, as to dividends, on a parity with or
junior to the series of Preferred Stock offered by the applicable Prospectus
Supplement for any period unless full dividends
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for the immediately preceding dividend period on such Preferred Stock (including
any accumulation in respect of unpaid dividends for prior dividend periods, if
dividends on such Preferred Stock are cumulative) have been or contemporaneously
are declared and paid or declared and a sum sufficient for the payment thereof
is set apart for such payment. When dividends are not so paid in full (or a sum
sufficient for such full payment is not so set apart) upon such Preferred Stock
and any other Preferred Stock of the Company ranking on a parity as to dividends
with the Preferred Stock, dividends upon such Preferred Stock and dividends on
such other Preferred Stock ranking on a parity with the Preferred Stock shall be
declared pro rata so that the amount of dividends declared per share on such
Preferred Stock and such other Preferred Stock ranking on a parity with the
Preferred Stock shall in all cases bear to each other the same ratio that
accrued dividends for the then-current dividend period per share on such
Preferred Stock (including any accumulation in respect of unpaid dividends for
prior dividend periods, if dividends on such Preferred Stock are cumulative) and
accrued dividends, including required or permitted accumulations, if any, on
shares of such other Preferred Stock, bear to each other. No interest, or sum of
money in lieu of interest, shall be payable in respect of any dividend
payment(s) on Preferred Stock which may be in arrears. Unless full dividends on
the series of Preferred Stock offered by the applicable Prospectus Supplement
have been declared and paid or set apart for payment for the immediately
preceding dividend period (including any accumulation in respect of unpaid
dividends for prior dividend periods, if dividends on such Preferred Stock are
cumulative), (a) no cash dividend or distribution (other than in shares of
Junior Stock) may be declared, set aside or paid on the Junior Stock, (b) the
Company may not, directly or indirectly, repurchase, redeem or otherwise acquire
any shares of its Junior Stock (or pay any monies into a sinking fund for the
redemption of any shares) except by conversion into or exchange for Junior
Stock, and (c) the Company may not, directly or indirectly, repurchase, redeem
or otherwise acquire any Preferred Stock or Parity Stock (or pay any monies into
a sinking fund for the redemption of any shares of any such stock) otherwise
than pursuant to pro rata offers to purchase or a concurrent redemption of all,
or a pro rata portion, of the outstanding Preferred Stock and shares of Parity
Stock (except by conversion into or exchange for Junior Stock).
Any dividend payment made on a series of Preferred Stock shall first be credited
against the earliest accrued but unpaid dividend due with respect to shares of
such series.
REDEMPTION. The terms, if any, on which Preferred Stock of any series may be
redeemed will be set forth in the applicable Prospectus Supplement.
LIQUIDATION. In the event of a voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Company, the holders of a series
of Preferred Stock will be entitled, subject to the rights of creditors, but
before any distribution or payment to the holders of Common Stock, or any Junior
Stock on liquidation, dissolution or winding up of the Company, to receive a
liquidating distribution in the amount of the liquidation preference per share
as set forth in the applicable Prospectus Supplement plus accrued and unpaid
dividends for the then-current dividend period (including any accumulation in
respect of unpaid dividends for prior dividend periods, if dividends on such
series of Preferred Stock are cumulative). If the amounts available for
distribution with respect to the Preferred Stock and all other outstanding
Parity Stock are not sufficient to satisfy the full liquidation rights of all
the outstanding Preferred Stock and Parity Stock, then the holders of each
series of such stock will share ratably in any such distribution of assets in
proportion to the full respective preferential amount (which in the case of
Preferred Stock may include accumulated dividends) to which they are entitled.
After payment of the full
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amount of the liquidation distribution, the holders of Preferred Stock will not
be entitled to any further participation in any distribution of assets by the
Company.
VOTING. The Preferred Stock of a series will not be entitled to vote, except as
described below or in the applicable Prospectus Supplement. Without the
affirmative vote of a majority of the Preferred Stock then outstanding (voting
separately as a class together with any Parity Stock), the Company may not (i)
increase or decrease the aggregate number of authorized shares of such class or
any security ranking prior to the Preferred Stock, (ii) increase or decrease the
par value of the shares of holders of such class, or (iii) alter or change the
voting or other powers, preferences or special rights of such class so as to
affect them adversely. An amendment which increases the number of authorized
shares of or authorizes the creation or issuance of other classes or series of
Junior Stock or Parity Stock, or substitutes the surviving entity in a merger,
consolidation, reorganization or other business combination for the Company,
shall not be considered to be such an adverse change.
NO OTHER RIGHTS. The shares of a series of Preferred Stock will not have any
preferences, voting powers or relative, participating, optional or other special
rights except as set forth above or in the applicable Prospectus Supplement, the
Charter and in the applicable Articles Supplementary or as otherwise required by
law.
TRANSFER AGENT AND REGISTRAR. The transfer agent for each series of Preferred
Stock will be described in the related Prospectus Supplement.
RESTRICTIONS ON OWNERSHIP OF CAPITAL STOCK
For the Company 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 capital stock of the Company
may be owned, directly or indirectly, by five or fewer individuals (as defined
in the Code to include certain entities) during the last half of a taxable year,
and the Company must be beneficially owned by 100 or more persons during at
least 335 days of a taxable year of 12 months or during a proportionate part of
a shorter taxable year. See "Material Federal Income Tax
Consequences -- Taxation of the Company -- Requirements for Qualification." In
addition, the Company must meet certain requirements regarding the nature of its
gross income in order to qualify as a REIT. One such requirement is that at
least 75% of the Company's gross income for each year must consist of rents from
real property and income from certain other real property investments. The rents
received by the Company from a lessee will not qualify as rents from real
property, which likely would result in loss of REIT status for the Company, if
the Company owns, directly or constructively, 10% or more of the ownership
interests in a lessee within the meaning of Section 856(d)(2)(B) of the Code.
See "Material Federal Income Tax Consequences."
Because the Company intends to continue to operate so as to qualify as a REIT,
among other reasons, the Company's 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 Common Stock: or (ii) the number of outstanding shares of
Preferred Stock (the "Ownership Limit" or "Ownership Limit Provision"). Any
transfer of shares of Common Stock or Preferred Stock that would: (i) result in
any person owning, directly or indirectly, shares of Common Stock or Preferred
Stock in excess of the Ownership Limit; (ii) result in the shares of Common
Stock and Preferred Stock being owned by fewer than 100 persons (determined
without reference to any rules of attribution); (iii) result in the
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Company being "closely held" within the meaning of Section 856(h) of the Code;
or (iv) cause the Company to own, directly or constructively, 10% or more of the
ownership interests in a tenant of the Company's real property, within the
meaning of Section 856(d)(2)(B) of the Code, shall be null and void, and the
intended transferee will acquire no rights in such shares of Common Stock or
Preferred Stock.
Subject to certain exceptions described below, any purported transfer of shares
of Common Stock or Preferred Stock that would: (i) result in any person owning,
directly or indirectly, shares of Common Stock or Preferred Stock in excess of
the Ownership Limit; (ii) result in the shares of Common Stock and Preferred
Stock being owned by fewer than 100 persons (determined without reference to any
rules of attribution); (iii) result in shares of the Company being "closely
held" within the meaning of Section 856(h) of the Code; or (iv) cause the
Company to own, directly or constructively, 10% or more of the ownership
interests in a tenant of the Company's real property, within the meaning of
Section 856(d)(2)(B) of the Code, will 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 Common
Stock or Preferred Stock. The record holder of the shares of Common Stock or
Preferred Stock that are designated as Stock-in-Trust (the "Prohibited Owner")
will be required to submit such number of shares of Common Stock or Preferred
Stock to the Company for registration in the name of the trustee of the Stock
Trust (the "Stock Trustee"). The Stock Trustee will be designated by the
Company, but will not be affiliated with the Company or any Prohibited Owner.
The beneficiary of the Stock Trust (the "Beneficiary") will be one or more
charitable organizations that are named by the Company.
Stock-in-Trust will remain issued and outstanding shares of Common Stock or
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-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 Common Stock or 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 the Company,
or its designee, at a price per share equal to the lesser of (i) the price per
share in the transaction that created such 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 the Company, or its designee,
accepts such offer. The Company will have the right to accept such offer for a
period of 90 days after the later of (i) the date of the
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purported transfer which resulted in such Stock-in-Trust, or (ii) the date the
Company 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 Common Stock
or 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 Company Board.
Any person who acquires or attempts to acquire shares of Common Stock or
Preferred Stock in violation of the foregoing restrictions, or any person who
owned shares of Common Stock or Preferred Stock that were transferred to a Stock
Trust, will be required (i) to give immediate written notice to the Company of
such event, and (ii) to provide to the Company such other information as the
Company may request in order to determine the effect, if any, of such transfer
on the Company's status as a REIT.
All persons who own, directly or indirectly, more than 5% (or such lower
percentages as required pursuant to regulations under the Code) of the
outstanding shares of Common Stock and 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 Common Stock and 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 the Company such
additional information as the Company may request in order to determine the
effect, if any, of such ownership on the Company's status as a REIT and to
ensure compliance with the Ownership Limit Provision.
The Ownership Limit generally will not apply to the acquisition of shares of
Common Stock or Preferred Stock by an underwriter that participates in a public
offering of such shares. In addition, the Company Board, upon such conditions as
the Company Board may direct, may exempt a person from the Ownership Limit under
certain circumstances.
All certificates representing shares of Common Stock or Preferred Stock
currently bear, or will bear when issued, a legend referring to the restrictions
described above.
CERTAIN OTHER PROVISIONS OF MARYLAND LAW AND CHARTER DOCUMENTS
THE FOLLOWING DISCUSSION SUMMARIZES CERTAIN PROVISIONS OF THE MGCL AND THE
COMPANY'S CHARTER AND BYLAWS. THIS SUMMARY DOES NOT PURPORT TO BE COMPLETE AND
IS SUBJECT TO AND QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE COMPANY'S
CHARTER AND BYLAWS.
LIMITATION OF LIABILITY AND INDEMNIFICATION. The Company's Charter and Bylaws
limit the liability of directors and officers to the Company and its
stockholders to the fullest extent permitted from time to time by the MGCL and
require the Company to indemnify its directors, officers and certain other
parties to the fullest extent permitted from time to time by the MGCL.
BUSINESS COMBINATIONS. Under the MGCL, certain "business combinations"
(including a merger, consolidation, share exchange or, in certain circumstances,
an asset transfer or issuance or reclassification of equity securities) between
a Maryland corporation and any person who beneficially owns 10% or more of the
voting power of the outstanding voting stock of the corporation or an affiliate
or associate of the corporation who, at any time
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within the two-year period immediately prior to the date in question, was the
beneficial owner, directly or indirectly, of 10% or more of the voting power of
the then-outstanding voting stock of the corporation (an "Interested
Stockholder") or an affiliate thereof, are prohibited for five years after the
most recent date on which the Interested Stockholder became an Interested
Stockholder. Thereafter, in addition to any other required vote, any such
business combination must be recommended by the board of directors of such
corporation and approved by the affirmative vote of at least (i) 80% of the
votes entitled to be cast by holders of outstanding shares of voting stock of
the corporation, voting together as a single voting group, and (ii) two-thirds
of the votes entitled to be cast by holders of voting stock of the corporation
(other than voting stock held by the Interested Stockholder who will, or whose
affiliate will, be a party to the business combination or by an affiliate or
associate of the Interested Stockholder) voting together as a single voting
group. The extraordinary voting provisions do not apply if, among other things,
the corporation's stockholders receive a price for their shares determined in
accordance with the MGCL and the consideration is received in cash or in the
same form as previously paid by the Interested Stockholder for its shares. These
provisions of the MGCL do not apply, however, to business combinations that are
approved or exempted by the board of directors of the corporation prior to the
time that the Interested Stockholder becomes an Interested Stockholder.
CONTROL SHARE ACQUISITIONS. The MGCL provides that "control shares" of a
Maryland corporation acquired in a "control share acquisition" have no voting
rights except to the extent approved by the affirmative vote of two-thirds of
the votes entitled to be cast on the matter other than "interested shares"
(shares of stock in respect of which any of the following persons is entitled to
exercise or direct the exercise of the voting power of shares of stock of the
corporation in the election of directors: an "acquiring person," an officer of
the corporation or an employee of the corporation who is also a director).
"Control shares" are shares of stock which, if aggregated with all other such
shares of stock owned by the acquiring person, or in respect of which such
person is entitled to exercise or direct the exercise of voting power of shares
of stock of the corporation 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 or more of all
voting power. Control shares do not include shares the acquiring person is
entitled to vote as a result of having previously obtained stockholder approval.
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 acquisitions approved or exempted by the Charter or bylaws of
the corporation.
A person who has made or proposes to make a control share acquisition, under
certain conditions (including an undertaking to pay expenses), may compel the
board of directors to call a special meeting of stockholders to be held within
50 days of demand to consider the voting rights of the control shares upon
delivery of an acquiring person statement containing certain information
required by the MGCL, including a representation that the acquiring person has
the financial capacity to make the proposed control share acquisition, and a
written undertaking to pay the corporation's expenses of the special meeting
(other than the expenses of those opposing approval of the voting rights). If no
request for a meeting is made, the corporation may itself present the question
at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person does
not deliver an acquiring person statement as required by the MGCL, then, subject
to certain conditions and limitations, the corporation may redeem any or all of
the control shares
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(except those for which voting rights have previously been approved) for fair
value, determined without regard to the absence of voting rights for control
shares, as of the date of the last control share acquisition or, if a
stockholder meeting is held, as of the date of the meeting of stockholders at
which the voting rights of such shares are considered and not approved. If
voting rights for control shares are approved at a stockholders' meeting before
the control share acquisition and the acquiring person becomes entitled to
exercise or direct the exercise of a majority or more of all voting power, all
other stockholders may exercise rights of objecting stockholders under Maryland
law to receive the fair value of their Shares. The fair value of the Shares for
such purposes may not be less than the highest price per share paid by the
acquiring person in the control share acquisition. Certain limitations and
restrictions otherwise applicable to the exercise of objecting stockholders'
rights do not apply in the context of a control share acquisition.
DESCRIPTION OF COMMON STOCK PURCHASE RIGHTS
The applicable Prospectus Supplement will describe the specific terms of any
Common Stock Purchase Rights offered thereby, including, among other things: the
duration, offering price and exercise price of the Common Stock Purchase Rights
and any provisions for the reallocation of Common Stock Purchase Rights not
initially subscribed. The Prospectus Supplement will describe the persons to
whom the Common Stock Purchase Rights will be issued (the Company's
stockholders, the general public or others) and any conditions to the offer and
sale of the Common Stock Purchase Rights offered thereby.
DESCRIPTION OF DEBT SECURITIES
The following description of the terms of the Debt Securities sets forth certain
general terms and provisions of the Debt Securities to which any Prospectus
Supplement may relate. The particular terms of the Debt Securities offered by
any Prospectus Supplement and the extent, if any, to which such general
provisions may apply to the Debt Securities so offered will be described in the
Prospectus Supplement relating to such Debt Securities.
The Debt Securities are to be issued in one or more series under an indenture
(the "Indenture"), to be entered into between the Company and a financial
institution as Trustee (the "Trustee"). The statements herein relating to the
Debt Securities and the Indenture are summaries and are subject to the detailed
provisions of the applicable Indenture. The Indenture will be subject to and
governed by the Trust Indenture Act of 1939, as amended (the "TIA"). The
description of the Indenture set forth below assumes that the Company has
entered into the Indenture. The Company will execute the Indenture when and if
the Company issues Debt Securities. The following summaries of certain
provisions of the Indenture do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, all of the provisions of
the Indenture, including the definitions therein of certain terms capitalized in
this Prospectus.
GENERAL
The Indenture will not limit the aggregate amount of Debt Securities which may
be issued thereunder, nor will it limit the incurrence or issuance of other
secured or unsecured debt of the Company.
The Debt Securities will be unsecured general obligations of the Company and
will rank with all other unsecured and unsubordinated obligations of the Company
as described in the applicable Prospectus Supplement. The Indenture will provide
that the Debt Securities
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may be issued from time to time in one or more series. The Company may authorize
the issuance and provide for the terms of a series of Debt Securities pursuant
to a supplemental indenture.
The applicable Prospectus Supplement relating to the particular series of Debt
Securities will describe specific terms of the Debt Securities offered thereby,
including, where applicable:
(1) the specific designation of such Debt Securities;
(2) any limit upon the aggregate principal amount of such Debt Securities;
(3) the date or dates on which the principal of and premium, if any, on
such Debt Securities will mature or the method of determining such
date or dates;
(4) the rate or rates (which may be fixed, variable or zero) at which such
Debt Securities will bear interest, if any, or the method of
calculating such rate or rates;
(5) the date or dates from which interest, if any, will accrue or the
method by which such date or dates will be determined;
(6) the date or dates on which interest, if any, will be payable and the
record date or dates therefor;
(7) the place or places where principal of, premium, if any, and interest,
if any, on such Debt Securities may be redeemed, in whole or in part,
at the option of the Company;
(8) the obligation, if any, of the Company to redeem or purchase such Debt
Securities pursuant to any sinking fund or analogous provisions or
upon the happening of a specified event and the period or periods
within which, the price or prices at which and the other terms and
conditions upon which, such Debt Securities shall be redeemed or
purchased, in whole or in part, pursuant to such obligations;
(9) the denominations in which such Debt Securities are authorized to be
issued;
(10) the currency or currency unit for which Debt Securities may be
purchased or in which Debt Securities may be denominated and/or the
currency or currencies (including currency unit or units) in which
principal of, premium, if any, and interest, if any, on such Debt
Securities will be payable and whether the Company or the holders of
any such Debt Securities may elect to receive payments in respect of
such Debt Securities in a currency or currency unit other than that in
which such Debt Securities are stated to be payable;
(11) if the amount of payments of principal of and premium, if any, or any
interest, if any, on such Debt Securities may be determined with
reference to an index based on a currency or currencies other than
that in which such Debt Securities are stated to be payable, the
manner in which such amount shall be determined;
(12) if the amount of payments of principal of and premium, if any, or
interest, if any, on such Debt Securities may be determined with
reference to changes in the prices of particular securities or
commodities or otherwise by application of a formula, the manner in
which such amount shall be determined;
(13) if other than the entire principal amount thereof, the portion of the
principal amount of such Debt Securities which will be payable upon
declaration of the
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acceleration of the maturity thereof or the method by which such
portion shall be determined;
(14) the person to whom any interest on any such Debt Security shall be
payable if other than the person in whose name such Debt Security is
registered on the applicable record date;
(15) any addition to, or modification or deletion of, any Event of Default
or any covenant of the Company specified in the Indenture with respect
to such Debt Securities;
(16) the application, if any, of such means of defeasance as may be
specified for such Debt Securities; and
(17) any other special terms pertaining to such Debt Securities. Unless
otherwise specified in the applicable Prospectus Supplement, the Debt
Securities will not be listed on any securities exchange.
