<PAGE> 1
REGISTRATION STATEMENT ON FORM S-3
(NOS. 333-63475 AND 333-63475-01)
FILING PURSUANT TO RULE 424(B)(2)
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED
OCTOBER 14, 1998)
CCA PRISON REALTY TRUST
272,600 COMMON SHARES
---------------------
The 272,600 common shares, par value $0.01 per share (the "Common Shares"),
of CCA Prison Realty Trust (the "Company") offered hereby are being offered by
the Company to certain officers and trustees of the Company in a directly
negotiated transaction at an average purchase price of $20.97 per share and an
aggregate purchase price of $5,717,524.66. The Common Shares to be sold hereby
have been approved for issuance on the New York Stock Exchange, subject to
official notice of issuance.
The shares purchased were sold to certain individuals pursuant to a share
purchase program approved by the Company, and the proceeds thereof are being
used to reimburse the cost of a like number of shares purchased by the Company
on the open market.
The Company is a self-administered and self-managed real estate investment
trust ("REIT"). The principal business of the Company is the ownership and
development of correctional and detention facilities and the leasing of such
facilities under long-term leases to qualified third-party operators. As of
October 20, 1998, the Company owned 20 correctional and detention facilities
with a total design capacity of 16,030 beds. The Company currently has one
facility under construction which has a total design capacity of approximately
528 beds and is expected to be completed in November of 1998. Additionally, the
Company has an option to acquire from Corrections Corporation of America up to
eleven additional facilities with an aggregate design capacity of 11,450 beds,
which are currently under construction or development.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO
WHICH IT RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
The date of this Prospectus Supplement is October 20, 1998
S-1
<PAGE> 2
TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUPPLEMENT....................................... S-1
PROSPECTUS
The Company................................................. 1
Corrections Corporation of America.......................... 3
Material Risk Factors....................................... 5
Use of Proceeds............................................. 14
Ratio of Earnings to Combined Fixed Charges and Preferred
Share Dividends........................................... 15
Description of Capital Shares............................... 16
Plan of Distribution........................................ 21
Material Federal Income Tax Consequences.................... 22
ERISA Considerations........................................ 33
Legal Matters............................................... 33
Experts..................................................... 33
</TABLE>
<PAGE> 3
PROSPECTUS
$500,000,000
CCA PRISON REALTY TRUST
COMMON SHARES
PREFERRED SHARES AND
COMMON SHARE PURCHASE RIGHTS OR
WARRANTS
---------------------
CCA Prison Realty Trust, a Maryland real estate investment trust (the
"Company"), may offer from time to time, together or separately, in one or more
series (i) common shares, par value $0.01 per share, of the Company (the "Common
Shares"); (ii) preferred shares, par value $0.01 per share, of the Company (the
"Preferred Shares"); and (iii) rights or warrants to purchase Common Shares of
the Company (the "Common Share Purchase Rights"), with an aggregate public
offering price not to exceed $500,000,000. The Common Shares, Preferred Shares
and Common Share Purchase Rights (collectively, the "Offered Securities") may be
offered, separately or together, in separate classes or series, in amounts, at
prices and on terms to be determined at the time of offering and as set forth in
a supplement to this Prospectus (each, a "Prospectus Supplement").
The specific terms of the Offered Securities for which this Prospectus is
being delivered will be set forth in the applicable Prospectus Supplement and
will include, when applicable: (i) in the case of Common Shares, any offering
price; (ii) in the case of Preferred Shares, the specific title and stated
value, any distribution, any return of capital, liquidation, redemption,
conversion, voting and other rights, and any offering price; and (iii) in the
case of Common Share Purchase Rights, the duration, offering price, exercise
price and any reallocation of Common Share Purchase Rights not initially
subscribed. In addition, such specific terms may include limitations on direct
or beneficial ownership and restrictions on transfer of the Offered Securities,
in each case as may be appropriate to preserve the status of the Company as a
real estate investment trust ("REIT") for federal income tax purposes.
The applicable Prospectus Supplement will also contain information, when
necessary, about all material United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Offered Securities
covered by such Prospectus Supplement. The Common Shares are listed on the New
York Stock Exchange (the "NYSE") under the symbol PZN. The Company's 8.0% Series
A Cumulative Preferred Shares, liquidation preference $25.00 per share (the
"Series A Preferred Shares"), are also listed on the NYSE, under the symbol "PZN
Pr A."
From the date hereof until consummation of the proposed merger between the
Company and Corrections Corporation of America described herein, the Company
will not issue a number of Common Shares or securities convertible into Common
Shares which would cause the shareholders of Prison Realty to own more than 50%
of the common stock of the surviving company.
The Offered Securities may be offered directly, through agents designated
from time to time by the Company or to or through underwriters or dealers. If
any agents or underwriters are involved in the sale of any of the Offered
Securities, their names, and any applicable purchase price, fee, commission or
discount arranged between or among them will be set forth or will be calculable
from the information set forth in the applicable Prospectus Supplement. No
Offered Securities may be sold without delivery of the applicable Prospectus
Supplement describing the method and terms of the offering of such class or
series of the Offered Securities.
Under the rules of the Securities and Exchange Commission, Corrections
Corporation of America, a Tennessee corporation ("CCA"), is deemed to be a
co-registrant with respect to the Offered Securities.
No person is authorized in connection with any offering made hereby to give
any information or to make any representation not contained or incorporated by
reference in this Prospectus, and any information or representation not
contained or incorporated herein must not be relied upon as having been
authorized by the Company or any underwriter. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, by any person
in any jurisdiction in which it is unlawful for such person to make such offer
or solicitation. Neither the delivery of this Prospectus at any time nor any
sale made herein shall, under any circumstances, imply that the information
herein is correct as of any date subsequent to the date hereof.
---------------------
SEE "MATERIAL RISK FACTORS" (BEGINNING ON PAGE 5 OF THIS PROSPECTUS) FOR
CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE OFFERED SECURITIES.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
The date of this Prospectus is October 14, 1998
<PAGE> 4
WHERE YOU CAN FIND MORE INFORMATION
The Company and CCA are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith both file reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy statements and other information filed by the Company and CCA with the
Commission can be inspected and copied at the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the following regional offices of the Commission: 7 World
Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
information can be obtained from the Public Reference Section of the Commission
at prescribed rates. The Commission also maintains a web site on the World Wide
Web that contains reports, proxy and information statements and other
information on registrants that must file such material with the Commission
electronically, such as the Company and CCA. The Commission's address on the
World Wide Web is "http://www.sec.gov." The Company's Common Shares and Series A
Preferred Shares and CCA's common stock are listed on the NYSE, and similar
information with respect to both companies can be inspected and copied at the
NYSE, 20 Broad Street, 17th Floor, New York, New York 10005.
This Prospectus constitutes a part of a registration statement on Form S-3
(the "Registration Statement") filed by the Company and CCA with the Commission
under the Securities Act of 1933, as amended (the "Securities Act"). As
permitted by the rules and regulations of the Commission, this Prospectus omits
certain of the information contained in the Registration Statement and reference
is hereby made to the Registration Statement and related exhibits for further
information with respect to the Company, CCA and the Offered Securities.
Statements contained herein concerning the provisions of any documents filed as
exhibits to the Registration Statement or otherwise filed with the Commission
are not necessarily complete, and in each instance reference is made to the copy
of such document so filed and each such statement is qualified in its entirety
by such reference.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The Commission allows the Company and CCA to "incorporate by reference"
certain information into this Prospectus. This means that the companies can
disclose important information to you by referring you to another document filed
separately with the Commission. The information incorporated by reference is
considered to be a part of this 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 and CCA 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 Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1997, as filed March 18, 1998, and amended on March 30,
1998.
(2) The Company's Quarterly Reports on Form 10-Q for the periods ended
March 31, 1998, as filed May 15, 1998 and June 30, 1998, as filed
August 14, 1998.
(3) The Company's Current Reports on Form 8-K dated April 22, 1998, May 4,
1998 and September 30, 1998.
(4) The description of the Company's Common Shares contained in its
Registration Statement on Form 8-A, filed with the Commission on May
28, 1997.
CCA
(1) CCA'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.
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<PAGE> 5
(2) CCA's Quarterly Reports on Form 10-Q/A for the period ended March 31,
1998, as filed May 15, 1998 and amended on June 5, 1998; and for the
period ended June 30, 1998, as filed August 14, 1998 and amended on
September 29, 1998.
(3) CCA's Current Report on Form 8-K dated April 22, 1998 and September 30,
1998.
(4) CCA's Registration Statement on Form 8-B, filed with the Commission on
July 10, 1997.
All other documents and reports filed with the Commission by the Company or
CCA 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 and CCA 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:
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THE COMPANY CCA
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<S> <C>
10 Burton Hills Boulevard, Suite 100 10 Burton Hills Boulevard
Nashville, Tennessee 37215 Nashville, Tennessee 37215
(615) 263-0200 (615) 263-3000
Attn: Vida H. Carroll Attn: Peggy Lawrence
</TABLE>
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 and CCA's expectations concerning their
future profitability, their operating and growth strategies, including strategic
acquisitions, both pending and potential, and their 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. In
addition, forward-looking statements may be included in various other documents
issued in the future and in various oral statements by representatives of the
Company and CCA to securities analysts and potential investors from time to
time. Investors are cautioned that all forward-looking statements involve risks
and uncertainties, including, without limitation, the factors set forth under
the caption "Material 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 and CCA believe 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 the 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 CCA or any other person that
the objectives and plans of the Company or CCA will be achieved. In addition,
the Company and CCA do not intend to, and are not obligated to, update these
forward-looking statements after they distribute this Prospectus, even if new
information, future events or other circumstances have made them incorrect or
misleading as of any future date.
ii
<PAGE> 6
THE COMPANY
GENERAL
The Company was formed on April 23, 1997 as a real estate investment trust
under the laws of the State of Maryland to acquire, develop, and lease private
and public correctional and detention facilities. The Company has elected to be
taxed and has operated so as to qualify as a real estate investment trust, or
REIT, under Sections 856 through 860 of the Internal Revenue Code of 1986, as
amended (the "Code"), commencing with its taxable year ended December 31, 1997.
On July 18, 1997, the Company commenced operations upon the completion of
its initial public offering of 21,275,000 of its Common Shares (including
2,775,000 shares issued as a result of the exercise of an over-allotment option
by the underwriters). The Common Shares were issued at an initial offering price
of $21.00 per share, generating gross proceeds to the Company of $446.8 million.
The aggregate proceeds to the Company, net of the underwriters' discount and
offering costs, were approximately $412.1 million, $308.1 million of which were
used to purchase nine correctional and detention facilities from CCA.
The Company was formed to capitalize on the opportunities created by the
perceived trend towards increased privatization in the corrections and detention
industry, including the increased demand for private correctional and detention
facilities. The principal business strategy of the Company is to own and develop
correctional and detention facilities that meet the Company's investment
criteria, to acquire such facilities from both private prison managers and
government entities, to expand the design capacity of its existing facilities
and to lease all such facilities under long-term leases to qualified third-party
operators. As of September 25, 1998, the Company owned 20 correctional and
detention facilities, with a total design capacity of 16,030 beds. In addition,
the Company currently has one facility under construction which has a total
design capacity of approximately 528 beds and is expected to be completed in
November of 1998. The Company also has options to acquire up to 11 additional
facilities from CCA, with an aggregate design capacity of 11,450 beds which are
currently under construction or development by CCA (the "Option Facilities"). In
addition, the Company has entered into a right to purchase agreement with CCA,
whereby the Company holds an option to acquire any correctional or detention
facility acquired or developed and owned by CCA in the future, for a period of
three years following the date on which inmates are first received with respect
to such facility (the "Right to Purchase Agreement"). The Company is the largest
self-administered and self-managed, publicly-traded REIT in the United States
focused on owning and acquiring correctional and detention facilities.
The Company leases 17 of its facilities to CCA, which manages the
facilities (CCA also manages one of the Company's other facilities which is
leased to the State of North Carolina). CCA is the largest developer and manager
of privatized correctional and detention facilities worldwide. The Company has
entered into a definitive agreement with CCA relative to a proposed business
combination of the two entities (the "Merger"). For a further discussion of the
proposed Merger, see "-- Recent Developments -- Pending Merger." The Company
also leases one of its facilities to a private operator other than CCA and two
of its facilities to government entities, all pursuant to terms materially
consistent with the leases with CCA.
As a REIT, the Company generally will not be subject to federal income tax
to the extent that it distributes its earnings to its shareholders and maintains
its qualification as a REIT. In order to qualify as a REIT, the Company's income
must be derived from certain sources, including rents from real property (and
generally excluding income from the operation of a correctional facility).
Accordingly, the Company is precluded from operating the correctional and
detention facilities that it owns and, as a consequence, intends to lease all
such properties pursuant to long-term non-cancellable leases.
The Company's executive offices are located at 10 Burton Hills Boulevard,
Suite 100, Nashville, Tennessee 37215, and its telephone number is (615)
263-0200.
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<PAGE> 7
RECENT DEVELOPMENTS
PENDING MERGER
On September 29, 1998, the Company, CCA, and Prison Realty Corporation, a
newly formed Maryland corporation ("New Prison Realty"), entered into an Amended
and Restated Agreement and Plan of Merger (the "Merger Agreement") relative to
the proposed Merger. Under the terms of the Merger Agreement: (i) holders of the
Company's Common Shares and the Company's Series A Preferred Shares will
continue to own 1.0 share of New Prison Realty for each share they currently
own; and (ii) holders of shares of CCA's common stock, par value $1.00 per share
(the "CCA Common Stock"), will obtain the right to receive 0.875 share of New
Prison Realty for each share of CCA Common Stock they currently own. New Prison
Realty will elect to be taxed and expects to operate so as to qualify as a REIT
for federal income tax purposes. The proposed Merger and the Merger Agreement
are more fully described in the Company's Current Report on Form 8-K filed with
the Commission on September 29, 1998, which is incorporated herein by reference.
The contents of the Company's and CCA's Joint Proxy Statement prepared with
respect to the Merger are included in the Registration Statement on Form S-4
filed by New Prison Realty in connection with the Merger on September 30, 1998.