Unless otherwise specified in the applicable Prospectus Supplement, Debt
Securities will be issued only in fully registered form without coupons. Unless
the Prospectus Supplement relating thereto specifies otherwise, Debt Securities
will be denominated in U.S. dollars and will be issued only in denominations of
U.S. $1,000 and any integral multiple thereof.
Debt Securities may be sold at a substantial discount below their stated
principal amount and may bear no interest or interest at a rate which at the
time of issuance is below market rates. Certain federal income tax consequences
and special considerations applicable to any such Debt Securities will be
described in the applicable Prospectus Supplement.
If the amount of payments of principal of and premium, if any, or any interest
on Debt Securities of any series is determined with reference to any type of
index or formula or changes in prices of particular securities or commodities,
the federal income tax consequences, specific terms and other information with
respect to such Debt Securities and such index or formula and securities or
commodities will be described in the applicable Prospectus Supplement.
If the principal of and premium, if any, or any interest on Debt Securities of
any series are payable in a foreign or composite currency, the restrictions,
elections, federal income tax consequences, specific terms and other information
with respect to such Debt Securities and such currency will be described in the
applicable Prospectus Supplement.
The Prospectus Supplement, with respect to any particular series of Debt
Securities being offered thereby which provide for optional redemption,
prepayment or conversion of such Debt Securities on the occurrence of certain
events, such as a change of control of the Company, will provide:
(1) a discussion of the effects that such provisions may have in deterring
certain mergers, tender offers or other takeover attempts, as well as
any possible adverse effect on the market price of the Company's
securities or the ability to obtain additional financing in the
future;
(2) a statement that the Company will comply with any applicable
provisions of the requirements of Rule 14e-1 under the Securities
Exchange Act of 1934 and any other applicable securities laws in
connection with any optional redemption, prepayment or conversion
provisions and any related offers by the Company (including, if such
Debt Securities are convertible, Rule 13e-4);
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(3) a disclosure of any cross-defaults in other indebtedness which may
result as a consequence of the occurrence of certain events so that
the payments on such Debt Securities would be effectively
subordinated;
(4) a disclosure of the effect of any failure to repurchase under the
applicable Indenture, including in the event of a change of control of
the Company;
(5) a disclosure of any risk that sufficient funds may not be available at
the time of any event resulting in a repurchase obligation; and
(6) a discussion of any definition of "change of control" contained in the
applicable Indenture.
PAYMENT, REGISTRATION, TRANSFER AND EXCHANGE
Unless otherwise provided in the applicable Prospectus Supplement, payments in
respect of the Debt Securities will be made in the designated currency at the
office or agency of the Company maintained for that purpose as the Company may
designate from time to time, except that, at the option of the Company, interest
payments, if any, on Debt Securities in registered form may be made by checks
mailed to the holders of Debt Securities entitled thereto at their registered
addresses. Unless otherwise indicated in an applicable Prospectus Supplement,
payment of any installment of interest on Debt Securities in registered form
will be made to the person in whose name such Debt Security is registered at the
close of business on the regular record date for such interest.
Unless otherwise provided in the applicable Prospectus Supplement, Debt
Securities in registered form will be transferable or exchangeable at the agency
of the Company maintained for such purpose as designated by the Company from
time to time. Debt Securities may be transferred or exchanged without service
charge, other than any tax or other governmental charge imposed in connection
therewith.
DESCRIPTION OF WARRANTS
The Company has no Warrants outstanding as of the date hereof (other than
outstanding options issued pursuant to CCA's employee and director incentive
plans and Prison Realty's employee and trustee incentive plans and assumed by
the Company in the Merger). The Company may issue Warrants for the purchase of
Common Stock, Preferred Stock or Debt Securities. Warrants may be issued
independently or together with any other Offered Securities offered by any
Prospectus Supplement and may be attached to or separate from such Securities.
Each series of Warrants will be issued under a separate warrant agreement (each,
a "Warrant Agreement") to be entered into between the Company and a warrant
agent specified in the applicable Prospectus Supplement (the "Warrant Agent").
The Warrant Agent will act solely as an agent of the Company in connection with
the Warrants of such series and will not assume any obligation or relationship
of agency or trust for or with any provisions of the Warrants offered hereby.
Further terms of the Warrants and the applicable Warrant Agreements will be set
forth in the applicable Prospectus Supplement.
The applicable Prospectus Supplement will describe the terms of the Warrants in
respect of which this Prospectus is being delivered, and shall set forth the
following: (1) the title of such Warrants; (2) the aggregate number of such
Warrants; (3) the price or prices at which such Warrants will be issued; (4) the
designation, number of terms of the shares of Preferred Stock, Common Stock or
Debt Securities purchasable upon exercise of such Warrants; (5) the designation
and terms of the Offered Securities, if any, with which such
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Warrants are issued and the number of such Warrants issued with each such
Offered Security; (6) the date, if any, on and after which such Warrants and the
related Preferred Stock, Common Stock or Debt Securities will be separately
transferable; (7) the price at which each share of Preferred Stock, Common Stock
or Debt Securities purchasable upon exercise of such Warrants may be purchased;
(8) the date on which the right to exercise such Warrants shall commence and the
date on which such right shall expire; (9) the minimum or maximum amount of such
Warrants which may be exercised at any one time; (10) information with respect
to book-entry procedures, if any; (11) a discussion of certain federal income
tax consequences; and (12) any other terms of such Warrants, including terms,
procedures and limitations relating to the exchange and exercise of such
Warrants.
PLAN OF DISTRIBUTION
The Company may sell the Offered Securities through underwriters or dealers,
directly to one or more purchasers, through agents or through a combination of
any such methods of sale. Any such underwriter or agent involved in the offer
and sale of the Offered Securities will be named in the applicable Prospectus
Supplement.
The distribution of the Offered Securities may be effected from time to time in
one or more transactions (which may involve block transactions) on the NYSE or
otherwise pursuant to and in accordance with the applicable rules of the NYSE,
in the over-the-counter market, in negotiated transactions, through the writing
of Common Stock Warrants or through the issuance of Preferred Stock convertible
into Common Stock (whether such Common Stock Warrants or shares of Preferred
Stocks are listed on a securities exchange or otherwise) or a combination of
such methods of distribution, at a fixed price or prices, which may be changed,
at market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices (any of which may represent a
discount from the prevailing market prices). The Company also may, from time to
time, authorize underwriters acting as the Company's agents to offer and sell
the Offered Securities upon the terms and conditions as are set forth in the
applicable Prospectus Supplement. In connection with the sale of the Offered
Securities, underwriters may be deemed to have received compensation from the
Company in the form of underwriting discounts or commissions and may also
receive commissions from purchasers of the Offered Securities for whom they may
act as agent. Underwriters may sell the Offered Securities to or through
dealers, and such dealers may receive compensation in the form of discounts,
concessions or commissions from the underwriters and/or commissions from the
purchasers for whom they may act as agent.
Any underwriting compensation paid by the Company to underwriters or agents in
connection with the offering of the Offered Securities, and any discounts,
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in the applicable Prospectus Supplement. Underwriters, dealers
and agents participating in the distribution of the Offered Securities may be
deemed to be underwriters, and any discounts and commissions received by them,
and any profit realized by them on resale of the Offered Securities, may be
deemed to be underwriting discounts and commissions under the Securities Act.
Underwriters, dealers and agents may be entitled, under agreements entered into
with the Company, to indemnification against and contribution toward certain
civil liabilities, including liabilities under the Securities Act.
Any shares of Common Stock sold pursuant to this Prospectus will be listed on
the NYSE, subject to official notice of issuance. Unless otherwise specified in
the applicable Prospectus Supplement, each series of Offered Securities other
than Common Stock will
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be a new issue with no established trading market. The Company may elect to list
any series of Preferred Stock or other securities on an exchange, but it is not
obligated to do so. It is possible that one or more underwriters may make a
market in a series of Offered Securities, but will not be obligated to do so and
may discontinue any market-making at any time without notice. Therefore, no
assurance can be given as to the liquidity of, or the trading market for, the
Offered Securities.
Underwriters, dealers and agents may engage in transactions with, or perform
services for, the Company in the ordinary course of business.
In order to comply with the securities laws of certain states, if applicable,
the Offered Securities will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Offered Securities may not be sold unless they have been registered or qualified
for sale in the applicable state or an exemption from the registration or
qualification requirement is available and is complied with.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion represents a summary of the material U.S. federal
income tax consequences relating to the purchase, ownership and disposition of
the Common Stock. In addition, set forth below is a general discussion of the
material U.S. federal income tax considerations relating to the treatment of the
Company as a REIT and ownership of Common Stock therein. The discussion is based
on the Code, current and proposed Treasury Regulations promulgated thereunder,
administrative rulings and applicable judicial decisions, all of which are
subject to change, possibly with retroactive effect. The discussion does not
purport to deal with all aspects of federal income taxation that may be relevant
to particular holders of Common Stock in view of their personal circumstances
and, except as otherwise specifically indicated, is not addressed to certain
types of holders subject to special treatment under federal income tax law, such
as insurance companies, tax-exempt organizations, financial institutions,
broker-dealers, persons that hold Common Stock that are a hedge or that are
hedged against currency risks or that are part of a "straddle" or "conversion"
transaction, and foreign persons.
In the opinion of Stokes & Bartholomew, P.A., commencing with its taxable year
ending December 31, 1999, the Company is organized in conformity with the
requirements for qualification as a REIT and its proposed method of operation as
described in this Prospectus will permit it to continue to meet the requirements
for qualification and taxation as a REIT under the Code. Qualification of the
Company as a REIT will depend upon its ability to meet, through actual annual
and other operating results, the various qualification tests imposed under the
Code, as discussed below. Such opinion assumes, although no assurance can be
given, that the actual results of the Company's operations for any one taxable
year will satisfy such requirements. See "-- Taxation of the Company -- Failure
to Qualify" below.
EACH PROSPECTIVE PURCHASER IS URGED TO CONSULT ITS TAX ADVISOR REGARDING THE
SPECIFIC TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND SALE OF THE COMMON
STOCK AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REIT, INCLUDING THE STATE,
LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH ACQUISITION, OWNERSHIP, SALE
AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
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TAXATION OF THE COMPANY
GENERAL. The Company intends to make an election to be taxed as a REIT under
Sections 856 through 860 of the Code for federal income tax purposes commencing
with its taxable year ending December 31, 1999. The Company 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 the Company will qualify
or will remain qualified as a REIT.
The requirements relating to the federal income tax treatment of a REIT and its
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., special tax
counsel to the Company, commencing with its taxable year ending December 31,
1999, the Company is 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 continue 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 and on certain factual
representations of the Company which are incorporated into such opinion.
Opinions of counsel are 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,
the Company's qualification and taxation as a REIT depends upon the ability of
the Company 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 the Company's operations for any one taxable year
will satisfy such requirements.
TAXATION AS A REIT. As a REIT, the Company 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
corporation. However, the Company may be subject to federal income tax in the
following circumstances. First, the Company will be taxed at regular corporate
rates on any undistributed taxable income of the Company, including
undistributed net capital gains. Second, under certain circumstances, the
Company may be subject to the "alternative minimum tax" on its items of tax
preference, if any. Third, if the Company 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 Company 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 Company should fail to satisfy the 75% gross income test
or the 95% gross
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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 Company fails the 75% or 95% test, multiplied by a
fraction intended to reflect the Company's profitability. Sixth, if the Company
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 Company will be subject to a 4% excise tax on the excess of
such required distribution over the amounts actually distributed. For purposes
of this 4% excise tax, any income, including net capital gains, on which the
Company pays regular corporate income tax is treated as having been distributed.
Seventh, if the Company acquires any asset from a C corporation (i.e., a
corporation which is generally subject to a full corporate-level tax) in a
transaction in which the basis of the asset in the Company's hands is determined
by reference to the basis of the asset (or any other asset) in the hands of the
C corporation and the Company recognizes gain on the disposition of the asset
during the 10-year period beginning on the date on which such asset was acquired
by the Company, then to the extent of such asset's "built-in gain" (i.e., the
excess of the fair market value of such asset at the time of acquisition over
the adjusted basis in such asset as of such time), such gain will be subject to
tax at the highest regular corporate rate applicable. 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.
REQUIREMENTS FOR QUALIFICATION. 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 subject to certain
provisions of the Code; (v) the beneficial ownership of which is held by 100 or
more persons; (vi) during the last half of each taxable year, not more than 50%
in value of the outstanding 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); and
(vii) which meets certain other tests, described below, regarding the nature of
its income and assets.
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.
The Company satisfies the requirements set forth in (i) through (iv) above and
has issued sufficient Common Stock and Preferred Stock with sufficient diversity
of ownership to allow it to satisfy conditions (v) and (vi) above. The Charter
of the Company includes certain restrictions regarding transfers of the
Company's Common Stock and Preferred Stock that are intended to assist the
Company 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 the Company's Common Stock or Preferred Stock
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in violation of the ownership limitations. See "Description of Capital
Stock -- Restrictions on Transfer -- Ownership Limits."
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. The
Company has a number of "qualified REIT subsidiaries." In applying the income
and asset tests described below to the Company, 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 the Company.
INCOME TESTS. For the Company to maintain its qualification as a REIT, it must
satisfy two gross income requirements on an annual basis. First, at least 75% of
the Company's gross income (excluding gross income from prohibited transactions)
for each taxable year must be derived directly or indirectly from investments
relating to real property (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 Company) (the "75% income
test"). Second, at least 95% of the Company'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 the Company 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 the Company'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 the Company would
be entitled to the benefit of these relief provisions. As discussed above, in
"-- Taxation of the Company -- Taxation of a REIT", even if these relief
provisions apply, a tax would be imposed with respect to the excess net income.
"Rents from real property" generally means the gross amount received for the use
of, or the right to use, a REIT's real property. Rents received by the Company
qualify as "rents from real property" in satisfying the gross income
requirements for a REIT 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), (iv) the extent to which the property owner retains the risk of loss
with respect to the operation of the property (e.g., whether the lessee bears
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the risk of increases in operating expenses or the risk of damage with respect
to the property), and (v) the extent to which the property owner retains the
burdens and benefits of ownership of the property.
Code Section 7701(e) provides that a contract that purports to be a service
contract (or a partnership agreement) will be treated instead as a lease of
property if the contract is properly treated as such, taking into account all
relevant factors, including whether or not: (i) the service recipient is in
physical possession of the property; (ii) the service recipient controls the
property; (iii) the service recipient has a significant economic or possessory
interest in the property (e.g., the property's use is likely to be dedicated to
the service recipient for a substantial portion of the useful life of the
property, the recipient shares the risk that the property will decline in value,
the recipient shares in any appreciation in the value of the property, the
recipient shares in savings in the property's operating costs, or the recipient
bears the risk of damage to or loss of the property); (iv) the service provider
does not bear any risk of substantially diminished receipts or substantially
increased expenditures if there is nonperformance under the contract; (v) the
service provider does not use the property concurrently to provide significant
services to entities unrelated to the service recipient; and (vi) the total
contract price does not substantially exceed the rental value of the property
for the contract period. Since the determination whether a service contract
should be treated as a lease is inherently factual, the presence or absence of
any single factor may not be dispositive in every case.
The Company and Operating Company have entered into the Operating Company Leases
relating to those facilities owned by the Company that are not leased to
government entities. The terms and conditions of the Operating Company Leases
are described under "Information About the Company -- Relationship with
Operating Company -- Leases." The Operating Company Leases should qualify as
true leases for federal income tax purposes, based, in part, on the following
facts: (i) the Operating Company Leases are styled as leases (e.g., the Company
holds legal title to the facilities, and the Operating Company Leases give
Operating Company the right to possession of the facilities), and the Company
and Operating Company have represented that they intend their relationship to be
that of lessor and lessee, (ii) the Company 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) the facilities should 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) the
Company is entitled to receive significant rental income under the Operating
Company Leases, and (vi) the Company and Operating Company have represented that
the rents payable under the Operating Company Leases are fair market rents.
Investors should be aware that there are 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
conclusion as 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
the Company 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, the Company likely would not satisfy either
the 75% income test or the 95% income test and, as a result, would lose its REIT
status.
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Another requirement for the qualification of rents as "rents from real property"
is that the Company, or an owner of 10% or more of the Company, 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
non-corporate tenant (a "Related Party Tenant") at any time during a taxable
year. To enable the Company to comply with these rules, the Company's 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
the Company's Common Stock or 9.8% of the outstanding shares of the Company's
Preferred Stock. See "Description of 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 the Company
and a tenant of the Company. The stock attribution rules, however, are highly
complex and difficult to apply, and the Company may inadvertently enter into
leases with tenants who, through application of such rules, will constitute
Related Party Tenants. In such event, rent paid by the Related Party Tenant will
not qualify as "rents from real property," which may jeopardize the Company's
status as a REIT.
The Company owns directly all of the Operating Company Non-Voting Common Stock.
The total number of shares of the Operating Company Non-Voting Common Stock
equals approximately 9.5% of the shares of the Operating Company Capital Stock
outstanding, and such shares represent approximately a 9.5% economic interest in
Operating Company. Therefore, the Company's ownership of these shares should not
be a violation of the Related Party Tenant rules. The Company does not intend
to, 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. Furthermore, the Company and Operating Company have entered into
an agreement providing that the Operating Company will not redeem any shares of
its capital stock if the effect of such redemption would be to cause the Company
to own (directly or constructively) 10% or more of the total outstanding
Operating Company Capital Stock.
The Company also holds the Operating Company Note. If the Operating Company Note
is treated for federal income tax purposes as equity rather than debt, the
Company 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) is
clearly denominated as debt, (ii) has a fixed maturity date of 10 years, (iii)
provides for a fixed rate of interest,
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(iv) requires 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) requires that certain excess cash flow be
used to prepay the note and (vi) is partially guaranteed by Doctor R. Crants. In
addition, Operating Company has represented 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
indebtedness is to be treated as 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 the Company receives
from Operating Company likely would not be considered as "rents from real
property". In that event, based upon the expected amount of rent to be paid to
the Company by Operating Company under the Operating Company Leases, the Company
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 Company 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 Company
derives no income. The Company, 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 Company 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 Company 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 the Company from Operating Company should
satisfy these requirements.
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
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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.
The Company has acquired 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 the Company 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.
The Company 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 its taxable year ending December 31, 1998. 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 are nonqualifying for purposes of both the
95% income test and the 75% income test. The Company anticipates that, taking
into account these other sources of income, it nonetheless satisfies and will
continue to satisfy the 75% income test and the 95% income test.
The IRS has the authority under a number of Code sections to reallocate income
and deductions between the Company 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 the Company to fail one or both of the 75% income test
and the 95% income test, which in turn could cause the Company to lose its
status as a REIT. To ensure that the amounts charged as rent under the Operating
Company Leases are fair market rents, the Company 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, the Company may
lose its status as a REIT. In rendering its opinion as to the qualification of
the Company as a REIT, Stokes & Bartholomew, P.A. has assumed that the payments
from Operating Company to the Company are correctly allocated in the Operating
Company Leases and other agreements between Operating Company and the Company.
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ASSET TESTS. For the Company 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 the Company'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 the Company) and cash,
cash items and government securities. Second, no more than 25% of the Company's
total assets may be represented by securities other than those in the 75% asset
class. Third, of the investments included in the 25% asset class, the value of
any one issuer's securities owned by the Company may not exceed 5% of the value
of the Company's total assets, and the Company may not own more than 10% of any
one issuer's outstanding voting securities (excluding securities of a "qualified
REIT subsidiary" or another REIT).
Total assets for purposes of these tests include only those assets that appear
on the Company'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 Board of Directors of the Company.
As of the end of the first calendar quarter of 1999, the total value of the
Company's real estate assets are expected to exceed 75% of the value of the
Company's total assets. In addition, the Company 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 the Company's total assets. If,
however, the Service Companies and Operating Company are not treated as separate
issuers, the Company 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, the Company has obtained
appraisals of the facilities and 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 the Company has not satisfied one or
more of the asset tests. If the IRS is successful in any such challenge, the
Company might lose its status as a REIT. In rendering its opinion as to the
qualification of the Company as a REIT, Stokes & Bartholomew, P.A. has assumed
that the Company will satisfy the asset tests.
After initially meeting the asset tests at the close of any quarter, the Company
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 the Company 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.
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ANNUAL DISTRIBUTION REQUIREMENTS. To be taxed as a REIT, the Company is
required to meet certain annual distribution requirements. The Company is
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 the
Company's "REIT taxable income" (computed without regard to the dividends paid
deduction and the Company's net capital gain) and (b) 95% of the net income, 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 the Company timely files its tax
return for such year and if paid on or before the first regular dividend payment
after such declaration.
To the extent that the Company does not distribute all of its net capital gain
or distributes at least 95% (but less than 100%) of its REIT taxable income, as
adjusted, it is subject to tax on the undistributed portion, at regular ordinary
and capital gains corporate tax rates. Furthermore, if the Company 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, the Company is subject to a 4% excise tax on the excess of
such required distribution over the amounts actually distributed. The Company
intends to make timely distributions sufficient to satisfy this annual
distribution requirement and to avoid liability for excise taxes.
It is possible that, from time to time, the Company 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 the Company 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 the Company 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, the
Company may find it necessary to arrange for short-term, or possibly long-term,
borrowing or to pay dividends in the form of taxable share dividends. If the
amount of nondeductible expenses exceeds non-cash deductions, the Company 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,
the Company may be able to rectify the failure to meet such distribution
requirement by paying "deficiency dividends" to stockholders in the later year,
which may be included in the Company's deduction for dividends paid for the
earlier year. Thus, the Company may be able to avoid being taxed on amounts
distributed as deficiency dividends; however, the Company will be required to
pay interest based upon the amount of any deduction taken for deficiency
dividends.
NON-REIT EARNINGS AND PROFITS. To maintain its qualification as a REIT, the
Company cannot complete any taxable year with accumulated earnings and profits
from a taxable corporation. Accordingly, the Company is required to distribute
the accumulated earnings and profits of CCA, as determined for federal income
tax purposes (the "Earnings and Profits Distribution"), before the end of its
first calendar year as a REIT. Under applicable ordering rules, distributions
made by the Company to comply with this requirement generally will be treated as
having been made first from CCA's accumulated earnings and
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profits, and then from the Company's current and accumulated earnings and
profits. The Earnings and Profits Distribution will be taken into account by the
stockholders of the Company 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 the Company as a REIT,
Stokes & Bartholomew, P.A. has assumed that the Company will distribute all of
CCA's earnings and profits in accordance with the foregoing requirements.
FAILURE TO QUALIFY. If the Company fails to qualify for taxation as a REIT in
any taxable year, and certain relief provisions do not apply, the Company 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 the Company fails to qualify will not be deductible by the Company nor
will they be required to be made. In such event, to the extent of current 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, the Company 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 the Company would be entitled to such
statutory relief.
TAXATION OF STOCKHOLDERS
GENERAL. The following is a general discussion of material federal income tax
consequences to holders of the Common Stock. The federal income tax consequences
of any Preferred Stock, Common Stock Purchase Rights, Debt Securities or
Warrants to be issued pursuant to this Registration Statement will be set forth
in a supplement to this Prospectus. There can be no assurance that the IRS will
not successfully challenge one or more of the tax consequences described herein,
and the Company has not obtained, nor does it intend to obtain, a ruling from
the IRS with respect to the United States federal income tax consequences of
acquiring, holding or disposing of the Common Stock.
This discussion does not deal with all aspects of United States federal income
taxation that may be important to holders of the Common Stock and does not deal
with tax consequences arising under the laws of any foreign, state or local
jurisdiction. This discussion is for general information only, and does not
purport to address all tax consequences that may be important to a particular
holder in light of its personal circumstances (such as holders subject to the
alternative minimum tax provisions of the Code), or to certain types of holders
(such as certain financial institutions, insurance companies, tax-exempt
entities, dealers in securities, persons who hold the Common Stock in connection
with a straddle or hedge, a conversion transaction or other integrated
transactions or persons whose "functional currency" is not the U.S. dollar) that
may be subject to special rules.
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE
FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THEIR PARTICIPATION IN
THIS OFFERING, OWNERSHIP AND DISPOSITION OF THE COMMON STOCK AND THE EFFECT THAT
THEIR PARTICULAR CIRCUMSTANCES MAY HAVE ON SUCH TAX CONSEQUENCES.
TAXATION OF TAXABLE U.S. STOCKHOLDERS. As long as the Company qualifies as a
REIT, distributions made to the Company's taxable U.S. Stockholders out of
current or accumulated earnings and profits (and not designated as capital gain
dividends) will be taken into account by them as ordinary income and will not be
eligible for the dividends
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received deduction for corporations. As used herein, the term "U.S. Stockholder"
means a holder of Common Stock that for U.S. federal income tax purposes is (i)
a citizen or resident of the United States, (ii) a corporation, partnership, or
other entity taxable as such created or organized in or under the laws of the
United States or of any State (including the District of Columbia), (iii) an
estate whose income from sources without the United States is includible in
gross income for U.S. federal income tax purposes, regardless of its connection
with the conduct of a trade or business within the United States, or (iv) any
trust with respect to which (A) a U.S. court is able to exercise primary
supervision over the administration of such trust and (B) one or more U.S.
fiduciaries have the authority to control all substantial decisions of the
trust.
Distributions that are properly designated by the Company as capital gain
dividends are subject to special treatment. According to a notice published by
the IRS, until further guidance is issued, if the Company designates a dividend
as a capital gain dividend, it may also designate the dividend as (i) a 20% rate
gain distribution, (ii) an unrecaptured Section 1250 gain distribution (25%
rate) or (iii) a 28% rate gain distribution. The maximum amount which may be
designated in each class of capital gain dividends is determined by treating the
Company as an individual with capital gains that may be subject to the maximum
20% rate, the maximum 25% rate, and the maximum 28% rate. If the Company does
not designate all or part of a capital gain dividend as within such classes, the
undesignated portion will be considered as a 28% rate gain distribution. Such
designations are binding on each stockholder, without regard to the period for
which the stockholder has held its Common Stock. However, corporate stockholders
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.
Distributions in excess of current and accumulated earnings and profits will not
be taxable to a U.S. Stockholder to the extent that they do not exceed the
adjusted basis of the U.S. Stockholder's Common Stock, but rather will reduce
the adjusted basis of such stock. To the extent that such distributions in
excess of current and accumulated earnings and profits exceed the adjusted basis
of a U.S. Stockholder's Common Stock, such distributions will be included in
income as long-term capital gain (or short-term capital gain if the Common Stock
had been held for one year or less), assuming the Common Stock is a capital
asset in the hands of the U.S. Stockholder. In addition, any distribution
declared by the Company in October, November, or December of any year and
payable to a U.S. Stockholder of record on a specified date in any such month
shall be treated as both paid by the Company and received by the U.S.
Stockholder on December 31 of such year, provided that the distribution is
actually paid by the Company during January of the following calendar year.
U.S. Stockholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company. Instead, such losses would be
carried over by the Company for potential offset against its future income
(subject to certain limitations). Taxable distributions from the Company and
gain from the disposition of the Common Stock will not be treated as passive
activity income and, therefore, U.S. Stockholders generally will not be able to
apply any passive activity losses (such as losses from certain types of limited
partnerships in which a U.S. Stockholder is a limited partner) against such
income. In addition, taxable distributions from the Company generally will be
treated as investment income for purposes of the investment interest
limitations. Capital gains from the disposition of Common Stock (or
distributions treated as such), however, will be treated as investment income
only if the U.S. Stockholder so elects, in which case such capital gains will be
taxed at ordinary income rates. The Company will notify U.S.
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Stockholders after the close of the Company's taxable year as to the portions of
the distributions attributable to that year that constitute ordinary income or
capital gain dividends.
A capital asset generally must be held for more than one year in order for gain
or loss derived from its sale or exchange to be treated as long-term capital
gain or loss. The highest marginal individual income tax rate is 39.6% and the
tax rate on long-term capital gains applicable to non-corporate taxpayers
generally is 20% for sales and exchanges of assets held for more than one year.
Thus, the tax rate differential between capital gain and ordinary income for
non-corporate taxpayers may be significant. In addition, the characterization of
income as capital gain or ordinary income may affect the deductibility of
capital losses. All or a portion of any loss realized upon a taxable disposition
of the Common Stock may be disallowed if other shares of Common Stock are
purchased within 30 days before or after the disposition. Capital losses not
offset by capital gains may be deducted against a non-corporate taxpayer's
ordinary income only up to a maximum annual amount of $3,000. Unused capital
losses may be carried forward indefinitely by non-corporate taxpayers. All net
capital gain of a corporate taxpayer is subject to tax at ordinary corporate
rates. A corporate taxpayer can deduct capital losses only to the extent of
capital gains, with unused losses being carried back three years and forward
five years.
Distributions from the Company and gain from the disposition of shares will not
ordinarily be treated as passive activity income, and therefore, stockholders
generally will not be able to apply any "passive losses" against such income.
Dividends from the Company (to the extent they do not constitute a return of
capital) and gain from the disposition of shares generally will be treated as
investment income for purposes of the investment interest limitation.
The Company will report to its U.S. Stockholders and the IRS the amount of
dividends paid during each calendar year, and the amount of tax withheld, if
any, with respect thereto. Under the backup withholding rules, a U.S.
Stockholder may be subject to backup withholding at the rate of 31% with respect
to dividends paid unless such holder (a) is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact, or
(b) provides a taxpayer identification number, certifies as to no loss of
exemption from backup withholding, and otherwise complies with applicable
requirements of the backup withholding rules. A U.S. Stockholder who does not
provide the Company with its correct taxpayer identification number may also be
subject to penalties imposed by the IRS. Any amount paid as backup withholding
will be creditable against the U.S. Stockholder's income tax liability. In
addition, the Company may be required to withhold a portion of capital gain
distributions made to any U.S. Stockholders who fail to certify their
non-foreign status to the Company. See "-- Taxation of Foreign Stockholders"
below.
Tax-exempt entities, including qualified employee pension and profit sharing
trusts and individual retirement accounts ("Exempt Organizations"), generally
are exempt from federal income taxation. However, they are subject to taxation
on their unrelated business taxable income ("UBTI"). While many investments in
real estate generate UBTI, the Service has issued a published ruling that
dividend distributions from a REIT to an exempt employee pension trust do not
constitute UBTI, provided that the shares of the REIT are not otherwise used in
an unrelated trade or business of the exempt employee pension trust. Based on
that ruling, amounts distributed by the Company to Exempt Organizations
generally should not constitute UBTI. However, if an Exempt Organization
finances its acquisition of the Common Stock with debt, a portion of its income
from the
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Company will constitute UBTI pursuant to the "debt-financed property" rules.
Furthermore, social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts, and qualified group legal services plans that are
exempt from taxation under paragraphs (7), (9), (17), and (20), respectively, of
Section 501(c) of the Code are subject to different UBTI rules, which generally
will require them to characterize distributions from the Company as UBTI.
TAXATION OF FOREIGN STOCKHOLDERS. The rules governing United States federal
income taxation of nonresident alien individuals, foreign corporations, foreign
partnerships and other foreign stockholders (collectively, "Non-U.S.
Stockholders") are complex, and no attempt will be made herein to provide more
than a limited summary of such rules. Prospective Non-U.S. Stockholders should
consult with their own tax advisors to determine the impact of U.S. federal,
state and local income tax laws with regard to an investment in the capital
stock of the Company, including any reporting requirements, as well as the tax
treatment of such an investment under their home country laws.
Distributions that are not attributable to gain from sales or exchanges by the
Company of a U.S. real property interest and not designated by the Company as
capital gain dividends will be treated as dividends of ordinary income to the
extent that they are made out of current or accumulated earnings and profits of
the Company. Such distributions, ordinarily, will be subject to a withholding
tax equal to 30% of the gross amount of the distribution unless an applicable
tax treaty reduces that tax. However, if income from the investment in the
shares is treated as effectively connected with the Non-U.S. Stockholder's
conduct of a United States trade or business, the Non-U.S. Stockholder generally
will be subject to a tax at graduated rates, in the same manner as U.S.
stockholders are taxed with respect to such dividends (and may also be subject
to the 30% branch profits tax if the stockholder is a foreign corporation). The
Company expects to withhold United States income tax at the rate of 30% on the
gross amount of any dividends paid to a Non-U.S. Stockholder (31% if appropriate
documentation evidencing such Non-U.S. Stockholders' foreign status has not been
provided) unless (1) a lower treaty rate applies and the required form
evidencing eligibility for that reduced rate is filed with the Company or (2)
the Non-U.S. Stockholder files an Internal Revenue Service Form 4224 with the
Company claiming that the distribution is "effectively connected" income. The
Treasury Department issued final regulations in October 1997 that modify the
manner in which the Company complies with the withholding requirements,
generally effective for distributions after December 31, 1999.
Distributions in excess of current and accumulated earnings and profits of the
Company will not be taxable to a Non-U.S. Stockholder to the extent that they do
not exceed the adjusted basis of the Non-U.S. Stockholder's shares, but rather
will reduce the adjusted basis of such shares. To the extent that such
distributions exceed the adjusted basis of a Non-U.S. Stockholder's shares, they
will give rise to tax liability if the Non-U.S. Stockholder would otherwise be
subject to tax on any gain from the sale or disposition of his shares as
described below. Because it generally cannot be determined at the time a
distribution is made whether or not such distribution will be in excess of
current and accumulated earnings and profits, amounts in excess thereof may be
withheld by the Company. However, any such excess amount withheld would be
refundable to the extent it is determined subsequently that such distribution
was, in fact, in excess of current and accumulated earnings and profits of the
Company. Under a separate provision, the Company is required to withhold 10% of
any distribution in excess of the Company's current and accumulated earnings and
profits. Consequently, although the Company intends to withhold at a rate of 30%
(or 31%, if applicable) on the entire amount of any
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distribution, to the extent that the Company does not do so, any portion of a
distribution not subject to withholding at a rate of 30% (or 31%, if applicable)
will be subject to withholding at a rate of 10%.
For any year in which the Company qualifies as a REIT, distributions that are
attributable to gain from sales or exchanges by the Company of U.S. real
property interests will be taxed to a Non-U.S. Stockholder under the provisions
of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under
FIRPTA, these distributions are taxed to a Non-U.S. Stockholder as if such gain
were effectively connected with a U.S. business. Thus, Non-U.S. Stockholders
would be taxed at the normal rates applicable to U.S. stockholders (subject to
applicable alternative minimum tax and a special alternative minimum tax in the
case of nonresident alien individuals). Distributions subject to FIRPTA may also
be subject to a 30% branch profits tax in the hands of a corporate Non-U.S.
Stockholder not entitled to treaty relief or exemption. The Company is required
to withhold 35% of any distribution that is designated by the Company as a
capital gains dividend. The amount withheld is creditable against the Non-U.S.
Stockholder's FIRPTA tax liability.
The Company is required to withhold from distributions to Non-U.S. Stockholders,
and remit to the IRS, (a) 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 (b) 30% of ordinary dividends paid out of earnings
and profits. In addition, if the Company designates prior distributions as
capital gain dividends, subsequent distributions, up to the amount of such prior
distributions, will be treated as capital gain dividends for purposes of
withholding. A distribution in excess of the Company'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
the Company's current or accumulated earnings and profits. Tax treaties may
reduce the Company's withholding obligations. If the amount withheld by the
Company with respect to a distribution to a Non-U.S. Stockholder exceeds the
stockholder's United States tax liability with respect to such distribution (as
determined under the rules described above), 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 28%
maximum rate on capital gains of individuals.
Gain recognized by a Non-U.S. Stockholder upon a sale of shares of capital stock
generally will not be taxed under FIRPTA if a REIT is a "domestically controlled
REIT," defined generally as a REIT in which at all times during a specified
testing period less than 50% in value of the stock was held directly or
indirectly by foreign persons. The Company currently believes that it is and
will continue to be a "domestically controlled REIT," and therefore the sale of
shares will not be subject to taxation under FIRPTA. However, because the Common
Stock is publicly traded, no assurance can be given the Company will in fact be
a "domestically controlled REIT." Gain not subject to FIRPTA will be taxable to
a Non-U.S. Stockholder if (i) investment in the shares of capital stock is
"effectively connected" with the Non-U.S. Stockholder's U.S. trade or business,
in which case the Non-U.S. Stockholder will be subject to the same treatment as
United States stockholders with respect to such gain, or (ii) the Non-U.S.