RECENT ACQUISITIONS OF ASSETS
The Company has historically focused its investments on privately-managed
facilities which are owned and operated by CCA or its subsidiaries. However, the
Company has pursued and is continuing to pursue other opportunities, including
acquisitions and leasebacks of, or financings for, facilities owned and operated
by various government entities and private operators other than CCA. The Company
believes it has significant access to potential development and acquisition
opportunities through its relationship with CCA and the experience and industry
contacts of the Company's Board of Trustees and management, particularly those
of J. Michael Quinlan, the Company's Chief Executive Officer and a member of its
Board of Trustees and former head of the Federal Bureau of Prisons.
On April 17, 1998, the Company and its wholly-owned subsidiary USCA
Corporation ("USCA"), on the one hand, and U.S. Corrections Corporation, a
privately-held owner and former operator of correctional and detention
facilities ("USCC"), on the other hand, entered into and completed an agreement
of merger, whereby USCA merged with and into USCC and the Company acquired all
of the outstanding capital stock and derivative securities of USCC (the "USCC
Merger") in exchange for a cash payment to the shareholders of USCC of
approximately $157.0 million. As a result of the USCC Merger, the Company also
assumed certain liabilities of USCC. Immediately prior to the USCC Merger, CCA
purchased USCC's facility management contracts and the corresponding enterprise
value of operations from USCC for $10.0 million in cash. Accordingly, as a
result of the USCC Merger, the Company acquired only real estate properties.
By virtue of the USCC Merger, the Company acquired four correctional and
detention facilities in Kentucky, one in Ohio and two, in North Carolina, one of
which is currently under construction. Such facilities currently have an
aggregate design capacity of approximately 5,200 beds. The Company leases the
Kentucky facilities to CCA; leases the completed North Carolina facility to the
State of North Carolina, who has contracted with CCA to operate the facility;
and expects to lease the North Carolina facility currently under construction to
the State of North Carolina, who will contract with CCA to operate the facility.
In addition, the Company continues to lease the Ohio facility to Hamilton
County, Ohio.
On May 4, 1998, the Company purchased the Leo Chesney Center, a 200 bed
correctional facility located in Live Oak, California. The facility, acquired
for a purchase price of approximately $5.1 million, is leased to and operated by
Cornell Corrections Corporation under a contract with the California Department
of Corrections. The Company is currently expanding the facility to increase the
rated capacity by approximately 72 beds.
In June of this year, the Company began the development of two educational
facilities, one in Houston, Texas, and one in Dallas, Texas, for Community
Education Partners, Inc., a privately-held Delaware corporation ("CEP"), which
develops and operates publicly funded, privately operated alternative education
programs for at-risk youth. The Company intends to renovate and lease these
facilities to CEP pursuant to terms and conditions materially consistent with
the Company's current relationship with private prison operators.
2
<PAGE> 8
BANK FINANCING
On July 31, 1998, the Company entered into an Amended and Restated Credit
Agreement with a syndication of banks arranged by First Union National Bank
("First Union"), NationsBank, N.A. ("NationsBank"), and Canadian Imperial Bank
of Commerce ("CIBC"), whereby the Company's existing revolving credit facility
was increased from $225.0 million to $300.0 million (the "Company Credit
Facility"). The Company Credit Facility will mature on July 18, 2000. The
proceeds from the Company Credit Facility are being used for the acquisition of
additional correctional and detention facilities as well as for working capital
and general corporate purposes. As of September 25, 1998, the Company had a
total indebtedness of approximately $236.7 million under the Company Credit
Facility.
SERIES A PREFERRED SHARE OFFERING
On January 30, 1998, the Company concluded a public offering of 4,300,000
of its Series A Preferred Shares (including 300,000 shares sold on February 27,
1998, pursuant to the underwriters' over-allotment option) in an aggregate
principal amount of $107.5 million. The Company used the net proceeds from the
offering, equal to approximately $103.5 million after deduction of the
underwriting discount and estimated offering expenses, to repay outstanding
indebtedness under its credit facility and to acquire additional correctional
and detention facilities.
The Series A Preferred Shares are redeemable at any time on or after
January 30, 2003, at $25.00 per share, plus dividends accrued and unpaid to the
redemption date. The Series A Preferred Shares have no stated maturity, sinking
fund provision or a mandatory redemption and are not convertible into any other
securities of the Company. Dividends on the Series A Preferred Shares are
cumulative from the date of original issue of such shares and are payable
quarterly in arrears on the 15th day of January, April, July and October of each
year, to shareholders of record on the last day of March, June, September and
December of each year, respectively, and at a fixed annual rate of 8.0%.
The Series A Preferred Shares rank senior to the Company's Common Shares as
to rights to receive distributions and to participate in distributions or
payments upon any liquidation, dissolution or winding-up of the Company.
CORRECTIONS CORPORATION OF AMERICA
GENERAL
CCA, a Tennessee corporation, is the largest developer and manager of
privatized correctional and detention facilities worldwide. CCA's facilities are
located in 22 states, the District of Columbia, Puerto Rico, Australia and the
United Kingdom. As of September 25, 1998, CCA had contracts to manage 78
correctional and detention facilities with an aggregate design capacity of
63,308 beds. Of these 78 facilities, 65 facilities, with an aggregate design
capacity of 46,886 beds, are currently in operation and 13 are under development
by CCA. Of the 13 facilities under development, ten will be financed and owned
by CCA and will be subject to an option to purchase by the Company. CCA, through
its United Kingdom joint venture, UK Detention Services, manages one facility in
the United Kingdom and, through its Australian joint venture, Corrections
Corporation of Australia, Pty. Ltd., manages two facilities in Australia. Of the
13 facilities under development by CCA, five are scheduled to commence
operations during 1998. In addition, at September 25, 1998, CCA had outstanding
written responses to requests for proposal and other solicitations for an
additional 13 projects with an aggregate design capacity of 8,716 beds.
The services provided by CCA to government agencies include the integrated
design, construction and management of new correctional and detention facilities
and the redesign, renovation and management of older facilities. In addition to
providing the fundamental residential services relating to adult and juvenile
inmates, CCA's facilities offer a large variety of rehabilitation and education
programs including basic education, life skills and employment training and
substance abuse treatment. CCA also provides health care (including medical,
dental and psychiatric services), institutional food services, transportation
requirements, and work and recreational programs. Management of CCA believes
that its proven ability to deliver a full
3
<PAGE> 9
range of high quality correctional and detention facility management services on
a cost-effective and efficient basis to government agencies provides such
agencies with sufficient incentives to choose CCA when awarding new contracts or
renewing existing contracts.
In addition to the opening of new facilities, in recent years, CCA has
expanded its service capabilities and broadened its geographic presence in the
United States market through a series of strategic acquisitions of prison
management companies and individual facilities, as well as the acquisition of an
inmate transportation company. CCA intends to continue to pursue strategic
acquisitions of prison management companies and facilities when the proposed
acquisition enhances shareholder value.
CCA's executive offices are located at 10 Burton Hills Boulevard,
Nashville, Tennessee 37215, and its telephone number is (615) 263-3000.
RECENT DEVELOPMENTS
PENDING MERGER
On September 29, 1998, CCA, the Company and New Prison Realty entered into
the Merger Agreement relative to the proposed Merger. Under the terms of the
Merger Agreement: (i) holders of shares of the CCA Common Stock will obtain the
right to receive 0.875 share of New Prison Realty for each share of CCA Common
Stock they own; and (ii) holders of the Company's Common Shares and the
Company's Series A Preferred Shares will continue to own 1.0 share of New Prison
Realty for each share they currently own. New Prison Realty will elect to be
taxed and expects to operate so as to qualify as a REIT for federal income tax
purposes. The proposed Merger and the Merger Agreement are more fully described
in the Company's Current Report on Form 8-K filed with the Commission on
September 30, 1998, which is incorporated herein by reference. The contents of
CCA's and the Company's Joint Proxy Statement prepared with respect to the
Merger are included in the Registration Statement on Form S-4 filed by New
Prison Realty in connection with the Merger on September 30, 1998.
RECENT ACQUISITION OF ASSETS
On April 17, 1998, CCA acquired all of the issued and outstanding capital
stock of eight subsidiaries of USCC (the "USCC Acquisition"). By virtue of the
USCC Acquisition, CCA acquired contracts to manage four currently operating
facilities in Kentucky and one in North Carolina, each of which is owned by the
Company, as well as one each in Florida and Texas, each of which is owned by
government entities of Florida and Texas, respectively. CCA, or one of its
affiliates, currently leases the four Kentucky facilities from the Company, or
one of its subsidiaries, pursuant to the terms of a master lease. The North
Carolina facility currently operated by CCA is owned by the Company, who leases
such facility to the State of North Carolina. CCA also acquired by virtue of the
USCC Acquisition the right to enter into a contract to manage a North Carolina
facility owned by the Company that is currently under construction. CCA expects
to operate the uncompleted North Carolina facility pursuant to a contract with
the State of North Carolina, who will lease the facility from the Company. The
total number of beds currently operated or under construction related to the
USCC Acquisition is 5,543.
BANK FINANCING
On June 24, 1998, CCA entered into an Amended and Restated Credit Agreement
with a syndication of banks arranged by First Union, NationsBank, and CIBC,
whereby CCA's existing revolving credit facility was increased from $170.0
million to $350.0 million (the "CCA Credit Facility"). The increase and
amendment to the CCA Credit Facility allows CCA to continue its budgeted
expansion plans during the interim period prior to the completion of the Merger,
if completed, as well as provide for working capital and funds for general
corporate purposes. The CCA Credit Facility will mature on the earlier of the
date of the completion of the Merger or September 6, 1999. Interest on amounts
drawn under the CCA Credit Facility is based on First Union's Base Rate, plus an
applicable Base Rate Margin or a LIBOR rate plus an applicable LIBOR Margin, as
each of those terms is defined in the Amended and Restated Credit Agreement. As
of September 25, 1998, CCA had a total indebtedness of approximately $299.0
million (including $64.0 million committed pursuant to letters of credit issued
under the CCA Credit Facility).
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<PAGE> 10
MATERIAL RISK FACTORS
An investment in the Offered Securities involves various material risks. In
addition to general investment risks and those factors set forth elsewhere in
this Prospectus, prospective investors should consider, among other things, the
following material risk factors:
THE COMPANY IS DEPENDENT ON CCA, AS PRIMARY LESSEE OF ITS FACILITIES, FOR THE
COMPANY'S REVENUES AND ABILITY TO MAKE DISTRIBUTIONS TO ITS SHAREHOLDERS
CCA is currently the lessee of 17 of the Company's 20 facilities and will
be the lessee of all of the Option Facilities, if the Company acquires those
facilities. The Company's revenues, and its ability to make distributions to its
shareholders, currently depend on rental payments by CCA under the lease
agreements between the Company and CCA. The Company believes that CCA 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 CCA will
have such assets or income in the future. Moreover, while the Company does have
three lessees other than CCA (representing three of the Company's 20 operating
facilities), there can be no assurance that the Company will continue to be
successful in reaching lease agreements with lessees other than CCA to an extent
such that the Company is not dependent on CCA as the primary source of its
revenues.
Failure by CCA or the Company's other lessees to materially comply with the
terms of a lease agreement would give the Company the right to terminate such
lease and enforce the lessee's obligations pursuant to the lease, but could also
require the Company to find another lessee to lease such facility or risk losing
its ability to elect or maintain REIT status, as applicable. Moreover, there can
be no assurance that CCA or the Company's other lessees will elect to renew a
lease upon the expiration of its initial term, which would also force the
Company to find a suitable replacement lessee. In either circumstance, due to
the nature of the corrections and detention industry, the Company may be unable
to locate a suitable lessee or to attract such a lessee, and may, therefore, be
required to reduce the rent, which would have the effect of reducing the
Company's amounts available for distribution.
EXISTING CONFLICTS OF INTEREST WHICH MAY HAVE AN EFFECT ON THE COMPANY
Several conflicts of interest currently exist on the part of the Company
and its trustees and officers, and on the part of CCA and its directors and
officers. The following description sets forth the principal conflicts of
interest, including the relationships through which they arise, and the policies
and procedures implemented by the Company to address those conflicts.
Existing Relationships Which May Give Rise to Conflicts of
Interest. Doctor R. Crants is the Chairman of the Board of Directors, President
and Chief Executive Officer of CCA and the Chairman of the Board of Trustees of
the Company. D. Robert Crants, III, President of the Company, is the son of
Doctor R. Crants. Doctor R. Crants and D. Robert Crants, III, as well as certain
other trustees and officers of the Company and directors or officers of CCA,
also own, directly or indirectly, shares in both companies. D. Robert Crants,
III and Michael W. Devlin, Chief Operating Officer of the Company, are
principals of DC Investment Partners, LLC, a limited liability company which
serves as the general partner of various private investment partnerships. DC
Investment Partners, LLC is owned by D. Robert Crants, III, Michael W. Devlin,
Stephens Group, Inc., an affiliate of Stephens Inc., the financial adviser to
CCA in connection with the Merger, and Lucius E. Burch, III, a member of the
Board of Directors of CCA. Doctor R. Crants and three other directors of CCA are
investors in one or more of the private investment partnerships managed by DC
Investment Partners, LLC. Rusty L. Moore, a trustee of the Company, is the
spouse of a shareholder of Stokes & Bartholomew, P.A., tax and securities
counsel to the Company. Stokes & Bartholomew, P.A. also provides certain legal
services to CCA. Samuel W. Bartholomew, Jr., a shareholder of Stokes &
Bartholomew, P.A., is also a director of CCA. J. Michael Quinlan, Chief
Executive Officer of the Company, is a former employee of CCA. C. Ray Bell, a
trustee of the Company, is the principal of a construction company which, as a
part of its business, builds correctional and detention facilities, including
facilities for CCA. Because of Mr. Bell's experience in building correctional
and detention facilities, it is anticipated that Mr. Bell's company may in the
future build correctional and detention facilities for or on behalf of the
Company or CCA.