Stockholder is a nonresident alien individual who was present in the United
States for 183 days or more during the taxable year and has a "tax home" in the
United States, in which case the nonresident alien individual who was present in
the U.S. will be subject to a 30% tax on the individual's capital gains. If the
gain on the sale of shares were to be subject to
58
<PAGE> 67
taxation under FIRPTA, the Non-U.S. Stockholder would be subject to the same
treatment as U.S. stockholders with respect to such gain (subject to applicable
alternative minimum tax, possible withholding tax and a special alternative
minimum tax in the case of nonresident alien individuals). A purchaser of shares
of capital stock from a Non-U.S. Stockholder will not be required under FIRPTA
to withhold on the purchase price if the purchased shares are "regularly traded"
on an established securities market or if the Company is a domestically
controlled REIT. Otherwise, under FIRPTA the purchaser of shares may be required
to withhold 10% of the purchase price and remit such amount to the IRS.
OTHER TAX CONSEQUENCES
The Company and its stockholders may be subject to state or local taxation in
various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its stockholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective stockholders should consult their own
tax advisors regarding the effect of state and local tax laws on an investment
in the Company.
ERISA CONSIDERATIONS
A fiduciary of an ERISA Plan should consider the fiduciary standards under ERISA
in the context of the ERISA Plan's particular circumstances before authorizing
an investment of any of such ERISA Plan's assets in shares of the Company's
capital stock. Accordingly, such fiduciary should consider whether the
investment (i) satisfies the diversification requirements of section
404(a)(1)(C) of ERISA, (ii) is in accordance with the documents and instruments
governing the ERISA Plan to the extent consistent with ERISA, (iii) is prudent
and an appropriate investment for the ERISA Plan, based on examination of the
ERISA Plan's overall investment portfolio and (iv) is for the exclusive benefit
of ERISA Plan participants and beneficiaries, as required by ERISA.
In addition to the imposition of general fiduciary standards, ERISA and the
corresponding provisions of the Code prohibit a wide range of transactions
involving ERISA Plans and persons who have certain relationships to ERISA Plans
("parties in interest" within the meaning of ERISA, "disqualified persons"
within the meaning of the Code). The Code's prohibited transaction rules also
apply to certain direct or indirect transactions between "disqualified persons"
and individual retirement accounts or annuities ("IRAs"), as defined in section
408(a) and (b) of the Code. Thus, an ERISA Plan fiduciary and an IRA considering
an investment in shares also should consider whether the acquisition or the
continued holding of shares might constitute or give rise to a prohibited
transaction.
Those persons proposing to invest on behalf of ERISA Plans should also consider
whether a purchase of one or more shares of capital stock will cause the assets
of the Company to be deemed assets of the ERISA Plan for purposes of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code. The Department of Labor (the "DOL") has issued regulations (the "DOL
Regulations") as to what constitutes assets of an ERISA Plan under ERISA. Under
the DOL Regulations, if an ERISA Plan acquires an equity interest in an entity,
the ERISA Plan's assets would include, for purposes of the fiduciary
responsibility provisions of ERISA and the prohibited transaction rules of ERISA
and the Code, both the equity interest and an undivided interest in each of the
entity's underlying assets unless (a) such interest is a "publicly offered
security," (b) such interest
59
<PAGE> 68
is a security issued by an investment company registered under the Investment
Company Act of 1940, as amended, or (c) another specified exception applies.
LEGAL MATTERS
The legality of the Offered Securities issued pursuant to any Prospectus
Supplement will be passed upon by Stokes & Bartholomew, P.A. As to matters of
Maryland law contained in its opinion, Stokes & Bartholomew, P.A. will rely on
the opinion of Miles & Stockbridge P.C. In addition, Stokes & Bartholomew, P.A.
will provide an opinion with respect to certain tax matters which form the basis
of the discussion under "Material Federal Income Tax Consequences".
EXPERTS
The financial statements included or incorporated by reference in this
Prospectus or elsewhere in this Registration Statement, to the extent and for
the periods indicated in their reports, have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports thereto, and
are included or incorporated by reference in reliance upon the authority of said
firm as experts in giving said reports.
60
<PAGE> 69
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PRISON REALTY CORPORATION
Unaudited Pro Forma Combined Financial Statements...... F-2
Prison Realty Corporation Pro Forma Combined Balance
Sheet as of September 30, 1998...................... F-3
Prison Realty Corporation Pro Forma Combined Statement
of Operations for the Year Ended December 31,
1997................................................ F-8
Prison Realty Corporation Pro Forma Combined Statement
of Operations for the Nine Months Ended September
30, 1998............................................ F-15
CORRECTIONAL MANAGEMENT SERVICES CORPORATION
Report of Independent Public Accountants............... F-22
Balance Sheet as of September 11, 1998................. F-23
Notes to Balance Sheet................................. F-24
</TABLE>
F-1
<PAGE> 70
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
On December 31, 1998, CCA merged with and into the Company, with the Company as
the surviving entity, and on January 1, 1999, Prison Realty merged with and into
the Company, with the Company as the surviving entity. 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 the
Company at historical cost and the purchase of Prison Realty by the Company. 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 the Company (the continuing
registrant) as of September 30, 1998 and the nine months then ended and for the
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
September 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 the Company'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
the Company's financial position or results of operations at any future date or
for any future period.
F-2
<PAGE> 71
PRISON REALTY CORPORATION
(THE COMPANY)
PRO FORMA COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SUM OF CCA PRISON REALTY
PRO FORMA PRISON REALTY TOTAL CORPORATION
CCA PRISON REALTY ADJUSTMENTS PRO FORMA PRO FORMA ADJUSTED
(HISTORICAL) (HISTORICAL) H ADJUSTMENTS ADJUSTMENTS PRO FORMA
------------ ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash, cash equivalents and restricted
cash................................ $ 27,627 $ 1,020 $ (3,347) $ -- $ (3,347) $ 25,300
Accounts receivable, net of
allowances.......................... 140,291 -- (136,660) -- (136,660) 3,631
Prepaid expenses...................... 8,032 -- (8,032) -- (8,032) --
Other................................. 3,317 -- (3,317) -- (3,317) --
-------- -------- --------- --------- --------- ----------
Total current assets................ 179,267 1,020 (151,356) -- (151,356) 28,931
Property and equipment, net............. 613,892 763,260 (38,833) 409,048A 271,920 1,649,072
(133,295)B
35,000F
Other long-term assets:
Notes receivable...................... 1,151 -- 137,000 -- 137,000 138,151
Investment in direct financing
leases.............................. 75,217 -- -- -- -- 75,217
Deferred tax assets................... 14,627 -- -- (54,627)C (14,627) --
40,000C
Investments........................... -- -- 138,866 -- 138,866 138,866
Other assets.......................... 60,773 11,482 (50,153) -- (50,153) (22,102)
-------- -------- --------- --------- --------- ----------
$944,927 $775,762 $ 35,524 $ 296,126 $ 331,650 $2,052,339
======== ======== ========= ========= ========= ==========
Current liabilities:
Accounts payable...................... $ 74,299 $ 15,190 $ (49,392) $ -- $ (49,392) $ 40,097
Accrued salaries and wages............ 12,104 -- (12,104) -- (12,104) --
Line of credit........................ -- 237,800 -- -- -- 237,800
Distributions payable................. -- 12,509 -- 273,000G 273,000 285,509
Income taxes payable.................. 614 -- -- -- -- 614
Deferred tax liabilities.............. 2,799 -- -- (2,799)C (2,799) --
Other accrued expenses................ 21,553 -- 9,873 35,000F 38,923 60,476
(5,950)B
Current portion of long-term debt..... 108 -- -- -- -- 108
Current portion of deferred gain on
real estate and investments......... 13,294 -- -- (13,294)B (13,294) --
-------- -------- --------- --------- --------- ----------
Total current liabilities........... 124,771 265,499 (51,623) 285,957 234,334 624,604
Long-term debt net of current portion... 292,832 -- -- -- -- 292,832
Deferred gain on real estate
transactions.......................... 114,051 -- -- (114,051)B (114,051) --
Deferred gain on sale of contracts...... -- -- 145,040 -- 145,040 145,040
Deferred tax liabilities................ -- -- -- 40,000C 40,000 40,000
Other noncurrent liabilities............ -- -- -- -- -- --
-------- -------- --------- --------- --------- ----------
Total liabilities................... 531,654 265,499 93,417 211,906 305,323 1,102,476
-------- -------- --------- --------- --------- ----------
Stockholders' equity
Preferred stock....................... 376 43 (376) -- (376) 43
Common stock.......................... 83,109 216 729 (83,838)D (82,376) 949
733D
Additional paid-in capital............ 226,494 518,372 (353) 409,048A 204,005 948,871
83,838D
(733)D
(8,368)E
(279,427)G
Retained earnings..................... 103,294 (8,368) (57,893) (51,828)C (94,926) --
8,368E
6,427G
Treasury stock at cost................ -- -- -- -- -- --
-------- -------- --------- --------- --------- ----------
Total stockholders' equity.......... 413,273 510,263 (57,893) 84,220 26,327 949,863
-------- -------- --------- --------- --------- ----------
$944,927 $775,762 $ 35,524 $ 296,126 $ 331,650 $2,052,339
======== ======== ========= ========= ========= ==========
</TABLE>
F-3
<PAGE> 72
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 21,581 at September 30,
1998........................................................ $ 817,057
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 at
September 30, 1998.......................................... 102,254
---------
Total implied fair market value of Prison Realty....... 919,311
Less net book value of net assets........................... (510,263)
---------
Asset basis adjustment...................................... $ 409,048
=========
</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 the Company 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 the Company. Each share of CCA Common Stock outstanding
as of the date of the common control transfer (approximately 83,838 after
conversion of Series B Preferred Stock) will be converted into 0.875 shares of
the Company's Common Stock, resulting in the issuance of approximately 73,358
shares of the Company's Common Stock to CCA common shareholders. The CCA
Common Stock has a $1.00 par value per share and the Company's Common Stock
has 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.
F-4
<PAGE> 73
SCHEDULE OF CCA
PRO FORMA BALANCE SHEET ADJUSTMENTS
AS OF SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SERVICE SERVICE OPERATING CCA SUM OF
COMPANY A COMPANY B COMPANY PRO FORMA CCA PRO FORMA
EE FF GG ADJUSTMENTS ADJUSTMENTS
--------- --------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash, cash equivalents and restricted cash...... $ (705) $ (837) $ (1,805) $ -- $ (3,347)
Accounts receivable, net of allowances.......... (22,703) (33,340) (80,617) -- (136,660)
Prepaid expenses................................ (667) (1,190) (6,175) -- (8,032)
Other........................................... (569) (824) (1,924) -- (3,317)
-------- -------- -------- --------- ---------
Total current assets.......................... (24,644) (36,191) (90,521) -- (151,356)
Property and equipment, net....................... (21,420) (17,413) -- -- (38,833)
Other long-term assets:
Notes receivable................................ -- -- -- 137,000CC 137,000
Investment in direct financing leases........... -- -- -- -- --
Deferred tax assets............................. -- -- -- -- --
Investments..................................... 28,140 37,657 65,029 (65,029)CC 138,866
4,750CC
(28,140)HH
67,058HH
67,058II
(37,657)II
Other assets.................................... (5,057) (5,007) (7,196) (32,893)DD (50,153)
-------- -------- -------- --------- ---------
$(22,981) $(20,954) $(32,688) $ 112,147 $ 35,524
======== ======== ======== ========= =========
Current liabilities:
Accounts payable................................ $(17,762) $(15,207) $(16,423) $ -- $ (49,392)
Accrued salaries and wages...................... (2,894) (2,477) (6,733) -- (12,104)
Line of credit.................................. -- -- -- -- --
Distributions payable........................... -- -- -- -- --
Income taxes payable............................ -- -- -- -- --
Deferred tax liabilities........................ -- -- -- -- --
Other accrued expenses.......................... (2,325) (3,270) (9,532) 25,000JJ 9,873
Current portion of long-term debt............... -- -- -- -- --
Current portion of deferred gain on real estate
and investments............................... -- -- -- -- --
-------- -------- -------- --------- ---------
Total current liabilities..................... (22,981) (20,954) (32,688) 25,000 (51,623)
Long-term debt net of current portion............. -- -- -- -- --
Deferred gain on real estate transactions......... -- -- -- -- --
Deferred gain on sale of
contracts....................................... -- -- -- 76,721CC 145,040
38,918HH
29,401II
Deferred tax liabilities.......................... -- -- -- -- --
Other noncurrent liabilities...................... -- -- -- -- --
-------- -------- -------- --------- ---------
Total liabilities............................. (22,981) (20,954) (32,688) 213,868 93,417
-------- -------- -------- --------- ---------
Stockholders' equity:
Preferred stock................................. -- -- -- (376)BB (376)
Common stock.................................... -- -- -- 729BB 729
(353)BB
Additional paid-in capital...................... -- -- -- -- (353)
Retained earnings............................... -- -- -- (32,893)DD (57,893)
(25,000)JJ
Treasury stock at cost.......................... -- -- -- -- --
-------- -------- -------- --------- ---------
Total stockholders' equity.................... -- -- -- (57,893) (57,893)
-------- -------- -------- --------- ---------
$(22,981) $(20,954) $(32,688) $ 112,147 $ 35,524
======== ======== ======== ========= =========
</TABLE>
F-5
<PAGE> 74
NOTES TO SCHEDULE OF CCA PRO FORMA BALANCE SHEET ADJUSTMENTS
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 $65,029 result in a total gain
of $76,721 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 Costs of Start-Up Activities" which CCA anticipates
adopting immediately prior to the Merger.
EE Immediately prior to the Merger, the Company and CCA, through a series of
transactions, will sell 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 sold to Service Company A into an investment in the service company prior
to the sale of the contracts and related net assets.
FF Immediately prior to the Merger, the Company and CCA, through a series of
transactions, will sell 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 sold 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
F-6
<PAGE> 75
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 $28,140
result in a total gain of $38,918 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 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 $37,657 result in a total gain of $29,401 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.
F-7
<PAGE> 76
PRISON REALTY CORPORATION
(THE COMPANY)
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SUM OF SUM OF PRISON REALTY
CCA PRISON REALTY CORPORATION
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>
F-8
<PAGE> 77
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 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 the Company 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 the Company 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.
F-9
<PAGE> 78
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>
F-10
<PAGE> 79
NOTES TO SCHEDULE OF CCA PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS FOR THE
YEAR ENDED DECEMBER 31, 1997
AA Immediately prior to the Merger, the Company and CCA, through a series of
transactions, will sell 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 sold to Service Company A as if the Merger and
sale had occurred as of January 1, 1997.
BB Immediately prior to the Merger, the Company and CCA, through a series of
transactions, will sell 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 sold to Service Company B as if the Merger and
sale 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.
F-11
<PAGE> 80
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>
F-12
<PAGE> 81
NOTES TO SCHEDULE OF PRISON REALTY PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C> <C>
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 the Company 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.
</TABLE>
F-13
<PAGE> 82
<TABLE>
<S> <C> <C> <C>
HHH To record equity in earnings (under the equity method of accounting) of
Service Company A and Service Company B based on the Company'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:
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
The Company's equity interest........................... 95%
-------
The Company's earnings in equity interests.............. $13,252
=======
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.
The Company'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 the
Company.
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.
</TABLE>
F-14
<PAGE> 83
PRISON REALTY CORPORATION
(THE COMPANY)
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SUM OF
SUM OF PRISON PRISON REALTY
PRISON CCA REALTY CORPORATION
CCA 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....................... $484,505 $48,727 $(484,505) $ 55,332 $104,059
-------- ------- --------- -------- --------
Expenses:
Operating.................... 339,136 -- (339,136) -- --
Lease........................ 40,638 -- (40,638) -- --
General and administrative... 16,183 1,725 (15,058) 375 3,225
Depreciation and
amortization.............. 11,673 13,183 (6,376) 8,901 27,381
-------- ------- --------- -------- --------
407,630 14,908 (401,208) 9,276 30,606
-------- ------- --------- -------- --------
Operating income............... 76,875 33,819 (83,297) 46,056 73,453
Equity in earnings of
subsidiaries................. -- -- -- (22,542) (22,542)
Licensing fees................. -- -- -- (2,601) (2,601)
Interest (income) expense...... (5,323) 5,090 5,323 (7,382) (2,292)
-------- ------- --------- -------- --------
Income before income taxes..... 82,198 28,729 (88,620) 78,581 100,888
Provision for income taxes..... 21,565 -- (21,565) -- --
-------- ------- --------- -------- --------
Net income..................... 60,633 28,729 (67,055) 78,581 100,888
Dividends to Preferred
Shareholders................. -- 5,719 -- -- 5,719
-------- ------- --------- -------- --------
Net income available to Common
Shareholders................. $ 60,633 $23,010 $ (67,055) $ 78,581 $ 95,169
======== ======= ========= ======== ========
Net income per common share:
Basic........................ $ 0.76 $ 1.07 $ 1.04
Diluted...................... $ 0.68 $ 1.05 $ 0.95
Weighted average common shares
outstanding, basic........... 79,924 21,577 (9,991)E 91,510
Weighted average common shares
outstanding, diluted......... 89,728 21,929 (11,216)E 100,441
</TABLE>
F-15
<PAGE> 84
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
A Represents the historical consolidated statement of operations of CCA for the
nine months ended September 30, 1998.
B Represents the historical consolidated statement of operations of Prison
Realty for the nine months ended September 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 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 the Company 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 the Company 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.
F-16
<PAGE> 85
SCHEDULE OF CCA
PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SERVICE SERVICE OPERATING SUM OF CCA
COMPANY A COMPANY B COMPANY PRO FORMA
AA BB CC ADJUSTMENTS
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
Revenues............................. $(115,751) $(99,153) $(269,601) $(484,505)
--------- -------- --------- ---------
Expenses:
Operating.......................... (85,745) (76,968) (176,423) (339,136)
Lease.............................. (2,709) (96) (37,833) (40,638)
General and administrative......... (3,866) (3,312) (7,880) (15,058)
Depreciation and amortization...... (3,084) (2,542) (750) (6,376)
--------- -------- --------- ---------
(95,404) (82,918) (222,886) (401,208)
--------- -------- --------- ---------
Operating income..................... (20,347) (16,235) (46,715) (83,297)
Equity in earnings of subsidiaries... -- -- -- --
Licensing fees....................... -- -- -- --
Interest (income) expense............ 74 12 5,237 5,323
--------- -------- --------- ---------
Income before income taxes........... (20,421) (16,247) (51,952) (88,620)
Provision for income taxes........... (5,357) (4,263) (11,945) (21,565)
--------- -------- --------- ---------
Net Income........................... $(15,064) $(11,984) $ (40,007) $ (67,055)
========= ======== ========= =========
</TABLE>
F-17
<PAGE> 86
NOTES TO SCHEDULE OF CCA PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1998
AA Immediately prior to the Merger, the Company and CCA, through a series of
transactions, will sell 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 sale had occurred as of January 1, 1998.
BB Immediately prior to the Merger, the Company and CCA, through a series of
transactions, will sell 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 sale 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.
F-18
<PAGE> 87
SCHEDULE OF PRISON REALTY
PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 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.............................. $(48,218)BBB $12,788CCC $ 90,762FFF $ 55,332
-------- ------- -------- --------
Expenses:
Operating........................... -- -- -- --
Lease............................... -- -- -- --
General and administrative.......... -- -- 375KKK 375
Depreciation and amortization....... -- 2,906DDD 5,995GGG 8,901
-------- ------- -------- --------
-- 2,906 6,370 9,276
-------- ------- -------- --------
Operating income...................... (48,218) 9,882 84,392 46,056
Equity in earnings of subsidiaries.... -- -- (22,542)HHH (22,542)
Licensing fees........................ -- -- (2,601)III (2,601)
Interest (income) expense............. -- 4,948EEE (12,330)JJJ (7,382)
-------- ------- -------- --------
Income before income taxes............ (48,218) 4,934 121,865 78,581
Provision for income taxes............ -- -- -- --
-------- ------- -------- --------
Net income............................ (48,218) 4,934 121,865 78,581
Dividends to Preferred Shareholders... -- -- -- --
-------- ------- -------- --------
Net income available to Common
Shareholders........................ $(48,218) $ 4,934 $121,865 $ 78,581
======== ======= ======== ========
</TABLE>
F-19
<PAGE> 88
NOTES TO SCHEDULE OF PRISON REALTY PRO FORMA
STATEMENT OF OPERATIONS ADJUSTMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 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 the Company 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 operation.
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 the Company's 95% equity
interest
F-20
<PAGE> 89
in accordance with EITF 95-6. The calculation of the pro forma earnings
amount is as follows:
<TABLE>
<S> <C>
Historical nine months net income of Service Company
A................................................. $15,064
Historical nine months net income of Service Company
B................................................. 11,984
-------
27,048
Pro forma aggregate payments during the nine months
ended September 30 by Service Companies A and B to
Operating Company for general and administrative
services, net of taxes............................ (3,319)
-------
Adjusted aggregate nine months net income of Service
Company A And Service Company B................... 23,729
The Company's equity interest........................ 95%
-------
The Company's earnings in equity interests........... $22,542
=======
</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 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.
The Company'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 the
Company.
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.
F-21
<PAGE> 90
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-22
<PAGE> 91
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-23
<PAGE> 92
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)
On January 1, 1999 the merger transactions ("the Merger") between Corrections
Corporation of America ("CCA"), CCA Prison Realty Trust ("Prison Realty") and
Prison Realty Corporation ("New Prison Realty") were completed and correctional
facilities owned previously by Prison Realty or acquired by New Prison Realty in
the Merger have been leased to the Company and the operations relating to such
facilities have been acquired by the Company, as discussed below.
Immediately prior to the Merger, CCA sold to the Company certain management
contracts and certain other net assets. In exchange, CCA received 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 is payable over 10 years and bears interest at a rate of 12% per annum.
Interest only is 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, outside
investors purchased a 32% interest in the Company for cash.
Immediately prior to the Merger and in connection with the transactions
described above, CCA entered into a trade name use agreement with the Company
(the "Trade Name Use Agreement"). Under the Trade Name Use Agreement, CCA
granted to the Company the right to use the name "Corrections Corporation of
America" and derivatives thereof, subject to specified terms and conditions
therein.
F-24
<PAGE> 93
CORRECTIONAL MANAGEMENT SERVICES CORPORATION
NOTES TO BALANCE SHEET -- (CONTINUED)
Immediately after the Merger, the Company entered into a services agreement (the
"Operating Company Services Agreement") with New Prison Realty pursuant to which
the Company agreed to 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.
Immediately after the Merger, the Company entered into a tenant incentive
agreement (the "Tenant Incentive Agreement") with New Prison Realty pursuant to
which New Prison Realty agreed to 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
were cancelled and New Prison Realty entered into non-cancellable "triple-net"
leases with the Company (the "Leases"). The term of the Leases are 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 entered 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 granted 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.
In connection with the completion of the Merger and the acquisition of
management contracts from CCA, the Company obtained a $30 million revolving
credit facility (the "Credit Facility") from General Electric Capital
Corporation ("GECC"). In accordance with the terms of the Credit Facility and
related agreements, the Company's obligations to New Prison Realty are
subordinate and junior in right of payment to all obligations and liabilities of
the Company to GECC. The agreements and restrictions also require that a portion
of the rent due to New Prison Realty under the Leases be deferred if certain
financial criteria are not met and limit the ability of the Company to make cash
interest payments to New Prison Realty under the Note if certain financial
criteria are not met.
F-25
<PAGE> 94
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table itemizes the expenses incurred, or to be incurred, by the
Registrant in connection with the registration and issuance of the Offered
Securities being registered hereunder. As indicated below, all amounts shown are
estimates except for the Commission registration fee.
<TABLE>
<S> <C>
Registration Fee -- Securities and Exchange
Commission....................................... $ 417,000
Printing and Engraving Expenses.................... 300,000*
Accounting Fees and Expenses....................... 250,000*
Legal Fees and Expenses............................ 500,000*
Blue Sky Fees and Expenses......................... 45,000*
Miscellaneous (including listing fees)............. 150,000*
----------
Total......................................... $1,662,000
</TABLE>
- -------------------------
* Estimated
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Charter of the Company provides for indemnification of directors and
executive officers to the full 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 any 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
II-1
<PAGE> 95
Charter of the Company, Bylaws of the Company, any resolution of stockholders or
directors, any agreement or otherwise.
The Company's Charter provides for indemnification of its officers, employees or
agents to the fullest extent permitted by law. The Company has also 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 the Company 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 the
Company, against losses incurred in connection with the defense or settlement of
such proceeding. The indemnification provided under each Indemnification
Agreement is limited to instances where the act or omission giving rise to the
claim for which indemnification is sought was not otherwise indemnified by the
Company or insurance maintained by the Company, was not established to have been
committed in bad faith or the result of active and deliberate dishonesty, did
not involve receipt of improper personal benefit, did not result in a judgment
of liability to the Company in a proceeding by or in the right of the Company,
did not involve an accounting or profits pursuant to Section 16(b) of the
Securities Exchange Act of 1934, as amended, and, with respect to any criminal
proceeding, the Indemnitee had no reasonable cause to believe his or her conduct
was unlawful.
The Company has obtained directors and officers liability insurance.
The Company may enter into underwriting agreements or other sales agreements
which contain provisions pursuant to which contain provisions pursuant to which
certain officers and directors may be entitled to indemnification.
II-2
<PAGE> 96
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<C> <S>
1.1* Form of Sales Agency Agreement
1.2** Form of Underwriting Agreement (Common Stock)
1.3** Form of Underwriting Agreement (Preferred Stock)
1.4** Form of Underwriting Agreement (Common Stock Purchase
Rights)
1.5** Form of Underwriting Agreement (Debt Securities)
1.6** Form of Underwriting Agreement (Warrants)
3.1 Articles of Incorporation of Prison Realty Corporation
(previously filed as Exhibit 3.1 to the Company's
Registration Statement on Form S-4 filed with the Commission
on September 30, 1998, as subsequently amended (File No.
333-65017) (the "Registration Statement on Form S-4") and
incorporated herein by reference)
3.2 Amended and Restated Bylaws of Prison Realty Corporation
(previously filed as Exhibit 3.2 to the Company's Current
Report on Form 8-K filed on January 6, 1999 (File No. 25245)
and incorporated herein by reference)
4.1 Specimen of certificate representing shares of Common Stock
of Prison Realty Corporation (previously filed as Exhibit
4.2 to the Registration Statement on Form S-4 and
incorporated herein by reference)
4.2** Form of certificate representing shares of Preferred Stock
of Prison Realty Corporation
4.3** Form of Indenture for Debt Securities
4.4** Form of Warrant Agreement
5.1* Form of Opinion of Stokes & Bartholomew, P.A. regarding the
validity of the Offered Securities being registered
5.2* Form of Opinion of Miles & Stockbridge P.C. regarding the
validity of the Offered Securities being registered
8.1* Form of Opinion of Stokes & Bartholomew, P.A. regarding
certain federal income tax matters
12.1* Statement regarding computation of ratios (included in this
Registration Statement)
23.1 Consent of Stokes & Bartholomew, P.A. (included as part of
Exhibits 5.1 and 8.1)
23.2 Consent of Miles & Stockbridge P.C. (included as part of
Exhibit 5.2)
23.3* Consent of Arthur Andersen LLP (with respect to CCA Prison
Realty Trust)
23.4* Consent of Arthur Andersen LLP (with respect to Corrections
Corporation of America)
23.5* Consent of Arthur Andersen LLP (with respect to Correctional
Management Services Corporation)
25 Power of Attorney (included on signature page)
</TABLE>
- -------------------------
* Included with this filing.
** To be filed by amendment or by a Current Report on Form 8-K incorporated by
reference herein.
II-3
<PAGE> 97
ITEM 17. UNDERTAKINGS
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 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.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) For purposes of determining any liability under the Securities Act,
each filing of the Registrant's annual report pursuant to Section 13(a)
or Section 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 the
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.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made of
the securities offered hereby, a post-effective amendment to this
Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in this Registration Statement; and
II-4
<PAGE> 98
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in this Registration
Statement or any material change to such information in this
Registration Statement;
provided, however, that the undertakings in paragraph (i) and (ii) above do not
apply if the information required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports filed by the Registrant
pursuant to Section 13 or Section 15(d) of the Exchange Act that are
incorporated by reference in this Registration Statement;
(2) That, for the purpose 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.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
The undersigned registrant hereby undertakes, at the time of any proposed offer
of Debt Securities pursuant to a Prospectus Supplement, to file an application
for the purpose of determining the eligibility of the trustee to act under
Subsection (a) of Section 310 of the Trust Indenture Act in accordance with the
rules and regulations prescribed by the Commission under Section 305(b)(2) of
the Trust Indenture Act.
The undersigned registrant hereby undertakes, at the time of any proposed offer
of any Common Stock Purchase Rights or Warrants pursuant to a Prospectus
Supplement, to further supplement the Prospectus, after the expiration of the
subscription period, to set forth the results of the subscription offer, the
transactions by the underwriters, if any, during the subscription period, the
amount of any unsubscribed securities to be purchased by the underwriters, and
the terms of any subsequent reoffering thereof. If any public offering by the
underwriters is to be made on terms differing from those set forth on the cover
page of the applicable Prospectus Supplement, a post-effective amendment will be
filed to set forth the terms of such offering.
II-5
<PAGE> 99
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Nashville, Tennessee, on the 11th day of January,
1999.
PRISON REALTY CORPORATION
By: /s/ DOCTOR R. CRANTS
------------------------------------
Doctor R. Crants
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints Doctor
R. Crants, D. Robert Crants, III and Vida H. Carroll, and each of them, the true
and lawful attorneys-in-fact and agents of the undersigned, with full power of
substitution and resubstitution, for and in the name, place and stead of the
undersigned, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement and any
registration statement relating to the same offering as the Registration
Statement that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act of 1933, as amended, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, and hereby grants to such attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done, as fully to all intents and purposes
as the undersigned might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, or their or his or
her substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
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 January 11, 1999
- --------------------------------------------------- (Principal Executive Officer),
Doctor R. Crants Chairman and Director
/s/ J. MICHAEL QUINLAN Vice Chairman and Director January 11, 1999
- ---------------------------------------------------
J. Michael Quinlan
/s/ D. ROBERT CRANTS, III President and Director January 11, 1999
- ---------------------------------------------------
D. Robert Crants, III
/s/ MICHAEL W. DEVLIN Chief Operating Officer and January 11, 1999
- --------------------------------------------------- Director
Michael W. Devlin
/s/ VIDA H. CARROLL Chief Financial Officer January 11, 1999
- --------------------------------------------------- (Principal Financial and
Vida H. Carroll Accounting Officer)
</TABLE>
II-6
<PAGE> 100
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ C. RAY BELL Director January 11, 1999
- ---------------------------------------------------
C. Ray Bell
/s/ RICHARD W. CARDIN Director January 11, 1999
- ---------------------------------------------------
Richard W. Cardin
/s/ MONROE J. CARELL, JR. Director January 11, 1999
- ---------------------------------------------------
Monroe J. Carell, Jr.
Director January , 1999
- ---------------------------------------------------
Jean-Pierre Cuny
/s/ JOHN W. EAKIN, JR. Director January 11, 1999
- ---------------------------------------------------
John W. Eakin, Jr.
/s/ TED FELDMAN Director January 11, 1999
- ---------------------------------------------------
Ted Feldman
/s/ JACKSON W. MOORE Director January 11, 1999
- ---------------------------------------------------
Jackson W. Moore
Director January , 1999
- ---------------------------------------------------
Rusty L. Moore
Director January , 1999
- ---------------------------------------------------
Joseph V. Russell
/s/ CHARLES W. THOMAS, PH.D. Director January 11, 1999
- ---------------------------------------------------
Charles W. Thomas, Ph.D.
</TABLE>
II-7
<PAGE> 101
EXHIBIT INDEX
REGISTRATION STATEMENT ON FORM S-3
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
1.1* Form of Sales Agency Agreement
1.2** Form of Underwriting Agreement (Common Stock)
1.3** Form of Underwriting Agreement (Preferred Stock)
1.4** Form of Underwriting Agreement (Common Stock Purchase
Rights)
1.5** Form of Underwriting Agreement (Debt Securities)
1.6** Form of Underwriting Agreement (Warrants)
3.1 Articles of Incorporation of Prison Realty Corporation
(previously filed as Exhibit 3.1 to the Company's
Registration Statement on Form S-4 filed with the Commission
on September 30, 1998, as subsequently amended (File No.
333-65017) (the "Registration Statement on Form S-4") and
incorporated herein by reference)
3.2 Amended and Restated Bylaws of Prison Realty Corporation
(previously filed as Exhibit 3.2 to the Company's Current
Report on Form 8-K filed on January 6, 1999 (File No. 25245)
and incorporated herein by reference)
4.1 Specimen of certificate representing shares of Common Stock
of Prison Realty Corporation (previously filed as Exhibit
4.2 to the Registration Statement on Form S-4 and
incorporated herein by reference)
4.2** Form of certificate representing shares of Preferred Stock
of Prison Realty Corporation
4.3** Form of Indenture for Debt Securities
4.4** Form of Warrant Agreement
5.1* Form of Opinion of Stokes & Bartholomew, P.A. regarding the
validity of the Offered Securities being registered
5.2* Form of Opinion of Miles & Stockbridge P.C. regarding the
validity of the Offered Securities being registered
8.1* Form of Opinion of Stokes & Bartholomew, P.A. regarding
certain federal income tax matters
12.1* Statement regarding computation of ratios (included in this
Registration Statement)
23.1 Consent of Stokes & Bartholomew, P.A. (included as part of
Exhibits 5.1 and 8.1)
23.2 Consent of Miles & Stockbridge P.C. (included as part of
Exhibit 5.2)
23.3* Consent of Arthur Andersen LLP (with respect to CCA Prison
Realty Trust)
23.4* Consent of Arthur Andersen LLP (with respect to Corrections
Corporation of America)
23.5* Consent of Arthur Andersen LLP (with respect to Correctional
Management Services Corporation)
25 Power of Attorney (included on signature page)
</TABLE>
- -------------------------
* Included with this filing.
** To be filed by amendment or by a Current Report on Form 8-K incorporated by
reference herein.
II-8
<PAGE> 1
EXHIBIT 1.1
FORM OF SALES AGENCY AGREEMENT
PRISON REALTY CORPORATION
SALES AGENCY AGREEMENT
STRUCTURED EQUITY SHELF PROGRAM
___________ SHARES (COMMON STOCK, $0.01 PAR VALUE PER SHARE)
________ __, 1999
[ADDRESSEE]
Dear ____________:
Prison Realty Corporation, a Maryland corporation (the "Company"),
confirms its agreement with ________________________ (the "Agent"), as follows:
ARTICLE I
DESCRIPTION OF SECURITIES
The Company proposes to issue and sell through the Agent, as sales agent,
up to _________ of the shares of common stock (the "Maximum Amount"), $0.01 par
value per share, of the Company (the "Shares"), on the terms set forth in
Article III below.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to, and agrees with, the Agent that:
(a) The Company meets the requirements for use of Form S-3 under the
Securities Act of 1933, as amended (the "Securities Act"), and the rules and
regulations thereunder (the "Rules and Regulations"). A registration statement
on Form S-3 (Registration Nos. 333-_____) with respect to, among other
securities, the Shares, including a form of prospectus, has been prepared by the
Company in conformity with the requirements of the Securities Act and the Rules
and Regulations and filed with the Securities and Exchange Commission (the
"Commission") and has become effective. Such registration statement and
prospectus may have been amended or supplemented prior to the date of this
Agreement. Any such amendment or supplement was so prepared and filed, and any
such amendment or supplement filed after the effective date of such
<PAGE> 2
registration statement has become effective. No stop order suspending the
effectiveness of the registration statement has been issued, and no proceeding
for that purpose has been instituted or threatened by the Commission. Copies of
such registration statement and prospectus and any such amendment or supplement
and all documents incorporated by reference therein that were filed with the
Commission on or prior to the date of this Agreement have been delivered to the
Agent. Such registration statement, as it may have heretofore been amended, is
referred to herein as the "Registration Statement," and the final form of
prospectus included in the Registration Statement, as amended or supplemented
from time to time, is referred to herein as the "Prospectus." Any reference
herein to the Registration Statement, the Prospectus, or any amendment or
supplement thereto shall be deemed to refer to and include the documents
incorporated (or deemed to be incorporated) by reference therein, and any
reference herein to the terms "amend," "amendment" or "supplement" with respect
to the Registration Statement or Prospectus shall be deemed to refer to and
include the filing after the execution hereof of any document with the
Commission deemed to be incorporated by reference therein.
(b) Each part of the Registration Statement, when such part became or
becomes effective, and the Prospectus and any amendment or supplement thereto,
on each Filing Date (as hereinafter defined), conformed or will conform in all
material respects with the requirements of the Securities Act and the Rules and
Regulations; each part of the Registration Statement, when such part became or
becomes effective, did not or will not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading; and the Prospectus and any
amendment or supplement thereto, on each Filing Date, did not or will not
include an untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; except that the foregoing shall not
apply to statements in or omissions from any such document in reliance upon, and
in conformity with, written information furnished to the Company by or on behalf
of the Agent, specifically for use in the Registration Statement, the Prospectus
or any amendment or supplement thereto.