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Potential for Future Conflicts. Because of the ongoing relationship
between CCA and the Company, the companies may be in situations where they have
differing interests. Such situations include the fact that; (i) CCA leases
facilities from the Company; (ii) the Company has an exclusive option to acquire
the Option Facilities, a right to purchase and a right of first refusal to
purchase any correctional or detention facility acquired or developed and owned
by CCA or its subsidiaries in the future and to provide mortgage financing for
any correctional or detention facilities financed in excess of 90% of their cost
by CCA or its subsidiaries in the future; and (iii) CCA has a right of first
refusal to acquire the facilities it leases from the Company and, if acquired,
the Option Facilities. Accordingly, the potential exists for disagreements as to
the compliance with the leases between the two entities or the values of the
facilities acquired or lease payments therefor in the future pursuant to the
Right to Purchase Agreement. Additionally, the possible need by the Company,
from time to time, to finance, refinance or effect a sale of any of the
properties managed by CCA may result in a need to modify the lease with CCA with
respect to such property. Any such modification will require the consent of CCA,
and the lack of consent from CCA could adversely affect the Company's ability to
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 CCA that it might achieve if such relationships did not exist.
OWNERSHIP OF CAPITAL SHARES OF THE COMPANY INVOLVES RISKS INHERENT IN THE
CORRECTIONS AND DETENTION INDUSTRY
The Company's business is to own correctional and detention facilities and
to lease these facilities to third-party operators and managers. As such, the
Company's revenues and therefore its ability to make distributions are dependent
on its tenants' abilities to make rental payments. Accordingly, the Company is
subject to the following risks, 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 with
terms of up to five years, with one or more renewal options that may be
exercised only by the contracting government agency. No assurance can be given
that any agency will exercise a renewal option in the future. Moreover, the
contracting agency typically may terminate a facility contract at any time
without cause by giving the private prison manager written notice. Therefore,
the risk exists that a facility owned by the Company may not be the subject of a
contract between a private manager and a government entity at some point during
its ownership by the Company since the Company's leases generally extend for
periods substantially longer than the underlying contracts with government
entities. Accordingly, if a private prison manager's contract with a government
entity to operate a facility is terminated, such event may adversely effect the
ability of the contracting private prison manager (including CCA) to make its
lease payments to the Company.
Dependence on Government Appropriations. A private prison manager's cash
flow is subject to the receipt of sufficient funding of and timely payment by
contracting government entities. If the appropriate government agency does not
receive sufficient appropriations to cover its contractual obligations, a
contract may be terminated, or the management fee may be deferred or reduced.
Any delays in payment could have an adverse effect on the private prison
manager's cash flow and therefore its ability to make lease payments to the
Company. Further, it is part of the Company's business strategy to acquire
facilities from government entities and to lease those facilities to the
government entity or to finance the facility for the government entity. The
ability of the government entity to make payments under such leases or in
connection with such financing may be dependent upon annual appropriations.
Dependence on Government Agencies for Inmates. Private prison managers are
dependent on government agencies supplying their facilities with a sufficient
number of inmates to meet the facility's design capacities. A failure to do so
may have a material adverse effect on a private prison manager's financial
condition and results of operations and therefore its ability to make lease
payments to the Company.
Dependence on Ability to Develop New Prisons 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
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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, private prison operators and the
private corrections industry in general. In addition, organized labor unions in
many states, including organized labor unions consisting of state correctional
and detention facility employees, have increasingly opposed the awarding of
contracts to CCA. Any of these occurrences may make it more difficult for CCA or
any of the Company's other private prison manager tenants 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 entities, all of which would have a material effect on the
Company's business.
Options to Purchase. When the Company buys a facility from CCA which is
the subject of a prison management contract between CCA and a government entity
or when the Company buys a facility from or develops a facility for a government
entity, the government entity may approve the management relationship on the
condition that the government entity receive an option to purchase the facility
for some period of time at a price that reflects fair market value. The Company
expects that if it purchases a property subject to such an option or is required
to grant such an option, CCA will, for any property acquired from CCA, agree to
indemnify the Company with respect to the difference between the price paid by
such government entity and the price paid by the Company. Further, if the option
is exercised, there exists the risk that the Company will be unable to invest
the proceeds in one or more properties that yield as much revenue as the
property reacquired by the government entity.
Legal Proceedings. The Company's ownership and operation of correctional
and detention facilities could expose it to potential third party claims or
litigation by prisoners or other persons related to personal injury or other
damages resulting from contact with a facility, its managers, personnel or other
prisoners, including damages arising from a prisoner's escape from, or a
disturbance or riot at, a Company-owned facility. In addition, as an owner of
real property, the Company may be subject to certain proceedings relating to
personal injury of persons at such facilities. The Company may be held
responsible under state laws for claims based on personal injury or property
damage despite contractual provisions in its leases with CCA and other managers
providing for indemnity against such claims.
OWNERSHIP OF CAPITAL SHARES OF THE COMPANY INVOLVES TAX RELATED RISKS
Adverse Impact on Distributions of Failure of the Company to Qualify as a
REIT. The Company currently operates, and intends to continue to operate, so as
to qualify as a REIT under the Code. Although the Company believes that it is so
organized and operates in such a manner, no assurance can be given that the
Company qualifies or will remain qualified as a REIT. Qualification as a REIT
involves the application of highly technical and complex Code provisions for
which there are only limited judicial or administrative interpretations. The
determination of various factual matters and circumstances not entirely within
the Company's control may affect its ability to qualify as a REIT. In addition,
no assurance can be given that legislation, new regulations, administrative
interpretations or court decisions will not significantly change the tax laws
with respect to qualification as a REIT or the federal income tax consequences
of such qualification. The Company is relying on the opinion of Stokes &
Bartholomew, P.A., tax counsel to the Company, regarding various issues
affecting the Company's ability to qualify, and retain qualification, as a REIT.
However, such opinion is not binding on the Internal Revenue Service or any
court. See "Material Federal Income Tax Consequences."
If the Company were to fail to qualify as a REIT in any taxable year, the
Company would not be allowed a deduction for distributions to shareholders in
computing taxable income and would be subject to federal income tax on its
taxable income at regular corporate rates. Unless entitled to relief under
certain statutory provisions, the Company would also be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification was lost. As a result, the funds available for distribution to the
Company's shareholders would be reduced for each of the years involved. Although
the Company currently intends to operate in a manner designed to qualify as a
REIT, it is possible that future economic, market, legal or tax considerations
may cause the Company to fail to qualify as a REIT or may cause the Board of
Trustees
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to revoke the REIT election if the Board and the holders of 66 2/3% of all
outstanding shares of beneficial interest of the Company entitled to vote
determine that such factors make it no longer beneficial to qualify as a REIT.
See "Material Federal Income Tax Consequences."
OWNERSHIP OF CAPITAL SHARES OF THE COMPANY INVOLVES RISKS INHERENT IN THE
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 properties will generate total rental rates lower than those
anticipated or will yield returns lower than those available through investment
in comparable real estate or other investments. Revenue from correctional and
detention facilities and yields from investments in such properties may be
affected by many factors beyond the Company's control, including changes in
government regulation, general or local economic conditions, the available local
supply of prison beds and a decrease in the need for prison beds.
Equity investments in real estate are relatively illiquid and, therefore,
the ability of the Company to vary its portfolio promptly in response to changed
conditions will be limited. There are no limitations on the percentage of the
Company's assets that may be invested in any one property or venture; however,
the Board of Trustees may establish limitations as it deems appropriate from
time to time. No limitations have been set on the number of properties in which
the Company will seek to invest or on the concentration of investments in any
one geographic region.
Environmental Matters. Operating costs may be affected by the obligation
to pay for the cost of complying with existing environmental laws, ordinances
and regulations, as well as the cost of complying with future legislation. Under
various federal, state and local environmental laws, ordinances and regulations,
a current or previous owner or operator of real property may be liable for the
costs of removal or remediation of hazardous or toxic substances on, under or in
such property. Such laws often impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances. The cost of complying with environmental laws could materially
adversely affect the amount of distributions made by the Company. Phase I
environmental assessments have been obtained on all of the Company's facilities.
The purpose of a Phase I environmental assessment is to identify potential
environmental contamination that is made apparent from historical reviews of the
Company's facilities, review of certain public records, and 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 the Company enters into with its tenants
typically require such tenants to maintain insurance with respect to each of
such facilities. CCA 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
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 each of its facilities at the time said facilities are
acquired. There is no assurance, however, that the amount of title insurance
coverage typically obtained for any of such facilities accurately reflects the
current value of such correctional facilities or that title losses would be
completely covered by such insurance. 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. In the opinion of management
of the Company, its facilities are adequately insured in accordance with
industry standards.
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THE COMPANY IS DEPENDENT ON CERTAIN INDIVIDUALS FOR ITS MANAGEMENT
The Company is dependent on the efforts of Doctor R. Crants, currently the
Chairman of its Board of Trustees, J. Michael Quinlan, currently its Chief
Executive Officer, and D. Robert Crants, III, currently its President. In
particular, the Company intends to continue to utilize the industry knowledge,
experience and relationships of both Doctor R. Crants and J. Michael Quinlan.
Doctor R. Crants has served in various managerial capacities with CCA and
currently serves as its President and Chief Executive Officer and from July 1987
through December 1992, J. Michael Quinlan served as the Director of the Bureau
of Prisons. If the Company were to lose the services of either of these
individuals, it would lose the benefit of their extensive knowledge of, and
experience in, the corrections industry. The Company has entered into employment
agreements with D. Robert Crants, III and J. Michael Quinlan. Under applicable
Tennessee law, which governs or will govern the interpretation and enforcement
of the employment agreements with D. Robert Crants, III 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 may not
operate, or participate in, decisions affecting the operations of its
facilities. Accordingly, the Company's lessees control the operations of the
facilities pursuant to long-term "triple-net" leases, most of which have initial
terms ranging from 10 to 12 years and three renewal terms of five years each,
exercisable upon the mutual agreement of the lessee and the Company. During the
terms of such leases, the Company does not have the authority to require lessees
to operate the facilities leased by them in a particular manner or to govern any
particular aspect of the operation of such facilities except as set forth in
their respective 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 the 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, and seek to recover
damages from the lessee. If a lease is terminated, the Company will be required
to find another suitable lessee or risk losing its ability to elect or maintain
REIT status, as applicable.
THE COMPANY IMPOSES LIMITS ON THE OWNERSHIP OF ITS CAPITAL SHARES TO MAINTAIN
QUALIFICATION AS A REIT
For the Company to maintain its qualification as a REIT, not more than 50%
in value of its outstanding shares may be owned, directly or constructively, by
five or fewer individuals (as defined in the Code). In addition, rent from
related party tenants is not qualifying income for purposes of the gross income
tests under the Code. See "Material Federal Income Tax 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, the
Company's Declaration of Trust, as amended and restated (the "Declaration of
Trust"), prohibits direct or constructive ownership by any person of more than
9.8% of the Company's Common Shares or more than 9.8% of the Company's Preferred
Shares (including the Company's Series A Preferred Shares) (such ownership limit
being referred to as the "Ownership Limit"). The constructive ownership rules in
the Code are complex and may cause the Common Shares or the Preferred Shares
owned, directly or constructively, by a group of related individuals and/or
entities to be deemed to be constructively owned by one individual or entity. As
a result, the acquisition of less than 9.8% of the Common Shares or the
Preferred Shares (or the acquisition of an interest in an entity which owns the
Common Shares or the Preferred Shares) by an individual or entity could cause
that individual or entity (or another individual or entity) to own
constructively in excess of 9.8% of the Common Shares or the Preferred Shares,
and thus subject such Common Shares or Preferred Shares to the Ownership Limit.
Direct or constructive ownership of the Common Shares or the Preferred Shares in
excess of the Ownership Limit would cause the violative transfer or ownership to
be void, or cause such shares to be held in trust as Shares-
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in-Trust (as hereinafter defined) for the benefit of one or more charitable
organizations. See "Description of Capital Shares -- Restrictions on Ownership
of Capital Shares." These provisions may inhibit market activity and the
resulting opportunity for shareholders to realize a premium for the Common
Shares or the Series A Preferred Shares or any of the Offered Securities if a
shareholder 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 shareholders may deem to be in their best interests. See
"-- Certain Provisions of the Company's Governing Documents May Limit Changes in
Control of Shares." 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 Shares -- Restrictions on Ownership of Capital Shares."
Notwithstanding the foregoing, the Company and CCA have entered into the
Merger Agreement relative to the Merger. See "The Company -- Recent
Developments -- Pending Merger."
CERTAIN PROVISIONS OF THE COMPANY'S GOVERNING DOCUMENTS MAY LIMIT CHANGES IN
CONTROL OF THE COMPANY
Certain provisions of the Declaration of Trust and the Company's Bylaws, as
amended (the "Bylaws"), including provisions imposing the Ownership Limit (which
are described specifically in the immediately preceding paragraph and under
"Description of Capital Shares -- Restrictions on Ownership of Capital Shares"
and which generally prohibit any shareholder from owning more than 9.8% of the
Common Shares or 9.8% of the Preferred Shares), authorizing the issuance of the
Preferred Shares and requiring staggered terms for the Company's Board of
Trustees, and certain provisions of Maryland law regarding business combinations
and control share acquisitions, could have the effect of delaying, deferring or
preventing a change in control of the Company or the removal of existing
management and, as a result, could prevent the shareholders of the Company from
being paid a premium for their Common Shares. The Declaration of Trust
authorizes the Company's Board of Trustees to issue the Preferred Shares in one
or more series, to establish the number of shares in each series and to fix the
designations, powers, preferences and rights of each series and the
qualifications, limitations or restrictions thereof, all without shareholder
approval. The authorization of the Preferred Shares may have an anti-takeover
effect because it gives the Company's Board of Trustees the power to issue the
Preferred Shares at its sole discretion on such terms as it, in its sole
discretion, deems proper, which may have a dilutive effect on or otherwise deter
any potential acquirer of the Company. The Declaration of Trust provides for
three classes of trustees, as nearly equal in size as is practicable (exclusive
of trustees elected by holders of the Series A Preferred Shares when dividends
are in arrears). Each class of trustees holds office until the third annual
meeting for selection of trustees following the election of such class. The
Declaration of Trust further provides that the Company's Board of Trustees or
shareholders may, at any time, remove any trustee, with or without cause, only
by an affirmative vote of a majority of trustees or a majority of holders of
shares entitled to vote in the election of trustees. These provisions may have
an anti-takeover effect because a third party will be unable to acquire
immediate control of the Company's Board of Trustees due to the existence of the
classified board and will further be unable to remove trustees without majority
shareholder approval.
Notwithstanding the foregoing, the Company and CCA have entered into the
Merger Agreement relative to the Merger. See "The Company -- Recent
Developments -- Pending Merger."
THE COMPANY'S BOARD OF TRUSTEES MAY CHANGE THE COMPANY'S INVESTMENT AND
FINANCING POLICIES WITHOUT VOTE OF THE COMPANY'S SHAREHOLDERS
The Board of Trustees determines the Company's investment and financing
policies with respect to certain activities, including its growth,
capitalization, distribution and operating policies. Although the Board of
Trustees has no present intention to revise these policies, the Board of
Trustees may do so at any time without a vote of the Company's shareholders. Any
such determination may have an adverse effect on the Company's results of
operations or its ability to make, or the amount of, its distributions to
shareholders.
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RISKS OF LEVERAGE AND FLOATING RATE DEBT
The Company's current total indebtedness is approximately $236.7 million
under the Company Credit Facility, which bears interest generally at a rate of
LIBOR plus 1.50%. Consequently, this substantial interest expense has increased
the Company's exposure to the risks associated with debt financing. The
Company's substantial leverage may have important consequences, including the
following: (i) the ability of the Company to obtain additional financing for
acquisitions, working capital, capital expenditures or other purposes, if
necessary, may be impaired or such financing may not be on terms favorable to
the Company; (ii) a substantial decrease in operating cash flow or an increase
in expenses of the Company could make it difficult for the Company to meet its
debt service requirements and force it to modify its operations; (iii) the
Company's higher level of debt and resulting interest expense could make it
difficult for the Company to make distributions to shareholders; (iv) the
Company's higher level of debt and resulting interest expense may place it at a
competitive disadvantage with respect to certain competitors with lower amounts
of indebtedness; and (v) the Company's greater leverage may make it more
vulnerable to a downturn in its business or the economy generally. Moreover, the
floating interest rates on these debt obligations could result in higher
interest rates, thereby increasing the Company's interest expense on its
floating rate debt and reducing funds available for distribution to the
Company's shareholders. Finally, the Company's existing credit facility contains
a cross-default clause tied to the default of any other Debt (as defined in the
credit facility) incurred by the Company. Any indebtedness incurred by the
Company under the credit facility may become immediately due and payable if the
Company suffers a technical or any other default on any Debt. The Company
currently has no Debt other than the $300.0 million credit facility.
THE COMPANY IS DEPENDENT ON OUTSIDE FINANCING TO SUPPORT ITS GROWTH
The agreements governing the Company Credit Facility contain various
restrictive covenants, including, among others, provisions generally restricting
the Company from incurring certain additional indebtedness in excess of $1.0
million, engaging in transactions with shareholders and affiliates, incurring
certain liens, liquidating or disposing of all or substantially all of its
assets or declaring or paying dividends, or having its subsidiaries do the same,
except under certain specified circumstances. In addition, these agreements
require the Company to maintain certain specified financial ratios. The Company
expects similar restrictions to apply to any future credit facilities or
financings it may obtain. These limitations may restrict the Company's ability
to obtain additional debt capital or limit its ability to engage in certain
transactions. In addition, any breach of these limitations could result in the
acceleration of most of the Company's outstanding indebtedness. The Company may
not be able to refinance or repay this indebtedness in full under such
circumstances.
The Company intends to continue its current growth strategy, which includes
acquiring and expanding correctional and detention facilities as well as other
properties. The Company generally cannot fund its growth from cash from its
operating activities because the Company must distribute to its shareholders at
least 95% of its taxable income each year to maintain its status as a REIT.
Consequently, the Company must 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 markets to fund
future growth at an acceptable cost. In addition, the Company's Board of
Trustees 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.
YEAR 2000 COMPLIANCE ISSUES MAY HAVE AN EFFECT ON THE COMPANY AND CCA
Generally
The Year 2000 issue generally relates to computer programs that were
written using two digits rather than four to define the applicable year. In
those programs, the year 2000 may be incorrectly identified as the year 1900,
which can result in a system failure or miscalculations causing a disruption of
operations, including a temporary inability to process transactions, prepare
financial statements or engage in other normal business activities. The
following discussion identifies the actions taken by each of CCA and the Company
to assess and address the Year 2000 issues facing the companies.
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Impact on CCA
CCA's Year 2000 compliance program is focused on addressing Year 2000
readiness in the following areas: (i) CCA's information technology hardware and
software; (ii) material non-information technology systems; (iii) Year 2000
compliance of third parties with which CCA has a material relationship; (iv)
systems used to track and report assets not owned by CCA (e.g. inmate funds and
personal effects); and (v) development of contingency plans.
CCA has completed an initial assessment and remediation of its key
information technology systems, including its client server and minicomputer
hardware and operating systems and critical financial and nonfinancial
applications. Remediation efforts as of the date hereof include upgrades of
CCA's minicomputer hardware and critical financial applications. Based on this
initial assessment and remediation efforts, CCA believes that these key
information technology systems are "Year 2000 compliant." However, there can be
no assurance that coding errors or other defects will not be discovered in the
future. CCA is in the process of evaluating the remaining noncritical
information technology systems for Year 2000 compliance.
CCA manages and operates facilities it owns, facilities it leases from the
Company, and facilities owned by and leased from government entities. CCA is
currently evaluating whether the material non-information technology systems
such as security control equipment, fire suppression equipment and other
physical plant and equipment at both the facilities it owns and the facilities
it leases from the Company are Year 2000 compliant. CCA will also request that
the owners of the government facilities it manages provide Year 2000
certification for material information technology and non-information technology
systems at those facilities.
All CCA managed correctional facilities, as a part of general operating
policy, have existing contingency plans that are deployed in the event key
operational systems, such as security control equipment, fail (e.g. when a power
failure occurs). In addition, the correctional facilities' key security systems
are "fail secure" systems which automatically "lock down" and are then operated
manually should the related electronic components fail. Therefore, CCA
management believes no additional material risks associated with the physical
operation of its correctional facilities are created as a result of potential
Year 2000 issues.
CCA depends upon the proper functioning of third-party computer and
non-information technology systems. These third parties include governmental
agencies for which CCA provides services, commercial banks and other lenders,
construction contractors, architects and engineers, and vendors such as
providers of food supplies and services, inmate medical services,
telecommunications and utilities. CCA has initiated communications with
third-parties with whom it has important financial or operational relationships
to determine the extent to which they are vulnerable to the Year 2000 issue. CCA
has not yet received sufficient information from all parties about their
remediation plans to predict the outcome of their efforts.
If third parties with whom CCA interacts have Year 2000 problems that are
not remedied, the following problems could result: (i) in the case of
construction contractors and architects and engineers, the delayed construction
of correctional facilities; (ii) in the case of vendors, disruption of important
services upon which CCA depends, such as medical services, food services and
supplies, telecommunications and electrical power; (iii) in the case of
governmental agencies, delayed collection of accounts receivable potentially
resulting in liquidity stress; (iv) in the case of banks and other lenders, the
disruption of capital flows potentially resulting in liquidity stress.
CCA is also evaluating Year 2000 compliance of other software applications
used to track and report assets that are not the property of CCA. This includes
applications used to track and report inmate funds and the inmates' personal
effects.
CCA is currently developing a contingency plan that is expected to address
financial and operational problems that might arise on and around January 1,
2000. This contingency plan would include establishing additional sources of
liquidity that could be drawn upon in the event of systems disruption and
identifying alternative vendors and back-up processes that do not rely on
computers, whenever possible. CCA management expects to have the contingency
plan completed by mid-year 1999.
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<PAGE> 18
CCA has incurred and expects to continue to incur expenses allocable to
internal staff, as well as costs for outside consultants, computer systems'
remediation and replacement and non-information technology systems' remediation
and replacement (including validation) in order to achieve Year 2000 compliance.
CCA currently estimates that these costs will total approximately $4.0 million.
Of this total it is estimated that $2.5 million will be for the repair of
software problems and $1.5 million will be for the replacement of problem
systems and equipment. As of September 25, 1998, CCA has incurred $500,000 in
Year 2000 program costs. These costs are expensed as incurred. Management of CCA
believes there will be no material impact on CCA's financial condition or
results of operations resulting from other information technology projects being
delayed due to Year 2000 efforts.
The costs of the Year 2000 program and the date on which CCA plans to
complete it are based on current estimates, which reflect numerous assumptions
about future events, including the continued availability of certain resources,
the timing and effectiveness of third-party remediation plans and other factors.
CCA can give no assurance that these estimates will be achieved, and actual
results could differ materially from CCA's plans. Specific factors that might
cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct relevant computer source codes and embedded technology, the results
of internal and external testing and the timeliness and effectiveness of
remediation efforts of third parties.
Impact on the Company
The Company has reviewed its computer systems and software applications and
believes that both are Year 2000 compliant. However, there can be no assurance
that coding errors or other defects will not be discovered in the future.
Because CCA manages 18 of the Company's 20 completed facilities, the Company may
be vulnerable to CCA's failure to remedy its Year 2000 issues. Management of the
Company is currently reviewing CCA's Year 2000 compliance program and upon
completion of such review will determine the extent to which it will be
vulnerable to CCA's failure to remedy its Year 2000 problems and the potential
effect of any such failures.
A FLUCTUATION IN MARKET INTEREST RATES MAY AFFECT THE PRICE OF THE COMPANY'S
CAPITAL SHARES
One of the factors that may affect the price of the Company's Capital
Shares is the amount of its distributions to shareholders 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 Shares.
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.
RISKS RELATED TO THE PROPOSED MERGER
General
The Company has entered into the Merger Agreement with CCA relative to the
Merger. See "The Company -- Recent Developments -- Pending Merger." Upon
completion of the Merger, purchasers of any Common Shares or Preferred Shares
offered hereunder or any Offered Securities which are convertible into Common
Shares will continue to own securities of the surviving company. Accordingly, if
completed, the
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<PAGE> 19
Merger involves additional material risks to prospective purchasers of the
Offered Securities. The Merger and the Merger Agreement and the material risk
factors and the material federal income tax consequences with respect to the
Merger, among other things, are more fully described in the Company's Current
Report on Form 8-K filed with the Commission on September 30, 1998, which is
incorporated herein by reference.
Ineligibility to Vote on the Proposed Merger
The Board of Trustees of the Company has set the close of business on
Wednesday, October 14, 1998 as the record date (the "Company Record Date") for
the special meeting of the shareholders of the Company's Common Shares, to be
held on Thursday, December 3, 1998 for the purpose of considering a proposal to
approve the Merger (the "Company Special Meeting"). Only holders of record of
the Company's Common Shares as of the Company Record Date will be entitled to
notice of and to vote at the Company Special Meeting. Accordingly, absent any
adjournment or postponement of the Company Special Meeting which requires that
the Company Record Date be reset, no investor who, after the Company Record
Date, purchases any of the Offered Securities which grant holders the right to
vote on matters such as the Merger, will be eligible to vote on the Merger at
the Company Special Meeting. Such purchasers will therefore be subject to the
outcome of the vote on the Merger at the Company Special Meeting without casting
a vote at such meeting.
Tax Legislation
On February 2, 1998, President Clinton released his budget proposal for
fiscal year 1999 (the "Proposal"). Two provisions contained in the Proposal
affecting REITs potentially could affect the viability of the Merger if enacted
as proposed. The Proposal is discussed in greater detail in the Joint Proxy
Statement prepared relative to the Merger, which is contained in the Company's
Current Report on Form 8-K filed with the Commission on September 30, 1998. This
discussion is incorporated herein by reference. Neither of the two provisions
were included in the Internal Revenue Service Restructuring Reform Act of 1998,
signed into law on July 22, 1998, or in the tax provisions of the Transportation
Equity Act for the 21st Century, signed into law on June 9, 1998. However,
legislation containing provisions similar to the Proposal could be introduced in
Congress at any time. Moreover, other 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
Merger and thus could adversely impact the results of operations, financial
condition and prospects of the Company.
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) 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.
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<PAGE> 20
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED SHARE DIVIDENDS
The following table sets forth the historical ratios of earnings to
combined fixed charges and preferred share dividends of the Company for the
periods indicated. The ratio of earnings to fixed charges and preferred share
dividends was computed by dividing earnings by fixed charges and preferred share
dividends. For the purpose of computing these ratios, earnings consist of net
income plus fixed charges. Fixed charges consist of interest on borrowed funds
and amortization of debt issuance cost. Preferred share dividends consist of
those dividends accrued on the Company's Series A Preferred Shares during the
respective periods shown.
<TABLE>
<CAPTION>
THREE AND SIX MONTHS ENDED
YEAR ENDED ------------------------------
DECEMBER 31, 1997 MARCH 31, 1998 JUNE 30, 1998
----------------- -------------- -------------
<S> <C> <C> <C>
Ratio of Earnings to Fixed Charges and Preferred
Share Dividends(1)................................ 78.9 5.0 6.8
</TABLE>
- ---------------
(1) 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.
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<PAGE> 21
DESCRIPTION OF CAPITAL SHARES
GENERAL
The authorized capital stock of the Company consists of 90,000,000 Common
Shares and 10,000,000 Preferred Shares. The following summary description of the
Common Shares, the Preferred Shares and the Common Share Purchase Rights or
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 more complete descriptions thereof set forth in the following documents: (i)
the Company's Amended and Restated Declaration of Trust, including the Articles
Supplementary for the Series A Preferred Shares (the "Declaration of Trust");
and (ii) its Bylaws, which documents are incorporated by reference to this
Registration Statement.
DESCRIPTION OF COMMON SHARES
As of September 25, 1998, 21,581,033 Common Shares were issued and
outstanding. A description of the Company's Common Shares is set forth in the
Company's Registration Statement on Form 8-A, filed with the Commission on May
28, 1997. The Common Shares of the Company are listed on the NYSE under the
symbol "PZN."
All Common Shares offered hereby will be duly authorized, fully paid and
nonassessable. Subject to the preferential rights of any other capital shares of
the Company, holders of Common Shares are entitled to receive distributions if,
as and when authorized and declared by the Board of Trustees out of assets
legally available therefore and to share ratably in the assets of the Company
legally available for distribution to its shareholders in the event of its
liquidation, dissolution or winding-up after payment of, or adequate provision
for, all known debts and liabilities of the Company. The Company currently pays
regular quarterly distributions.