(c) The documents incorporated by reference in the Registration
Statement or the Prospectus, or any amendment or supplement thereto, when they
became or become effective under the Securities Act or were or are filed with
the Commission under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as the case may be, conformed or will conform in all material
respects with the requirements of the Securities Act or the Exchange Act, as
applicable, and the rules and regulations of the Commission thereunder.
(d) The financial statements of the Company and its subsidiaries,
together with the related notes and schedules, set forth or incorporated by
reference in the Registration Statement and Prospectus fairly present the
financial condition and the results of operations and cash flows of the Company
and its subsidiaries as of the dates indicated or for the periods therein
specified and were prepared in conformity with generally accepted accounting
principles consistently applied throughout the periods involved (except as
otherwise stated therein).
2
<PAGE> 3
(e) The Company has been duly formed and is validly existing as a
corporation in good standing under the laws of the State of Maryland with power
and authority to own, lease and operate its properties and to conduct its
business as described in the Registration Statement and Prospectus; and the
Company is duly qualified to transact business and is in good standing in each
jurisdiction in which the laws of such jurisdiction require such qualification,
except where the failure to so qualify and be in good standing, considering all
such cases in the aggregate, would not have a material adverse effect on the
condition, financial or otherwise, or the earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one enterprise.
(f) Each significant subsidiary (as defined in Section 1-02 of
Regulation S-X) of the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the jurisdiction of
its incorporation, has power and authority to own, lease and operate its
properties and conduct its business and is duly qualified to transact business
and is in good standing in each jurisdiction in which such qualification is
required, whether by reason of the ownership or leasing of property or the
conduct of business, except where the failure to so qualify and be in good
standing would not have a material adverse effect on the condition, financial or
otherwise, or the earnings, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise; and all of the issued
and outstanding capital stock (or other equity interests) of each subsidiary has
been duly authorized and validly issued, is fully paid and nonassessable.
(g) The outstanding common stock of the Company and the Shares have
been duly authorized and are, or when issued as contemplated hereby will be,
validly issued, fully paid and nonassessable and conform, or when so issued will
conform, to the description thereof in the Prospectus. The shareholders of the
Company have no preemptive rights with respect to the Shares.
(h) Except as contemplated in the Prospectus, subsequent to the
respective dates as of which information is given in the Registration Statement
and the Prospectus, neither the Company nor any of its subsidiaries has incurred
any liabilities or obligations, direct or contingent, or entered into any
transactions, not in the ordinary course of business, that are material to the
Company and its subsidiaries considered as a whole, and there has not been any
material change in the capital shares, short-term debt or long-term debt of the
Company and its subsidiaries, or any material change, or any development
involving a prospective material change, in the condition, financial or
otherwise, or the earnings, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise.
(i) Except as set forth in the Prospectus, there is not pending or, to
the knowledge of the Company, threatened any action, suit or proceeding to which
the Company or any of its subsidiaries is a party, before or by any court or
governmental agency or body, that could reasonably be expected to result in any
material adverse change in the condition, financial or otherwise, or the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, or that could reasonably be expected
to materially and adversely affect the properties or assets thereof considered
as a whole.
3
<PAGE> 4
(j) There are no contracts or documents of the Company or any of its
subsidiaries that are required to be filed as exhibits to the Registration
Statement or to any of the documents incorporated by reference therein by the
Securities Act or the Exchange Act or by the rules and regulations of the
Commission thereunder that have not been so filed.
(k) All necessary action has been duly and validly taken by the Company
to authorize the execution, delivery and performance of this Agreement. This
Agreement has been duly and validly authorized, executed and delivered by the
Company and constitutes the legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, except as the
enforceability thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting the enforcement of creditors' rights
generally and by general equitable principles.
(l) The performance of this Agreement and the consummation of the
transactions contemplated herein will not result in a breach or violation of any
of the terms and provisions of, or constitute a default under with giving of
notice or lapse of time or both, any agreement or instrument to which the
Company or any of its subsidiaries is a party or by which it is bound or to
which any of the property of the Company or any of its subsidiaries is subject
except for such breaches or defaults that would not in the aggregate have a
material adverse effect on the Company's ability to perform its obligations
under this Agreement or on the condition, financial or otherwise, or the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, nor will such action result in the
violation of the Company's declaration of trust or by-laws, or any statute or
any order, rule or regulation of any court or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries or any of its
properties; no consent, approval, authorization or order of, or filing with, any
court or governmental agency or body is required for the consummation by the
Company of the transactions contemplated by this Agreement, except such as may
be required by state securities or blue sky laws.
(m) Each of the Company and its subsidiaries has (i) good and
indefeasible title to all of the properties and assets described in the
Prospectus as owned by it, free and clear of all liens, charges, encumbrances or
restrictions, except such as are described in the Prospectus or are not material
to the business, condition, financial or otherwise, or the earnings, business
affairs or business prospects of the Company and its subsidiaries considered as
one enterprise, (ii) peaceful and undisturbed possession under all material
leases to which it is party as lessee, (iii) all governmental or regulatory
licenses, certificates, permits, authorizations, approvals, franchises or other
rights necessary to engage in the business currently conducted by it, except
such as are not material to the business, condition, financial or otherwise, or
the earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, (iv) no reason to believe that any
governmental body or agency is considering limiting, suspending or revoking any
such license, certificate, permit, authorization, approval, franchise or right
and (v) not received any notice of and has no reason to believe that any
governmental body or agency is considering enacting, amending or repealing any
statute, law, ordinance or regulation required to be described in the
Registration Statement and Prospectus that is not so described as required. All
material leases to which the
4
<PAGE> 5
Company or any of its subsidiaries is a party are valid and binding and no
default has occurred and is continuing thereunder, and, to the best knowledge of
the Company, no material defaults by the landlord are existing under any such
leases.
(n) Each of the Company and its subsidiaries owns or possesses all of
the patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures), trademarks, service marks and
trade names presently employed by them in connection with the business now
operated by them, and neither the Company nor any of its subsidiaries has
received any notice of infringement of or conflict with asserted rights of
others with respect to any of the foregoing which, if singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, would
result in any material adverse change in the condition, financial or otherwise,
or in the earnings, business affairs or business prospects of the Company and
its subsidiaries considered as one enterprise.
(o) The Company and its subsidiaries have not violated and, to its
knowledge, are in compliance in all material respects with all material laws,
statutes, ordinances, regulations, rules and orders of any foreign, federal,
state or local government and any other governmental department or agency, and
any judgment, decision, decree or order of any court or governmental agency,
department or authority, including, without limitation, environmental laws.
Neither the Company nor any of its subsidiaries has received any notice to the
effect that, or otherwise been advised that, it is not in compliance with any
such statutes, regulations, rules, judgments, decrees, orders, ordinances or
other laws, and the Company is not aware of any existing circumstances which are
likely to result in material violations of any of the foregoing.
(p) The Company is organized in conformity with the requirements for
qualification as, and operates in a manner that qualifies the Company as, a real
estate investment trust under the Internal Revenue Code of 1986, as amended (the
"Code"), and the rules and regulations thereunder and will be so qualified after
consummation of the transaction contemplated by this Agreement.
ARTICLE III
SALE AND DELIVERY OF SECURITIES
3.1. SALE AND DELIVERY OF SECURITIES. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to issue and sell
through the Agent, as non-exclusive sales agent, and the Agent agrees to sell,
as non-exclusive sales agent for the Company, on a best efforts basis, up to the
Maximum Amount of Shares on the terms set forth herein.
The Shares, up to the Maximum Amount, are to be sold on a daily basis
or otherwise as shall be agreed to by the Company and the Agent. The Company
will designate the maximum amount
5
<PAGE> 6
of Shares to be sold by the Agent daily as reasonably agreed to by the Agent and
in any event not in excess of the amount available for issuance under the
currently effective Registration Statement. Subject to the terms and conditions
hereof, the Agent shall use its best efforts to sell all of the designated
Shares up to the Maximum Amount.
Notwithstanding the foregoing the Company may instruct the Agent by
telephone (confirmed promptly by telecopy) not to sell Shares if such sales
cannot be effected at or above the price designated by the Company in any such
instruction; furthermore, the Company shall not authorize the issuance and sale
of, and the Agent shall not be obligated to use its best efforts to sell, any
Shares at a price lower than the minimum price therefor designated from time to
time by the Company and notified to the Agent in writing. In addition, the
Company or the Agent may, upon notice to the other party hereto by telephone
(confirmed promptly by telecopy), suspend the offering of the Shares; provided,
however, that such suspension or termination shall not affect or impair the
parties' respective obligations with respect to the Shares sold hereunder prior
to the giving of such notice.
If either party has reason to believe that the exemptive provisions set
forth in Rule 101(c)(1) of Regulation M under the Exchange Act, are not
satisfied with respect to the Shares, the amount of the Shares that may be sold
on any day pursuant to this Agreement and any other sales agency agreement shall
not exceed 10% of the average daily trading volume of the Shares for the sixty
days prior to such day (provided, that any Shares purchased by the Agent as
principal during such period shall not be included in the calculation of trading
volume). Unless otherwise agreed by the Company and the Agent, the Agent shall
sell the Shares only by means of ordinary brokers' transactions on the New York
Stock Exchange (the "NYSE"). Unless otherwise agreed to by the Company and the
Agent, the Agent shall not solicit or arrange for the solicitation of customer's
orders in anticipation of or in connection with such transactions, nor shall it
sell short as principal Shares of the Company, except in connection with
customary market making activities in the Company's outstanding securities. The
Agent shall not engage in any special selling efforts or selling methods
relating to the Shares within the meaning of Rule 100 of Regulation M under the
Exchange Act. The Agent shall calculate on a weekly basis the average daily
trading volume of the Shares.
The compensation to the Agent for sales of Shares shall be ____ of the
gross sales price of the Shares sold, in the form of a commission. The remaining
proceeds, after further deduction for any transaction fees imposed by any
governmental or self-regulatory organization in respect of such sales, shall
constitute the net proceeds to the Company for such Shares (the "Net Proceeds").
The Agent shall provide written confirmation to the Company following
the close of trading on the NYSE each day in which Shares are sold under this
Agreement setting forth the amount of Shares sold on such day, the Net Proceeds
to the Company, and the compensation payable by the Company to the Agent with
respect to such sales.
Settlement for sales of Shares will occur on the third business day
following the date on which such sales are made (each such day, a "Settlement
Date"). On each Settlement Date, the
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Shares sold through the Agent for settlement on such date shall be delivered by
the Company to the Agent against payment of the Net Proceeds for the sale of
such Shares. Settlement for all Shares shall be effected by free delivery of
Shares to the Agent's account at The Depository Trust Corporation in return for
payments in same day funds delivered to the account designated by the Company.
If the Company shall default on its obligation to deliver Shares on any
Settlement Date, the Company shall (i) hold the Agent harmless against any loss,
claim or damage arising from or as a result of such default by the Company and
(ii) pay the Agent any commission to which it would otherwise be entitled absent
such default. If the Agent breaches this Agreement by failing to deliver
proceeds on any Settlement Date for Shares delivered by the Company, the Agent
will pay the Company interest based on the effective overnight Federal Funds
rate.
At each Settlement Date, the Company shall be deemed to have affirmed
each representation, warranty, covenant and other agreement contained in this
Agreement, and on each Filing Date (as defined below), the Company shall affirm
in writing each representation, warranty, covenant and other agreement contained
in this Agreement. The Company covenants and agrees with the Agent that on or
prior to the second business day after the end of each calendar week during
which sales of Shares were made by the Agent (each such week a "Reporting
Period"), the Company will (i) file a prospectus supplement with the Commission
under the applicable paragraph of Rule 424(b) (each a "Filing Date"), which
prospectus supplement will set forth, with regard to such Reporting Period, the
dates included within the Reporting Period, the amount of Shares sold through
the Agent, the Net Proceeds to the Company and the compensation payable by the
Company to the Agent with respect to sales of Shares pursuant to this Agreement
(all as provided in writing by the Agent for inclusion in each such prospectus
supplement) and (ii) deliver such number of copies of each such prospectus
supplement to the NYSE as are required by the NYSE. Any obligation of the Agent
to use its best efforts to sell the Shares shall be subject to the continuing
accuracy of the representations and warranties of the Company herein, to the
performance by the Company of its obligations hereunder and to the continuing
satisfaction of the additional conditions specified in Article V of this
Agreement.
ARTICLE IV
COVENANTS OF THE COMPANY
4.1. COVENANTS OF THE COMPANY. The Company covenants and agrees with
the Agent and the Company that:
(a) During the period in which a prospectus relating to the Shares is
required to be delivered under the Securities Act, the Company will notify the
Agent promptly of the time when any subsequent amendment to the Registration
Statement has become effective or any subsequent supplement to the Prospectus
has been filed and of any request by the Commission for any amendment or
supplement to the Registration Statement or Prospectus or for additional
information; it will prepare and file with the Commission, promptly upon the
Agent's request, any amendments or supplements to the Registration Statement or
Prospectus that, in the Agent's reasonable opinion,
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may be necessary or advisable in connection with the distribution of the Shares
by the Agent; and the Company will furnish to the Agent at the time of filing
thereof a copy of any document that upon filing is deemed to be incorporated by
reference in the Registration Statement or Prospectus; and the Company will
cause each amendment or supplement to the Prospectus to be filed with the
Commission as required pursuant to the applicable paragraph of Rule 424(b) of
the Rules and Regulations or, in the case of any document to be incorporated
therein by reference, to be filed with the Commission as required pursuant to
the Exchange Act, within the time period prescribed.
(b) The Company will advise the Agent, promptly after it shall receive
notice or obtain knowledge thereof, of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement, of the
suspension of the qualification of the Shares for offering or sale in any
jurisdiction, or of the initiation or threatening of any proceeding for any such
purpose; and it will promptly use its best efforts to prevent the issuance of
any stop order or to obtain its withdrawal if such a stop order should be
issued.
(c) Within the time during which a prospectus relating to the Shares is
required to be delivered under the Securities Act, the Company will comply as
far as it is able with all requirements imposed upon it by the Securities Act
and by the Rules and Regulations, as from time to time in force, so far as
necessary to permit the continuance of sales of or dealings in the Shares as
contemplated by the provisions hereof and the Prospectus. If during such period
any event occurs as a result of which the Prospectus as then amended or
supplemented or any document that is deemed to be incorporated by reference in
the Prospectus would include an untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in the light of
the circumstances then existing, not misleading, or if during such period it is
necessary to amend or supplement the Registration Statement or Prospectus or any
document that is deemed to be incorporated by reference in the Registration
Statement or Prospectus to comply with the Securities Act, the Company will
promptly notify the Agent to suspend the offering of Shares during such period
and the Company will amend or supplement the Registration Statement or
Prospectus or any document that is deemed to be incorporated by reference in the
Registration Statement or Prospectus (at the expense of the Company, unless the
misstatements or omissions in question were made solely in reliance or written
information furnished to the Company by the Agent expressly for use in the
Registration Statement or Prospectus, in which case such amendment or supplement
shall be at the expense of the Agent) so as to correct such statement or
omission or effect such compliance.
(d) The Company will use its best efforts to qualify the Shares for
sale under the securities laws of such jurisdictions as the Agent designates and
to continue such qualifications in effect so long as required for the
distribution of the Shares, except that the Company shall not be required in
connection therewith to qualify as a foreign entity or to execute a general
consent to service of process in any jurisdiction.
(e) The Company will furnish to the Agent and its counsel (at the
expense of the Company) copies of the Registration Statement, the Prospectus
(including all documents incorporated by reference therein) and all amendments
and supplements to the Registration Statement or Prospectus
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that are filed with the Commission during the period in which a prospectus
relating to the Shares is required to be delivered under the Securities Act
(including all documents filed with the Commission during such period that are
deemed to be incorporated by reference therein), in each case as soon as
available and in such quantities as the Agent may from time to time reasonably
request and, in the case when the Trading Market is a national securities
exchange, the Company will also furnish copies of the Prospectus to such
exchange in accordance with Rule 153 of the Rules and Regulations.
(f) The Company will make generally available to its security holders
as soon as practicable, but in any event not later than 15 months after the end
of the Company's current fiscal quarter, an earnings statement (which need not
be audited) covering a 12-month period that satisfies the provisions of Section
11(a) of the Act and Rule 158 of the Rules and Regulations.
(g) The Company, whether or not the transactions contemplated hereunder
are consummated or this Agreement is terminated, will pay all of its expenses
incident to the performance of its obligations hereunder (including, but not
limited to, any transaction fees imposed by any governmental or self-regulatory
organization with respect to transactions contemplated by this Agreement and any
blue sky fees) and will pay the expenses of printing all documents relating to
the offering. The Agent will pay its own out-of-pocket costs and expenses
incurred in connection with the entering into of this Agreement and the
transaction contemplated by this Agreement, and including, without limitation,
travel, reproduction, printing and similar expenses, as well as the fees and
disbursements of its legal counsel.
(h) The Company will not, directly or indirectly, offer or sell any
Shares or securities convertible into or exchangeable for, or any rights to
purchase or acquire, Shares during the period from the date of this Agreement
through the final Filing Date for the sale of Shares hereunder without (a)
giving the Agent at least three business days' prior written notice specifying
the nature of the proposed sale and the date of such proposed sale and (b)
suspending activity under this program for such period of time as may be
determined by the Company in its sole discretion; provided, however, that no
such notice and suspension shall be required in connection with the Company's
issuance or sale of (i) Shares pursuant to any employee or trustee share option
or benefits plan, share ownership plan, dividend reinvestment or share purchase
plan now in effect as such plans may be amended from time to time, (ii) Shares
issuable upon conversion of securities or the exercise of warrants, options or
other rights in effect or outstanding on the date hereof, and (iii) Shares to
institutional investors in privately negotiated transactions pursuant to the
Registration Statement.
(i) The Company will, at any time during the term of this Agreement, as
supplemented from time to time, advise the Agent immediately after it shall have
received notice or obtain knowledge thereof, of any information or fact that
would alter or affect any opinion, certificate, letter and other document
provided to the Agent pursuant to Article V herein.