Each outstanding Common Share entitles the holder to one vote on all
matters submitted to a vote of shareholders, including the election of trustees,
and, except as otherwise required by law or except as provided with respect to
any other class or series of capital shares, the holders of such Common Shares
will possess the exclusive voting power. There is no cumulative voting in the
election of trustees, which means that the holders of a majority of the
outstanding Common Shares can elect all of the trustees then standing for
election and the holders of the remaining shares of beneficial interest, if any,
will not be able to elect any trustees.
Holders of Common Shares have no conversion, sinking fund, redemption or
preemptive rights to subscribe for any securities of the Company. Subject to the
provisions of the Company's Declaration of Trust regarding excess shares, Common
Shares have equal distribution, liquidation and other rights, and have no
preference, exchange or, except as expressly required by Title 8 of the
Corporations and Associations Article of the Annotated Code of Maryland (the
"MRL"), appraisal rights.
The registrar and transfer agent for the Common Shares is Boston EquiServe
Limited Partnership, an affiliate of BankBoston, N.A.
DESCRIPTION OF PREFERRED SHARES
The following is a description of certain general terms and provisions of
the Preferred Shares. The particular terms of any series of Preferred Shares
will be described in the applicable Prospectus Supplement. If so indicated in a
Prospectus Supplement, the terms of any such series may differ from the terms
set forth below.
The summary of terms of the Company's Preferred Shares contained in this
Prospectus does not purport to be complete and is subject to, and qualified in
its entirety by, the provisions of the Amended and Restated Declaration of Trust
and the articles supplementary relating to each series of the Preferred Shares
(the "Articles Supplementary"), 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
Shares.
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<PAGE> 22
The Declaration of Trust authorizes the issuance of 10,000,000 Preferred
Shares. As of September 25, 1998, 4,300,000 Series A Preferred Shares were
outstanding. The Series A Preferred Shares are listed on the NYSE under the
symbol "PZN Pr A." A description of the Company's Series A Preferred Shares is
set forth in the Company's Registration Statement on Form 8-A, filed with the
Commission on January 27, 1998, and incorporated herein by reference. The
Preferred Shares authorized by the Declaration of Trust may be issued from time
to time in one or more series in such amounts and with such designations,
preferences, conversions or other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption as may be fixed by the Board of Trustees. Under certain
circumstances, the issuance of Preferred Shares 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 Shares.
The Declaration of Trust authorizes the Board of Trustees to classify or
reclassify any unissued Preferred Shares 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 Shares.
The Preferred Shares 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 Shares. The
applicable Prospectus Supplement will describe the following terms of the series
of Preferred Shares in respect of which this Prospectus is being delivered: (1)
the title of such Preferred Shares and the number of shares offered; (2) the
amount of liquidation preference per share; (3) the initial public offering
price at which such Preferred Shares 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 exchange rights;
(7) any additional voting, dividend, liquidation, redemption, sinking fund and
other rights, preferences, limitations and restrictions; (8) any listing of such
Preferred Shares on any securities exchange; (9) the relative ranking and
preferences of such Preferred Shares as to dividend rights and rights upon
liquidation, dissolution or winding up of the affairs of the Company; (10) any
limitations on issuance of any series of Preferred Shares ranking senior to or
on a parity with such series of Preferred Shares as to dividend rights and
rights upon liquidation, dissolution or winding up of the affairs of the
Company; and (11) any limitations on direct, beneficial or constructive
ownership. The applicable Prospectus Supplement will also include a discussion
of federal income tax considerations applicable to such Preferred Shares.
General. The Preferred Shares offered hereby will be issued in one or more
series. The Preferred Shares, 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 Shares will actually trade
on or after the date of issuance.
The Preferred Shares shall, with respect to dividend rights and rights upon
liquidation, dissolution and winding up of the Company, rank prior to the Common
Shares and to all other classes and series of equity securities of the Company
now or hereafter authorized, issued or outstanding (the Common Shares and such
other classes and series of equity securities collectively may be referred to
herein as the "Junior Shares"), 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 Shares") or senior to (the "Senior
Shares") the Preferred Shares as to dividend rights and rights upon liquidation,
dissolution or winding up of the Company. The Preferred Shares shall be junior
to all outstanding debt of the Company. The Preferred Shares shall be subject to
creation of Senior Shares, Parity Shares and Junior Shares to the extent not
expressly prohibited by the Declaration of Trust.
Dividends. Holders of Preferred Shares shall be entitled to receive, when,
as and if authorized by the Board of Trustees 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 Board of Trustees in its 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
authorized 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, which shall
not be more than 90 calendar days preceding the payment dates therefor, as such
dates are determined by the Board of Trustees (each of such dates, a "Record
Date").
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<PAGE> 23
Such dividends may be cumulative or noncumulative, as described in the
applicable Prospectus Supplement. If dividends on a series of Preferred Shares
are noncumulative and if the Board of Trustees fails to authorize a dividend in
respect of a dividend period with respect to such series, then holders of such
Preferred Shares 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 authorized payable on any future
dividend payment dates. If dividends of a series of Preferred Shares 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 authorized or paid or set apart for payment on
Preferred Shares of any series ranking, as to dividends, on a parity with or
junior to the series of Preferred Shares offered by the applicable Prospectus
Supplement for any period unless full dividends for the immediately preceding
dividend period on such Preferred Shares (including any accumulation in respect
of unpaid dividends for prior dividend periods, if dividends on such Preferred
Shares are cumulative) have been or contemporaneously are authorized and paid or
authorized 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 Shares and any other
Preferred Shares of the Company ranking on a parity as to dividends with the
Preferred Shares, dividends upon such Preferred Shares and dividends on such
other Preferred Shares ranking on a parity with the Preferred Shares shall be
authorized pro rata so that the amount of dividends authorized per share on such
Preferred Shares and such other Preferred Shares ranking on a parity with the
Preferred Shares 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 Shares (including any accumulation in respect of unpaid dividends for
prior dividend periods, if dividends on such Preferred Shares are cumulative)
and accrued dividends, including required or permitted accumulations, if any, on
shares of such other Preferred Shares, 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 Shares which may be in arrears. Unless full dividends on
the series of Preferred Shares offered by the applicable Prospectus Supplement
have been authorized 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 Shares are
cumulative), (a) no cash dividend or distribution (other than in Junior Shares)
may be authorized, set aside or paid on the Junior Shares, (b) the Company may
not, directly or indirectly, repurchase, redeem or otherwise acquire any of its
Junior Shares (or pay any monies into a sinking fund for the redemption of any
shares) except by conversion into or exchange for Junior Shares and (c) the
Company may not, directly or indirectly, repurchase, redeem or otherwise acquire
any Preferred Shares or Parity Shares (or pay any monies into a sinking fund for
the redemption of any such shares otherwise than pursuant to pro rata offers to
purchase or a concurrent redemption of all, or a pro rata portion, of the
outstanding Preferred Shares and Parity Shares (except by conversion into or
exchange for Junior Shares).
Any dividend payment made on a series of Preferred Shares 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 Shares 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 Shares will be entitled, subject to the rights of creditors, but
before any distribution or payment to the holders of Common Shares or any Junior
Shares 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 Shares are cumulative). If the amounts available for
distribution with respect to the Preferred Shares and all other outstanding
Parity Shares are not sufficient to satisfy the full liquidation rights of all
the outstanding Preferred Shares and Parity Shares, 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 Shares may include accumulated dividends) to which they are entitled.
After payment of the full amount of the liquidation distribution, the
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<PAGE> 24
holders of Preferred Shares will not be entitled to any further participation in
any distribution of assets by the Company.
The MRL does not contain any sections on the power of a Maryland real
estate investment trust, such as the Company, to make distributions, including
dividends, to its shareholders. It is possible that a Maryland court may look to
Maryland general corporate law ("MGCL") for guidance on matters, such as the
making of distributions to shareholders, not covered by the MRL. The MGCL
requires that, after giving effect to a distribution, (1) the corporation must
be able to pay its debts as they become due in the usual course of business and
(2) the corporation's assets must at least equal the sum of its liabilities and
the preferential rights on dissolution of stockholders whose rights on
dissolution are superior to those stockholders receiving the distribution.
However, the MGCL also provides that the charter of the corporation may provide
that senior dissolution preferences shall not be included with liabilities for
purposes of determining amounts available for distribution. The applicable
articles supplementary may include such a provision.
Voting. The Preferred Shares 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 Shares then outstanding
(voting separately as a class together with any Parity Shares), 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 Shares, (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 Shares or Parity Shares, or substitutes the surviving entity in
a merger, consolidation, reorganization or other business combination of the
Company, shall not be considered to be such an adverse change.
No Other Rights. The share of a series of Preferred Shares will not have
any preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends and other distributions, qualifications, and terms
and conditions of redemption except as set forth above or in the applicable
Prospectus Supplement, the Declaration of Trust and in the applicable Articles
Supplementary or as otherwise required by law.
Transfer Agent and Registrar. The transfer agent for each series of
Preferred Shares will be described in the related Prospectus Supplement.
COMMON SHARE PURCHASE RIGHTS
The applicable Prospectus Supplement will describe the specific terms of
any rights or warrants to purchase Common Shares offered thereby, including,
among other things: the duration, offering price and exercise price of the
Common Share Purchase Rights and any provisions for the reallocation of Common
Share Purchase Rights not initially subscribed. The Prospectus Supplement will
describe the persons to whom the Common Share Purchase Rights will be issued
(the Company's shareholders, the general public or others) and any conditions to
the offer and sale of the Common Share Purchase Rights offered thereby.
RESTRICTIONS ON OWNERSHIP OF CAPITAL SHARES
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% in value of the Company's outstanding shares 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)
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<PAGE> 25
(B) of the Code. See "Material Federal Income Tax Considerations -- Taxation of
the Company -- Income Tests."
Because the Board of Trustees believes it is essential for the Company to
continue to qualify as a REIT, the Declaration of Trust, subject to certain
exceptions described below, provides that no person may own, or be deemed to own
by virtue of the attribution provisions of the Code, more than 9.8% of (i) the
number of outstanding Common Shares or (ii) the number of outstanding Preferred
Shares (the "Ownership Limit" or "Ownership Limit Provision"). Any transfer of
Common Shares or Preferred Shares that would (i) result in any person owning,
directly or indirectly, Common Shares or Preferred Shares in excess of the
Ownership Limit, (ii) result in the Common Shares and Preferred Shares being
owned by fewer than 100 persons (determined without reference to any rules of
attribution), (iii) result in the Company being "closely held" within the
meaning of Section 856(h) of the Code, or (iv) cause the Company to own,
directly or constructively, 10% or more of the ownership interests in a tenant
of the Company's real property, within the meaning of Section 856(d)(2)(B) of
the Code, shall be null and void, and the intended transferee will acquire no
rights in such Common Shares or Preferred Shares.
Subject to certain exceptions described below, any purported transfer of
Common Shares or Preferred Shares that would (i) result in any person owning,
directly or indirectly, Common Shares or Preferred Shares in excess of the
Ownership Limit, (ii) result in the Common Shares and Preferred Shares being
owned by fewer than 100 persons (determined without reference to any rules of
attribution), (iii) result in the Company being "closely held" within the
meaning of Section 856(h) of the Code, or (iv) cause the Company to own,
directly or constructively, 10% or more of the ownership interests in a tenant
of the Company's real property, within the meaning of Section 856(d)(2)(B) of
the Code, will be designated as "Shares-in-Trust" and transferred automatically
to a trust (the "Share Trust") effective on the day before the purported
transfer of such Common Shares or Preferred Shares. The record holder of the
Common Shares or Preferred Shares that are designated as Shares-in-Trust (the
"Prohibited Owner") will be required to submit such number of Common Shares or
Preferred Shares to the Company for registration in the name of the trustee of
the Share Trust (the "Share Trustee"). The Share Trustee will be designated by
the Company, but will not be affiliated with the Company or any Prohibited
Owner. The beneficiary of the Share Trust (the "Beneficiary") will be one or
more charitable organizations that are named by the Company.
Shares-in-Trust will remain issued and outstanding Common Shares or
Preferred Shares and will be entitled to the same rights and privileges as all
other shares of the same class or series. The Share Trustee will receive all
dividends and distributions on the Shares-in-Trust and will hold such dividends
and distributions in trust for the benefit of the Beneficiary. The Share Trustee
will vote all Shares-in-Trust and will designate a permitted transferee of the
Shares-in-Trust, provided that the permitted transferee (i) purchases such
Shares-in-Trust for valuable consideration and (ii) acquires such
Shares-in-Trust without such acquisition resulting in a transfer to another
Share Trust.
The Prohibited Owner with respect to Shares-in-Trust will be required to
repay the Share Trustee the amount of any dividends or distributions received by
the Prohibited Owner (i) that are attributable to any Shares-in-Trust and (ii)
the record date of which was on or after the date that such shares became
Shares-in-Trust. The Prohibited Owner generally will receive from the Share
Trustee the lesser of (i) the price per share such Prohibited Owner paid for the
Common Shares or Preferred Shares that were designated as Shares-in-Trust (or,
in the case of a gift or bequest, the Market Price (as hereinafter defined) per
share on the date of such transfer) or (ii) the price per share received by the
Share Trustee from the sale of such Shares-in-Trust. Any amounts received by the
Share Trustee in excess of the amounts to be paid to the Prohibited Owner will
be distributed to the Beneficiary.
The Shares-in-Trust will be deemed to have been offered for sale to the
Company, or its designee, at a price per share equal to the lesser of (i) the
price per share in the transaction that created such Shares-in-Trust (or, in the
case of a gift or bequest, the Market Price (as hereinafter defined) per share
on the date of such transfer) or (ii) the Market Price (as hereinafter defined)
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
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the later of (i) the date of the purported transfer which resulted in such
Shares-in-Trust or (ii) the date the Company determines in good faith that a
transfer resulting in such Shares-in-Trust occurred.
"Market Price" means the last reported sales price of the Common Shares or
Preferred Shares, 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 Board of
Trustees.
Any person who acquires or attempts to acquire Common Shares or Preferred
Shares in violation of the foregoing restrictions, or any person who owned
Common Shares or Preferred Shares that were transferred to a Share Trust, will
be required (i) to give 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 Common Shares and Preferred Shares must, within 30 days after
January 1 of each year, provide to the Company a written statement or affidavit
stating the name and address of such direct or indirect owner, the number of
Common Shares and Preferred Shares owned directly or indirectly by such owner,
and a description of how such shares are held. In addition, each direct or
indirect shareholder shall provide to the Company such additional information as
the Company may request in order to determine the effect, if any, of such
ownership on the Company's status as a REIT and to ensure compliance with the
Ownership Limit Provision.
The Ownership Limit generally will not apply to the acquisition of Common
Shares or Preferred Shares by an underwriter that participates in a public
offering of such shares. In addition, the Board of Trustees, upon such
conditions as the Board of Trustees may direct, may exempt a person from the
Ownership Limit under certain circumstances.
All certificates representing Common Shares or Preferred Shares bear a
legend referring to the restrictions described above.
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 Share warrants or through the issuance of Preferred Shares
convertible into Common Shares (whether such Common Share warrants or Preferred
Shares 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.
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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 Common Shares 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 Shares will be a new issue with no established trading market. The
Company may elect to list any series of Preferred Shares 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 summary of the taxation of the Company and the material
federal income tax consequences to holders of the Offered Securities is for
general information only, and is not tax advice. The tax treatment of a holder
of Offered Securities will vary depending upon the holder's particular
situation, and this discussion addresses only holders that hold Offered
Securities as capital assets and does not purport to deal with all aspects of
taxation that may be relevant to particular holders in light of their personal
investment or tax circumstances, or to certain types of holders (including
dealers in securities or currencies, banks, tax-exempt organizations, life
insurance companies, persons that hold Offered Securities that are a hedge or
that are hedged against currency risks or that are part of a straddle or
conversion transaction, foreign corporations and persons who are not citizens of
the United States) subject to special treatment under the federal income tax
laws. This summary is based on the Code, its legislative history, existing and
proposed regulations thereunder, published rulings and court decisions, all as
currently in effect and all subject to change at any time, perhaps with
retroactive effect.
The following summary does not take into account the Merger. See "The
Company -- Recent Developments -- Pending Transaction." If completed, the Merger
will involve additional material federal income tax consequences to prospective
investors. The Company has filed a Joint Proxy Statement relative to the Merger,
which discusses the material federal income tax consequences of the Merger and
the operations of the surviving entity after the Merger. This Joint Proxy
Statement is contained in the Company's Current Report on Form 8-K filed with
the Commission on September 30, 1998, and the discussion of the material federal
income tax consequences contained therein is incorporated herein by reference.
INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THE
TAX CONSEQUENCES TO THEM OF THE ACQUISITION, OWNERSHIP AND SALE OF SECURITIES,
INCLUDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF SUCH
ACQUISITION, OWNERSHIP AND SALE IN THEIR PARTICULAR CIRCUMSTANCES AND POTENTIAL
CHANGES IN APPLICABLE LAWS.
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TAXATION OF THE COMPANY
General. The Company has made an election to be taxed as a REIT under
Sections 856 through 860 of the Code, commencing with its taxable year ending
December 31, 1997. The Company believes that it has been organized and operated
in such a manner as to qualify for taxation as a REIT under the Code. Because
these sections of the Code are highly technical and complex, no assurance can be
given that the Company qualifies or will remain qualified as a REIT.
The following sets forth the material aspects of the sections that govern
the federal income tax treatment of a REIT and its shareholders. This summary is
qualified in its entirety by the applicable Code provisions, rules and Treasury
Regulations promulgated thereunder, and administrative and judicial
interpretations thereof.
Stokes & Bartholomew, P.A. has acted as special tax counsel to the Company.
Prior to issuance of Offered Securities pursuant to this Prospectus, the Company
will receive an opinion of Stokes & Bartholomew, P.A. that the Company qualifies
as a REIT for federal income tax purposes and that its proposed method of
operation will enable it to continue to meet the requirements for qualification
and taxation as a REIT under the Code. This opinion is based upon, and subject
to, certain assumptions and various factual representations of the Company,
which are incorporated into such opinion and are addressed in this discussion of
"Material Federal Income Tax Consequences." Opinions of counsel are not binding
on the Internal Revenue Service ("IRS") or courts. Accordingly, there can be no
assurance that the IRS will not successfully assert a position contrary to the
opinion of Stokes & Bartholomew, P.A., and therefore prevent the Company from
qualifying as a REIT. Qualification and taxation as a REIT also depends upon the
Company's ability to meet, through actual annual operating results, distribution
requirements, diversity of stock ownership requirements and the various other
qualification tests imposed under the Code, the results of which will not be
reviewed by Stokes & Bartholomew, P.A. Thus, there can be no assurance that the
actual results of the Company's operation for any particular taxable year will
satisfy such requirements. For a discussion of the tax consequences of failure
to qualify as a REIT, see "Material Federal Income Tax Consequences -- Failure
to Qualify."
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on its net income that is currently
distributed to shareholders. This treatment substantially eliminates the "double
taxation" (at the corporate and shareholder levels) of income that generally
results from investment in a regular corporation. However, the Company will be
subject to federal income tax in the following circumstances: First, the Company
will be taxed at regular corporate rates on any undistributed REIT taxable
income, including undistributed net capital gains. Second, under certain
circumstances, the Company may be subject to the "alternative minimum tax" on
its items of tax preference, if any. Third, if the Company has (i) net income
from the sale or other disposition of "foreclosure property" which is held
primarily for sale to customers in the ordinary course of business or (ii) other
nonqualifying income from foreclosure property, it will be subject to tax at the
highest corporate rate on such income. Fourth, if the Company has net income
from prohibited transactions (which are, in general, certain sales or other
dispositions of property held primarily for sale to customers in the ordinary
course of business other than sales of foreclosure property and certain
involuntary conversions), such income will be subject to a 100% tax. Fifth, if
the Company fails to satisfy the 75% gross income test or the 95% gross income
test (as discussed below), but has nonetheless maintained its qualification as a
REIT because certain other requirements have been met, it will be subject to a
100% tax on an amount equal to (a) the gross income attributable to the greater
of the amount by which the Company fails the 75% or 95% test, multiplied by (b)
a fraction intended to reflect the Company's profitability. Sixth, if the
Company fails to distribute during each calendar year at least the sum of: (i)
85% of its REIT ordinary income for such year; (ii) 95% of its REIT capital gain
net income for such year; and (iii) any undistributed taxable income from prior
periods, it will be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. For this purpose, of the 4%
excise tax, any income, including net capital gains, upon which the Company pays
regular corporate income tax is treated as having been distributed. Seventh,
with respect to any asset (a "Built-in Gain Asset") acquired by the Company from
a corporation which is or has been a C corporation (i.e., generally a
corporation subject to full corporate-level tax) in certain transactions in
which the basis of the Built-in Gain Asset in the hands of
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the Company is determined by reference to the basis of the asset in the hands of
the C corporation, if the Company recognizes gain on the disposition of such
asset during the 10-year period (the "Recognition Period") beginning on the date
on which such asset was acquired by the Company, then, to the extent of the
Built-in Gain (i.e., the excess of (a) the fair market value of such asset over
(b) the Company's adjusted basis in such asset, determined as of the beginning
of the Recognition Period), such gain will be subject to tax at the highest
regular corporate rate. The results described above with respect to the
recognition of Built-in Gain assume that the Company will make an election
pursuant to IRS Notice 88-19.
Requirements for Qualification. The Code defines a REIT as a corporation,
trust or association: (i) which is managed by one or more trustees 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 Sections 856 through 859 of the Code;
(iv) which is neither a financial institution nor an insurance company; (v) the
beneficial ownership of which is held by 100 or more persons; (vi) during the
last half of each taxable year not more than 50% in value of the outstanding
stock of which is owned, directly or constructively, by five or fewer
individuals (as defined in the Code to include certain entities); and (vii)
which meets certain other tests, described below, regarding the nature of its
income and assets. The Code provides that conditions (i) to (iv), inclusive,
must be met during the entire taxable year and that condition (v) must be met
during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months. Conditions (v) and
(vi) do not apply until after the first taxable year for which an election is
made to be taxed as a REIT. Condition (vi) is deemed to be satisfied in any year
that the REIT satisfies certain recordkeeping requirements and does not know, or
by the exercise of reasonable diligence would not have known, of any failure to
meet such condition.
The Company has previously issued sufficient Common Shares to allow it to
satisfy conditions (v) and (vi). The Company also intends to satisfy applicable
recordkeeping requirements and to exercise reasonable diligence to insure that
condition (vi) is satisfied, thereby qualifying for the relief described above.
In addition, the Company's Declaration of Trust provides for restrictions
regarding the transfer and ownership of shares, which restrictions are intended
to assist the Company in continuing to satisfy the share ownership requirements
described in (v) and (vi) above. Such transfer and ownership restrictions are
described in "Description of Capital Shares -- Restrictions on Ownership of
Capital Shares."
Income Tests. To maintain qualification as a REIT, the Company annually
must satisfy two gross income requirements. First, at least 75% of the Company's
gross income (excluding gross income from prohibited transactions) for each
taxable year must be derived directly or indirectly from investments relating to
real property or mortgages on real property (including "rents from real
property," gain from the sale of real property and, in certain circumstances,
interest) or from certain types of temporary investments. Second, at least 95%
of the Company's gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived from such real property
investments, dividends, interest and gain from the sale or disposition of stock
or securities (or from any combination of the foregoing).
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts or sales. Second, rents received from a tenant will not qualify as
"rents from real property" in satisfying the gross income tests if the REIT, or
an owner of 10% or more of the REIT, directly or constructively owns 10% or more
of such tenant (a "Related Party Tenant"). Third, if rent attributable to
personal property, leased in connection with a lease of real property, is
greater than 15% of the total rent received under the lease, then the portion of
rent attributable to such personal property will not qualify as "rents from real
property." Finally, for rents received to qualify as "rents from real property,"
the REIT generally must not operate or manage the property or furnish or render
services to the tenants of such property, other than through an independent
contractor from whom the REIT derives no revenue. The REIT, however, (i) may
directly perform certain services that are "usually or customarily rendered" in
connection with the rental of space for occupancy only and are not otherwise
considered "rendered to the occupant" of the property, and (ii) may render a de
minimis amount of otherwise impermissible services, if the amount
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received for such services does not exceed 1% of all of the income from the
property during the tax year. The amount treated as received for impermissible
services generally may not be less than 150% of the cost to the REIT in
rendering or furnishing such services. Amounts received for otherwise
impermissible services do not qualify as "rents from real property" even if
within the 1% limitation. Furthermore, if the amount received by the REIT for
impermissible services exceeds the 1% limitation, then no amounts received or
accrued from the property during the tax year qualify as "rents from real
property."
Pursuant to the leases between the Company and CCA (the "Leases"), CCA
leases from the Company the land, buildings and improvements comprising 17 of
the Company's 20 facilities (the "Facilities") and certain personal property
located at the Facilities for initial terms ranging from 10 to 12 years. Upon
mutual agreement of the parties, each Lease may be extended for up to three
additional five-year terms. The Leases are "triple net" leases which will
require CCA to pay substantially all expenses associated with the operation of
the Facilities, such as real estate taxes, insurance, utilities and services,
maintenance and other operating expenses. The minimum rent for the first year of
each Lease is a fixed amount. Thereafter, minimum rent will be increased each
year by the Base Rent Escalation.
On an ongoing basis, the Company will use its best efforts: (i) not to
charge rent for any property that is based in whole or in part on the income or
profits of any person (except by reason of being based on a percentage of
receipts or sales, as described above); (ii) not to rent any property to a
Related Party Tenant (taking into account the constructive ownership rules),
unless the Company determines in its discretion that the rent received from such
Related Party Tenant is not material and will not jeopardize the Company's
status as a REIT; (iii) not to derive rental income attributable to personal
property (other than personal property leased in connection with the lease of
real property, the amount of which is less than 15% of the total rent received
under the lease); or (iv) not to perform more than a de minimis amount of
services considered to be rendered to the occupant of the property, other than
through an independent contractor from whom the Company derives no revenue.
Because the Code provisions applicable to REITs are complex, however, the
Company may fail to meet one or more of the foregoing objectives, which failure
may jeopardize the Company's status as a REIT. For a discussion of the
consequences of any failure by the Company to qualify as a REIT, see "-- Failure
to Qualify."
Rents under the Leases will constitute "rents from real property" only if
the Leases are treated as true leases for federal income tax purposes and are
not treated as service contracts, joint ventures, financing arrangements or some
other type of arrangement. The determination of whether the Leases are true
leases depends on an analysis of all surrounding facts and circumstances. In
making such a determination, courts have considered a variety of factors,
including the following: (i) the intent of the parties; (ii) the form of the
agreement; (iii) the degree of control over the property that is retained by the
property owner (e.g., whether the lessee has substantial control over the
operation of the property or whether the lessee was required simply to use its
best efforts to perform its obligations under the agreement); (iv) the extent to
which the property owner retains the risk of loss with respect to the operation
of the property (e.g., whether the lessee bears the risk of increases in
operating expenses or the risk of damage 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
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determination whether a service contract should be treated as a lease is
inherently factual, the presence or absence of any single factor may not be
dispositive in every case.
The Leases should be treated as true leases for federal income tax
purposes, based, in part, on the following facts: (i) the Company and CCA intend
for their relationship to be that of a lessor and lessee and such relationship
is so documented by lease agreements; (ii) CCA has the right to exclusive
possession and use and quiet enjoyment of the Facilities during the term of the
Leases; (iii) CCA bears the cost of, and is responsible for, day-to-day
maintenance and repair of the Facilities, and will dictate how the Facilities
are operated, maintained, and improved; (iv) CCA bears all of the costs and
expenses of operating the Facilities during the terms of the Leases; (v) CCA
will benefit from any savings in the costs of operating the Facilities during
the terms of the Leases; (vi) CCA has agreed to indemnify the Company against
all liabilities imposed on the Company during the term of the Leases by reason
of (a) injury to persons or damage to property occurring at the Facilities, or
(b) CCA's use, management, maintenance or repair of the Facilities; (vii) CCA is
obligated to pay substantial fixed rent for the period of use of the Facilities;
(viii) CCA stands to incur substantial losses (or reap substantial gains)
depending on how successfully it operates the Facilities; (ix) the useful lives
of the Facilities are significantly longer than the terms of the Leases; and (x)
the Company will receive the benefit of any increase in value, and will bear the
risk of any decrease in value, of the Facilities during the terms of the Leases.