(j) Each time that (i) the Registration Statement or the Prospectus
shall be amended or supplemented (other than a supplement filed pursuant to Rule
424(b) under the Securities Act that contains solely the information set forth
in the final paragraph of Article III of this Agreement) or
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(ii) there is filed with the Commission any documents incorporated by reference
into the Prospectus (other than any Quarterly Report on Form 10-Q or a Current
Report on Form 8-K unless the Agent shall otherwise reasonably request), the
Company shall furnish or cause to be furnished to the Agent forthwith a
certificate dated the date of filing with the Commission of such amendment,
supplement or other document, the date of effectiveness of such amendment, as
the case may be, in form satisfactory to the Agent to the effect that the
statements contained in the certificate referred to in Section 5.1(e) hereof
which were last furnished to the Agent are true and correct at the time of such
amendment, supplement, or filing, as the case may be, as though made at and as
of such time (except that such statements shall be deemed to relate to the
Registration Statement and the Prospectus as amended and supplemented to such
time) or, in lieu of such certificate, a certificate of the same tenor as the
certificate referred to in said Section 5.1(f), modified as necessary to relate
to the Registration Statement and the Prospectus as amended and supplemented to
the time of delivery of such certificate.
(k) Each time that (i) the Registration Statement or the Prospectus is
amended or supplemented (other than a supplement filed pursuant to Rule 424(b)
under the Securities Act that contains solely the information set forth in the
final paragraph of Article III of this Agreement) or (ii) there is filed with
the Commission any documents incorporated by reference into the Prospectus other
than any Quarterly Report on Form 10-Q or a Current Report on Form 8-K, unless
the Agent shall otherwise reasonably request, the Company shall furnish or cause
to be furnished forthwith to the Agent and to counsel to the Agent a written
opinion of Stokes & Bartholomew, P.A., counsel to the Company (the "Company
Counsel"), dated the date of filing with the Commission of such amendment,
supplement or other document and the date of effectiveness of such amendment, as
the case may be, in form and substance satisfactory to the Agent, of the same
tenor as the opinion referred to in Section 5.1(d) hereof, but modified as
necessary to relate to the Registration Statement and the Prospectus as amended
and supplemented to the time of delivery of such opinion.
(l) Each time that the Registration Statement or the Prospectus shall
be amended or supplemented to include additional amended financial information
or there is filed with the Commission any document incorporated by reference
into the Prospectus which contains additional amended financial information, the
Company shall cause Arthur Andersen, L.L.P., or other independent accountants
satisfactory to the Agent, forthwith to furnish the Agent a letter, dated the
date of effectiveness of such amendment, or the date of filing of such
supplement or other document with the Commission, as the case may be, in form
satisfactory to the Agent, of the same tenor as the letter referred to in
Section 5.1(e) hereof but modified to relate to the Registration Statement and
the Prospectus, as amended and supplemented to the date of such letter.
(m) The Company hereby consents to the Agent trading in the Company's
Shares for its own account on the same side of the market and at the same time
as the Company's sale pursuant to this Agreement.
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ARTICLE V
CONDITIONS OF THE AGENT'S OBLIGATIONS
5.1. CONDITIONS OF AGENT'S OBLIGATIONS. The obligations of the Agent to
sell the Shares as provided herein shall be subject to the accuracy, as of the
date hereof, and as of each Settlement Date, of the representations and
warranties of the Company herein, to the performance by the Company of its
obligations hereunder and to the following additional conditions:
(a) No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceeding for that purpose shall have
been instituted or, to the knowledge of the Company or the Agent, threatened by
the Commission, and any request of the Commission for additional information (to
be included in the Registration Statement or the Prospectus or otherwise) shall
have been complied with to the Agent's satisfaction.
(b) The Agent shall not have advised the Company that the Registration
Statement or Prospectus, or any amendment or supplement thereto, contains an
untrue statement of fact that in the Agent's reasonable opinion is material, or
omits to state a fact that in the Agent's reasonable opinion is material and is
required to be stated therein or is necessary to make the statements therein not
misleading.
(c) Except as contemplated in the Prospectus, subsequent to the
respective dates as of which information is given in the Registration Statement
and the Prospectus, there shall not have been any material change, on a
consolidated basis, in the capital shares of the Company and its subsidiaries,
or any material adverse change, or any development that may reasonably be
expected to cause a material adverse change, in the condition (financial or
other), business, prospects, net worth or results of operations of the Company
and its subsidiaries.
(d) The Agent shall have received at every date specified in Section
4.1(l) hereof, opinions of Company Counsel, dated as of such date, to the effect
that:
(i) The Company has been duly formed and is validly existing
as a real estate investment trust in good standing under the laws of
its jurisdiction of formation, has full power and authority to conduct
its business as described in the Registration Statement and Prospectus
and is duly qualified to do business in each jurisdiction set forth on
a schedule thereto; to their knowledge, such jurisdictions are the only
jurisdictions in which the Company's ownership or leasing of real
property or conduct of its business requires such qualification;
(ii) Each subsidiary of the Company has been duly incorporated
or formed and is validly existing as a corporation (or partnership or
real estate investment trust, as the case may be) in good standing
under the laws of the jurisdiction of its incorporation or formation,
has power and authority to own, lease and operate its properties and
conduct its business as
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described in the Registration Statement and Prospectus, and all of the
issued outstanding capital stock (or other equity interests) of each
such subsidiary has been duly authorized and validly issued, is fully
paid and nonassessable, and free and clear of any mortgage, pledge,
lien, encumbrance, claim or equity;
(iii) The Shares have been duly and validly authorized, and,
when issued and delivered to and paid for by the purchasers thereof
pursuant to this Agreement, will be fully paid and nonassessable and
conform to the description thereof in the Prospectus; and the
shareholders of the Company have no preemptive rights with respect to
the Shares; all corporate action required to be taken for the
authorization, issuance and sale of the Shares have been validly and
sufficiently taken; and the Shares are the subject of an effective
registration statement permitting their sale in the manner contemplated
by this Agreement;
(iv) The Registration Statement has become effective under the
Securities Act; to the knowledge of such counsel no stop order
suspending the effectiveness of the Registration Statement has been
issued and no proceeding for that purpose has been instituted or
threatened by the Commission;
(v) This Agreement has been duly authorized, executed and
delivered by the Company;
(vi) The execution, delivery and performance of this Agreement
by the Company and the consummation of the transactions contemplated
herein by the Company do not and will not result in a breach or
violation of any of the terms and provisions of, or constitute a
default under, any agreement or instrument known to such counsel to
which the Company or any of its subsidiaries is a party or by which it
is bound or to which any of the property of the Company or any of its
subsidiaries is subject except for such breaches or defaults that would
not in the aggregate have a material adverse effect on the Company's
ability to perform its obligations under this Agreement or on the
condition, financial or otherwise, or the earnings business affairs or
business prospects of the Company and its subsidiaries considered as
one enterprise, nor will such action result in the violation of the
Company's declaration of trust or by-laws, or any statute or any order,
rule or regulation known to such counsel of any court or governmental
agency or body having jurisdiction over the Company or any of its
subsidiaries or any of its properties; and no consent, approval,
authorization or order of, or filing with, any court or governmental
agency or body is required for the consummation of the transactions
contemplated by this Agreement in connection with the issuance or sale
of the Shares by the Company, except such as have been obtained under
the Act and such as may be required under state securities or blue sky
laws in connection with the sale and distribution of the Shares by the
Agent;
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(vii) Except for permits and similar authorizations required
under the securities or blue sky laws of certain states, no consent,
waiver, approval, authorization or other order of any regulatory body,
administrative agency or other governmental body is legally required
for the sale of the Shares by the Agent as contemplated hereby and by
the Prospectus;
(viii) Such counsel knows of no actions, suits or proceedings
pending or threatened against or affecting the Company or any of its
subsidiaries or the business, properties, business prospects, condition
(financial or otherwise) or results of operations of the Company or any
of its subsidiaries, or any of their respective officers in their
capacities as such, before or by any Federal or state or foreign court,
commission, regulatory body, wherein an unfavorable ruling, decision or
finding might materially and adversely affect the Company or any of its
subsidiaries or its business, properties, business prospects, condition
(financial or otherwise) or results of operations; and
(ix) The Company will be able to qualify as a REIT for
the taxable year beginning January 1, 1998, provided that after the
date hereof, the Company continues to be organized and operated as
described in the Registration Statement and according to
representations made to us in a certificate of an officer of the
Company and therefore continues to satisfy the income tests, and
distribution, shareholder, recordkeeping and other applicable REIT
requirements under the Code. The information presented in the
Registration Statement under the caption "Material Federal Income Tax
Consequences," to the extent it constitutes matters of law or legal
conclusions, is accurate in all material respects.
(e) The Agent shall have received from the Company a certificate, or
certificates, signed by the Chairman of the Board, the President, or the Chief
Operating Officer and by the principal financial or accounting officer of the
Company, dated as of the first business day following each Filing Date (each a
"Certificate Date"), to the effect that, to the best of their knowledge based
upon reasonable investigation:
(i) The representations and warranties of the Company in this
Agreement are true and correct, as if made at and as of the Certificate
Date, and the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied
at or prior to each such Certificate Date;
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceeding for that
purpose has been instituted or, to the knowledge of such officer after
due inquiry, is threatened, by the Commission;
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(iii) Since the date of this Agreement there has occurred no
event required to be set forth in an amendment or supplement to the
Registration Statement or Prospectus that has not been so set forth and
there has been no document required to be filed under the Exchange Act
and the rules and regulations of the Commission thereunder that upon
such filing would be deemed to be incorporated by reference in the
Prospectus that has not been so filed; and
(iv) Since the date of this Agreement, there has not been any
material adverse change, on a consolidated basis, in the business,
financial condition or results of operations of the Company and its
subsidiaries considered as one enterprise which has not been described
in an amendment or supplement to the Registration Statement or
Prospectus (directly or by incorporation).
In addition, on each Certificate Date the certificate shall also state
that the Shares to be sold on that date have been duly and validly authorized by
the Company and that all corporate action required to be taken for the
authorization, issuance and sale of such Shares had been validly and
sufficiently taken.
ARTICLE VI
INDEMNIFICATION AND CONTRIBUTION
6.1.(a) The Company agrees to indemnify and hold harmless the Agent and
each person, if any, who controls the Agent within the meaning of Section 15 of
the Securities Act or Section 20 of the Exchange Act, as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), or the omission or
alleged omission therefrom of a material fact required to be stated
therein or necessary to make the statements therein not misleading or
arising out of any untrue statement or alleged untrue statement of a
material fact contained in any preliminary prospectus or the Prospectus
(or any amendment or supplement thereto) or the omission or alleged
omission therefrom of a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened,
or of any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission, if such
settlement is effected with the written consent of the Company; and
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(iii) against any and all expense whatsoever, as incurred
(including, subject to Section 6(c) hereof, the reasonable fees and
disbursements of counsel chosen by the Agent), reasonably incurred in
investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such
untrue statement or omission, or any such alleged untrue statement or
omission, to the extent that any such expense is not paid under (i) or
(ii) above;
PROVIDED, HOWEVER, that this indemnity agreement shall not apply to any
loss, liability, claim, damage or expense to the extent arising out of any
untrue statement or omission or alleged untrue statement or omission made in
reliance upon and in conformity with written information furnished to the
Company by the Agent expressly for use in the Registration Statement (or any
amendment thereto) or any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto).
(b) The Agent agrees to indemnify and hold harmless the Company and its
trustees and each officer of the Company who signed the Registration Statement,
and each person, if any, who controls the Company within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act against any and all
loss, liability, claim, damage and expense described in the indemnity contained
in subsection (a) of this Article, as incurred, but only with respect to untrue
statements or omissions, or alleged untrue statements or omissions, made in the
Registration Statement (or any amendments thereto) or any preliminary prospectus
or the Prospectus (or any amendment or supplement thereto) in reliance upon and
in conformity with written information furnished to the Company by the Agent
expressly for use in the Registration Statement (or any amendment thereto) or
such preliminary prospectus or the Prospectus (or any amendment or supplement
thereto).
(c) Any indemnified party that proposes to assert the right to be
indemnified under this Article VI will, promptly after receipt of notice of
commencement of any action against such party in respect of which a claim is to
be made against an indemnifying party or parties under this Article VI, notify
each such indemnifying party of the commencement of such action, enclosing a
copy of all papers served, but the omission so to notify such indemnifying party
will not relieve the indemnifying party from (i) any liability that it might
have to any indemnified party otherwise than under this Article VI and (ii) any
liability that it may have to any indemnified party under the foregoing
provision of this Article VI unless, and only to the extent that, such omission
results in the forfeiture of substantive rights or defenses by the indemnifying
party. If any such action is brought against any indemnified party and it
notifies the indemnifying party of its commencement, the indemnifying party will
be entitled to participate in and, to the extent that it elects by delivering
written notice to the indemnified party promptly after receiving notice of the
commencement of the action from the indemnified party, jointly with any other
indemnifying party similarly notified, to assume the defense of the action, with
counsel satisfactory to the indemnified party, and after notice from the
indemnifying party to the indemnified party of its election to assume the
defense, the indemnifying party will not be liable to the indemnified party for
any legal or other expenses except as provided below and except for the
reasonable costs of investigation subsequently incurred by the
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indemnified party in connection with the defense. The indemnified party will
have the right to employ its own counsel in any such action, but the fees,
expenses and other charges of such counsel will be at the expense of such
indemnified party unless (1) the employment of counsel by the indemnified party
has been authorized in writing by the indemnifying party, (2) the indemnified
party has reasonably concluded (based on advice of counsel) that there may be
legal defenses available to it or other indemnified parties that are different
from or in addition to those available to the indemnifying party, (3) a conflict
or potential conflict exists (based on advice of counsel to the indemnified
party) between the indemnified party and the indemnifying party (in which case
the indemnifying party will not have the right to direct the defense of such
action on behalf of the indemnified party) or (4) the indemnifying party has not
in fact employed counsel to assume the defense of such action within a
reasonable time after receiving notice of the commencement of the action, in
each of which cases the reasonable fees, disbursements and other charges of
counsel will be at the expense of the indemnifying party or parties. It is
understood that the indemnifying party or parties shall not, in connection with
any proceeding or related proceedings in the same jurisdiction, be liable for
the reasonable fees, disbursements and other charges of more than one separate
firm admitted to practice in such jurisdiction at any one time for all such
indemnified party or parties. All such fees, disbursements and other charges
will be reimbursed by the indemnifying party promptly as they are incurred. An
indemnifying party will not be liable for any settlement of any action or claim
effected without its written consent (which consent will not be unreasonably
withheld).
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in the foregoing
paragraphs of this Article VI is applicable in accordance with its terms but for
any reason is held to be unavailable from the Company or the Agent, the Company
and the Agent will contribute to the total losses, claims, liabilities, expenses
and damages (including any investigative, legal and other expenses reasonably
incurred in connection with, and any amount paid in settlement of, any action,
suit or proceeding or any claim asserted, but after deducting any contribution
received by the Company from persons other than the Agent, such as persons who
control the Company within the meaning of the Securities Act, officers of the
Company who signed the Registration Statement and trustees of the Company, who
also may be liable for contribution) to which the Company and the Agent may be
subject in such proportion as shall be appropriate to reflect the relative
benefits received by the Company on the one hand and the Agent on the other. The
relative benefits received by the Company on the one hand and the Agent on the
other hand shall be deemed to be in the same proportion as the total net
proceeds from the offering (before deducting expenses) received by the Company
bear to the total compensation (before deducting expenses) received by the Agent
from the sale of Shares on behalf of the Company. If, but only if, the
allocation provided by the foregoing sentence is not permitted by applicable
law, the allocation of contribution shall be made in such proportion as is
appropriate to reflect not only the relative benefits referred to in the
foregoing sentence but also the relative fault of the Company, on the one hand,
and the Agent, on the other, with respect to the statements or omission which
resulted in such loss, claim, liability, expense or damage, or action in respect
thereof, as well as any other relevant equitable considerations with respect to
such offering. Such relative fault shall be determined by reference to whether
the untrue or alleged untrue statement of
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a material fact or omission or alleged omission to state a material fact relates
to information supplied by the Company or the Agent, the intent of the parties
and their relative knowledge, access to information and opportunity to correct
or prevent such statement or omission. The Company and the Agent agree that it
would not be just and equitable if contributions pursuant to this Article VI
were to be determined by pro rata allocation or by any other method of
allocation which does not take into account the equitable considerations
referred to herein. The amount paid or payable by an indemnified party as a
result of the loss, claim, liability, expense or damage, or action in respect
thereof, referred to above in this Article VI shall be deemed to include, for
the purpose of this Article VI, any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the foregoing provisions of this Article VI,
the Agent shall not be required to contribute any amount in excess of the amount
by which the total actual sales price at which Shares sold by the Agent exceeds
the amount of any damages that the Agent has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission and no person found guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) will be entitled to contribution
from any person who was not guilty of such fraudulent misrepresentation. For
purposes of this Article VI, any person who controls a party to this Agreement
within the meaning of the Act will have the same rights to contribution as that
party, and each officer of the Company who signed the Registration Statement
will have the same rights to contribution as the Company, subject in each case
to the provisions hereof. Any party entitled to contribution, promptly after
receipt of notice of commencement of any action against such party in respect of
which a claim for contribution may be made under this Article VI, will notify
any such party or parties from whom contribution may be sought, but the omission
so to notify will not relieve that party or parties from whom contribution may
be sought from any other obligation it or they may have under this Article VI.
No party will be liable for contribution with respect to any action or claim
settled without its written consent (which consent will not be unreasonably
withheld).
(e) The indemnity and contribution provided by this Article VI shall
not relieve the Company and the Agent from any liability the Company and the
Agent may otherwise have (including, without limitation, any liability the Agent
may have for a breach of its obligations under Article III hereof).
ARTICLE VII
REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY
7.1. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. All
representations, warranties and agreements of the Company herein or in
certificates delivered pursuant hereto, and the agreements of the Agent
contained in Article VI hereof, shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of the Agent or any
controlling persons, or the Company (or any of their officers, trustees or
controlling persons), and shall survive delivery of and payment for the Shares.