Investors should be aware that there are no controlling Treasury
Regulations, published rulings, or judicial decisions involving leases with
terms substantially similar to those contained in the Leases that address
whether such leases constitute true leases for federal income tax purposes. If
the Leases are recharacterized as service contracts or partnership agreements,
rather than true leases, part or all of the payments that the Company receives
from CCA may not be considered rent or may not otherwise satisfy the various
requirements for qualification as "rents from real property." In that case, the
Company likely would not be able to satisfy either the 75% or 95% gross income
tests and, as a result, would lose its REIT status.
For the rents to constitute "rents from real property," the other
requirements enumerated above also must be satisfied. One requirement is that
the rent attributable to personal property leased in connection with the lease
of a Facility must not be greater than 15% of the total rent received under the
Leases. The rent attributable to the personal property in a Facility is the
amount that bears the same ratio to total rent for the taxable year as the
average of the adjusted bases of the personal property in the Facility at the
beginning and at the end of the taxable year bears to the average of the
aggregate adjusted bases of both the real and personal property comprising the
Facility at the beginning and at the end of such taxable year (the "Adjusted
Basis Ratio"). The Company currently leases certain personal property to CCA
pursuant to the Leases. The Adjusted Basis Ratio with respect to each Lease is,
however, less than 15%. Accordingly, rent received by the Company should satisfy
this requirement.
A second requirement for qualification of the rents as "rents from real
property" is that the rent must not be based in whole or in part on the income
or profits of any person. The rent paid by CCA for the Facilities is a fixed
amount (as adjusted based in part on the gross revenues of each Facility) and is
not based in whole or in part on the net income of the Facilities. Thus, the
rent should also satisfy this requirement.
A third requirement for qualification of the rents as "rents from real
property" is that the Company must not own, directly or constructively, 10% or
more of CCA or any other tenant of the Company's facilities. The constructive
ownership rules generally provide that if 10% or more in value of the shares of
the Company are owned, directly or indirectly, by or for any person, the Company
is considered as owning the shares owned, directly or indirectly, by or for such
person. The Declaration of Trust provides that no person may own, directly or
constructively, more than 9.8% of the outstanding Common Shares or 9.8% of the
outstanding Preferred Shares, unless such ownership restriction is waived by the
Company. See "Description of Capital Shares -- Restrictions on Ownership."
Assuming the ownership restrictions contained in the Declaration of Trust are
complied with or are waived only with respect to persons who are not tenants of
the Company (applying for purposes of this determination the constructive
ownership rules), the Company should never enter into a lease with a Related
Party Tenant. Furthermore, the Company has represented that it will not lease to
a Related Party Tenant. The constructive ownership rules, however, are highly
complex and difficult
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to apply, and the Company may inadvertently enter into leases with tenants who,
through application of such rules, will constitute Related Party Tenants. In
such event, rent paid by the Related Party Tenant will not qualify as "rents
from real property," which may jeopardize the Company's status as a REIT.
A fourth requirement for qualification of the rents as "rents from real
property" is that the Company cannot furnish or render more than a de minimis
amount of noncustomary services to the tenants of the Facilities, other than
through an independent contractor who is adequately compensated and from whom
the Company itself does not derive or receive any income. Provided that the
Leases are respected as true leases, the Company should satisfy this requirement
because it is not performing for CCA any services other than customary services.
Furthermore, the Company has represented that, with respect to other properties
that it acquires in the future, it will not perform more than a de minimis
amount of noncustomary services with respect to the tenant of the property. As
described above, however, if the Leases are recharacterized as service contracts
or partnership agreements, the rents likely would be disqualified as "rents from
real property" because the Company would be considered to furnish or render more
than a de minimis amount of services to the occupants of the Facilities other
than through an independent contractor who is adequately compensated and from
whom the Company derives or receives no income.
Based on the foregoing, the rent should qualify as "rents from real
property" for purposes of the 75% and 95% gross income tests. As described
above, however, there can be no complete assurance that the IRS will not
successfully assert a contrary position and, therefore, prevent the Company from
qualifying as a REIT.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions will be generally available if the Company's failure to meet such
tests was due to reasonable cause and not due to willful neglect, the Company
attaches a schedule of the sources of its income to its return, and any
incorrect information on the schedules was not due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances the
Company would be entitled to the benefit of these relief provisions. As
discussed above, even if these relief provisions apply, a tax would be imposed
with respect to the excess net income.
Other Issues. Because the Facilities were acquired from and leased back to
CCA, the IRS could assert that the Company realized prepaid rental income in the
year of purchase to the extent that the value of the Facilities exceeds the
purchase price paid by the Company. In litigated cases involving sale-leasebacks
which have considered this issue, courts generally have concluded that buyers
have realized prepaid rent where both parties acknowledged that the purported
purchase price for the property was substantially less than fair market value,
and the proposed rents were substantially less than the fair market rentals.
Because of the lack of clear precedent and the inherently factual nature of the
inquiry, no assurance can be given that the IRS could not successfully assert
the existence of prepaid rental income in such circumstances. The value of
property and the fair market rent for properties involved in sale-leasebacks are
inherently factual matters and always subject to challenge. If the Company is
deemed to have realized prepaid rental income, it may have difficulty meeting
the annual distribution requirements, as it will have received no funds with
which to make a distribution.
Additionally, Section 467 of the Code (concerning leases with increasing
rents) may apply to these Leases because they provide for rents that increase
from one period to the next. Section 467 provides that in the case of a
so-called "disqualified leaseback agreement," rental income must be accrued at a
constant rate. If such constant rate accrual is required, the Company would
recognize rental income in excess of cash rents and, as a result, may fail to
meet the 95% dividend distribution requirement. "Disqualified leaseback
agreements" include leaseback transactions where a principal purpose of
providing increasing rent under the agreement is the avoidance of federal income
tax. The Company and CCA have represented that the principal purpose of rent
increases under the Leases is not the avoidance of federal income taxes.
Furthermore, under proposed Treasury Regulations, tax avoidance is not
considered a principal purpose where the lessee is required to pay third party
costs, such as insurance, maintenance and taxes, or where rent is adjusted based
on reasonable price indices. Accordingly, the Company believes that the Leases
will not be subject to rent leveling under Code Section 467. It should be noted,
however, that leases involved in sale-leaseback transactions are subject to
special scrutiny under this Section.
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Assets Tests. The Company, at the close of each quarter of its taxable
year, must also satisfy three tests relating to the nature of its assets. First,
at least 75% of the value of the Company's total assets must be represented by
real estate assets (including its allocable share of real estate assets held by
partnerships in which the Company owns an interest), cash, cash items and
government securities. Second, not more than 25% of the Company's total assets
may be represented by securities other than those in the 75% asset class. Third,
of the investments included in the 25% asset class, the value of any one
issuer's securities owned by the Company may not exceed 5% of the value of the
Company's total assets, and the Company may not own more than 10% of any one
issuer's outstanding voting securities.
The Company has represented that, as of the date of this Prospectus, and
will represent as of the date of each applicable Prospectus Supplement, (i) at
least 75% of the value of its total assets will be represented by real estate
assets, cash and cash items (including receivables), and government securities,
and (ii) it will not own any securities that do not satisfy the 75% asset
requirement (except for the stock of subsidiaries with respect to which it holds
100% of the stock). In addition, the Company has represented that it will not
acquire or dispose of assets in the future in a way that would cause it to
violate either asset requirement. Based on the foregoing, the Company should
satisfy both asset requirements for REIT status.
If the Company should fail inadvertently to satisfy the asset requirements
at the end of a calendar quarter, such a failure would not cause it to lose its
REIT status if (i) it satisfied all of the asset tests at the close of the
preceding calendar quarter, and (ii) the discrepancy between the value of the
Company's assets and the standards imposed by the asset requirements either did
not exist immediately after the acquisition of any particular asset or was not
wholly or partly caused by such an acquisition (i.e., the discrepancy arose from
changes in the market values of its assets). If the condition described in
clause (ii) of the preceding sentence were not satisfied, the Company still
could avoid disqualification by eliminating any discrepancy within 30 days after
the close of the calendar quarter in which it arose.
Annual Distribution Requirements. The Company, to qualify as a REIT, is
required to distribute dividends (other than capital gain dividends) to its
shareholders in an amount at least equal to (i) the sum of (a) 95% of the
Company's "REIT taxable income" (computed without regard to the dividends paid
deduction and the Company's net capital gain) and (b) 95% of the net income
(after tax), if any, from foreclosure property, minus (ii) the sum of certain
items of noncash income. In addition, if the Company disposes of any Built-in
Gain Asset during its Recognition Period, the Company will be required to
distribute at least 95% of the Built-in Gain (after tax), if any, recognized on
the disposition of such asset. Such distributions must be paid in the taxable
year to which they relate, or in the following taxable year if declared before
the Company timely files its tax return for such year and if paid on or before
the first regular dividend payment after such declaration. To the extent that
the Company does not distribute all of its net capital gain or distributes at
least 95%, but less than 100% of its "REIT taxable income", as adjusted, it will
be subject to tax thereon at regular ordinary and capital gain corporate tax
rates. Furthermore, if the Company should fail to distribute during each
calendar year at least the sum of: (i) 85% of its REIT ordinary income for such
year; (ii) 95% of its REIT capital gain income for such year; and (iii) any
undistributed taxable income from prior periods, the Company will be subject to
a 4% excise tax on the excess of such required distribution over the amounts
actually distributed. For this purpose, any income, including net capital gains,
upon which the Company pays regular corporate income tax is treated as having
been distributed to shareholders. The Company intends to make timely
distributions sufficient to avoid the 4% excise tax. Although the Company may
elect to retain and pay tax on some or all of its net capital gain, this should
not result in the imposition of the excise tax. See "-- Taxation of Taxable
Domestic Shareholders."
It is possible that the Company, from time to time, may not have sufficient
cash or other liquid assets to meet the 95% distribution requirement due to
timing differences between (i) the actual receipt of income and actual payment
of deductible expenses, and (ii) the inclusion of such income and deduction of
such expenses in arriving at taxable income of the Company. In the event that
such timing differences occur, in order to meet the 95% distribution
requirement, the Company may find it necessary to arrange for short-term, or
possibly long-term, borrowings to pay dividends in the form of taxable stock
dividends.
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Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency dividends"
to shareholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Thus, the Company may be able
to avoid being taxed on amounts distributed as deficiency dividends; however,
the Company will be required to pay interest based upon the amount of any
deduction taken for deficiency dividends.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to shareholders in any year in which the
Company fails to qualify will not be deductible by the Company nor will they be
required to be made. In such event, to the extent of current and accumulated
earnings and profits, all distributions to shareholders will be taxable as
ordinary income, and, subject to certain limitations of the Code, corporate
distributees may be eligible for the dividends received deduction. Unless
entitled to relief under specific statutory provisions, the Company will also be
disqualified from taxation as a REIT for the four taxable years following the
year during which qualification was lost. It is not possible to state whether in
all circumstances the Company would be entitled to such statutory relief.
TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS
As used herein, the term "U.S. Shareholder" means a holder of Capital
Shares that (for United States federal income tax purposes) (i) is a citizen or
resident of the United States, (ii) is a corporation, partnership, or other
entity created or organized in or under the laws of the United States or of any
political subdivision thereof, (iii) is an estate (or generally a trust for tax
years of such trust beginning before January 1, 1997) the income of which is
subject to United States federal income taxation regardless of its source or
(iv) is a trust if a United States court is able to exercise primary supervision
over the administration of the trust and one or more United States persons have
the authority to control all substantial decisions of the trust. For any taxable
year for which the Company qualifies for taxation as a REIT, amounts distributed
to taxable U.S. Shareholders will be taxed as set forth below.
Distributions Generally. Distributions to U.S. Shareholders, other than
capital gain dividends discussed below, will be taxable as ordinary income to
such holders up to the amount of the Company's current or accumulated earnings
and profits. Such distributions are not eligible for the dividends-received
deduction for corporations. To the extent that the Company makes distributions
in excess of its current or accumulated earnings and profits, such distributions
will first be treated as a tax-free return of capital, reducing the tax basis in
the U.S. Shareholder's respective shares of capital stock and thereafter will be
taxable as gain realized from the sale of such shares. Dividends declared by the
Company in October, November, or December of any year payable to a shareholder
of record on a specified date in any such month will be treated as both paid by
the Company and received by the Shareholder on December 31 of such year,
provided that the U.S. Shareholder dividend is actually paid by the Company
during January of the following calendar year. Shareholders may not include on
their own income tax returns any tax losses of the Company.
The Company will be treated as having sufficient earnings and profits to
treat as a dividend any distribution by the Company up to the greater of its
current or accumulated earnings and profits. As a result, shareholders may be
required to treat certain distributions that would otherwise result in a
tax-free return of capital as taxable dividends. Moreover, any "deficiency
dividend" will be treated as a "dividend" (an ordinary dividend or a capital
gain dividend, as the case may be), regardless of the Company's earnings and
profits.
Capital Gain Dividends. Dividends to U.S. Shareholders that are properly
designated by the Company as capital gain dividends will be treated as gain from
the sale or exchange of a capital asset held for more than one year (to the
extent they do not exceed the Company's actual net capital gain) without regard
to the period for which the shareholder has held his stock. Corporate
shareholders, however, may be required to treat up to 20% of certain capital
gain dividends as ordinary income. Capital gain dividends are not eligible for
the dividends-received deduction for corporations.
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Under recently-enacted legislation effective for gains taken into account
after May 6, 1997, individual U.S. Shareholders and U.S. Shareholders that are
estates and trusts are subject to federal income tax on net capital gains at
different tax rates depending upon the nature of the gain and the holding period
of the asset disposed of. The legislation provides that Treasury Regulations may
be prescribed to apply these rules in the case of sales and exchanges by
pass-through entities such as REITs. It is anticipated that such Treasury
Regulations or other guidance will provide procedures for REITs to report the
information necessary for U.S. Shareholders to compute the appropriate tax in
respect of capital gain dividends.
Although a REIT is taxed on its undistributed net capital gains, for
taxable years beginning after 1997, a REIT may elect to include all or a portion
of such undistributed net capital gains in the income of its shareholders. In
such event, the shareholder will receive a credit or refund for the amount of
tax paid by the REIT on such undistributed net capital gains.
Passive Activity and Loss; Investment Interest Limitations. Distributions
from the Company and gain from the disposition of the Capital Shares ordinarily
will not be treated as passive activity income, and therefore, U.S. Shareholders
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) generally will be treated as investment income for purposes of the
investment interest limitation. Net capital gain from the disposition of Capital
Shares and capital gain dividends generally will be excluded from investment
income unless the taxpayer elects to have the gain taxed at ordinary rates.
Dispositions of Capital Shares. A U.S. Shareholder will recognize gain or
loss on the sale or exchange of Capital Shares to the extent of the difference
between the amount realized on such sale or exchange and the holder's tax basis
in such shares. Such gain or loss generally will constitute long-term capital
gain or loss if the holder has held such shares for more than one year. Losses
incurred on the sale or exchange of Capital Shares held for six months or less
(after applying certain holding period rules), however, generally will be deemed
long-term capital loss to the extent of any long-term capital gain dividends
received by the U.S. Shareholder with respect to such shares.
BACKUP WITHHOLDING
The Company will report to its domestic shareholders and the IRS the amount
of dividends paid during each calendar year, and the amount of tax withheld, if
any. Under the backup withholding rules, a shareholder may be subject to backup
withholding at the rate of 31% with respect to dividends paid unless such holder
(a) is a corporation or comes within certain other exempt categories and, when
required, demonstrates this fact, or (b) provides a taxpayer identification
number, certifies as to no loss of exemption from backup withholding, and
otherwise complies with applicable requirements of the backup withholding rules.
A shareholder that does not provide the Company with his correct taxpayer
identification number may also be subject to penalties imposed by the IRS. Any
amount paid as backup withholding will be creditable against the shareholder's
income tax liability. In addition, the Company may be required to withhold a
portion of capital gain distributions made to any shareholders who fail to
certify their non-foreign status to the Company. See "-- Taxation of Foreign
Shareholders."
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts ("Exempt Organizations"),
generally are exempt from federal income taxation. However, they are subject to
taxation on their unrelated business taxable income ("UBTI"). While many
investments in real estate generate UBTI, the IRS has issued a published ruling
that dividend distributions by a REIT to an exempt employee pension trust do not
constitute UBTI, provided that the shares of the REIT are not otherwise used in
an unrelated trade or business of the exempt employee pension trust. Based on
that ruling, amounts distributed by the Company to Exempt Organizations
generally should not constitute UBTI. However, if an Exempt Organization
finances its acquisition of the Capital Shares with debt, a portion of its
income from the Company will constitute UBTI pursuant to the "debt-financed
property" rules. Furthermore, social clubs, voluntary employee benefit
associations, supplemental unemployment benefit trusts, and qualified
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group legal services plans that are exempt from taxation under paragraphs (7),
(9), (17), and (20), respectively, of Code Section 501(c) are subject to
different UBTI rules, which generally will require them to characterize
distributions from the Company as UBTI.
Notwithstanding the above, however, a portion of the dividends paid by a
"pension held REIT" shall be treated as UBTI as to any trust which (i) is
described at Section 401(a) of the Code, (ii) is tax exempt under Section 501(a)
of the Code and (iii) holds more than 10% (by value) of the interests in the
REIT. Tax exempt pension funds that are described in Section 401(a) of the Code
are referred to below as "qualified trusts."
A REIT is a "pension held REIT" if (i) it would not have qualified as a
REIT but for the fact that Section 856(h)(3) of the Code provides that stock
owned by qualified trusts shall be treated, for purposes of the "not closely
held" requirement, as owned by the beneficiaries of the trust rather than by the
trust itself and (ii) either (a) at least one such qualified trust holds more
than 25% (by value) of the interests in the REIT, or (b) one or more of such
qualified trusts, each of which owns more than 10% (by value) of the interests
in the REIT, hold in the aggregate more than 50% (by value) of the interests in
the REIT. The percentage of any REIT dividend treated as UBTI is equal to the
ratio of (i) the UBTI earned by the REIT (treating the REIT as if it were a
qualified trust and therefore subject to tax on UBTI) to (ii) the total gross
income of the REIT. A de minimis exception applies where the percentage is less
than 5% for any year. The provisions requiring qualified trusts to treat a
portion of REIT distributions as UBTI will not apply if the REIT is able to
satisfy the "not closely held" requirement without relying upon the look through
exception with respect to qualified trusts. As a result of certain limitations
on transfer and ownership of Capital Shares contained in the Declaration of
Trust, the Company does not expect to be classified as a "pension held REIT."
While an investment in the Company by an Exempt Organization generally is
not expected to result in UBTI except in the circumstances described herein, any
gross UBTI that does arise from such an investment will be combined with all
other gross UBTI of the Exempt Organization for a taxable year and reduced by
all deductions attributable to the UBTI plus $1,000. Any amount then remaining
will constitute UBTI on which the Exempt Organization will be subject to tax. If
the gross income taken into account in computing UBTI exceeds $1,000, the Exempt
Organization is obligated to file a tax return for such year on IRS Form 990-T.
Neither the Company, the Board of Trustees, nor any of their Affiliates expects
to undertake the preparation for filing of IRS Form 990-T for any Exempt
Organization in connection with an investment by such Exempt Organization in the
Capital Shares. Generally, IRS Form 990-T must be filed with the IRS by April 15
of the year following the year to which it relates.
TAXATION OF FOREIGN SHAREHOLDERS
The rules governing United States federal income taxation of non-resident
alien individuals, foreign corporations, foreign partnerships, and foreign
trusts and estates (collectively, "Non-U.S. Shareholders") are complex, and the
following discussion is intended only as a summary of such rules. Prospective
Non-U.S. Shareholders should consult with their own tax advisors to determine
the impact of federal, state and local income tax laws on an investment in the
Company, including any reporting requirements, as well as the tax treatment of
such an investment under their home country laws.
In general, Non-U.S. Shareholders will be subject to United States federal
income tax with respect to their investment in the Company if such investment is
"effectively connected" with the Non-U.S. Shareholder's conduct of a trade or
business in the United States. A corporate Non-U.S. Shareholder that receives
income that is (or is treated as) effectively connected with a United States
trade or business also may be subject to the branch profits tax under Section
884 of the Code, which is payable in addition to United States corporate income
tax. The following discussion will apply to Non-U.S. Shareholders whose
investment in the Company is not so effectively connected. The Company expects
to withhold United States income tax, as described below, on the gross amount of
any distributions paid to a Non-U.S. Shareholder unless (i) a lower treaty rate
applies and the required form evidencing eligibility for that reduced rate is
filed with the Company, or (ii) the Non-U.S. Shareholder files an IRS Form 4224
or applicable successor form with the Company, claiming that the distribution is
"effectively connected" income.
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A distribution by the Company that is not attributable to gain from the
sale or exchange by the Company of a United States real property interest and
that is not designated by the Company as a capital gain dividend will be treated
as an ordinary income dividend to the extent made out of current or accumulated
earnings and profits. Generally, an ordinary income dividend will be subject to
a United States withholding tax equal to 30% of the gross amount of the
distribution unless such tax is reduced or eliminated by an applicable tax
treaty. A distribution of cash in excess of the Company's earnings and profits
will be treated first as a return of capital that will reduce a Non-U.S.
Shareholder's basis in its Capital Shares (but not below zero) and then as gain
from the disposition of such shares, the tax treatment of which is described
under the rules discussed below with respect to dispositions of shares.
Distributions by the Company that are attributable to gain from the sale or
exchange of a United States real property interest will be taxed to a Non-U.S.
Shareholder under the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, such distributions are taxed to a Non-U.S. Shareholder
as if such distributions were gains "effectively connected" with a United States
trade or business. Accordingly, a Non-U.S. Shareholder will be taxed at the
normal capital gain rates applicable to a U.S. Shareholder (subject to any
applicable alternative minimum tax and a special alternative minimum tax in the
case of non-resident alien individuals). Distributions subject to FIRPTA also
may be subject to a 30% branch profits tax in the hands of a foreign corporate
shareholder that is not entitled to treaty exemption.
The Company will be required to withhold from distributions to Non-U.S.
Shareholders, and remit to the IRS, (i) 35% of designated capital gain dividends
(or, if greater, 35% of the amount of any distributions that could be designated
as capital gain dividends) and (ii) 30% of ordinary dividends paid out of
earnings and profits. In addition, if the Company designates prior distributions
as capital gain dividends, subsequent distributions, up to the amount of such
prior distributions not withheld against, will be treated as capital gain
dividends for purposes of withholding. A distribution in excess of 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. To take
advantage of a reduced withholding rate under a tax treaty, the Non-U.S.
Shareholder must file an appropriate form with the Company. If the amount
withheld by the Company with respect to a distribution to a Non-U.S. Shareholder
exceeds the shareholder's United States tax liability with respect to such
distribution (as determined under the rules described in the two preceding
paragraphs), the Non-U.S. Shareholder may file for a refund of such excess from
the IRS. It should be noted that the 35% withholding tax rate on capital gain
dividends currently corresponds to the maximum income tax rate applicable to
corporations, but is higher than the 20% maximum rate on capital gains of
individuals.
Unless the Capital Shares constitute a "United States real property
interest" within the meaning of FIRPTA or are effectively connected with a U.S.
trade or business, a sale of such shares by a Non-U.S. Shareholder generally
will not be subject to United States taxation. The Capital Shares will not
constitute a United States real property interest if the Company is a
"domestically-controlled REIT." A domestically-controlled REIT is a REIT in
which at all times during a specified testing period less than 50% in value of
its shares is held directly or indirectly by Non-U.S. Shareholders. It is
currently anticipated that the Company will be a domestically-controlled REIT,
and therefore that the sale of shares in the Company will not be subject to
taxation under FIRPTA. However, because the Capital Shares are publicly traded,
no assurance can be given that the Company will continue to be a
domestically-controlled REIT. Notwithstanding the foregoing, capital gain not
subject to FIRPTA will be taxable to a Non-U.S. Shareholder if the Non-U.S.
Shareholder is a nonresident alien individual who is present in the United
States for 183 days or more during the taxable year and certain other conditions
apply, in which case the nonresident alien individual will be subject to a 30%
tax on such individual's capital gains. If the Company did not constitute a
domestically-controlled REIT, whether a Non-U.S. Shareholder's sale of Capital
Shares would be subject to tax under FIRPTA as a sale of a United States real
property interest would depend on whether the shares were "regularly traded" (as
defined by applicable Treasury Regulations) on an established securities market
(e.g., the New York Stock Exchange, on which shares of the Company currently are
listed) and on the size of the selling shareholder's interest in the Company.
Where Capital Shares are readily traded on an established
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securities market and where the Selling Shareholder owns (including constructive
ownership) during a specified testing period no more than 5% of that class of
shares, the sale is not subject to tax under FIRPTA. If the gain on the sale of
the Company's shares were subject to taxation under FIRPTA, the Non-U.S.
Shareholder would be subject to the same treatment as a U.S. Shareholder with
respect to such gain (subject to applicable alternative minimum tax and a
special alternative minimum tax in the case of nonresident alien individuals).
In any event, a purchaser of Capital Shares from a Non-U.S. Shareholder will not
be required under FIRPTA to withhold on the purchase price if the purchased
Capital Shares are "regularly traded" on an established securities market or if
the Company is a domestically-controlled REIT. Otherwise, under FIRPTA the
purchaser of Capital 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 shareholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its shareholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective shareholders should consult their own
tax advisors regarding the effect of state and local tax laws on an investment
in the Company.
ERISA CONSIDERATIONS
The following is intended to be a summary only and is not a substitute for
careful planning with a professional. Employee benefit plans subject to ERISA
and other sections of the Code should consult with their own tax or other
appropriate counsel regarding the application of ERISA and the Code to an ERISA
Plan's decision whether to acquire the Offered Securities. ERISA Plans should
also consider the entire discussion under the heading of "Material Federal
Income Tax Consequences."
Before determining whether to acquire Offered Securities pursuant to this
Prospectus, an ERISA Plan fiduciary should ensure that such approval is in
accordance with ERISA's general fiduciary standards, as set forth in Part 4 of
Subtitle B of Title I of ERISA. In making such a determination, an ERISA Plan
fiduciary should ensure that the acquisition of Offered Securities is in
accordance with the governing instruments and the overall policy of the ERISA
Plan and should consider the effect of such acquisition on the ERISA Plan's
compliance with the diversification and composition requirements of ERISA.
Fiduciaries of IRAs or employee benefit plans qualified under Code Section
401(a) that are not subject to ERISA, such as governmental plans, church plans,
and plans that do not cover any common law employees ("Non-ERISA Plans"), should
carefully consider the impact of applicable state law and the terms of the IRA
or Non-ERISA Plan document on the IRA's or Non-ERISA Plan's decision whether to
acquire Offered Securities.
LEGAL MATTERS
Certain legal matters with respect to the securities offered hereby will be
passed on for the Company by Stokes & Bartholomew, P.A., Nashville, Tennessee,
and, if applicable, for the underwriters or agents by counsel to be identified
in the Prospectus Supplement.
EXPERTS
The consolidated financial statements and schedule of the Company and
subsidiaries incorporated by reference or appearing in the Company's Annual
Report on Form 10-K/A for the year ended December 31, 1997, have been audited by
Arthur Andersen LLP, as set forth in their reports thereon included or
incorporated by reference therein and incorporated herein by reference in
reliance upon such reports given upon the authority of such firm as experts in
giving said reports.
The consolidated financial statements and schedule of CCA and subsidiaries
incorporated by reference or appearing in CCA's Annual Report on Form 10-K/A for
the year ended December 31, 1997, have been audited by Arthur Andersen LLP, as
set forth in their reports thereon included or incorporated by reference therein
and incorporated herein by reference in reliance upon such reports given upon
the authority of such firm as experts in giving said reports.
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