17
<PAGE> 18
ARTICLE VIII
TERMINATION
8.1. (a) The Agent shall have the right, by giving notice as
hereinafter specified at any time at or prior to any Filing Date, to terminate
this Agreement if (i) any material adverse change, or any development that has
actually occurred and that is reasonably expected to cause material adverse
change, in the business, financial condition or results of operations of the
Company and its subsidiaries has occurred which, in the judgment of such Agent,
materially impairs the investment quality of the Shares, (ii) the Company shall
have failed, refused or been unable, at or prior to the Filing Date, to perform
any agreement on its part to be performed hereunder, (iii) any other condition
of the Agent's obligations hereunder is not fulfilled, (iv) any suspension or
limitation of trading in the Shares on the NYSE, or any setting of minimum
prices for trading of the Shares on the NYSE, shall have occurred, (v) any
banking moratorium shall have been declared by Federal or New York authorities
or (vi) an outbreak or material escalation of major hostilities in which the
United States is involved, a declaration of war by Congress, any other
substantial national or international calamity or any other event or occurrence
of a similar character shall have occurred since the execution of this Agreement
that, in the judgment of the Agent, makes it impractical or inadvisable to
proceed with the completion of the sale of and payment for the Shares to be sold
by the Agent on behalf of the Company. Any such termination shall be without
liability of any party to any other party except that the provisions of Section
4.1(g) and Articles VI and VII hereof shall remain in full force and effect
notwithstanding such termination. If the Agent elects to terminate this
Agreement as provided in this Article, the Agent shall provide the required
notice as specified herein.
(b) The Company shall have the right, by giving thirty (30) days' prior
written notice as hereinafter specified in Article IX, to terminate this
Agreement in its sole discretion at any time. Any such termination shall be
without liability of any party to any other party except that the provisions of
Section 4.1(g) and Articles VI and VII hereof shall remain in full force and
effect notwithstanding such termination.
(c) The Agent shall have the right, by giving thirty (30) days' prior
written notice as hereinafter specified in Article IX, to terminate this
Agreement in its sole discretion at any time. Any such termination shall be
without liability of any party to any other party except that the provisions of
Section 4.1(g) and Articles VI and VII hereof shall remain in full force and
effect notwithstanding such termination.
(d) This Agreement shall remain in full force and effect unless
terminated pursuant to Section 8.1(a), (b) or (c) above or otherwise by mutual
agreement of the parties; provided that any such termination by mutual agreement
shall in all cases be deemed to provide that Section 4.1(g) and Articles VI and
VII shall remain in full force and effect.
18
<PAGE> 19
(e) Any termination of this Agreement shall be effective on the date
specified in such notice of termination; provided that such termination shall
not be effective until the close of business on the date of receipt of such
notice by the Agent or the Company, as the case may be. If such termination
shall occur prior to the Settlement Date for sale of any Shares, such sale shall
settle in accordance with the provisions of the second-to-last paragraph of
Article III hereof.
ARTICLE IX
NOTICES
9.1. NOTICES. All notices or communications hereunder shall be in
writing and if sent to the Agent shall be mailed, delivered, telexed or
telecopied and confirmed to the Agent at _____________________________
____________________________________________________, or if sent to the Company,
shall be mailed, delivered, telexed or telecopied and confirmed to the Company
at 10 Burton Hills Boulevard, Suite 100, Nashville, Tennessee 37215, Attention:
James W. Phillips. Each party to this Agreement may change such address for
notices by sending to the parties to this Agreement written notice of a new
address for such purpose.
ARTICLE X
MISCELLANEOUS
10.1. PARTIES. This Agreement shall inure to the benefit of and be
binding upon the Company and the Agent and their respective successors and the
controlling persons, officers and trustees referred to in Article VI hereof, and
no other person will have any right or obligation hereunder.
10.2. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
and supersedes all other prior and contemporaneous agreements and undertakings,
both written and oral, among the parties hereto with regard to the subject
matter hereof.
10.3. APPLICABLE LAW. This Agreement shall be governed by, and
construed in accordance with, the internal laws of the State of Tennessee
without regard to the principles or conflicts of laws.
10.4. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
19
<PAGE> 20
If the foregoing correctly sets forth the understanding between the
Company and the Agent, please so indicate in the space provided below for that
purpose, whereupon this letter shall constitute a binding agreement between the
Company and the Agent. Alternatively, the execution of this Agreement by the
Company and its acceptance by or on behalf of the Agent may be evidenced by an
exchange of telegraphic or other written communications.
Very truly yours,
PRISON REALTY CORPORATION
By:
--------------------------
Title:
-----------------------
ACCEPTED as of this ______ day of
________, 1999:
________________________
By:
------------------------------
Title:
---------------------------
20
<PAGE> 1
Exhibit 5.1
[STOKES & BARTHOLOMEW, P.A. LETTERHEAD]
January __, 1999
Prison Realty Corporation
10 Burton Hills Boulevard, Suite 100
Nashville, Tennessee 37215
Ladies and Gentlemen:
We have acted as counsel to Prison Realty Corporation, a Maryland
corporation (the "Company"), in connection with the Registration Statement on
Form S-3, filed on January 11, 1999, by the Company with the Securities and
Exchange commission under the Securities Act of 1933, as amended, relating to
the offer and sales of up to $1,500,000,000 of aggregate initial offering price
of (a) shares of common stock, $0.01 par value per share (the "Common Stock"),
(b) shares of preferred stock, $0.01 par value per share (the "Preferred
Stock"), (c) rights to purchase Common Stock (the "Common Stock Purchase
Rights") (d) one or more series of debt securities (the "Debt Securities"), and
(e) warrants to purchase shares of Common Stock, Preferred Stock, or Debt
Securities (the "Warrants"). The Common Stock , the Common Stock Purchase
Rights, the Preferred Stock, the Debt Securities, and the Warrants are referred
to, collectively, as the "Offered Securities." The Prospectus set forth in the
Registration Statement (the "Prospectus") provides that the Offered Securities
may be offered separately or together, in separate series, and in amounts, at
prices and on terms to be set forth in one or more supplements to the Prospectus
(each, a "Prospectus Supplement"). This opinion is being provided to you in
connection with the filing of the Registration Statement.
We have examined the originals or copies, certified or otherwise
identified to our satisfaction, of all such records of the Company and all such
agreements, certificates of public officials, certificates of officers or other
representatives of the Company, and such other documents, certificates and other
records as we have deemed necessary or appropriate as a basis for the opinions
set forth herein, including (i) the Charter of the Company (the "Charter"), (ii)
the Amended and Restated Bylaws of the Company (the "Bylaws"), and (iii)
certified copies of certain resolutions duly adopted by the Board of Directors
of the Company. As to factual matters material to the opinions set forth below
we have relied, without investigation, upon the representations and statements
of the Company in the Registration Statement and in such certificates of
government officials and officers of the Company as we have deemed necessary for
the purpose of the opinions expressed herein.
We have assumed that: (i) prior to the issuance of any Common Stock or
Preferred Stock (or Offered Securities convertible into shares of Common Stock
or Preferred Stock), the Company will have a sufficient number of authorized but
unissued shares of Common Stock or Preferred Stock authorized under its Charter
and will comply with all other applicable requirements of Maryland law; (ii) the
issuance, sale, amount and terms of the Offered Securities to be sold from time
to time will be authorized by action of the Board of Directors of the company
(the "Resolutions") and in
<PAGE> 2
Board of Directors
January __, 1999
Page 2
accordance with its Charter, Bylaws and applicable Maryland law; and (iii) the
Common Stock Purchase Rights, Debt Securities, and Warrants have been issued in
accordance with the terms of any applicable rights, warrant agreements, or
indenture instruments.
The opinions stated herein are limited to the federal laws of the
United States, the laws of the State of Tennessee and the General Corporation
Law of the State of Maryland. The opinions expressed below with respect to the
valid and binding nature of any Offered Securities are subject to the effect of
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' rights generally and the application of general principles
of equity, whether in a proceeding in equity or at law.
Based upon and subject to the conditions and limitation set forth
herein, we are of the opinion that:
1. When the Registration Statement has become effective under the Act
and payment for such shares of Common Stock has been made (a) in the manner
contemplated by the applicable Resolutions, the Registration Statement, the
Prospectus and the applicable Prospectus Supplement and, if applicable, an
underwriting agreement relating to the issuance of such shares, or (b) pursuant
to the conversion of validly issued and fully paid and non-assessable Preferred
Stock on accordance with the established terms of such Preferred Stock, the
exercise of validly issued Common Stock Purchase Rights in accordance with the
terms thereof, and the certificates representing such shares of Common Stock are
authenticated and delivered, such Common Stock issued will be duly authorized,
validly issued, fully paid and non-assessable by the Company.
2. When the Registration Statement has become effective under the Act
and a series of the Preferred Stock has been duly authorized and established in
accordance with the applicable Resolutions, the terms of the Charter and
applicable Maryland law, and upon payment for the shares of Preferred Stock in
the manner contemplated by the applicable Resolutions, the Registration
Statement, the Prospectus and the applicable Prospectus Supplement and, if
applicable, an underwriting agreement relating to the issuance of such Preferred
Stock, and certificates representing such Preferred Stock are authenticated and
delivered, such Preferred Stock will be duly authorized, validly issued, fully
paid and non-assessable.
3. When the Registration Statement has become effective under the Act
and the Common Stock Purchase Rights, Debt Securities, or Warrants have been
duly established by any applicable rights agreements, warrant agreements, or
indenture instruments, and duly authenticated by any agent required under such
agreements or indentures and duly authorized and established by the applicable
Resolutions, and the Common Stock Purchase Rights, Debt Securities, or Warrants
have been duly executed and delivered on behalf of the Company against payment
therefor in accordance with the terms and provisions of the applicable
Resolutions, any applicable rights agreements, warrant agreements, or indenture
agreements and as contemplated by the Registration Statement, the Prospectus and
the applicable
<PAGE> 3
Board of Directors
January __, 1999
Page 3
Prospectus Supplement and, if applicable, an underwriting agreement relating to
the issuance of such Common Stock Purchase Rights, Warrants, or Debt Securities,
the Common Stock Purchase Rights, Warrants, or Debt Securities will be duly
authorized and will constitute valid and binding obligations of the Company.
We hereby consent to the filing of this opinion as an exhibit to the
above-referenced Registration Statement and to the use of our name as it appears
under the caption "Legal Matters" in the Prospectus contained in such
Registration Statement.
Very truly yours,
Stokes & Bartholomew, P.A.
<PAGE> 1
Exhibit 5.2
[LETTERHEAD OF MILES & STOCKBRIDGE P.C.]
January ___, 1999
Prison Realty Corporation
10 Burton Hills Boulevard, Suite 100
Nashville, Tennessee 37215
Ladies and Gentlemen:
In connection with the registration under the Securities Act of 1933
(the "Act") by Prison Realty Corporation, a Maryland corporation (the
"Company"), of securities of the Company with an aggregate purchase price of up
to $1,500,000,000 (the "Offered Securities"), consisting of (a) shares of the
Company's common stock, par value $0.01 per share (the "Common Stock"), (b)
shares of the Company's preferred stock, par value $0.01 per share (the
"Preferred Stock"), (c) rights to purchase shares of Common Stock (the "Common
Stock Purchase Rights") (d) one or more series of debt securities (the "Debt
Securities"), and (e) warrants to purchase shares of Common Stock, Preferred
Stock or Debt Securities (the "Warrants") on its Registration Statement on Form
S-3 (the "Registration Statement"), we have examined such corporate records,
certificates and documents as we deemed necessary for the purpose of this
opinion. Based on that examination and subject to the assumptions and
qualifications set forth herein, we advise you that in our opinion:
1. The issuance and sale by the Company of the Offered Securities
with an aggregate purchase price of up to $1,500,000,000 has
been duly and validly authorized.
2. When the issuance and sale of the shares of Common Stock have
been authorized by the Pricing Committee of the Board of
Directors of the Company in a manner consistent with the
delegation of authority to that committee and sold in the
manner contemplated by the Registration Statement, such shares
of Common Stock will be legally issued, fully paid and
non-assessable.
3. When a series of the Preferred Stock has been duly authorized
and established by the Board of Directors, Articles
Supplementary filed with the State Department of
<PAGE> 2
Prison Realty Corporation
January ____, 1999
Page 2
Assessments and Taxation of the State of Maryland with respect
thereto, and upon issuance and sale of such shares in a manner
contemplated by the applicable Board authorization and the
Registration Statement, such shares of Preferred Stock will be
duly authorized, validly issued, fully paid and
non-assessable.
4. When the Common Stock Purchase Rights have been duly
established by any applicable rights agreements and duly
authenticated by any agent required under such agreements and
duly authorized and established by resolution of the Board of
Directors, and issued and sold in accordance with the
applicable authorizations and agreements and as contemplated
in the Registration Statement, the Common Stock Purchase
Rights will be duly authorized and will constitute valid and
binding obligations of the Company.
5. When the Debt Securities are duly established by any
applicable indenture instruments and duly authorized and
established by resolution of the Board of Directors, and
issued and sold in accordance with applicable authorizations
and agreements and as contemplated in the Registration
Statement, the Debt Securities will be duly authorized and
constitute valid and binding obligations of the Company.
6. When the Warrants have been duly established by any applicable
rights agreements and duly authenticated by any agent required
under such agreements and duly authorized and established by
resolution of the Board of Directors, and issued and sold in
accordance with the applicable authorizations and agreements
and as contemplated in the Registration Statement, the
Warrants will be duly authorized and will constitute valid and
binding obligations of the Company.
In giving our opinions, we have assumed that, prior to the issuance of
any shares of Common Stock or shares of Preferred Stock or any Offered
Securities convertible or exchangeable into shares of Common Stock or shares of
Preferred Stock, the Company will have a sufficient number of shares of
authorized but unissued Common Stock or Preferred Stock, as applicable. With
respect to the issuance of any Common Stock Purchase Rights exercisable,
exchangeable or convertible into Common Stock, or any Warrant to purchase Common
Stock or Preferred Stock, we have assumed that the Company will reserve for
issuance upon such exercise, exchange or conversion a sufficient number of
shares of Common Stock or Preferred Stock. Further, each of our opinions is
based on the assumption that the aggregate purchase price paid for any Offered
Securities, as well as for any other Offered Securities theretofore issued, does
not exceed $1,500,000,000.
<PAGE> 3
Prison Realty Corporation
January ____, 1999
Page 3
We understand that Stokes & Bartholomew, P.A. will rely on our opinion
in giving its opinion letter to you on the date hereof and we consent to that
reliance. The opinion expressed herein is limited to the matters set forth in
this letter and no other opinion should be inferred beyond the matters expressly
stated.
Very truly yours,
Miles & Stockbridge P.C.
By
--------------------------------------
Principal
<PAGE> 1
Exhibit 8.1
[STOKES & BARTHOLOMEW, P.A. LETTERHEAD]
January ____, 1999
Board of Directors
Prison Realty Corporation
10 Burton Hills Boulevard, Suite 100
Nashville, Tennessee 37215
Re: Prison Realty Corporation Registration Statement on Form S-3
Gentlemen:
We have acted as tax counsel to Prison Realty Corporation, a Maryland
corporation (the "Company"), in connection with the offering from time to time,
together or separately, in one or more series of (i) common stock, par value
$0.01 per share, of the Company (the "Common Stock"); (ii) preferred stock, par
value $0.01 per share, of the Company (the "Preferred Stock"); (iii) rights to
purchase Common Stock (the "Common Stock Purchase Rights"); (iv) one or more
series of debt securities ("Debt Securities"), which may be either senior debt
securities or subordinated debt securities, and (v) warrants to purchase shares
of Preferred Stock, Common Stock or Debt Securities, with an aggregate public
offering price not to exceed $1,500,000,000 as described in the Registration
Statement on Form S-3 filed with the Securities and Exchange Commission today
(the "Registration Statement").
You have requested our opinion whether the Company qualifies as a real
estate investment trust under Sections 856 through 860 of the Internal Revenue
Code of 1986, as amended (the "Code"), commencing with its taxable year ended
December 31, 1999, and whether its proposed method of operation will enable it
to continue to meet the requirements for qualification and taxation as a real
estate investment trust under the Code.
In rendering our opinion, we have examined such records, documents,
certificates and other instruments and made such investigations of fact and law
as in our judgment are necessary or appropriate to enable us to render the
opinion expressed below. In our examination, we have assumed the authenticity of
all documents submitted to us as originals, the genuineness of all signatures
thereon, the legal capacity of natural persons executing the documents and the
conformity to authentic original documents of all documents submitted to us as
copies.
This opinion is based upon various statements of fact and assumptions,
including the statements of fact and assumptions set forth in the Registration
Statement concerning the business, assets and governing documents of the
Company. We have also been furnished, and with your
<PAGE> 2
Board of Directors
January ____, 1999
Page 2
consent have relied upon, certain representations as to factual matters made by
the Company through a certificate of certain officers of the Company ("Officer's
Certificate"). We express no opinion as to the laws of any jurisdiction other
than the Federal laws of the United States of America to the extent specifically
referred to herein.
On the basis of and in reliance on the foregoing, it is our opinion
that, under current law, including relevant statutes, regulations and judicial
and administrative precedent (which law is subject to change on a retroactive
basis), the Company, commencing with its tax year ending December 31, 1999, will
be organized in conformity with the requirements for qualification as a real
estate investment trust under the Code, and its proposed method of operation, as
described in the Registration Statement and the Officer's Certificate referenced
above, will enable it to continue to meet the requirements for qualification and
taxation as a real estate investment trust under the Code. Since actual
qualification as a real estate investment trust is dependent upon future facts
and circumstances, it is possible that future events, operations, distributions
or other actions will cause the Company not to qualify or continue to qualify as
a real estate investment trust.
This opinion is intended for the use of the person to whom it is
addressed, except as set forth herein, and it may not be used, circulated,
quoted or relied upon for any other purpose without our prior written consent.
We consent to the filing of this opinion with the Commission as an exhibit to
the Registration Statement. This opinion is expressed as of the date hereof, and
we disclaim any undertaking to advise you of any subsequent changes of the
matters stated, represented, or assumed herein or any subsequent changes in
applicable law.
Very truly yours,
STOKES & BARTHOLOMEW, P.A.
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accounts, we hereby consent to the incorporation
by reference in this registration statement on Form S-3 of Prison Realty
Corporation of our report dated January 9, 1998 relating to the financial
statements of CCA Prison Realty Trust and subsidiary included in CCA Prison
Realty Trust's Form 10-K, as amended, for the year ended December 31, 1997 and
to all references to our Firm included in or incorporated by reference in this
registration statement.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
January 8, 1999
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement on Form S-3 of Prison Realty
Corporation of our report dated February 16, 1998 relating to the financial
statements of Corrections Corporation of America and subsidiaries included in
Corrections Corporation of America's Form 10-K, as amended, for the year ended
December 31, 1997 and to all references to our Firm included in or incorporated
by reference in this registration statement.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
January 8, 1999
<PAGE> 1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated September 11, 1998 (except for certain matters discussed in Note 2 as to
which the date is September 28, 1998), relating to the balance sheet of
Correctional Management Services Corporation as of September 11, 1998 and to
all references to our Firm included in this registration statement on Form S-3.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
January 8, 1999
